UNITED STATES 
                       SECURITIES AND EXCHANGE COMMISSION 

                             WASHINGTON, D.C. 20549 

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

                                   FORM 10-K

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

     For the Year Ended December 31, 1998, or
                        --------------------

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

             For the Transition period from _____ to _________. 

                         Commission file number 0-22570

                             LYNX THERAPEUTICS, INC.
             (Exact name of Registrant as specified in its charter)

           Delaware                                      94-3161073
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

                    25861 Industrial Blvd., Hayward, CA  94545
          (Address of principal executive offices, including zip code)

                                 (510) 670-9300
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: 
                                                 Common Stock, $.01 Par Value


         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  and 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|

The number of shares of common stock of the Registrant outstanding as of
March 1, 1999, was 11,132,815.  The aggregate market value of the common
stock of the Registrant held by non-affiliates as of March 1, 1999, was
$89,291,631.




<PAGE>














































                                     PART I

ITEM 1. BUSINESS

        Except for the historical information contained herein, the 
following discussion contains forward-looking statements that involve 
risks and uncertainties.  The Company's actual results could differ 
materially from those discussed here.  Factors that could cause or 
contribute to such differences include, but are not limited to, those 
discussed in this section "Business Risks" and the section entitled 
"Item 7.  Management's Discussion and Analysis of Financial Condition and 
Results of Operations."

Overview

        Lynx Therapeutics, Inc. ("Lynx" or the "Company") has developed, 
and continues to develop, unique, proprietary technologies aimed at 
handling and/or analyzing, simultaneously, the DNA molecules or fragments 
in complex biological samples.  Applications include the identification of 
genes differentially expressed between samples, the characterization of 
gene expression within a sample, and a novel, highly efficient means for 
scoring ("genotyping") large numbers of genetic markers or single 
nucleotide polymorphisms ("SNPs"), simultaneously, against very large 
numbers of genomes. 

        The Company's business strategy currently combines two approaches 
for the exploitation of its technologies.  The first, which sells to 
others access to the Company's technologies, generates immediate revenue, 
and serves to finance growth and additional technological developments.  
The second, which seeks to leverage the Company's technologies with the 
financial and research and development resources of others, seeks a larger 
share of the value enabled by the Company's technologies and longer term 
income.  The strategy will be modified accordingly as increased Company
resources begin to match the demands of new applications and opportunities 
for the Company's technologies.

        Lynx's technologies have already started to generate revenue for the 
Company through high margin service agreements with pharmaceutical and 
other companies.  To date, Lynx has entered into agreements with Hoechst 
AG and Hoechst Marion Roussel (collectively referred to as "Hoechst"), 
BASF AG ("BASF"), and E.I. DuPont de Nemours and Co. ("DuPont").  
Additionally, Lynx has granted a five year license to its technologies, in 
return for an initial 49% equity ownership, to BASF-LYNX Bioscience AG, a joint 
venture ("JV") formed by Lynx and BASF, working on the discovery of 
novel gene targets.  BASF committed to provide research funding to the JV 
over a five year period in exchange for its initial 51% ownership interest
in the JV.

INDUSTRY BACKGROUND

Genomics

        A human consists of many trillions of cells.  The nucleus of each 
cell contains the same DNA material comprising the same set of genes.  
This full complement of genes that is present in each cell is referred to 
as the "genome."  The many different types of cells in a single human do 
not differ in their genomes.  They differ, rather, by the genes that are 
active or expressed (i.e., transcribed into messenger RNA molecules which 
are in turn translated into specific protein molecules) in order to meet 
the requirements of that particular cell and its function.  Proteins play 
a central role in nearly every aspect of human metabolism and physiology.  
Many human diseases result from the inappropriate performance or 
production of specific proteins. Most drugs today are either compounds 
designed to interact with proteins, or are proteins themselves (such as 
insulin).  Proteins are difficult to purify and analyze, but it is 
possible to access their composition (amino acid sequences) by analyzing 
the genetic code (base sequence) of the genes that specify them.  Advances 
in techniques for analyzing gene sequences, to discover new gene products 
and understand gene function, have generated expectations that more 
effective therapies could result from finding the genes or the messenger 
RNAs that result in inappropriate proteins and that are, therefore, 
responsible for disease.


DNA Composition (Sequence)

        The DNA material that makes up the genome contains the coded 
information for life's functions.  DNA molecules (or DNA fragments) are 
double stranded chains of building blocks, called nucleotides, strung 
together.  There are only four nucleotides commonly referred to as the 
four bases, adenine ("A"), guanine ("G"), cytosine ("C"), or thymine 
("T").  The single most important determinant of a particular DNA 
molecule or fragment is the sequence of bases that make up the chains.  
Analyzing such a molecule or fragment, for the specific sequence of As, 
Gs, Cs and Ts that make it up, is called sequencing.

Gene Expression

        The process of converting the genetic information encoded in the 
double-stranded DNA of a gene into messenger or mRNA (transcription) and 
subsequently into a specific protein molecule (translation) is referred to 
as "gene expression."  At any one time, the transcribing and translating 
machinery of any particular human cell expresses some tens of thousands of 
genes (out of some 100,000 total genes in the human genome).  Each mRNA 
type will be present at a different copy number (abundance) depending upon 
the particular cell, its function, and its environmental conditions at the 
time.  Thus, a cell contains, at any one time, tens of thousands of 
different mRNAs, each at some small to large copy number, for a total on 
the order of one million or more mRNA molecules. 

Regulation of Gene Expression

        The regulation of gene expression is highly complex, differing not 
only between the various cell types within the organism, but also 
differing within each cell during growth, development and aging, as well 
as during the organism's response to various stimuli from the environment.  
Higher organisms, such as humans, include in their makeup genetically 
programmed responses (to intrinsic and extrinsic stimulations or insults) 
that have evolved to protect them from injury.  These protective responses 
require, in turn, biochemical sensors (such as receptors) that are coupled 
to the cellular mechanisms controlling gene expression through changes in 
the amounts of specific mRNA molecules within the cell.

Disease

        Many diseases spring from a failure of the host's genetically 
programmed, protective response to an insult such as trauma, infection, 
stress, or an inherited mutant gene.  That failure may mean that the 
insult is followed by inadequate, misguided, or exaggerated gene 
expression(s).  These then unfold a complex pathogenic process which may 
resolve itself, linger chronically, or evolve with increasingly 
destructive effects in a manner quite removed from, and even independent 
of, the original insult.

The Genome and the Search for Therapeutics

        Genomic approaches to therapeutics seek to identify genes connected 
to the origin of disease, or genes whose expression differentiates 
diseased cells from healthy ones.  In either case the searches generally 
are laborious and involve a very large amount of DNA sequencing to 
identify genes or gene fragments.  This knowledge of genes is a first step 
only.  It may set the stage for understanding either the pre-dispositions 
to a disease or its eventual characteristics, and thus pave the way for 
the development of better diagnostics.  However it may not necessarily 
lead to a successful therapy.  For example, while a particular gene, or 
absence of a gene, may predispose to a cancer, the full-blown tumor and 
its metastases are likely governed by entirely different genes.  Hence, it 
appears that in addition to understanding the cause of disease, it is 
equally important, if not more so, to understand gene function in both 
health and disease in order to identify the optimal target(s) for therapy.

Gene Function and Gene Expression

        Elucidation of gene function is not simply a matter of looking up 
which genes are expressed in a healthy or diseased tissue.  It also 
requires determining which of the altered gene expressions cause disease 
versus result from disease.  Ideally, one would follow the full gene 
expression of a cell or tissue through the evolution of a disease.  Then 
one could apply specific and successive biological and/or chemical 
modulations of specific gene expressions in order to gain insight into 
cause and effect.  However this is not practical, or even possible, in 
human disease.  While theoretically possible in in vitro or in vivo model 
systems, it may not be practical, or cost effective, because of the 
limitations of current technologies.  Only the most abundantly expressed 
genes (the top 3% to 5% of the 10,000 to 30,000 expressed in any one 
sample) are accessible using current gene identification technologies.  In 
addition, these current technologies are all dependent on separating and 
cloning double stranded copies of each individual mRNA (cDNA) prior to 
analysis, which makes the process quite arduous and expensive.

Single Nucleotide Polymorphisms ("SNPs") and the Search for Disease Genes

        SNPs are single base mutations in the human genome.  They are 
believed to occur frequently, perhaps as often as once in every 1,000 
bases.  Some are relatively recent and others may have occurred a long 
time ago and been passed on over many generations.  Their importance lies 
in that they may have been passed on together with inherited sequences 
containing inappropriate genetic modifications responsible for disease, 
disease pre-disposition, or even inordinate sensitivity to certain 
otherwise therapeutic drugs.  Many companies attempt to discover and 
catalogue as many SNPs as possible, in order to test for their presence or 
absence from the genomes of individuals sharing disorders or negative 
reactions to drugs.  SNPs that are found preferentially in such genomes 
could, if their correlation to the disorder is proven ("linkage"), point 
to those regions of the genomes in which the sequences responsible for the 
disorder may be located.  The larger the SNP set, the narrower the 
potential localization of the regions of interest.  It is believed 50,000 
SNPs, which if evenly distributed along the genome would be separated by 
an average of 64,000 basepairs, are probably the smallest set likely to 
provide useful correlations.  However, testing one genome for the absence 
or presence of one SNP (genotyping) currently costs approximately $1.00.  
Thus, to genotype 50,000 SNPs against a few hundred to a few thousand 
individuals as statistics dictate, would cost many millions of dollars.  
While some companies have undertaken such studies, the cost and time 
required to do such may prove prohibitive for many.  Hence, the search for 
new genotyping technologies. 

LYNX'S TECHNOLOGIES

        Lynx's novel, proprietary technologies are designed to manipulate 
simultaneously the hundreds of thousands to a million or more DNA 
molecules or fragments that typically make up a sample, with the aim of 
either characterizing that sample, or comparing it to others.  Lynx's 
technologies are based on a process, proprietary to Lynx, called 
MegacloneTM technology. 

MegacloneTM Technology

        MegacloneTM technology transforms a sample containing millions of 
DNA molecules into one made up of millions of micro-beads, each of which 
carries approximately 100,000 copies of one of the DNA molecules in the 
sample.  Because each such molecule is replaced by approximately 100,000 
copies concentrated on a micro-bead, detection, analysis, and other 
operations aimed at that molecule are much easier to conduct.  
Approximately 100,000 identical copies of a molecule, concentrated on the 
surface of a 5 micron bead, are much more easy to "see" or detect than a 
single molecule reacting to an assay.  In addition, because each DNA 
molecule is anchored to a micro-bead, the millions of DNA molecules in a 
given sample may be separated, manipulated, operated or reacted upon, 
detected and analyzed simultaneously.  This enables several powerful 
sorting manipulations and/or analyses.

MegasortTM Technology

        MegasortTM technology enables the comparison of samples, each 
containing millions of DNA molecules (or genes), and the physical 
extraction of those genes that are differentially expressed in the 
samples.  Because the comparison and sorting do not require prior 
knowledge of the genes in the samples, the technique is extremely 
powerful, especially when the samples involved are from organs or 
organisms that are not yet well characterized.



Massively Parallel Signature Sequencing

        Massively Parallel Signature Sequencing is another unique analysis 
technique enabled by the MegacloneTM technology.  It permits the 
simultaneous identification, based on short sequences of approximately 20 
bases each, of all the DNA molecules in a sample after they have been 
cloned on micro-beads.  Lynx is in the final testing stages of over a 
dozen second generation instruments capable of reading the required 
sequences from up to 1,000,000 micro-beads.  

MegatypingTM Technology

        MegatypingTM technology is the latest application of MegacloneTM 
technology.  It involves a recently validated proprietary process which 
the Company expects will enable it to offer pharmaceutical companies a 
powerful and competitive tool to genotype disease populations or 
populations that exhibit negative reactions to otherwise promising drugs.  
Lynx expects to be able to genotype very large numbers of SNPs against 
large populations of genomes, simultaneously, in one experiment.

High Resolution Genomic Maps

        Another potential application of Lynx's technologies is the 
construction of high resolution maps of the human and other genomes.  
Genomic maps are used by researchers in academic institutions and 
companies undertaking positional cloning studies to find genes that cause 
specific diseases.  Currently available maps have resolutions on the order 
of hundreds of thousands of bases (i.e., identifiable markers, spaced with 
100,000 or more DNA bases between them).  Newer maps are under development 
in industry and academia that will have resolutions of approximately 
50,000 bases.

        Lynx's technologies could potentially analyze any genome for a 
particular subset of signatures and construct a physical map of these.  
For example, a one kilobase resolution map (one signature every 1,000 
bases) of the entire human genome could be derived by determining 12 
million signatures and mapping them.  Lynx believes that its technologies 
could potentially be used to make maps with a resolution of about 500 to 
1,000 bases with a manageable number of runs once such runs are able to 
routinely process 500,000 signatures.  Lynx's collaboration agreement with 
DuPont includes a program to develop a mapping capability at Lynx and to 
produce a high-resolution map of a certain crop genome.  If and when the 
technology is fully developed, Lynx believes it could potentially be used 
to construct other economically useful maps.

OTHER LYNX PROGRAMS

Biology-based Target Discovery Programs

        In 1995, the Company launched a program to establish the concepts, 
strategies and techniques necessary for the identification of drug targets 
based on the analysis of differential gene expression.  This program was 
designed to capitalize eventually on the power of the Company's massively 
parallel technologies but, in its early phase, was built on know-how and 
intermediate technologies then currently resident within Lynx.  These 
included existing differential molecular techniques, as well as 
hybridization-based techniques for the analysis of specific disease 
paradigms.  The initial projects were centered on the medically important 
field of neurovascular diseases, in areas for which good in vitro and in 
vivo models exist, and that are particularly well suited to analyses with 
the Company's technologies.  

        Early results from these programs contributed to the formation of 
BASF-LYNX Bioscience AG, the biotechnology joint venture company formed in 
partnership with BASF.  In December 1998, Lynx sold these programs to the 
joint venture company in which it continues to hold a 49% interest.  
Concomitantly, BASF increased its funding commitment to the joint venture 
to enable active pursuit of the programs.  BASF-LYNX Bioscience AG 
currently has 35 employees.

Therapeutic Program

        Lynx was originally formed in 1992 to target inappropriate gene 
expression in disease with synthetic DNA fragments designed to bind to, 
and functionally block, genes whose inappropriate expression could be 
correlated with disease.  Lynx's early efforts in this area formed the 
foundation and understanding for the development of its existing 
technologies.  These research efforts resulted in a compound ("LR-3280") 
for the prevention of coronary artery restenosis.  In March 1998, Lynx 
sold its portfolio of phosphorothioate antisense patents and licenses 
(which includes LR-3280), and its therapeutic oligonucleotide 
manufacturing facility, to Inex Pharmaceuticals Corporation ("Inex") of 
Vancouver, Canada.  Lynx received $3 million in cash and will receive 1.2 
million shares of Inex common stock and royalties on future sales of 
phosphorothioate antisense products.  In addition, Lynx has granted a 
royalty-bearing license to Inex for its phosphoramidate chemistry for 
certain therapeutic applications in the fields of cancer and inflammation.

CORPORATE COLLABORATIONS

  o  In October 1998, the Company entered into a research collaboration 
     with DuPont to apply Lynx's technologies to the study of certain 
     crop plants and their protection.  Under the terms of the agreement, 
     Lynx could receive $60 million over a five-year period for certain 
     analyses, the achievement of specific technological milestones and 
     the delivery of the genomic map of a certain crop.  An initial 
     payment of $10 million was received at the execution of the 
     agreement, with an additional minimum of $12 million to be 
     received by Lynx over the next three years.

  o  Also in the fourth quarter of 1998, Lynx reached agreement with 
     BASF to expand the scope of the agreements that the 
     companies had signed in 1996.  The first of these agreements had 
     granted BASF non-exclusive access to certain other Lynx bead-based 
     technologies developed since the original agreements, and to 
     establish the basis upon which BASF will pay Lynx (cost plus a 
     specified profit margin) for any experiments performed by Lynx under 
     the agreement.  Pursuant to this amendment, BASF paid $1 million to 
     Lynx in January 1999.

  o  The other 1996 agreements with BASF had established and defined a 
     JV (BASF-LYNX Bioscience AG) licensed to use Lynx's
     technologies in epilepsy, toxicology and fermentation, 
     with financial support from BASF.  These agreements were amended to 
     enable the JV to study certain other central nervous system 
     ("CNS") diseases and, subject to approval by Lynx and BASF through 
     their representatives on the Advisory Board of the JV, other fields 
     of interest.  The non-exclusive license granted by Lynx to the JV 
     was extended accordingly.  Together with these amendments, BASF 
     agreed to commit an additional $10 million in funding to the JV, of 
     which $4.25 million was paid to Lynx in January 1999, for the JV's
     acquisition of Lynx's technology assets for certain CNS diseases.


  o  In October 1995, Lynx entered into an agreement with Hoechst, which 
     provided Hoechst with non-exclusive access to Lynx's Massively 
     Parallel Signature Sequencing.  Under the terms of the agreement, 
     Hoechst paid Lynx an access fee of $3 million on execution of the 
     agreement and, upon the achievement of a certain milestone, agreed 
     to pay an additional fee of $8 million and a service fee of $4 
     million for the first subscription year under the agreement.  In 
     return, Lynx will provide Hoechst with a certain number of analyses 
     per year.  In addition, the Company received $5 million in November 
     1995 in a private placement to Hoechst of 40,000 shares of Lynx's 
     Series D preferred stock at $125.00 per share (since converted into 
     400,000 shares of common stock).

  o  The agreement between Hoechst and Lynx was amended in September 1997 
     and again in May 1998.  The 1997 amendment modified the technology 
     milestone included in the original agreement and extended the date 
     by which such milestone must be achieved under the contract.  The 
     1998 amendment eliminated the milestone and includes instead 
     Hoechst's right to access Lynx's Massively Parallel Signature 
     Sequencing technologies by payment of a technology access fee.  Also, 
     the 1998 amendment allows Hoechst and Lynx to mutually agree to 
     include access by Hoechst to certain other of Lynx's technologies.

RESEARCH AND DEVELOPMENT EXPENDITURES

        Lynx has devoted its efforts primarily to research and development.  
Research and development expenses were $13.2 million for the year ended 
December 31, 1998, $14.2 million for the year ended December 31, 1997 and 
$12.5 million for the year ended December 31, 1996.

SCIENTIFIC ADVISORS

        The following are Lynx's principal scientific advisors:

        Sydney Brenner, M.B., D. Phil.  Director and President of The 
Molecular Sciences Institute, a non-profit research institute in Berkeley, 
California.  Until his retirement in 1996, Dr. Brenner was Honorary 
Professor of Genetic Medicine, University of Cambridge School of Clinical 
Medicine, Cambridge, England.  Dr. Brenner is known for his work on the 
genetic code and the information transfer from genes to proteins, and for 
his pioneering research on the genetics and development of the nematode.  
Dr. Brenner is a Fellow of the Royal Society (1955) and a Foreign 
Associate of the U.S. National Academy of Sciences (1977) and has received 
numerous awards of recognition, including the Albert Lasker Medical 
Research Award (1991), the Genetics Society of America Medal (1987) and 
the Kyoto Prize (1990).

        Robert L. Letsinger, Ph.D.  holds joint appointments in the 
Departments of Chemistry and Molecular Biology and Professor of Chemistry 
at the Northwestern University in Evanston, Illinois.  Dr. Letsinger is 
known for his pioneering work in solid phase synthesis of DNA and the 
phosphite method for assembly of oligonucleotides.  Dr. Letsinger's 
achievements in these areas laid much of the conceptual groundwork for 
current automated technologies to produce synthetic DNA.

EMPLOYEES

        As of December 31, 1998, Lynx employed 73 full-time employees, of 
which 58 were engaged in research and development activities and 15 in 
finance and administrative activities. Lynx believes that it has been 
successful in attracting skilled and experienced scientific personnel; 
however, competition for such personnel is intense.  None of Lynx's 
employees are covered by collective bargaining agreements, and management 
considers relations with its employees to be good.

BUSINESS RISKS

        Technology Uncertainty and Product Development Risk.  The Company's 
strategy of using its proprietary technologies for the purpose of rapidly 
identifying genes, defining and characterizing gene function, and enabling 
high-resolution genomic mapping is unproven. While certain other companies 
have similar technology or have adopted a similar strategy, the 
application of these technologies and strategies is in too early a stage 
to determine whether it can be successfully implemented.  These 
technologies are new and unproven approaches and are based on the 
assumption that information about gene expression and gene sequences may 
enable scientists to understand better complex disease processes. 
Generally, there is limited understanding of the roles of genes in these 
diseases, and relatively few therapeutic products based on gene 
discoveries have been developed and commercialized. There can be no 
assurance that the Company's technologies will enable it or its strategic 
partners to identify genes, drug targets and drug leads useful for the 
discovery and development of therapeutic and diagnostic products.  To 
date, no drug targets or drug leads have been identified based on the 
Company's technologies, and the Company has not commercialized any 
therapeutic or diagnostic products either alone or in conjunction with its 
strategic partners. 

        The use of the Company's products to assist in and improve the 
efficiency of the traditional drug discovery process is in too early a 
stage to determine whether it can be successful.  There can be no 
assurance that companies will accept the usefulness of the Company's 
products and related services.  In addition, the Company has limited 
experience in providing products or services.  The Company's ability to 
achieve profitability depends on attracting customers for its products and 
services.  The nature of the Company's products and services are such that 
there is a limited number of large pharmaceutical companies that are 
potential customers for such products and services, three of which have 
signed agreements with the Company to date.  There can be no assurance 
that any of the Company's product development efforts will be successfully 
completed or that the Company's products will gain market acceptance. 

        Early Stage of Development; Limited Operating History; Profitability 
Uncertainty.  Lynx is at an early stage of development and must be 
evaluated in light of the uncertainties and complications present in an 
early stage genomics company.  All of Lynx's products and services are in 
research or development, and have not generated significant revenues.  
Lynx's technologies are in the development stage and are dependent upon 
the successful integration of independent technologies, each of which has 
its own development risks.  The development of the Company's technologies 
and their application to the discovery of genes, genomic mapping, drug 
targets and drug leads will require significant additional research and 
development and investment, including testing to further validate 
performance and demonstrate cost effectiveness.  There can be no assurance 
that the Company's technologies will continue to be successfully 
developed, or that any therapeutic or diagnostic products discovered or 
developed through their utilization will prove to be commercially useful, 
meet applicable regulatory standards in a timely manner or at all, compete 
with other technologies and products, avoid infringing the proprietary 
rights of others, be manufactured in sufficient quantities or at 
reasonable costs or be marketed successfully.  The Company believes it 
will be a number of years, if ever, before the Company will recognize 
revenue from therapeutic or diagnostic product sales or royalties.  There 
can be no assurance that these technologies will be successfully developed 
or, if they are, that they can be integrated successfully. 

        The Company has a limited history of operations and has experienced 
significant operating losses since its inception in 1992, including net 
losses of approximately $4.3 and $10.8 million during the years ended 
December 31, 1998 and 1997, respectively.  The Company had an accumulated 
deficit of approximately $46.7 million through December 31, 1998.  The 
Company may incur additional losses for at least the next several years 
and such losses may increase as the Company expands its research and 
development activities.  The Company's losses to date have resulted 
principally from costs incurred in research and development and from 
general and administrative costs associated with the Company's operations.  
To date, substantially all of the Company's revenues have been derived 
from payments under corporate collaborations and agreements, and the 
Company expects that substantially all of its revenues for the foreseeable 
future will result from payments under corporate collaborations and 
agreements and interest income.  There can be no assurance that the 
Company will receive additional revenues under existing corporate 
collaborations and agreements or that the Company will be successful in 
entering into any new corporate collaborations and agreements that result 
in revenues.  The Company's ability to generate revenues and achieve 
profitability is dependent in large part on the Company's ability to enter 
into additional corporate collaborations and agreements, and on the 
ability of the Company and its corporate partners to discover genes and 
drug targets associated with particular diseases and, thereafter, utilize 
such discoveries to identify drug leads, develop therapeutic and 
diagnostic products, conduct preclinical studies and clinical trials, 
obtain required regulatory approvals and successfully manufacture, 
introduce and market such products. In addition, to the extent that the 
Company relies upon others for these research, development and 
commercialization activities, the Company's ability to achieve 
profitability will be dependent in part upon the success of such outside 
parties. The time required to reach profitability is highly uncertain, and 
there can be no assurance that the Company will be able to achieve 
profitability on a sustained basis, if at all. Failure to achieve 
significant revenue or profitability would have a material adverse effect 
on the Company's business, financial condition and results of operations.

        Intense Competition; Rapid Technological Change.  There are a finite 
number of genes in the human genome.  The race amongst competitors in the 
genomics field is not just to identify these genes by their sequences, but 
also to determine gene function, particularly gene function in disease.  
Competition among entities attempting to identify genes associated with 
specific diseases and to develop products based on such discoveries is 
intense.  Even when all genes are known, and their sequences determined, 
the hunt for functional information in the wide variety of diseases and 
disease conditions will continue, and characterization of genes (by their 
sequences) in various samples will still be needed.  While Lynx believes 
that it contributes a uniquely efficient gene analysis technique to that 
hunt, other companies have substantially greater research and product 
development capabilities and financial, scientific, and marketing 
resources than the Company.

        The Company faces, and will continue to face, competition from 
pharmaceutical, biotechnology and diagnostic companies, academic and 
research institutions and government agencies, both in the United States 
and abroad. Several entities are attempting to identify and patent 
randomly sequenced genes and gene fragments, while others are pursuing a 
gene identification, characterization and product development strategy 
based on positional cloning.  The Company is aware that certain entities 
are utilizing a variety of different gene expression analysis 
methodologies, including the use of chip-based systems, to attempt to 
identify disease-related genes. In addition, numerous pharmaceutical 
companies are developing genomic research programs, either alone or in 
partnership with the Company's competitors. Competition among such 
entities is intense and is expected to increase. In order to compete 
against existing and future technologies, the Company will need to 
demonstrate to potential customers that its technologies and capabilities 
are superior to competing technologies. 

        Many of the Company's competitors have substantially greater capital 
resources, research and development staffs, facilities, manufacturing and 
marketing experience, distribution channels and human resources than the 
Company. These competitors may discover, characterize or develop important 
genes, drug targets or drug leads in advance of Lynx which could have a 
material adverse effect on any similar Lynx program. Moreover, there can 
be no assurance that the Company's competitors will not obtain patent 
protection or other intellectual property rights that would limit the 
Company's or its strategic partners' ability to use the Company's 
technologies or drug discovery technologies or commercialize therapeutic 
or diagnostic products, which could have a material adverse effect on the 
Company's business, financial condition and results of operations

        While Lynx, at this time, is not aware of technologies equivalent or 
superior to its technologies, there are other companies that provide data 
or access to data similar to that which Lynx intends to offer.  There can 
be no assurance that research and development efforts by others will not 
render any of the Company's potential products and services 
noncompetitive.  

        Future competition will come from existing competitors as well as 
other companies seeking to develop new technologies for drug discovery 
based on gene sequencing, gene expression analysis, bioinformatics and 
related technologies. In addition, certain pharmaceutical and 
biotechnology companies have significant needs for genomic information and 
may choose to develop or acquire competing technologies to meet such 
needs. Genomic technologies have undergone and are expected to continue to 
undergo rapid and significant change. The Company's future success will 
depend in large part on its maintaining a competitive position in the 
genomics field. Rapid technological development by the Company or others 
may result in products or technologies becoming obsolete before the 
Company recovers the expenses it incurs in connection with their 
development. Products offered by the Company could be made obsolete by 
less expensive or more effective drug target and drug lead technologies, 
including technologies which may be unrelated to genomics. There can be no 
assurance that the Company will be able to make the enhancements to its 
technologies necessary to compete successfully with newly emerging 
technologies. 

        Patents and Proprietary Rights; Third Party Rights.  Lynx's success 
will depend on its ability to obtain patents for its technologies and 
products, maintain trade secrets and operate without infringing on the 
proprietary rights of others, both in the United States and in other 
countries.  Patent matters in biotechnology are highly uncertain and 
involve complex legal and factual questions.  Accordingly, the 
availability of and breadth of claims allowed in biotechnology and 
pharmaceutical patents cannot be predicted.  Lynx has filed and will 
continue to file applications, as appropriate, for patents covering both 
its products and processes and has licensed a number of patents and patent 
applications covering certain of its technologies, processes and 
compounds.  No assurance can be given that patents will issue from any of 
the pending applications or that, if patents do issue, the claims allowed 
will be sufficiently broad to protect Lynx's technologies. In addition, 
patent law relating to the scope of claims in the technology field in 
which the Company operates is still evolving. The degree of future 
protection for the Company's proprietary rights, therefore, is uncertain. 
Furthermore, there can be no assurance that others will not independently 
develop similar or alternative technologies, duplicate any of the 
Company's technologies, or, if patents are licensed or issued to the 
Company, design around the patented technologies licensed to or developed 
by the Company. In addition, the Company could incur substantial costs in 
litigation if it is required to defend itself in patent suits brought by 
third parties or if it initiates such suits. 

        The Company is aware of a number of United States patents and 
patent applications and corresponding foreign patents and patent 
applications owned by third parties relating to the analysis of gene 
expression or the manufacture and use of DNA chips.  There can be no 
assurance that these or other technologies will not provide third parties 
with competitive advantages over the Company and will not have a material 
adverse effect on the Company's business, financial condition and results 
of operations.  In addition, certain third-party patent applications 
contain broad claims, and it is not possible to determine whether or not 
such claims will be narrowed during prosecution and/or will be allowed and 
issued as patents, even if such claims appear to cover the prior art or 
have other defects. There can be no assurance that an owner or licensee of 
a patent in the field will not threaten or file an infringement action or 
that the Company would prevail in any such action.  There can be no 
assurance that the cost of defending an infringement action would not be 
substantial and would not have a material adverse effect on the Company's 
business, financial condition and results of operations.  Furthermore, 
there can be no assurance that any required licenses would be made 
available on commercially viable terms, if at all.  Failure to obtain any 
required license could prevent the Company from utilizing or 
commercializing one or more of its technologies and could have a material 
adverse effect on the Company's business, financial condition and results 
of operations.

        In general, the Company intends to continue to apply for patent 
protection for methods relating to gene expression and to apply for patent 
protection for the individual disease genes and drug targets it discovers. 
Such patents may include claims relating to novel genes and gene fragments 
and to novel uses for known genes or gene fragments identified through its 
discovery programs. There can be no assurance that the Company will be 
able to obtain meaningful patent protection for its discoveries; even if 
patents are issued, the scope of the coverage or protection afforded 
thereby is uncertain.  Failure to secure such meaningful patent protection 
could have a material adverse effect on the Company's business, financial 
condition and results of operations.

        Several groups are attempting to identify and patent gene fragments 
and full-length genes, the functions of which have not been characterized, 
as well as fully characterized genes. There is substantial uncertainty 
regarding the possible patent protection for gene fragments or genes 
without known function or correlation with specific diseases. To the 
extent any patents issue to other parties on such partial or full-length 
genes, the risk increases that the potential products and processes of the 
Company or its strategic partners may give rise to claims of patent 
infringement. The public availability of partial or full sequence 
information or the existence of patent applications related thereto, even 
if not accompanied by relevant function or disease association, prior to 
the time the Company applies for patent protection on a corresponding gene 
could adversely affect the Company's ability to obtain patent protection 
with respect to such gene or related expression patterns. Furthermore, 
others may have filed, and in the future are likely to file, patent 
applications covering genes or gene products that are similar or identical 
to any for which the Company may seek patent protection. No assurance can 
be given that any such patent application will not have priority over 
patent applications filed by the Company. Any legal action against the 
Company or its strategic partners claiming damages and seeking to enjoin 
commercial activities relating to the affected products and processes 
could, in addition to subjecting the Company to potential liability for 
damages, require the Company or its strategic partners to obtain a license 
in order to continue to manufacture or market the affected products and 
processes. There can be no assurance that the Company or its strategic 
partners would prevail in any such action or that any license required 
under any such patent would be made available on commercially acceptable 
terms, if at all.  The Company believes that there is likely to be 
significant litigation in the industry regarding patent and other 
intellectual property rights. If the Company becomes involved in such 
litigation, it could consume a substantial portion of the Company's 
managerial and financial resources and have a material adverse effect on 
the Company's business, financial condition and results of operations. 

        Enactment of legislation implementing the General Agreement on 
Tariffs and Trade has resulted in certain changes to United States patent 
laws that became effective on June 8, 1995. Most notably, the term of 
patent protection for patent applications filed on or after June 8, 1995 
is no longer a period of 17 years from the date of grant. The new term of 
United States patents will commence on the date of issuance and terminate 
20 years from the earliest effective filing date of the application. 
Because the time from filing to issuance of biotechnology patent 
applications is often more than three years, a 20-year term from the 
effective date of filing may result in a substantially shortened period of 
patent protection which may adversely affect the Company's patent 
position. If this change results in a shorter period of patent coverage, 
the Company's business could be adversely affected to the extent that the 
duration and level of the royalties it is entitled to receive from its 
strategic partners are based on the existence of a valid patent covering 
the product subject to the royalty obligation.

        Lynx also relies on trade secrets and proprietary know-how, which it 
seeks to protect in part by confidentiality agreements with its 
collaborators, employees and consultants. There can be no assurance that 
these agreements will not be breached, that Lynx would have adequate 
remedies for any breach or that its trade secrets will not otherwise 
become known or be independently developed by competitors.  To the extent 
that the Company or its consultants or research collaborators use 
intellectual property owned by others in their work for the Company, 
disputes may also arise as to the rights in related or resulting know-how 
and inventions.

        Need to Establish Collaborative Relationships; Dependence on 
Partners.  Lynx's business strategy includes entering into collaborations, 
subscription arrangements, strategic alliances or licensing arrangements 
with corporate partners, primarily pharmaceutical, biotechnology and 
genomic companies, relating to the development and commercialization of 
certain of its potential technologies, and products. There can be no 
assurance that Lynx will be able to negotiate attractive corporate 
arrangements or that such collaborations will be available to Lynx on 
acceptable terms or that any such relationships, once established, will be 
scientifically or commercially successful.  Lynx currently has three 
corporate agreements for its technologies, with Hoechst, BASF and DuPont.

        There can be no assurance that Hoechst, BASF or DuPont or any other 
future collaborator or contract partner will not pursue their existing or 
alternative technologies in preference to those being developed in 
collaboration with or by the Company.  Furthermore, there can be no 
assurance that the Company will be able to negotiate additional 
collaborative arrangements or contracts on acceptable terms, if at all, or 
that such collaborations or relationships will be successful.  To the 
extent that the Company chooses not to or is unable to establish such 
arrangements, it would require substantially greater capital to undertake 
research and development of certain of its potential technologies, data 
bases and products at its own expense.  

        Absence of Sales and Marketing Experience.  Lynx has no experience 
in the sales, marketing or distribution of pharmaceutical products or 
services. To market the products or services of its technologies, Lynx 
must define the particular products and services that it will offer and 
develop a sales and marketing group with the appropriate technical 
expertise. Lynx does not plan to market any future pharmaceutical products 
directly.  There can be no assurance that Lynx will be able to build such 
a sales force or that its direct sales and marketing efforts will be 
successful. 

        Use of Hazardous Materials.  Lynx's research and development may 
involve the controlled use of hazardous materials, chemicals, viruses and 
various radioactive compounds.   Although Lynx believes that its safety 
procedures for handling and disposing of such materials will comply with 
the standards prescribed by state, federal and local regulations, the risk 
of accidental contamination or injury from these materials cannot be 
completely eliminated.   In the event of such an accident, Lynx could be 
held liable for any damages that result, and any such liability could 
exceed the resources of Lynx.

        Dependence Upon Key Personnel.  Lynx is highly dependent on the 
principal members of its management and scientific staff, the loss of 
whose services could significantly delay or prevent the achievement of 
research, development and business objectives, thus having a material 
adverse effect on Lynx.  Furthermore, recruiting and retaining qualified 
scientific personnel to perform research and development work in the 
future will be critical to Lynx's success.  Although Lynx believes it will 
be successful in attracting and retaining skilled and experienced 
scientific personnel, there can be no assurance that Lynx will be able to 
attract and retain such personnel on acceptable terms, given the 
competition among numerous pharmaceutical and health care companies, 
universities and non-profit research institutions for experienced 
scientists.   The Company is dependent on its Chairman and Chief Executive 
Officer, Sam Eletr, Ph.D., the loss of whose services could have a 
material adverse effect on the Company.  The Company has not entered into 
an employment agreement with him.

        Potential Volatility of Stock Price; Limited Market for Stock.  The 
trading price of Lynx's common stock is subject to significant 
fluctuations.  The market prices of the common stock of many publicly 
held, early stage biotechnology companies have in the past been, and can 
in the future be expected to be, especially volatile.  In addition, the 
securities markets have from time to time experienced significant price 
and volume fluctuations that may be unrelated to the operating performance 
of particular companies. Factors such as fluctuations in the Company's 
operating results, announcements of technological innovations or new 
commercial products by the Company or its competitors, release of reports 
by securities analysts, developments or disputes concerning patent or 
proprietary rights, developments in the Company's relationships with 
current or future collaborative or contract partners, if any, and general 
market conditions may have a significant and adverse impact on the market 
price of the common stock.

         Future Capital Requirements; Uncertainty Of Access To Additional 
Funding.  The Company has invested significant capital in its 
infrastructure and in its scientific and business development activities 
and expects capital and operating expenditures to increase over the next 
several years as it expands its operations.  The Company's actual future 
capital requirements and the adequacy of its available funds will depend 
on many factors, including the number, breadth and progress of its 
programs, the ability of the Company to establish and maintain corporate 
collaborations, corporate agreements, and licensing arrangements, and the 
progress of the development and commercialization efforts under the Company's 
corporate collaborations and corporate agreements.  These factors also 
include the level of the Company's activities relating to competing 
technological and market developments, the costs associated with obtaining 
access to samples and related information and the costs involved in 
preparing, filing, prosecuting, maintaining and enforcing patent claims 
and other intellectual property rights.

        The Company expects that it will require significant additional 
funding in the future, which it may seek through public or private equity 
offerings, debt financings or additional corporate collaborations and 
corporate agreements.  No assurance can be given that additional financing 
or corporate collaborations and corporate agreements will be available 
when needed, or that, if available, such financing and other arrangements 
will be obtained on terms favorable to the Company or its stockholders.  
To the extent the Company raises additional capital by issuing equity or 
convertible debt securities, ownership dilution to stockholders will 
result.  If adequate funds are not available when needed, the Company may 
be required to curtail operations significantly or to obtain funds by 
entering into corporate collaborations and corporate agreements, in which 
case the Company may be required to relinquish rights to certain of its 
technologies, discoveries or potential products, or to grant licenses on 
terms that are not favorable to the Company, any of which could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  In the event that adequate funds are not 
available, the Company's business would be adversely affected. 

        Ethical, Legal And Social Implications Of Gene-Based Diagnostics.   
The Company and its partners may seek to develop diagnostic products based 
on genes it discovers.  The prospect of broadly available gene-based 
diagnostic tests raises issues regarding their appropriate utilization and 
the confidentiality of the information provided by such testing.  It is 
possible that discrimination by third party payors, based on the results 
of such testing, could lead to the increase of premiums by such payors to 
prohibitive levels, outright cancellation of insurance, or unwillingness to 
provide coverage to individuals showing unfavorable gene expression 
profiles.  Similarly, employers could discriminate against employees with 
gene expression profiles indicative of the potential for high disease-
related costs and lost employment time.  Finally, government authorities 
could, for social or other purposes, limit or prohibit the use of such 
tests under certain circumstances.  There can be no assurance that such 
ethical and social factors or concerns about genetic testing and target 
identification will not have a material adverse effect on market 
acceptance of the Company's technologies and products.

ITEM 2. PROPERTIES

        In February 1998, the Company entered into a noncancelable operating
lease for facilities space of approximately 111,000 square feet in two 
buildings in Hayward, California.  Currently, Lynx's corporate headquarters, 
principal research and development facilities and production facilities are
located  in one of the two buildings.  The remaining space will be developed
and occupied in phases, depending on the growth of the Company.  The lease
runs through December 2008.  The Company has the option to extend the lease
for an additional five year period, subject to certain conditions. The Company 
has an option to lease approximately 37,000 square feet of additional
building space for expansion purposes.

        In August 1993, the Company entered into a noncancelable operating 
lease for facilities which expires on July 31, 2003.  In 1998, the Company
entered into an agreement to sublease a portion of this space.  The term of the 
sublease is twenty-four months, commencing in March 1998.  The sublessee 
has the option to extend the term of the sublease through July 2003, 
subject to certain conditions.  In January 1999, the Company entered into 
a second agreement to sublease the remaining portion of its facilities 
under the 1993 lease.  The term of this second sublease is fifty-four 
months, commencing in February 1999, and runs through July 2003.


ITEM 3. LEGAL PROCEEDINGS

        The Company is not a party to any material legal proceedings.


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

        No matters were submitted to a vote of security holders in the 
quarter ended December 31, 1998.


                                  PART II

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

        On December 30, 1997, the Company listed its common stock on The 
Nasdaq Stock Market.  Prior to December 30, 1997, there was no established 
public trading market for the Company's voting stock.  On March 31, 1998, 
pursuant to the Amended and Restated Certificate of Designation dated 
September 30, 1997, all shares of Series B, Series C, and Series D 
preferred stock were converted into common stock on a ten-for-one basis.  
The Company's common stock trades on The Nasdaq Stock Market under the 
symbol "LYNX."  The following table sets forth, for the periods 
indicated, the high and low close sales prices for the common stock as 
reported by The Nasdaq Stock Market:

<TABLE>
<CAPTION>
                                     High       Low
                                   --------- ---------
<S>                                <C>       <C>
 1998
     First Quarter..............     $19.25    $10.00
     Second Quarter.............      11.13      7.75
     Third Quarter..............      13.25      7.75
     Fourth Quarter.............      13.00      7.13

        As of March 1, 1999, there were approximately 2,800 stockholders of 
record of the Company's common stock.  On March 22, 1999, the last 
reported sale price of the Company's common stock was $9.13.

        The Company has not paid any dividends on its common stock or 
preferred stock and does not anticipate the payment of dividends in the 
foreseeable future.  The Company expects that any future earnings will be 
retained and applied toward the development of the Company's business.
</TABLE>


ITEM 6.       SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                       --------------------------------------------------
                                         1998      1997       1996      1995       1994
                                       --------  ---------  --------  ---------  --------
<S>                                    <C>       <C>        <C>       <C>        <C>
Consolidated Statements of
  Operations Data:
(in thousands, except per share data)

Revenues..............................  $7,005     $4,582    $9,749       $680    $4,699

Operating costs and expenses:
  Research and development............  13,166     14,226    12,545     11,301     8,457
  Selling, general and administrative.   2,141      1,930     3,170      1,591     1,768
                                       --------  ---------  --------  ---------  --------
Total operating costs and expenses....  15,307     16,156    15,715     12,892    10,225
                                       --------  ---------  --------  ---------  --------
Other income, net.....................   4,106        753       585        744       506
Provision for income taxes............     151       --          10       --         --
                                       --------  ---------  --------  ---------  --------
Net loss.............................. ($4,347)  ($10,821)  ($5,391)  ($11,468)  ($5,020)
                                       ========  =========  ========  =========  ========

Basic and diluted net loss
  per share ..........................  ($0.45)    ($3.09)   ($2.45)    ($5.66)   ($4.87)
                                       ========  =========  ========  =========  ========
Shares used in per share
  computation ........................   9,642      3,501     2,197      2,026     1,031

<CAPTION>
                                                          December 31,
                                       --------------------------------------------------
                                         1998      1997       1996      1995       1994
                                       --------  ---------  --------  ---------  --------
<S>                                    <C>       <C>        <C>       <C>        <C>
Consolidated Balance Sheet Data:
(in thousands)

Cash, cash equivalents and
  short-term investments.............. $23,862    $24,930   $14,082    $13,779   $12,246

Working capital.......................  20,834     21,875     9,118     12,730    11,702

Total assets..........................  40,334     29,267    18,412     17,685    15,142

Stockholders' equity..................  23,457     25,590    10,732     13,742    14,044

</TABLE>
<PAGE>

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

        Except for the historical information contained herein, the 
following discussion contains forward-looking statements that involve 
risks and uncertainties.  The Company's actual results could differ 
materially from those discussed here.  Factors that could cause or 
contribute to such differences include, but are not limited to, those 
discussed in this section, as well as in the section entitled "Item 1.  
Business--Business Risks."

Overview

        Lynx Therapeutics, Inc. ("Lynx" or the "Company") has developed, 
and continues to develop, unique, proprietary technologies aimed at 
handling and/or analyzing, simultaneously, the DNA molecules or fragments 
in complex biological samples.  At the core of these technologies is 
Lynx's MegacloneTM  technology which allows both the 
simultaneous cloning of millions of DNA molecules or fragments in a 
sample, and the parallel probing or assaying of the millions 
of resulting clones, all without requiring prior separation, purification, 
individual amplification, or identification of any of the templates.  
Applications include the identification of genes differentially expressed 
between samples, the characterization of gene expression within a sample, 
and a novel, highly efficient means for scoring ("genotyping") large 
numbers of genetic markers or single nucleotide polymorphisms ("SNPs"), 
simultaneously, against very large numbers of genomes.

        During the fourth quarter of 1998, Lynx entered into a research 
collaboration with E.I. DuPont De Nemours and Company ("DuPont") to 
apply the above technologies to the study of certain crop plants and their 
protection. In addition to an initial payment of $10 million received by 
Lynx from DuPont at the execution of the agreement, Lynx will receive 
payments from DuPont over the five-year term of the agreement for certain 
analyses, the achievement by Lynx of specific technological milestones, 
and Lynx's delivery to DuPont of the genomic map of a certain crop.

        Also during the fourth quarter of 1998, Lynx and BASF AG ("BASF") 
amended several agreements originally signed by the two parties in 1996.  
One of the amendments provides for non-exclusive access by BASF to certain 
other Lynx bead-based technologies, in addition to the originally 
contemplated access to Lynx's Massively Parallel Signature Sequencing 
technology. The amended agreement also establishes the basis upon which 
BASF will pay Lynx (cost plus a specified profit margin) for any 
experiments performed by Lynx under the agreement.

        The other 1996 agreements with BASF had set up and defined a joint 
venture ("JV") company (BASF-LYNX Bioscience AG) licensed to use Lynx's 
technologies in epilepsy, toxicology and fermentation, with financial 
support from BASF.  These agreements were amended in 1998 to enable the JV 
to study certain other central nervous system ("CNS") diseases and, 
subject to approval by Lynx and BASF through their representatives on the 
Advisory Board of the JV, other fields of interest. The non-exclusive 
license granted by Lynx to the JV was extended accordingly.  Together with 
these amendments, BASF agreed to commit an additional $10 million in 
funding to the JV. 

        Lynx was originally formed in 1992 to target inappropriate gene 
expression in disease with synthetic DNA fragments designed to bind to, 
and functionally block, genes whose inappropriate expression could be 
correlated with disease.  Lynx's early efforts in this area formed the 
foundation and understanding for the development of its existing 
technologies.  The research efforts resulted in a compound ("LR-3280") 
for the prevention of coronary artery restenosis.  In March 1998, Lynx 
sold its portfolio of phosphorothioate antisense patents and licenses 
(which includes LR-3280), and its therapeutic oligonucleotide 
manufacturing facility, to Inex Pharmaceuticals Corporation ("Inex") of 
Vancouver, Canada.  Lynx received $3 million in cash and will receive 1.2 
million shares of Inex common stock and royalties on future sales of 
phosphorothioate antisense products.  In addition, Lynx has agreed to a 
royalty-bearing license to Inex for its phosphoramidate chemistry for 
certain therapeutic applications in the fields of cancer and inflammation.

        Lynx has been unprofitable since its inception and may incur 
substantial losses for the next several years, due primarily to its 
research and development programs, including the continuing development of 
applications for its technologies and costs associated with establishing 
commercial capacity.  Lynx may generate revenues based on its agreements 
with partners for certain analyses, the achievement of certain milestones, 
and the delivery of products or services, as defined in the agreements.  
However, there is no guarantee that the underlying technologies will ever 
be proven commercially successful.

        Lynx's business is subject to significant risks, including the risks 
inherent in its research and development efforts, uncertainties associated 
with obtaining and enforcing patents, and possible competition from other 
products.  Lynx's technologies could face competition from the development 
of similarly efficient, or better, combinations of techniques for the 
handling of DNA molecules and fragments.

        On March 31, 1998, the Series B, Series C and Series D preferred 
stock converted to common stock on ten-for-one basis.  The inclusion of 
these shares in both the basic and diluted earnings per share had, and 
will have, a significant impact on loss per share amounts in 1998 and 
subsequent years, respectively.

Results of Operations

Years Ended December 31, 1998 and 1997

Revenues
        Lynx had total revenues of $7.0 million and $4.6 million for the 
years ended December 31, 1998 and 1997, respectively.  Revenues for 1998 
included $2.3 million earned under an agreement with BASF for access to 
Lynx's gene expression analysis services; $4.3 million for the fourth 
quarter acquisition by BASF-LYNX Bioscience AG of Lynx's technology assets 
for certain central nervous system ("CNS") diseases; $0.3 million earned 
under a research collaboration signed in late 1998 with DuPont to apply 
Lynx's technologies to the study of certain crop plants and their 
protection;  and approximately $0.1 million in product and other revenue.  
Revenues for 1997 included $3.9 million earned under agreements with BASF 
and Hoechst AG and Hoechst Marion Roussel (collectively referred to as 
"Hoechst"), for access to gene expression analysis services to be 
performed by Lynx.  The 1997 revenue also included approximately $0.5 
million in sales of LR-3280 for use in clinical trials, and approximately 
$0.2 million in grant revenue and other product sales.

Operating Expenses

        Research and development expenses were $13.2 million and $14.2 
million in the years ended December 31, 1998 and 1997, respectively.  The 
decrease in expenses was due primarily to lower spending subsequent to the 
sale of Lynx's antisense program in March 1998 and the phaseout of the CNS 
scientific efforts at Lynx.  The Company's efforts in 1998 focused on 
continuing the development of applications of its technologies and 
establishing initial commercial capacity.  Lynx expects to continue to 
incur substantial research and development expenses due to planned 
spending for ongoing technology development and implementation, and new 
research applications. 

        General and administrative expenses were $2.1 million for the year 
ended December 31, 1998 compared to $1.9 million for the year ended 
December 31, 1997.  The increase was partially due to outside legal and 
administrative costs associated with the Company's business development 
efforts and facilities expansion.  Lynx expects to continue to incur 
substantial general and administrative expenses in support of its research 
and development and business development efforts.


Other

        Other income was $4.1 million and $0.8 million in the years ended 
December 31, 1998 and 1997, respectively.  The increase was due primarily 
to the $2.9 million gain from the March 1998 sale of Lynx's antisense 
program to Inex.  As partial consideration in this transaction, Lynx 
received $3 million in cash and will receive 1.2 million shares of Inex 
common stock, in three equal installments, with the first 400,000 shares 
received on March 10, 1998, and the second and third installments of stock 
to be received no later than two and three years, respectively, from the 
closing date of the transaction.  The Inex common stock received by Lynx 
is subject to certain restrictions on trading for specific periods of time 
following receipt by Lynx.  Interest income increased between years due to 
higher average cash, cash equivalents and investment balances during 1998 
as compared to 1997. 

Income Taxes

        The provision for income taxes of approximately $151,000 for 1998 
consists entirely of alternative minimum tax.  Due to operating losses and 
the inability to recognize an income tax benefit therefrom there was no 
provision for income taxes for 1997.

Years Ended December 31, 1997 and 1996

Revenues

        Lynx had total revenues of $4.6 million and $9.7 million for the 
years ended December 31, 1997 and 1996, respectively.  Revenues for 1997 
included $3.9 million earned under agreements with Hoechst and BASF for 
access to gene expression analysis services to be performed by Lynx.  The 
1997 revenue also included approximately $0.5 million in sales of LR-3280 
for use in clinical trials, and approximately $0.2 million in grant 
revenue and other product sales.  The 1996 revenue included $7.5 million 
in up-front fees under the agreements related to LR-3280 with Schwarz 
Pharma AG and Tanabe Seiyaku Co., Ltd., approximately $1.9 million earned 
under the agreements with Hoechst and BASF, and approximately $0.3 million 
earned from a government grant.

Operating Expenses

        Research and development expenses were $14.2 million and $12.5 
million in the years ended December 31, 1997 and 1996, respectively.  The 
increase was primarily due to costs associated with higher levels of 
research and development personnel, and increased patent and licensing 
activity.

        General and administrative expenses were $1.9 million for the year 
ended December 31, 1997 compared to $3.2 million for the year ended 
December 31, 1996.  The decrease is primarily attributable to lower 
business development and legal expenses in 1997 than in 1996 which 
reflected the costs associated with the signing of several corporate 
agreements.  Headcount related expenses were also slightly lower in 1997 
than in 1996 due to the severance agreement associated with the 
termination of a corporate officer in 1996.

Other

        Interest income was $753,000 and $585,000 in the years ended 
December 31, 1997 and 1996, respectively.  The increase was due to higher 
average cash, cash equivalents and investment balances in 1997 than in 
1996, particularly in the fourth quarter.

Income Taxes

        Due to operating losses and the inability to recognize an income tax 
benefit therefrom, there was no provision for income taxes for 1997.  The 
provision for income taxes of approximately $10,000 for 1996 consisted 
entirely of alternative minimum tax.

Liquidity and Capital Resources

        Net cash provided by operating activities of $5.7 million for the 
year ended December 31, 1998 differs from the net loss for the same period 
due to: the increase in deferred revenue from a contract payment received 
in 1998, partially offset by the current year recognition of a portion of 
previously deferred revenue; changes in working capital; amortization of 
deferred compensation; and depreciation and amortization of fixed assets 
and leasehold improvements.  Net cash provided by investing activities of 
$1.0 million for the year ended December 31, 1998, was primarily due to 
maturities of short-term investments, partially offset by the cost of 
leasehold improvements to the Company's new facility and purchases of 
equipment.  Net cash provided by financing activities in 1998 of $0.6 
million resulted primarily from the issuance of common stock through the 
exercise of stock options.  Cash and cash equivalents and short term 
investments were $23.9 million at December 31, 1998.

        Lynx plans to use available funds to further the development of, and 
applications for, its technologies.  During the year ended December 31, 
1998, Lynx invested approximately $5.7 million to develop and improve a 
new facility to meet anticipated expansion needs for Lynx's operations.  
Most of the facilities development work has been completed, although there 
will be a relatively low level of additional expenditures in early 1999.  
Lynx expects that capital investments during 1999 will be comprised 
primarily of purchases of equipment required in the normal course of 
business.  Lynx intends to invest its excess cash in short-term investment 
grade, interest-bearing securities or certificates of deposit.

        Since commencing operations as an independent company, Lynx has 
obtained funding for its operations through sales of preferred and common 
stock to venture capital investors, institutional investors, and contract 
partners; revenue from contractual arrangements; interest income; product 
sales; and government grants.  The cost, timing, and amount of funds 
required for specific uses by Lynx cannot be precisely determined at this 
time and will be based upon Lynx's progress in its research and 
development, legal and administrative costs, the establishment of 
corporate collaborations and other arrangements, additional facilities 
capacity needs, and the availability of alternate methods of financing.

        Lynx expects to incur substantial and increasing research and 
development expenses and intends to seek additional financing, as needed, 
through contractual arrangements with corporate partners and equity or 
debt offerings.  There can be no assurance that any additional financing 
required by Lynx will be available or, if available, will be on terms 
favorable to Lynx.  The Company believes that, at current spending levels, 
its existing capital resources and interest income thereon will enable it 
to maintain its current and planned operations at least through the middle 
of the year 2000.

        In late 1998, the Company entered into an agreement with a financial 
institution ("Lender") whereby the Company may borrow from the Lender up 
to $5.0 million for the purchase of equipment and certain other capital 
expenditures.  The Lender will obtain a security interest in all items 
financed by it under this agreement.  The Company paid to the Lender a fee 
that will be applied to loan transaction costs and expenses and to 
payments due by the Company under its borrowings.  As of December 31, 1998 
the Company had not financed any equipment under this arrangement.

Impact of Year 2000

       The Year 2000 ("Y2K") issue is the result of computer programs 
being written using two rather than four digits to define the year.  A 
company's hardware or computer programs that have date-sensitive software 
or embedded chips may recognize a date using "00" as the year 1900 
rather than the year 2000.  This could result in a system failure or 
miscalculations causing disruptions of operations.

        Lynx has established a team comprised of financial, information 
technology ("IT") and scientific personnel to address the potential 
exposure related to the impact of Y2K issues on its IT and non-IT systems.  
Lynx's approach to the Y2K issue involves the following four phases: 
assessment, remediation, testing, and implementation, including 
development of a contingency plan.  As of March 1999, the Company had 
completed assessment of almost all of its facilities, IT equipment and 
systems, non-IT equipment and systems, third-party services, and vendors.

Facilities
        In January 1999, the Company moved to a newly-built facility whose 
building systems are Y2K compliant.

IT Equipment and Systems
        Most of Lynx's computers and computer software are either compliant 
or can be made compliant with patches available from the vendors at 
minimal cost.  The IT staff is in the process of installing and testing 
the patches.  During the second quarter of 1999, the Company will install 
new Y2K compliant software for accounting, purchasing, and human resources 
applications.  The decision to implement the new administrative software 
was made as a result of overall Company need, irrespective of Y2K issues.

Non-IT Equipment and Systems
       Lynx's non-IT equipment consists primarily of laboratory equipment.  
The majority of this equipment has no date function and will not be 
affected by Y2K. Overall, the company found the level of non-compliant 
equipment to be minimal, although approximately 5% of the lab equipment 
have yet to be assessed.  It is not expected that a significant number of 
the unassessed pieces of equipment will be found to be non-compliant.

Third Party Services and Vendors
        The Company is reliant upon third parties to provide Y2K compliant 
systems sufficiently before December 31, 1999.  Lynx has surveyed its 
primary suppliers, banks, investment brokerages, and other third party 
service providers to determine whether they are Y2K compliant.  The 
Company has determined that certain of the third parties use systems that 
are not Y2K compliant, but all of the third parties surveyed have programs 
in place to address these Y2K issues.  The Company cannot guarantee that 
all of the third parties will achieve Y2K compliance in a timely manner.  
The failure of third parties to successfully address the Y2K issue could 
have a material adverse effect on the Company's business, financial 
condition and results of operations.

        Due to the relatively low level of Y2K non-compliance of Lynx's 
facilities, equipment, and systems, Lynx expects the remediation and 
testing process to be limited.  As such, the Company to date has spent an 
insignificant amount of funds addressing the Y2K issue, and expects that 
the total costs associated with addressing the Y2K issue and attaining 
compliance will be immaterial.  Lynx expects the remediation and testing 
phase of compliance to be completed by August 1999.

        The Company is in the process of developing a contingency plan for 
the IT and non-IT equipment and systems and third party service providers 
and vendors, if any, for which Lynx determines Y2K compliance is 
substantially at risk.  Lynx expects to have completed the contingency 
plan by September 1999.


ITEM 7A.        MARKET RISK DISCLOSURES

        The primary objective of the company's investment activities is to 
preserve principal while at the same time maximizing yields without 
significantly increasing risk.  To achieve this objective, the Company 
invests in highly liquid and high quality debt securities.  The Company's 
investments in debt securities are subject to interest rate risk.  To 
minimize the exposure due to adverse shifts in interest rates, the Company 
invests in short term securities and maintains an average maturity of less 
than one year.






<PAGE>



ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                             Lynx Therapeutics, Inc.

                   Index to Consolidated Financial Statements


Report of Ernst & Young LLP, Independent Auditors

Audited Consolidated Financial Statements:

  Consolidated Balance Sheets
  Consolidated Statements of Operations
  Consolidated Statements of Stockholders' Equity
  Consolidated Statements of Cash Flows
  Notes to Consolidated Financial Statements










<PAGE>




                Report of Ernst & Young LLP, Independent Auditors



The Board of Directors and Stockholders
Lynx Therapeutics, Inc.


We have audited the accompanying balance sheets of Lynx 
Therapeutics, Inc. as of December 31, 1998 and 1997, and the related 
consolidated statements of operations, stockholders' equity, and cash flows 
for each of the three years in the period ended December 31, 1998.  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 generally accepted auditing 
standards.  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 financial position of Lynx Therapeutics, Inc.
at December 31, 1998 and 1997, and the results of its operations and  
its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted 
accounting principles.



                                             /s/ ERNST & YOUNG LLP

Palo Alto, California
January 29, 1999



<PAGE>











                     Consolidated Balance Sheets
            (In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
                                                               December 31,
                                                          ---------------------
                                                             1998       1997
                                                          ---------- ----------
<S>                                                       <C>        <C>
Assets
Current assets:
   Cash and cash equivalents.............................   $16,170     $8,798
   Short-term investments................................     7,692     16,132
   Accounts receivable...................................     5,316        244
   Other current assets..................................       678        199
                                                          ---------- ----------
Total current assets.....................................    29,856     25,373
Property and equipment:
   Leasehold improvements................................     9,510      3,795
   Laboratory and other equipment........................     3,657      3,562
                                                          ---------- ----------
                                                             13,167      7,357
   Less accumulated depreciation.........................    (3,530)    (3,588)
                                                          ---------- ----------
Net property and equipment...............................     9,637      3,769
Notes receivable from officers and employees.............       841        125
                                                          ---------- ----------
                                                            $40,334    $29,267
                                                          ========== ==========
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable......................................    $1,770       $191
   Accrued accounts payable..............................     3,332         19
   Accrued compensation..................................       295        289
   Accrued professional fees.............................       136        179
   Deferred revenue - current portion....................     3,000      2,292
   Other accrued liabilities.............................       489        528
                                                          ---------- ----------
Total current liabilities................................     9,022      3,498

Deferred revenue.........................................     7,667        --
Other noncurrent liabilities.............................       188        179

Stockholders' equity:
   Preferred  stock,  issuable  in  series,  $.001
     par value; 2,000,000 shares authorized, all
     shares designated represent convertible
     preferred stock:
   Series B, no shares outstanding at December 31,
     1998; 332,288 shares designated, issued, and
     outstanding at December 31, 1997....................       --      16,091
   Series C, no shares outstanding at December 31,
     1998; 123,299 shares designated, issued, and
     outstanding at December 31, 1997....................       --       6,109
   Series D, no shares outstanding at December 31,
     1998; 40,000 shares designated, issued, and
     outstanding at December 31, 1997....................       --       4,989
   Common stock, $.01 par value; 20,000,000 shares
     authorized, 11,132,815 and 5,892,353 shares
     issued and outstanding at December 31, 1998 and
     1997, respectively..................................    74,329     46,640
   Notes receivable from stockholders....................      (436)      (460)
   Deferred compensation.................................    (3,742)    (5,394)
   Accumulated other comprehensive income (loss).........        (7)       (45)
   Accumulated deficit...................................   (46,687)   (42,340)
                                                          ---------- ----------
Total stockholders' equity...............................    23,457     25,590
                                                          ---------- ----------
                                                            $40,334    $29,267
                                                          ========== ==========
</TABLE>
                       See accompanying notes.
<PAGE>
<PAGE>
                   Consolidated Statements of Operations
                 (In thousands, except per share amounts)
<TABLE> 
<CAPTION> 
                                             Years Ended December 31,
                                         --------------------------------
                                            1998       1997       1996
                                         ---------- ---------- ----------
<S>                                      <C>                   <C>
Net revenues:
  License fees........................      $  --      $  --      $7,500
  Revenues from collaborative
    arrangements......................       6,875      4,420      1,958
  Product sales and other revenues....         130        162        291
                                         ---------- ---------- ----------
Total revenues                               7,005      4,582      9,749
Operating costs and expenses:
  Research and development............      13,166     14,226     12,545
  Selling, general and administrative.       2,141      1,930      3,170
                                         ---------- ---------- ----------
Total operating costs and expenses....      15,307     16,156     15,715
                                         ---------- ---------- ----------
Loss from operations..................      (8,302)   (11,574)    (5,966)
Interest income.......................       1,241        753        585
Other income..........................       2,865        --         --
Provision for income taxes............         151        --          10
                                         ---------- ---------- ----------
Net loss..............................     ($4,347)  ($10,821)   ($5,391)
                                         ========== ========== ==========
Basic and diluted net loss per
  share ..............................      ($0.45)    ($3.09)    ($2.45)
                                         ========== ========== ==========
Shares used in basic and diluted per
  share computation...................       9,642      3,501      2,197
                                         ========== ========== ==========
</TABLE>
                    See accompanying notes.
<PAGE>



                Consolidated Statements of Stockholders' Equity
              For the Years Ended December 31, 1996, 1997 and 1998
                      (In thousands, except share numbers)
<TABLE>
<CAPTION>
                                                                                               Accumulated
                                                                                                  Other                  Total
                                   Preferred Stock      Common Stock         Notes   Deferred  Comprehen-               Stock-
                                  ------------------ ---------------------  Receiv-   Compen-     sive     Accumulated holders'
                                   Shares    Amount    Shares     Amount     able     sation   Income (loss  Deficit    Equity
                                  ----------------------------------------------------------------------------------------------
<S>                               <C>       <C>      <C>         <C>       <C>       <C>       <C>         <C>         <C>
Balance at December 31, 1995..     495,587  $27,189   2,334,524   $13,394     ($660)     ($51)        ($2)   ($26,128)  $13,742
                                  ----------------------------------------------------------------------------------------------
Comprehensive loss:
   Net loss...................         --        --        --         --         --       --         --        (5,391)   (5,391)
   Other comprehensive
    income (loss)
      Net unrealized
      gain/(loss) on
      securities                       --        --        --         --         --       --            5        --           5
                                                                                               ---------------------------------
Comprehensive loss                                                                                      5      (5,391)   (5,386)
Exercise of employee stock
  options for cash............         --        --       9,663        12        --       --         --          --          12
Repurchase of common stock             --        --    (157,500)     (297)      450       --         --          --         153
Issuance of common stock
  in connection with
  Lynx/Spectragen merger......         --        --     959,182     4,221        --    (2,076)       --          --       2,145
Issuance of common stock
  for services................         --        --       6,279        31        --       --         --          --          31
Amortization of deferred
  compensation................         --        --        --         --         --        35        --          --          35
                                  ----------------------------------------------------------------------------------------------
Balance at December 31, 1996..     495,587   27,189   3,152,148    17,361      (210)   (2,092)          3     (31,519)   10,732
                                  ----------------------------------------------------------------------------------------------
Comprehensive loss:
   Net loss...................         --        --        --         --         --       --         --       (10,821)  (10,821)
   Other comprehensive
    income (loss)
      Net unrealized
      gain/(loss) on
      securities                       --        --        --         --         --       --          (48)       --         (48)
                                                                                               ---------------------------------
Comprehensive loss                                                                                    (48)    (10,821)  (10,869)
Exercise of employee stock
  options for cash and note
  receivable..................         --        --      76,181       287      (250)      --         --          --          37
Repurchase of common stock....         --        --     (11,476)     (198)       --       197        --          --          (1)
Issuance of common stock for
  cash, net of issuance
  costs of $1,685.............         --        --   2,675,500    25,070        --       --         --          --      25,070
Amortization of deferred
  compensation................         --        --        --         --         --       621        --          --         621
Recognition of deferred
  compensation on employee
  stock options...............         --        --        --       4,120        --    (4,120)       --          --         --
                                  ----------------------------------------------------------------------------------------------
Balance at December 31, 1997..     495,587   27,189   5,892,353    46,640      (460)   (5,394)        (45)    (42,340)   25,590
                                  ----------------------------------------------------------------------------------------------
Comprehensive loss:
   Net loss...................         --        --        --         --         --       --         --        (4,347)   (4,347)
   Other comprehensive
    income (loss)
      Net unrealized
      gain/(loss) on
      securities                       --        --        --         --         --       --           38        --          38
                                                                                               ---------------------------------
Comprehensive loss                                                                                     38      (4,347)   (4,309)

Exercise of employee stock
  options for cash and note
  receivable..................         --        --     334,309       744       (81)      --         --          --         663
Repurchase of common stock....         --        --     (49,717)     (108)      105       --         --          --          (3)
Conversion of series B, C
  and D preferred stock to
  common stock................    (495,587) (27,189)  4,955,870    27,189        --       --         --          --         --
Amortization of deferred
   compensation, including
   forfeitures................         --        --        --        (416)       --     1,652        --          --       1,236
Compensation and service
   expense related to stock
   option grants..............         --        --        --         280        --       --         --          --         280
                                  ----------------------------------------------------------------------------------------------
Balance at December 31, 1998..         --      $ --  11,132,815   $74,329     ($436)  ($3,742)        ($7)   ($46,687)  $23,457
                                  ==============================================================================================
</TABLE>
                    See accompanying notes.
<PAGE>




















                  Consolidated Statements of Cash Flows
           Net increase (decrease) in cash and cash equivalents
                               (In thousands)
<TABLE> 
<CAPTION> 
                                                    Years Ended December 31,
                                                --------------------------------
                                                   1998       1997       1996
                                                ---------- ---------- ----------
<S>                                             <C>        <C>        <C>
Cash flows from operating activities:
Net loss........................................  ($4,347)  ($10,821)   ($5,391)
Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
   Depreciation and amortization of fixed
     assets and leasehold improvements..........    1,176      1,298        829
   Issuance of common stock expensed in
     connection with the Lynx/Spectragen merger.      --         --       2,145
   Issuance of stock options to
     non-employees in exchange for services.....      111        --         --
   Amortization of deferred compensation........    1,236        621         35
   Other........................................     (138)       --          31
Changes in operating assets and liabilities:
   Accounts receivable..........................   (5,072)      (126)       (30)
   Other current assets.........................     (479)       (41)       (79)
   Accounts payable.............................    4,892       (219)      (264)
   Accrued liabilities..........................      (76)        60        413
   Deferred revenue.............................    8,375     (3,875)     3,542
   Other noncurrent liabilities.................        9         31         46
                                                ---------- ---------- ----------
Net cash provided by (used in) operating
  activities....................................    5,687    (13,072)     1,277
                                                ---------- ---------- ----------
Cash flows from investing activities:
Purchases of short-term investments.............  (21,767)   (16,180)    (6,903)
Maturities of short-term investments............   30,245      1,973      4,935
Leasehold improvements and equipment
  purchases, net of retirements.................   (7,254)    (1,188)    (1,511)
Notes receivable from officers and employees....     (175)        50        367
                                                ---------- ---------- ----------
Net cash provided by (used in) investing
  activities....................................    1,049    (15,345)    (3,112)
                                                ---------- ---------- ----------
Cash flows from financing activities:
Issuance of common stock, net of repurchases....      636     25,106        165
                                                ---------- ---------- ----------
Net cash provided by financing activities.......      636     25,106        165
                                                ---------- ---------- ----------
Net increase (decrease) in cash and cash
  equivalents...................................    7,372     (3,311)    (1,670)
Cash and cash equivalents at beginning of year..    8,798     12,109     13,779
                                                ---------- ---------- ----------
Cash and cash equivalents at end of year........  $16,170     $8,798    $12,109
                                                ========== ========== ==========
 Supplemental disclosures of cash flow
  information:
   Income tax paid..............................    $ --       $ --         $10
                                                ========== ========== ==========

Following are the effects of the non-cash
  transactions relating to the sale of the
  antisense business:
   Assets sold, net of depreciation.............     $210      $ --       $ --
                                                ========== ========== ==========

   Inex stock received..........................     $603      $ --       $ --
</TABLE>                                        ========== ========== ==========
                        See accompanying notes.
<PAGE>




                   Notes to Consolidated Financial Statements

                                December 31, 1998

1.       Summary of Significant Accounting Policies and Basis of Presentation

Ownership and Basis of Presentation

        Lynx Therapeutics, Inc. ("Lynx" or the "Company") has developed, 
and continues to develop, unique, proprietary technologies aimed at 
handling and/or analyzing, simultaneously, the DNA molecules or fragments 
in complex biological samples.  At the core of these technologies is 
Lynx's MegacloneTM  technology which allows both the 
simultaneous cloning of millions of DNA molecules or fragments in a 
sample, and the parallel probing or assaying of the millions 
of resulting clones, all without requiring prior separation, purification, 
individual amplification, or identification of any of the templates.  
Applications include the identification of genes differentially expressed 
between samples, the characterization of gene expression within a sample, 
and a novel, highly efficient means for scoring ("genotyping") large 
numbers of genetic markers or single nucleotide polymorphisms ("SNPs"), 
simultaneously, against very large numbers of genomes.

        The consolidated financial statements of the Company include the 
accounts of the Company and its wholly owned subsidiary, Lynx Therapeutics 
GmbH, formed under the laws of the Federal Republic of Germany.  All 
significant intercompany balances and transactions have been eliminated.  
Certain amounts in prior periods have been reclassified to conform to 
current presentation.

Use of Estimates

        The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the amounts reported in the financial statements 
and accompanying notes.  Actual results could differ from those estimates.


Cash, Cash Equivalents and Short-Term Investments

        The Company considers all investments with maturities at the date of 
purchase of 90 days or less as cash equivalents. Investments with original 
maturities beyond 90 days but less than one year are considered to be 
short-term investments. The Company's investment policy stipulates that 
the investment portfolio be maintained with the objectives of preserving 
principal, maintaining liquidity and maximizing return.

        The Company determines the appropriate classification of debt 
securities at the time of purchase and reevaluates such designation as of 
each balance sheet date.  As of December 31, 1998 and 1997, the Company 
has classified its entire investment portfolio as available-for-sale.  
Available-for-sale securities are carried at fair value based on quoted 
market prices, with the unrealized gains and losses reported as a separate 
component of stockholders' equity.  The cost of debt securities in this 
category is adjusted for amortization of premiums and accretion of 
discounts to maturity, which are included in interest income.  Realized 
gains and losses and declines in value judged to be other-than-temporary, 
on available-for-sale securities, if any, are included in interest 
income or expense. The cost of securities sold,  is based on the 
specific identification method.

        The Company invests its excess cash in deposits with major banks and 
in money market and short-term debt securities of companies with strong 
credit ratings from a variety of industries.  These securities generally 
mature within 365 days and, therefore, bear minimal risk.  The Company has 
not experienced any losses on it's investments.  The Company, by Corporate 
policy, limits the amount of credit exposure to any one issuer and to any 
one type of investment.

Property and Equipment

        Property and equipment are stated at original cost and are 
depreciated using the straight-line method over the estimated useful lives 
of the assets, which is generally three years.  Leasehold improvements  
are amortized over the lesser of the useful life of the asset or the 
remaining term of the facility lease.

Revenue Recognition

        Technology access fees or contract initiation fees are deferred and 
recognized as revenue on a straight-line basis over the noncancelable 
term of the agreement, exclusive of any possible future extensions to, or 
renewals of, the contract term by the other party.  Payments for services 
and/or materials to be provided by Lynx will be recognized as revenue when 
earned over the contract period in which the services are performed and/or 
materials are delivered by Lynx, provided no other obligations, refunds, 
or credits to be applied to future work exist.  Milestone payments are 
recognized as revenue upon the achievement of the related milestone and 
the satisfaction of any related obligations.  Revenues from the sales of 
products are recognized upon shipment.

        During 1998, revenue from three collaborative partners represented 
61%, 33% and 5% of total revenue.  During 1997, revenue from three 
collaborative partners represented 60%, 25% and 11%.  During 1996, revenue 
from three collaborative partners represented 36%, 30%, and 15% of total 
revenue.

Net Loss per Share 

        The Company complies with Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings Per Share" ("EPS").  Basic
earnings per share is computed by dividing income or loss applicable to 
common shareholders by the weighted-average number of common shares
outstanding for the period, net of certain common shares outstanding
which are subject to continued vesting and the Company's
right of repurchase.  Diluted EPS reflects the potential dilution
of securities that could share in the earnings of the Company,
to the extent such securities are dilutive.  Basic and diluted net
loss per share are equivalent for all periods presented herein due to 
the Company's net loss in all periods.  The following have been excluded 
from the calculation of loss per share for 1998 because the effect of 
inclusion would be antidilutive: approximately 152,000 common shares which 
are outstanding but are subject to the Company's right of repurchase which 
expires ratably over five years; and options to purchase approximately 
1,400,000 shares of common stock at a weighted average price of $5.35 per 
share.  The repurchasable shares and options will be included in the 
calculation at such time as the effect is no longer antidilutive, as 
calculated using the treasury stock method.

        Refer to Note 7 for additional disclosure regarding the common stock 
and stock option plan.

Stock-Based Compensation

        As permitted by Statement of Financial Accounting Standards No. 123, 
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has 
elected to account for stock options granted to employees using the 
intrinsic value method and, accordingly, does not recognize compensation 
expense for options granted to employees with exercise prices equal to the 
fair market value of the Company's common stock on the grant date.

Recent Accounting Pronouncements

        In 1998, Lynx adopted the provisions of Statute of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income," 
("SFAS 130").  SFAS 130 establishes new rules for the reporting
and presentation of comprehensive income and its components; 
however, the adoption of SFAS 130 had an immaterial impact on the 
company's net loss and shareholders' equity.  SFAS requires unrealized 
gains or losses on the Company's available-for-sale securities, which 
prior to adoption were reported separately in shareholders' equity, to be 
included in other comprehensive income (loss).

        In 1998, the Company adopted Statement of Financial Accounting 
Standards No. 131, "Disclosures about Segments of an Enterprise and Related 
information" ("SFAS 131").  SFAS 131 supersedes Statement of Financial 
Accounting Standards No. 14, "Financial Reporting for Segments of a 
Business Enterprise".  SFAS 131 establishes standards for the way that 
public business enterprises report information about operating segments in 
annual financial statements and requires that those enterprises report 
selected information about operating segments in interim financial reports.  
SFAS 131 also establishes standards for related disclosures about products 
and services, geographic areas and major customers.  The Company's business 
activities include the development of technologies aimed at handling and/or 
analyzing the DNA molecules or fragments in complex biological samples.  
Accordingly, the Company operates in only one business segment.  All of the 
Company's assets and revenues are derived from this activity.  
Substantially all of the Company's assets are located in the United States.  
To date, revenues have been derived primarily from contracts with companies 
located in the North America, Europe and Japan, as follows (in thousands):

<TABLE> 
<CAPTION> 
                                    Years Ended December 31,
                                --------------------------------
                                   1998       1997       1996
                                ---------- ---------- ----------
<S>                             <C>                   <C>
  North America............          $401       $176       $291
  Europe...................         6,542      4,401      5,958
  Japan....................            62          5      3,500
                                ---------- ---------- ----------
                                   $7,005     $4,582     $9,749
                                ========== ========== ==========
</TABLE>

2.       Investments

         The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
                                        Available-for-Sale Securities
                                -------------------------------------------
                                             Gross      Gross      Estimated
                                Amortized  Unrealized Unrealized     Fair
                                  Cost       Gains     Losses        Value
                                ---------- ---------- ---------- ----------
                                               (In thousands)
<S>                             <C>         <C>        <C>        <C>
December 31, 1998:
Money market mutual funds..          $775   $   --     $   --         $775
Commercial paper...........         8,177       --           (2)     8,175
Government notes...........         5,919       --         --        5,919
Mutual funds...............           800       --         --          800
Corporate bonds and notes..         7,799       --           (5)     7,794
                                ---------- ---------- ---------- ----------
                                  $23,470   $   --          ($7)   $23,463
                                ========== ========== ========== ==========

December 31, 1997:
Money market mutual funds..        $3,280   $   --     $   --       $3,280
Commercial paper...........         7,904       --           (6)     7,898
Government notes...........         6,902       --          (35)     6,867
Mutual funds...............         1,000       --         --        1,000
Corporate bonds and notes..         5,809       --           (4)     5,805
                                ---------- ---------- ---------- ----------
                                  $24,895   $   --         ($45)   $24,850
                                ========== ========== ========== ==========
</TABLE>

        During the years ended December 31, 1998, 1997 and 1996, the Company 
did not sell any securities.  As of December 31, 1998, $15.8 million of 
the marketable securities were classified as cash equivalents, and the 
balance of $7.7 million was classified as short-term investments. As of 
December 31, 1997, $8.8 million of the marketable securities were 
classified as cash equivalents, and the balance of $16.1 million was 
classified as short-term investments.  All short-term investments have 
maturities of less than one year.  Expected maturities may differ from 
contractual maturities because the issuers of the securities may have the 
right to prepay obligations without prepayment penalties.

3.      Collaborative Arrangements

        In October 1998, the Company entered into a research collaboration 
with DuPont to apply Lynx's technologies to the study of certain crop 
plants and their protection.  Under the terms of the agreement, Lynx will 
receive payments over a five-year period for certain analyses, the 
achievement of specific technological milestones and the delivery of the 
genomic map of a certain crop.  An initial payment of $10.0 million was 
received at the execution of the agreement, with an additional minimum of 
$12.0 million to be received by Lynx over the next three years.

        Also in the fourth quarter of 1998, Lynx reached agreement with BASF 
AG ("BASF") to expand the scope of the agreements that the companies had 
signed in 1996.  The first of these agreements had granted BASF non-
exclusive access to certain other Lynx bead-based technologies developed 
since the original agreements, and to establish the basis upon which BASF 
will pay Lynx (cost plus a specified profit margin) for any experiments 
performed by Lynx under the agreement.  Pursuant to this amendment, BASF 
paid $1 million to Lynx in January 1999.

        The other 1996 agreements with BASF had established and defined a 
joint venture ("JV") company (BASF-LYNX Bioscience AG) licensed to use 
Lynx's technologies in epilepsy, toxicology and fermentation, with 
financial support from BASF.  These agreements were amended to enable the 
JV to study certain other central nervous system ("CNS") diseases and, 
subject to approval by Lynx and BASF through their representatives on the 
Advisory Board of the JV, other fields of interest.  The non-exclusive 
license granted by Lynx to the JV was extended accordingly.  Together with 
these amendments, BASF agreed to commit an additional $10 million in funding
to the JV, of which $4.25 million was paid to Lynx in January 1999, for
the JV's acquisition of Lynx's technology assets for certain CNS diseases.

        In October 1995, Lynx entered into an agreement with Hoechst, which 
provided Hoechst with non-exclusive access to Lynx's Massively Parallel 
Signature Sequencing.  Under the terms of the agreement, Hoechst paid Lynx 
an access fee of $3 million on execution of the agreement and, upon the 
achievement of a certain milestone, agreed to pay an additional fee of $8 
million to initiate its subscription and a minimum access fee of $4 
million for the first subscription year under the agreement.  In return, 
Lynx will provide Hoechst with a certain number of analyses per year.  In 
addition, the Company received $5 million in November 1995 in a private 
placement to Hoechst of 40,000 shares of Lynx's Series D preferred stock 
at $125.00 per share (since converted into 400,000 shares of common 
stock).

        The agreement between Hoechst and Lynx was amended in September 1997 
and again in May 1998.  The 1997 amendment modified the technology milestone
included in the original agreement and extended the date by which such
milestone must be achieved under the contract.  The amendment eliminated
the milestone and includes instead Hoechst's right to access Lynx's Massively
Parallel Signature Sequencing technologies by payment 'of a technology access
fee.  Also, the 1998 amendment allows Hoechst 'and Lynx to mutually agree
to include access by Hoechst to certain other of Lynx's technologies.

4.      Sale of the Antisense Business

        On March 10, 1998, Lynx sold its portfolio of phosphorothioate antisense
patents and licenses, and its therapeutic oligonucleotide manufacturing facility
(collectively, the "Antisense Business"), to Inex Pharmaceuticals Corporation
("Inex"), a Canadian company.  As partial consideration in this transaction,
Lynx received $3 million in cash and will receive 1.2 million shares of Inex
common stock, in three equal installments, with the first 400,000 shares
received on the above date, and the second and third installments of stock to
be received no later than two and three years, respectively, from the closing
of the transaction.  The Inex common stock received by Lynx is subject to
certain restrictions on trading for specific periods of time following receipt
by Lynx.  Lynx is also entitled to receive royalties on future sales of
phosphoroamidate chemistry for certain therapeutic applications in the fields
of cancer and inflammation.

        The gain on the sale of the Antisense Business is based on the cash
and the first installment of the Inex common stock received on the transaction
date, net of the book value of the assets transferred to Inex and certain other
costs associated with the transaction and incurred by Lynx.  The Inex common
stock is classified in long term assets.

5.      License Agreements

        Lynx has entered into various license agreements with companies and 
academic institutions. Such agreements generally require Lynx to pay 
annual or semiannual license fees and are generally cancelable upon 60 to 
120 days' notice.  Lynx recorded a credit to expense of approximately 
$27,000 in the year ended December 31, 1998 for license fees which had 
been paid, then subsequently included in the sale to Inex.  The expenses 
associated with licenses were approximately $314,000 for the year ended 
December 31, 1997; and $242,000 for the year ended December 31, 1996.

6.      Notes Receivable from Officers

        In August 1998, the Company entered into two loan agreements with an 
officer of the Company.  Each loan is in the amount of $100,000, secured 
by a second mortgage on real property, with interest accruable at the rate 
of 5.57% per annum, and subject to early repayment under specified 
circumstances.  The principal and interest on one loan will be forgiven, 
based on the officer's continuous employment over a four year period, in the 
following amounts: 50% on the second anniversary date of employment; and 
25% on each of the third and fourth anniversary dates of employment.  The 
second loan is to be repaid by the officer according to the following 
schedule: 50% of the principal on the third anniversary date of 
employment; and the remainder of the principal plus accrued interest on 
the fourth anniversary date of employment.

        In April 1997, the Company entered into a full-recourse loan 
agreement with an officer of the Company.  A note receivable of $250,000 
was issued under a stock purchase agreement for the purchase of 50,000 
shares of common stock whereby all the shares issued under the agreement 
are pledged as collateral.  The outstanding principal amount is due and 
payable in full in April 2002, subject to an obligation to prepay under 
specified circumstances.  Interest is payable upon the expiration or 
termination of the note and accrues at the rate of 6.49% per annum.

        In October 1995, the Company entered into a full-recourse loan 
agreement with an officer of the Company. A note receivable of $210,000 
was issued under a stock purchase agreement for the purchase of 60,000 
shares of common stock whereby all the shares issued under the agreement 
are pledged as collateral.  The note and all interest receivable was paid 
in full according to the terms of the agreement in April 1998.

7.      Stockholders' Equity 

Preferred Stock

        On March 31, 1998, pursuant to the Amended and Restated Certificate 
of Designation, dated September 30, 1997, the 332,288 shares of Series B 
preferred stock, 123,299 shares of Series C preferred stock and 40,000 
shares of Series D preferred stock converted into 4,955,870 shares of 
common stock.

Common Stock

        At December 31, 1998, Lynx has reserved 2,865,563 shares of common 
stock for issuance upon the exercise of outstanding employee and 
nonemployee stock options, upon the issuance of shares purchased pursuant 
to the employee stock purchase plan, and upon the exercise of certain 
warrants, as noted below:

<TABLE>

<S>                                                    <C>

        Stock option grants outstanding.........      1,429,722
        Shares available for grant..............        785,841
        Employee stock purchase plan shares.....        200,000
        Warrants outstanding....................         50,000
        Other...................................        400,000
                                                      ----------
                                                      2,865,563
                                                      ==========
</TABLE>


        In October 1997, Lynx issued 2,675,500 shares of common stock, 
resulting in net proceeds of $25.1 million, pursuant to a common stock 
purchase agreement between the Company and certain investors.  The shares 
were registered for resale on Form S-3 Registration Statement that became 
effective on December 31, 1997.  In connection with this transaction, 
warrants to purchase 50,000 shares of common stock at an exercise price of 
$14.00 per share were issued to the underwriters of the transaction, 
pursuant to the Common Stock Purchase Agreement dated September 28, 1997 
between the Company and certain investors, and will expire on October 1, 
2000.

        In November 1996, Lynx issued 959,182 shares of Lynx common stock in 
exchange for 737,832 shares of Spectragen, Inc. common stock held by 
certain officers, employees and one consultant of Spectragen, pursuant to 
an Agreement of Merger between Lynx and Spectragen.  A portion of the 
shares are subject to repurchase rights which expire ratably over a five 
year period.  Pursuant to the merger, and in accordance with APB 25, 
"Accounting for Stock Issued to Employees," Lynx recorded compensation 
and consultant expense of $2.1 million and recognized approximately $1.4 
million in deferred compensation for the difference between the fair 
market value of the Lynx stock and the deemed fair market value of the 
Spectragen stock on the day of acquisition.  The deferred compensation 
will be charged ratably to expense as the repurchase rights expire.

 1998 Employee Stock Purchase Plan

        In May 1998, the stockholders approved the adoption of the Company's 
1998 Employee Stock Purchase Plan (the "Purchase Plan").  The Purchase 
Plan authorized the issuance of 200,000 shares of common stock pursuant to 
purchase rights granted to employees of the Company and is intended to be 
an "employee stock purchase plan" as defined in Section 423 of the 
Internal Revenue Code.

        The Purchase Plan was adopted to provide a means by which employees 
of the Company and its affiliates will be given an opportunity to purchase 
stock in the Company, to assist in retaining the services of its 
employees, to attract and secure the services of new employees, and to 
provide incentives for all employees, to exert maximum efforts for the 
success of the Company.  There has been no activity to date in the 
Purchase Plan.

 1992 Stock Option Plan

        In July 1992, Lynx adopted the 1992 Stock Option Plan ("the Plan") 
under which incentive or nonqualified stock options to purchase shares of 
common stock may be granted to employees and officers of, and consultants 
to, the Company.  In February 1998, the stockholders approved an amendment 
to the 1992 Plan to enhance the flexibility of the Board of Directors 
("Board") and the Board's Compensation Committee in granting stock 
options.  The amendment increases the number of shares authorized for 
issuance under the 1992 Plan from a total of 3,400,000 to 4,000,000 
shares.

        Under the Plan, the exercise price of incentive options granted may 
not be less than 100% (110% in the case of options granted to a person who 
owns more than 10% of the total combined voting power of all classes of 
stock of the Company) of the fair market value of common stock at the date 
of grant. Nonqualified options may be granted at not less than 85% of fair 
market value at the date of grant.  Options generally vest over a five-
year period from the date of grant and have a term of ten years (five 
years in the case of options granted to a person who owns more than 10% of 
the total combined voting power of all classes of stock of the Company).

        In December 1997, the Board of Directors approved the commencement 
of vesting of certain performance-based stock options that had been 
granted to certain employees prior to the merger between Spectragen and 
Lynx.  In connection with this action, Lynx recognized deferred 
compensation of $4.1 million representing the difference between the 
exercise price of the options and the fair market value of the Company's 
common stock at the time of the December 1997 approval. The deferred 
compensation will be charged to expense over the period beginning December 
1997, through the end of the five year vesting period.

        In November 1996, Lynx issued 524,355 options to purchase Lynx 
common stock in exchange for 403,350 options to purchase Spectragen common 
stock pursuant to the Agreement of Merger between the Company and 
Spectragen.  In accordance with APB 25, Lynx recognized deferred 
compensation of $712,000 representing the difference between the exercise 
price of the options and the fair market value of the Company's common 
stock on the day of the grants.  The deferred compensation will be charged 
to expense over the five year vesting period of the grants.

         The stock option activity under the Plan was as follows:
<TABLE>
<CAPTION>
                                                    Options Outstanding
                                            ------------------------------------
                                             Number of                  Weighted
                                              Shares         Exercise   Average
                                 Available    Subject          Price    Exercise
                                 for Grant  to Options       per Share   Price
                                ----------- ----------- --------------- --------
<S>                             <C>         <C>         <C>             <C>
  Balance at December 31, 1995.    169,035     732,411   $0.10 - $5.00    $1.97
  Shares authorized...........   1,224,355        --               --       --
  Options granted..............   (859,858)    859,858   $0.15 - $6.00    $2.75
  Options exercised............       --        (9,663)  $0.10 - $6.00    $1.23
  Options canceled.............     64,954     (65,004)  $0.10 - $6.00    $2.76
                                ----------- -----------
  Balance at December 31, 1996.    598,486   1,517,602   $0.10 - $6.00    $2.39
  Options granted..............   (266,841)    266,841   $4.00 -$14.38    $7.56
  Options exercised............       --       (76,181)  $0.10 - $6.00    $3.78
  Options canceled.............     29,163     (82,008)  $0.15 -$14.10    $1.68
                                ----------- -----------
  Balance at December 31, 1997.    360,808   1,626,254   $0.10 -$14.38    $3.22
  Shares authorized...........     600,000        --       --      --       --
  Options granted..............   (407,500)    407,500   $7.13 -$15.00   $11.27
  Options exercised............       --      (334,309)  $0.10 - $6.00    $2.27
  Options canceled.............    232,533    (269,723)  $0.10 -$15.00    $5.30
                                ----------- -----------
  Balance at December 31, 1998.    785,841   1,429,722   $0.10 -$15.00    $5.35
                                =========== ===========
</TABLE>

        To date, all options granted under the Plan are nonqualified 
options.  Options to purchase a total of 505,522 shares were exercisable 
under the Plan at December 31, 1998.  Certain officers and employees of 
the Company were granted the right to exercise their options prior to 
vesting, subject to the Company's right of repurchase at the original 
issue price, which lapses ratably over five years.  As of December 31, 
1998, 151,978 shares outstanding were subject to repurchase.

         The options outstanding at December 31, 1998 have been segregated into
ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
                       Options Outstanding            Options Exercisable
                ----------------------------------- ----------------------
                  Options      Weighted               Options
                Outstanding    Average    Weighted- Exercisable  Weighted-
                     at       Remaining    Average       at       Average
   Range of     December 31, Contractual  Exercise  December 31, Exercise
 Exercise Prices    1998     Life (Years)   Price       1998       Price
--------------- ------------ ------------ --------- ------------ ---------
<S>             <C>          <C>          <C>       <C>          <C>
 $0.10   $0.77      112,773         8.81     $0.30       48,736     $0.30
 $1.00   $1.00      182,625         5.79     $1.00      170,596     $1.00
 $1.54   $1.54      311,610         7.60     $1.54       39,195     $1.54
 $2.00   $4.00       89,580         7.54     $3.69       42,362     $3.35
 $5.00   $5.00      143,806         7.22     $5.00       89,703     $5.00
 $6.00   $7.13      154,576         7.59     $6.11       72,906     $6.00
 $7.25   $8.75      176,000         9.47     $8.54        1,166     $8.38
 $9.13  $14.25      136,986         9.96    $11.96       28,464    $11.62
$14.38  $14.38        7,500         8.46    $14.38        2,250    $14.38
 15.00  $15.00      114,266         9.15    $15.00       10,144    $15.00
                ------------                        ------------
                  1,429,722         8.01     $5.35      505,522     $3.56
                ============                        ============
</TABLE>

 Pro Forma Information

        The Company has elected to follow APB 25 and related interpretations 
in accounting for its stock options because, as discussed below, the 
alternative fair value accounting provided for under SFAS 123 requires use 
of option valuation models that were not developed for use in valuing 
stock options.  Under APB 25, when the exercise price of the Company's 
stock options equals the market price of the underlying stock on the date 
of the grant, no compensation expense is recognized.

        Pro forma information regarding net loss and net loss per share is 
required by SFAS 123, and has been determined as if the Company had 
accounted for its stock options granted subsequent to December 31, 1994 
under the fair value method of SFAS 123.  The weighted average fair value 
of options granted in 1996, 1997 and 1998 was $2.61, $4.11 and $6.74 per 
share, respectively.  The weighted average fair value of options granted 
in 1996 at a weighted average exercise price of $1.40 per share, which was 
less than the market price on grant date, was $6.79.  The fair value for 
these options was estimated at the date of grant using a Black-Scholes 
option pricing model for the multiple option approach with the following 
weighted-average assumptions:  a risk-free interest rate of 5.5%, 6.33% 
and 6.34% for 1998, 1997, and 1996, respectively, a weighted-average 
expected life of 5.1 years for 1998 grants, 4.2 years for 1997 grants, and 
4.3 years for 1996 grants, and an expected dividend yield of zero for all 
three years.  The Company believes that due to the low trading volume of 
Lynx stock in 1996, the calculated volatility of the Company's common 
stock did not provide a representative picture of future volatility.  
Consequently, an industry-based proxy volatility of 73% was used in the 
calculations for 1996.  In 1997 and 1998, trading volume was sufficient to 
generate an average volatility of 56% and 64% respectively, which the 
Company believes is representative of future volatility.

        The Black-Scholes option valuation model was developed for use in 
estimating the fair value of traded options which have no vesting 
restrictions and are fully transferable.  In addition, option valuation 
models require the input of highly subjective assumptions including the 
expected stock price volatility.  Because the Company's stock options have 
characteristics significantly different from those of traded options, and 
because changes in the subjective input assumptions can materially affect 
the fair value estimate, in management's opinion, the existing models do 
not necessarily provide a reliable single measure of the fair value of the 
Company's stock options.

        Had compensation cost for the Company's stock-based compensation 
plan been determined based on the fair value at the grant date for awards 
under the plan consistent with the method of SFAS 123, the Company's net 
loss and net loss per share would have been increased to the pro forma 
amounts indicated below:

<TABLE> 
<CAPTION> 
                                      Years Ended December 31,
                                   -----------------------------
                                     1998      1997      1996
                                   --------- --------- ---------
<S>                                <C>                 <C>
 Net loss:
    Historical..................    ($4,347) ($10,821)  ($5,391)
    Pro forma...................    ($5,610) ($11,498)  ($5,853)


 Net loss per share:
    Historical..................     ($0.45)   ($3.09)   ($2.45)
    Pro forma...................     ($0.58)   ($3.28)   ($2.66)
</TABLE>

        Because SFAS 123 is applicable only to options granted subsequent to 
December 31, 1994, future pro forma net income and income/loss per share 
results, may be materially different from actual amounts presented.

 8.     Income Taxes

        The provision for income taxes of approximately $151,000 for 1998 
and $10,000 for 1996 consists entirely of alternative minimum tax.  Due to 
operating losses and the inability to recognize an income tax benefit 
therefrom, there is no provision for income taxes for 1997.

        The reconciliation of income tax expense (benefit) attributable to 
continuing operations computed at the U.S. federal statutory rates to 
income tax expense (benefit) for the fiscal years ended December 31, 1998, 
1997 and 1996 is as follows (in thousands):

<TABLE> 
<CAPTION> 
                                      Years Ended December 31,
                                   -----------------------------
                                     1998      1997      1996
                                   --------- --------- ---------
<S>                                <C>                 <C>
Tax provision (benefit) at U.S.
   statutory rate.................. ($1,427)  ($3,679)  ($1,830)
Book amortization of compensation
   expense for which no tax
   deduction is permitted..........     421       211       --
Alternative minimum tax............     151       --         10
Loss for which no tax benefit
   is currently recognizable.......   1,006     3,468     1,830
                                   --------- --------- ---------
                                       $151     $ --        $10
                                   ========= ========= =========
</TABLE>

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the amounts used for income tax  purposes.  Significant
components of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
                                                  December 31,
                                             -------------------
                                               1998      1997
                                             --------- ---------
<S>                                          <C>       <C>
 Deferred tax assets:
   Net operating loss carryforwards......      $9,423   $10,800
   Research & development tax
      credit carryforwards...............       1,345     1,172
   Alternative minimum tax credit
      carryforwards......................         162        10

   Capitalized research and
      development expenditures...........       1,319       616
   Deferred revenue......................       4,182       912
   Reserves and accruals.................         324       --
   Other, net............................         599       708
   Valuation allowance...................     (17,354)  (14,218)
                                             --------- ---------
Net deferred tax assets..................       $ --      $ --
                                             ========= =========
</TABLE>

        Realization of deferred tax assets is dependent on future earnings, 
if any, the timing and the amount of which are uncertain.  Accordingly, a 
valuation allowance, in an amount equal to the net deferred tax asset as 
of December 31, 1998 and 1997 has been established to reflect these 
uncertainties.  The change in the valuation allowance was a net increase 
of approximately $3,136,000 and $2,661,000 for the fiscal years ended 
December 31, 1998 and 1997, respectively.

        As of December 31, 1998, the Company had federal and California net 
operating loss carryforwards of approximately $27,680,000 and $190,000, 
respectively, which will expire at various dates from 2002 through 2012, 
if not utilized.  As of December 31, 1998, the Company also had federal 
and California research and development tax credit carryforwards of 
approximately $1,096,000 and $249,000, respectively, which will expire at 
various dates from 2007 through 2018, if not utilized.

        Utilization of net operating loss and tax credit carryforwards may 
be subject to a substantial annual limitation due to the ownership change 
limitations provided by the Internal Revenue Code of 1986, as amended, and 
similar state provisions.  The annual limitation may result in expiration 
of net operating loss and tax credit carryforwards before full 
utilization.  Utilization of federal and California net operating losses 
and credit carryforwards incurred prior to February 1994 is limited on an 
annual basis under the Internal Revenue Code of 1986, as amended, as a 
result of an ownership change in 1994.

 9.     Obligations under Operating Leases

        In August 1993, the Company entered into a noncancelable operating
lease for facilities which expires on July 31, 2003.  In 1998, the Company
entered into an agreement to sublease a portion of this space.  The term
of the sublease is twenty-four months, commencing in March 1998.  The 
sublessee has the option to extend the term of the sublease through July 
2003, subject to certain conditions.  In January 1999, the Company entered 
into a second agreement to sublease the remaining portion of its facilities 
under the 1993 lease.  The term of this second sublease is fifty-four 
months, commencing in February 1999, and runs through July 2003.

        Rent from the two subleases is sufficient to support the rent and
other operating expenses incurred by Lynx under the terms of the 1993 
Lease.

        In February 1998, the Company entered into a noncancelable 
operating lease for facilities.  The term of the lease commenced on 
December 15, 1998 and expires on December 14, 2008.  Under the terms of 
the lease, the monthly rental payments are fixed for the first twenty-four 
months.  Thereafter, the monthly rental payments increase, and are subject 
to annual Consumer Price Index-based adjustments, with minimum and maximum 
limits.  The Company is recognizing rent expense on a straight-line basis 
over the lease period.  The Company has the option to extend the lease for 
an additional five year period, subject to certain conditions, with 
payments to be determined at the time of the exercise of the option.  
Additionally, the Company has an option (the "Expansion Option"), 
exercisable on or prior to January 1, 2000, to lease additional building 
space.  In return for the Expansion Option, the Company may be subject to 
a nominal carrying cost on the additional space, depending on the timing 
of the exercise of such option.

        The Company also leases equipment under various operating lease 
agreements subject to minimum annual lease payments.

<TABLE>
<CAPTION>

         Minimum  annual  rental  commitments  and sublease income under  operating
 leases  are  as follows (in thousands):
                                             Commit-   Sublease
    Years ending December 31:                  ments    Income
----------------------------------           --------- ---------
<S>                                          <C>       <C>
       1999.................................   $1,580    $1,009
       2000.................................    1,862       913
       2001.................................    2,142       891
       2002.................................    2,211       914
       2003.................................    2,029       546
       Thereafter...........................   10,831       --
                                             --------- ---------
                                              $20,655    $4,273
                                             ========= =========
</TABLE>

        Rent expense for facilities and equipment under operating leases was 
$738,000, $649,000, and $722,000 for the years ended December 31, 1998, 
1997, and 1996, respectively.  Rental income for the facility under 
sublease was $186,000 for the year ended December 31, 1998.  There was no 
rental income in the years ended December 31, 1997 and 1996.

10.      401(k) Plan

        In October 1992, Lynx adopted a 401(k) Plan covering all of its 
employees.  The 401(k) Plan is intended to qualify under Section 401 of 
the Code so that contributions by employees or by Lynx to the 401(k) Plan 
are not taxable to employees until withdrawn from the 401(k) Plan, and so 
that contributions by Lynx, if any, will be deductible by Lynx when made.  
Pursuant to the 401(k) Plan, employees may elect to reduce their current 
compensation by up to 15% (subject to an annual limit prescribed by the 
Code as described below) and have the amount of such reduction contributed 
to the 401(k) Plan.  Under limitations imposed by the Code, the maximum 
amount of compensation reduction a participant could elect to have 
contributed to the 401(k) Plan for the 1998 calendar year was $10,000.  
This amount is subject to annual adjustments for increases in the cost of 
living, as determined under Internal Revenue Service regulations.  The 
401(k) Plan permits, but does not require, additional contributions to the 
401(k) Plan by Lynx on behalf of all participants in the 401(k) Plan.  In 
the years ended 1998, 1997 and 1996, the Company contributed $49,383, 
42,088 and $37,073, respectively.

11.     Equipment Debt Financing

        In late 1998, the Company entered into an agreement with a financial 
institution ("Lender") whereby the Company may borrow from the Lender up 
to $5.0 million for the purchase of equipment and certain other capital 
expenditures.  The Lender will obtain a security interest in all items 
financed by it under this agreement.  The Company paid to the Lender a fee 
that will be applied to loan transaction costs and expenses and to 
payments due by the Company under its borrowings.  The term of each loan 
under the arrangement is forty-eight months, with a right of prepayment.  
As of the date each loan term commences, the interest rate and monthly 
payment under such loan are fixed for the entire loan term.  As of December 
31, 1998, the Company had not financed any equipment under this 
arrangement.



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

         Not applicable.


<PAGE>



                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The Company's executive officers,  directors and certain employees, and
their ages as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
              Name               Age            Company Positions
-------------------------------- ---- -------------------------------------
<S>                              <C>  <C>
Sam Eletr, Ph.D ................  59  Chief Executive Officer and
                                        Chairman of the Board
Edward C. Albini ...............  41  Chief Financial Officer and Secretary
Stephen C. Macevicz, Ph.D. .....  49  Vice President, Intellectual Property
William K. Bowes, Jr.(1) .......  72  Director
Sydney Brenner, M.B., D. Phil ..  71  Director
James C. Kitch(1) ..............  51  Director
Kathleen D. La Porte(2) ........  37  Director
Craig C. Taylor(2) .............  48  Director

</TABLE>
-----------
  (1)  Member of the Audit Committee
  (2)  Member of the Compensation Committee


        Sam Eletr has served as Chairman of the Board of the Company since 
February 1992 and resumed the position of Chief Executive Officer of the 
Company in November 1996, a position he held from February 1992 through 
January 1996.  In 1981, Dr. Eletr founded Applied Biosystems, Inc., a 
manufacturer of instruments and consumables for life science research and 
related applications, now a wholly-owned subsidiary of Perkin Elmer 
Corporation, and served as Chairman of the Board of Directors and in 
various executive positions at ABI from its inception until March 1987.  
Dr. Eletr acted as a consultant to ABI from September 1990 until July 
1992, during which time he undertook to assume the leadership of the 
Company.

        Edward C. Albini has served as Chief Financial Officer of the 
Company since April 1997.  He was elected Secretary of the Company in 
February 1998.  From January 1983 to April 1997, Mr. Albini served in 
various financial management positions with Genentech, Inc., a 
biotechnology company.  His most recent role at Genentech was as the 
director of Financial Planning and Analysis.  Mr. Albini holds a BS degree 
in Accounting from Santa Clara University and an MBA degree from Walter A. 
Haas School of Business at the University of California at Berkeley.  Mr. 
Albini is also a certified public accountant.

        Stephen C. Macevicz joined the Company in September 1995 as Vice 
President, Intellectual Property. He was Senior Patent Attorney and chief 
patent counsel at ABI from 1992 to August 1995 and, from 1986 to 1992, 
Patent Counsel at DNAX Research Institute of Molecular and Cellular 
Biology, a research subsidiary of Schering-Plough Corporation.  He 
received his law degree from the University of California, Berkeley (Boalt 
Hall) in 1984 and his Ph.D. in Biophysics from the University of 
California, Berkeley in 1979.

        William K. Bowes, Jr. has served as a director of the Company since 
March 1994.  He has been a general partner of U.S. Venture Partners, a 
venture capital partnership, since 1981.  He currently serves as a 
director of Amgen, Inc., a biotechnology company, AMCC, an integrated 
circuit company, XOMA Corporation, a biotechnology company, and one U.S. 
Venture Partners privately owned portfolio company.

        Sydney Brenner has served as a director of the Company since October 
1993.  In July 1996, he was appointed the Director and President of The 
Molecular Sciences Institute, a non-profit research institute in Berkeley, 
California.  In September 1996, he retired from his position of Honorary 
Professor of Genetic Medicine, University of Cambridge Clinical School.  
From 1986 to his retirement in 1991, Dr. Brenner directed the Medical 
Research Council Unit of Molecular Genetics.  He was a member of the 
Scripps Research Institute in La Jolla, California until December 1994.

        James C. Kitch has served as a director of the Company since 
February 1993 and Secretary of Lynx from February 1992 to December 1997.  
He was a director of ABI from August 1986 to February 1993.  He is a 
partner at Cooley Godward LLP, a law firm which has provided legal services
to the Company.

        Kathleen D. La Porte has served as a director of the Company since 
March 1994.  She is a general partner of the Sprout Group, the venture 
capital affiliate of Donaldson, Lufkin and Jenrette.  From 1987 to 1993, 
Ms. La Porte was a principal at Asset Management Company.  She currently 
serves as a director of Keravision, Inc., a medical device company, Gentle 
Dental Service Corporation, a healthcare service company, and several 
private companies.

        Craig C. Taylor has served as a director of the Company since March 
1994 and as Acting Chief Financial Officer from July 1994 to April 1997.  
He has been active in venture capital since 1977 when he joined Asset 
Management Company.  He is a general partner of AMC Partners 89 L.P., 
which serves as the general partner of Asset Management Associates 1989 
L.P., a private venture capital partnership.  He currently serves as a 
director of Metra BioSystems, Inc., a biotechnology company, 
Pharmacyclics, Inc., a biotechnology company, and several private 
companies.

Compliance with the Reporting Requirements of Section 16(a)

        Section 16(a) of the Exchange Act requires the Company's directors 
and executive officers, and persons who own more than ten percent (10%) of 
a registered class of the Company's equity securities, to file with the 
Security and Exchange Commission ("SEC") initial reports of ownership 
and reports of changes in ownership of common stock and other equity 
securities of the Company.  Officers, directors and greater than ten 
percent (10%) stockholders are required by SEC regulation to furnish the 
Company with copies of all Section 16(a) forms they file.

        To the Company's knowledge, based solely on a review of the copies 
of such reports furnished to the Company, during the calendar year ended 
December 31, 1998, all Section 16(a) filing requirements applicable to its 
officers, directors and greater than ten percent (10%) beneficial owners 
were complied with.


ITEM 11.        EXECUTIVE COMPENSATION

        The following table sets forth certain compensation paid by the 
Company during the calendar years ended December 31, 1998, 1997 and 1996, 
to its Chief Executive Officer and the two other most highly compensated 
executive officers whose compensation exceeded $100,000 (the "Named 
Executive Officers"):

<TABLE>
<CAPTION>

                            Summary Compensation Table
                                                      Long-Term    All Other
                                          Annual     Compensation   Compen-
  Name and Principal Position    Year   Salary(1)     Options(#)   sation(2)
------------------------------- ------- ----------   ------------ -----------
<S>                             <C>     <C>          <C>          <C>
Sam Eletr, Ph.D.                 1998    $230,460          --           $ --
   Chief Executive Officer       1997     196,131          --             --
   and Chairman of the Board     1996     176,121         32,500          --

Edward C. Albini                 1998    $147,336         50,000        $750
   Chief Financial Officer       1997     100,244 (3)     50,000          --


Stephen C. Macevicz, Ph.D.       1998    $167,611          --           $750
   Vice President,               1997     155,886          --            750
   Intellectual Property         1996     144,505          --            750

<FN>

(1) Includes amounts earned but deferred at the election of the Named
    Executive Officer pursuant to the Company's 401(k) Plan.
(2) Contributions made by the Company to the Company's 401(k) Plan on
    behalf of such employee.
(3) Mr. Albini joined the Company on April 17, 1997.

</FN>
</TABLE>

        Except as disclosed above, no compensation characterized as long-
term compensation, including restricted stock awards issued at a price 
below fair market value or long-term incentive plan payouts, was paid by 
the Company during the year ended December 31, 1998, to any of the Named 
Executive Officers.

Stock Option Grants and Exercises

        The following table sets forth, for each of the Named Executive 
Officers in the Summary Compensation Table, certain information regarding 
options granted during the year ended December 31, 1998.

<TABLE>
<CAPTION>
                                     OPTION GRANTS IN LAST FISCAL YEAR

                                      Individual Grants     
                         --------------------------------------------
                                                                        Potential Realizable
                                      % of Total                          Value at Assumed
                                        Options                           Annual Rates of
                          Number of     Granted   Exercise                  Stock Price
                          Securities      to       or Base               Appreciation for
                          Underlying   Employees  Price per  Expir-       Option Term (3)
                           Options     in Fiscal   Share      ation   -----------------------
          Name            Granted(1)    Year(2)    ($/sh)    Date(1)     5%($)      10%($) 
------------------------ ------------ ----------- --------- --------- ----------- -----------
<S>                      <C>          <C>         <C>       <C>       <C>         <C>
Edward C. Albini              50,000       12.59%   $15.00  02/26/08     471,671   1,195,307
</TABLE>

-------------
 (1)  Officers of the Company were granted the right to exercise their 
      options prior to vesting, subject to the Company's right of 
      repurchase at the original issue price, which lapses ratably over 
      five years.  Options granted generally vest over a five-year period.  
      The term of the options is ten years.

 (2)  Based on an aggregate of 397,500 options granted to employees of, 
      and consultants to, the Company during the year ended December 31, 
      1998, including the Named Executive Officer.

 (3)  The potential realizable value is calculated based on the term of 
      the option at its time of grant (ten years).  It is calculated by 
      assuming that the stock price on the date of grant appreciates at 
      the indicated annual rate, compounded annually for the entire term 
      of the option, and that option is exercised and sold on the last day 
      of the term for the appreciated stock price. 

        The following table sets forth certain information concerning the 
number of options exercised by the Named Executive Officers during the 
year ended December 31, 1998, and the number of shares covered by both 
exercisable and unexercisable stock options held by the Named Executive 
Officers.  Also reported are values for "in-the-money" options that 
represent the positive spread between the respective exercise prices of 
outstanding options and the fair market value of the Company's common 
stock as of December 31, 1998 ($11.44 per share).

          Aggregated Option Exercises in the Year Ended December 31, 1998 and
                                     Option Values
<TABLE>
<CAPTION>
                                                                              Value of Unexercised
                          Shares                   Number of Unexercised      In-the-Money Options
                         Acquired                   Options at Year-End         at Year-End(1)
                            on        Value      -------------------------  -------------------------
Name                     Exercise  Realized (1)  Exercisable Unexercisable  Exercisable Unexercisable
------------------------ --------- ------------  ----------- -------------  ----------- -------------
<S>                      <C>       <C>           <C>         <C>            <C>         <C>
Sam Eletr.............       --        $ --         189,333        28,167   $1,774,297      $278,853
Edward C. Albini......       --          --            --          50,000         --           --
Stephen C. Macevicz...       --          --          26,000        28,000      285,252       311,657

<FN>
(1)      Based on the fair market value of the Company's common stock
         at December 31, 19978($11.44),  minus the  exercise price of
         the option,  multiplied by the number of shares  underlying
         the options.
</FN>
</TABLE>

Compensation of Directors

        Directors are not compensated by the Company for service as 
directors.

Compensation Committee Interlocks and Insider Participation

        The Company's Compensation Committee was established in March 1994.  
There were no officers or employees of the Company who participated in 
deliberations of the Company's Compensation Committee concerning executive 
officer compensation during the year ended December 31, 1998.

Limitations of Liability and Indemnification

        The Company's Bylaws provide that the Company will indemnify its 
directors and executive officers and may indemnify its other officers, 
employees and other agents to the fullest extent permitted by Delaware 
law.  The Company is also empowered under its Bylaws to enter into 
indemnification agreements with its directors and officers and to purchase 
insurance on behalf of any person whom it is required or permitted to 
indemnify.  Pursuant to this provision, the Company has entered into 
indemnity agreements with each of its directors and executive officers.

        In addition, the Company's Certificate of Incorporation provides 
that, to the fullest extent permitted by Delaware law, the Company's 
directors will not be liable for monetary damages for breach of the 
directors' fiduciary duty of care to the Company and its stockholders.  
This provision in the Certificate of Incorporation does not eliminate the 
duty of care, and in appropriate circumstances, equitable remedies such as 
an injunction or other forms of nonmonetary relief would remain available 
under Delaware law.  Each director will continue to be subject to 
liability for breach of the director's duty of loyalty to the Company, for 
acts or omissions not in good faith or involving intentional misconduct or 
knowing violations of law, for acts or omissions that the director 
believes to be contrary to the best interests of the Company or its 
stockholders, for any transaction from which the director derived an 
improper personal benefit, for acts or omissions involving a reckless 
disregard for the director's duty to the Company or its stockholders when 
the director was aware or should have been aware of a risk of serious 
injury to the Company or its stockholders, for acts or omissions that 
constitute an unexcused pattern of inattention that amounts to an 
abdication of the director's duty to the Company or its stockholders, for 
improper transactions between the director and the Company and for 
improper distributions to stockholders and loans to directors and 
officers.  This provision also does not affect a director's 
responsibilities under any other laws such as the federal securities laws 
or state or federal environmental laws.

        No pending material litigation or proceeding involving a director, 
officer, employee or other agent of the Company as to which 
indemnification is being sought exists, and the Company is not aware of 
any pending or threatened material litigation that may result in claims 
for indemnification by any director, officer, employee or other agent.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth certain information regarding 
beneficial ownership of the common stock as of March 1, 1999, by (i) each 
stockholder who is known by the Company to own beneficially more than 5% 
of the common stock; (ii) each Named Executive Officer of the Company 
listed on the Summary Compensation Table; (iii) each director of the 
Company; and (iv) all directors and executive officers of the Company as a 
group. 
<TABLE>
<CAPTION>

                                              Common Stock(1)
Name and Address                            ---------------------
of Beneficial Owners                          Number   Percent(2)
------------------------------------------- ---------- ----------
<S>                                         <C>        <C>
Entities affiliated with
        U.S. Venture Partners IV, L.P.(3)     730,000        6.6%
        2180 Sand Hill Road, Suite 300
        Menlo Park, CA  94025

Entities affiliated with the
        Sprout Group(4)                       729,980        6.6%
        3000 Sand Hill Road, Suite 270
        Menlo Park, CA  94025

Cannon Street Fund Ltd.                       565,000        5.1%
        c/o Meridian Venture Group
        R.R. Box 272
        Charlottesville, VA  22314

Asset Management Associates 1989 L.P.(5)      360,000        3.2%

Sam Eletr, Ph.D.(6)                           460,759        4.1%

Edward C. Albini(7)                           100,000       **

William K. Bowes, Jr.(8)                      747,720        6.7%
        U.S. Venture Partners IV, L.P.
        2180 Sand Hill Road, Suite 300
        Menlo Park, CA  94025

Sydney Brenner, M.B., D. Phil.(9)             309,057        2.8%

James C. Kitch(10)                              9,787       **

Kathleen D. La Porte(4)                       729,980        6.6%
        Sprout Group
        3000 Sand Hill Road, Suite 270
        Menlo Park, CA  94025

Stephen C. Macevicz, Ph.D(11)                  99,651       **

Craig C. Taylor(12)                           371,497        3.3%

All directors and officers as a             2,828,451       25.4%
group (8 persons)(13)

<FN>
(1)  Except as otherwise noted, and subject to community property laws 
     where applicable, each person or entity named in the table has sole 
     voting and investment power with respect to all shares shown as 
     beneficially owned by him, her or it.

(2)  Percentage of beneficial ownership is based on 11,132,815 shares of 
     common stock outstanding as of March 1, 1999, except as otherwise 
     noted in the footnotes.  Beneficial ownership is determined in 
     accordance with the rules of the Securities and Exchange Commission 
     and generally includes voting or investment power with respect to 
     securities.  Shares of common stock subject to options currently 
     exercisable or exercisable within 60 days of March 1, 1999, are 
     deemed outstanding for computing the percentage of the person 
     holding such option but are not deemed outstanding for computing the 
     percentage of any other person.

(3)  Includes 730,000 shares of common stock held by entities affiliated 
     with U.S. Venture Partners IV, L.P. ("U.S.V.P. IV")  Mr. Bowes, a 
     director of the Company, is a general partner of Presidio Management 
     Group IV, the general partner of U.S.V.P. IV.  Mr. Bowes shares the 
     power to vote and control the disposition of shares held by U.S.V.P. 
     IV and therefore may be deemed to be the beneficial owner of such 
     shares.  Mr. Bowes disclaims beneficial ownership of such shares, 
     except to the extent of his pro-rata interest therein.

(4)  Includes 729,980 shares of common stock held by entities affiliated 
     with Sprout Group.  Ms. La Porte, a director of the Company, is a 
     general partner of the Sprout Group, an entity affiliated with 
     Sprout Capital VI, Sprout Capital VII and DLJ Capital.  Ms. La Porte 
     shares the power to vote and control the disposition of shares held 
     by Sprout Capital VI, Sprout Capital VII and DLJ Capital and 
     therefore may be deemed to be the beneficial owner of such shares.  
     Ms. La Porte disclaims beneficial ownership of such shares, except 
     to the extent of her pro-rata interest therein.

(5)  Includes 360,000 shares of common stock held by Asset Management 
     Associates 1989 L.P. ("Asset 1989 L.P.").  Mr. Taylor, a director of 
     the Company, is a general partner of AMC Partners 89, which is the 
     general partner of Asset 1989 L.P.  Mr. Taylor shares the power to 
     vote and control the disposition of shares held by Asset 1989 L.P. 
     and therefore may be deemed to be the beneficial owner of such 
     shares.  Mr. Taylor disclaims beneficial ownership of such shares, 
     except to the extent of his pro-rata interest therein. 

(6)  Includes 217,500 shares of common stock issuable upon exercise of 
     Lynx stock options held by Dr. Eletr that are exercisable within 60 
     days.

(7)  Includes 50,000 shares of common stock issuable upon exercise of 
     Lynx stock options held by Mr. Albini.

(8)  See Note 3 above.  Common stock amount also includes 17,720 shares 
     held by Mr. Bowes.

(9)  Includes 49,057 shares of common stock issuable upon exercise of 
     Lynx stock options held by Dr. Brenner that are exercisable 
     within 60 days.

(10) Includes 2,287 shares of common stock and 7,500 shares of common 
     stock issuable upon the exercise of Lynx stock options held by Mr. 
     Kitch on behalf of GC&H Investments, an investment partnership of 
     which Mr. Kitch is a general partner.  Mr. Kitch shares the power to 
     vote and control the disposition of such shares and therefore may be 
     deemed to be the beneficial owner of such shares.  Mr. Kitch 
     disclaims beneficial ownership of such shares, except to the extent 
     of his pro-rata interest therein.

(11) Includes 54,000 shares of common stock issuable upon exercise of 
     Lynx stock options held by Dr. Macevicz that are exercisable within 
     60 days.

(12) See Note 5 above.  Includes 11,497 shares of common stock held by 
     Mr. Taylor.

(13) Common stock amount includes 1,839,980 shares held by entities 
     affiliated with certain directors and 324,057 shares of common stock 
     issuable upon exercise of the Company's stock options held by 
     directors and officers that are exercisable within 60 days.  See 
     Notes 6 through 12 above.

</FN>
</TABLE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Corporate Collaborations

See  "ITEM 1.   BUSINESS" and "Note 3. of the Notes to Consolidated 
Financial Statements"

        In 1992, ABI distributed all but an aggregate of 299,800 shares of 
the Lynx common stock it held to its shareholders (the "Distribution").  
In connection with this transaction, Lynx granted ABI an option to 
purchase up to 215,900 shares of Lynx common stock at $0.10 per share 
which, prior to October 1996, could only be exercised by ABI in connection 
with the distribution by ABI of Lynx stock to its option holders upon the 
exercise of ABI stock options outstanding as of the date of the 
Distribution.  In September 1997, the option expired and the remaining 
shares were canceled.

Transactions with Directors and Executive Officers

        In April 1997, the Company entered into a full-recourse loan 
agreement with Edward C. Albini, an officer of the Company.  A note 
receivable of $250,000 was issued under a stock purchase agreement for the 
purchase of 50,000 shares of common stock whereby all the shares issued 
under the agreement are pledged as collateral.  The outstanding principal 
amount is due and payable in full in April 2002, subject to an obligation 
to prepay under specified circumstances.  Interest is payable upon the 
expiration or termination of the note and accrues at the rate of 6.49% per 
annum.

        In October 1995, the Company entered into a full-recourse loan 
agreement with Karoly Nikolich, an officer of the Company. A note 
receivable of $210,000 was issued under a stock purchase agreement for the 
purchase of 60,000 shares of common stock whereby all the shares issued 
under the agreement are pledged as collateral.  The note and all interest 
receivable was paid in full according to the terms of the agreement in 
April 1998.

        For legal services rendered during the calendar year ended December 
31, 1998, the Company paid approximately $239,000 to Cooley Godward LLP, 
the Company's counsel, of which Mr. Kitch, a director of the Company, is a 
partner.






ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                  FORM 8-K

 (a)    (1)     The following index, Report of Ernst & Young LLP, 
Independent Auditors and financial statements are set forth on pages 
22 through 27 of this report:

         (i)      Report of Ernst & Young  LLP, Independent Auditors.

         (ii)     Consolidated Balance Sheets as of December 31, 1998 and 1997.

         (iii)    Consolidated  Statements  of  Operations  for the years  ended
                  December 31, 1998, 1997 and 1996.

         (iv)     Consolidated  Statements of Stockholders' Equity for the years
                  ended December 31, 1998, 1997 and 1996.

         (v)      Consolidated  Statements  of Cash  Flows for the  years  ended
                  December 31, 1998, 1997 and 1996.

         (vi)     Notes to Consolidated Financial Statements.

     (2) All  schedules  are  omitted  because  they are not  required,  are not
applicable,  or  the  information  is  included  in the  consolidated  financial
statement or notes thereto.

     (3) The following documents are filed as Exhibits to this report:

Exhibit
 Number                       Description of Document
-------- -----------------------------------------------------------------
2.1**    Acquisition  Agreement,  dated as of February 4, 1998, by and between
         the Company and Inex  Pharmaceuticals  Corporation,  incorporated  by
         reference to the indicated exhibit of the Registrant's current report
         on Form 8-K filed on March 24, 1998.
3.1.1    Certificate  of Amendment of  Certificate of the Amended and Restated
         Certificate of Incorporation of the Company, incorporated by
         reference to the indicated exhibit of the Registrant's Form 10-K for
         the period ended December 31, 1997.
3.2      Bylaws of the Company,  as amended,  incorporated by reference to the
         indicated  exhibit of the  Registrant's  Statement  Form 10 (File No.
         0-22570), as amended.
3.3      Certificate of Amendment of  Designation  of  Preferences of Series B
         Convertible Preferred Stock of the Company, incorporated by reference
         to Exhibit 3.4 of the registrant's Form 10-Q for the period ended
         March 31, 1995. 
3.3.1    Certificate of Amendment to Certificate of Designation of Preferences
         of Series B Convertible Preferred Stock of the Company, incorporated
         by reference to Exhibit 3.4.1 of the Registration's Form 10-K for the
         period ended December 31, 1997.
3.3.2    Certificate of Amendment to Certificate of Designation of Preferences 
         of Series B Convertible Preferred Stock of the Company dated
         September 30, 1997, incorporated by reference to Exhibit 3.4.2 of the
         Registrant's Form 10-K for the period ended December 31, 1997.
3.4      Certificate of Designation of Preferences of Series C Convertible
         Preferred Stock, incorporated by reference to the indicated exhibit
         of the registrant's Form 10-Q for the period ended March 31, 1995.
3.4.1    Certificate of Amendment to Certificate of Designation of Preferences
         of Series C Convertible Preferred Stock of the Company dated
         September 30, 1997, incorporated by reference to exhibit 3.5.1 of the
         registrant's Form 10-K for the period ended December 31, 1997.
3.4.2    Certificate of Amendment to Certificate of Designation of Preferences
         of  Series C  Convertible  Preferred  Stock  of  the  Company  dated
         September 30, 1997, incorporated by reference to exhibit 3.5.2 of
         the Registrant's Form 10-K for the period ended December 31, 1997.
3.5      Certificate of Amendment to Certificate of Designation of Preferences
         of  Series D  Convertible  Preferred  Stock  of  the  Company  dated
         September 30, 1997, incorporated by reference to exhibit 3.6 of
         the Registrant's Form 10-K for the period ended December 31, 1997.
4.1      Form of Common Stock Certificate, incorporated by reference to
         Exhibit 4.2 of the Registrant's statement Form 10 (File No. 0-22570),
         as amended.
10.1     Form of Indemnity  Agreement entered into between the Company and its
         directors and officers,  incorporated by reference to Exhibit 10.7 of
         the Registrant's Statement Form 10 (File No. 0-22570), as amended.
10.2+    The  Company's  1992 Stock  Option  Plan (the "Stock  Option  Plan"),
         incorporated  by  reference  to  Exhibit  10.8  of  the  Registrant's
         Statement Form 10 (File No. 0-22570), as amended.
10.3+    Form of  Incentive  Stock  Option  Grant under the Stock Option Plan,
         incorporated  by  reference  to  Exhibit  10.9  of  the  Registrant's
         Statement Form 10 (File No. 0-22570), as amended.
10.4+    Form of Nonstatutory  Stock Option Grant under the Stock Option Plan,
         incorporated  by  reference  to  Exhibit  10.10  of the  Registrant's
         Statement Form 10 (File No. 0-22570), as amended.
10.5     Agreement of Assignment and License of Intellectual  Property Rights,
         dated June 30,  1992,  between the Company and ABI,  incorporated  by
         reference  to Exhibit  10.11 of the  Registrant's  Statement  Form 10
         (File No. 0-22570), as amended.
10.6     Amended and Restated Investor Rights Agreement, dated as of
         November 1, 1995, incorporated by reference to the Exhibit 10.30 of
         the Registrant's  Form 10-K for the period ended December 31, 1995.
10.7+    Stock Purchase Agreement, dated as of June 13, 1996, between
         Spectragen, Inc. and Sam Eletr.  (The Stock Purchase Agreement was
         assumed by the Company pursuant to the Agreement of Merger between
         the Company and Spectragen, Inc.), incorporated by reference to
         Exhibit 10.25 of the Registrant's Form 10-K for the period ended
         December 31, 1996.
10.8     Joint Venture Agreement dated as of October 23, 1996, between the
         Company and BASF Aktiengesellschaft, incorporated by reference to
         the indicated exhibit of the Registrant's Form 10-K for the 
         period ended December 31, 1996.**
10.8.1   First Amendment to Joint Venture Agreement dated as of October 23, 
         1998, between the Company and BASF Aktiengesellschaft.**
10.9+    Stock Purchase Agreement dated as of April 14, 1997, between the
         Company and Edward C. Albini, incorporated by reference to Exhibit
         10.32 of the Registran't Form 10-K for the period ended December 31,
         1997
10.10    Form of Common  Stock Purchase Agreement, dated as of September 28,
         1997, by and between the Company and the investors listed therein,
         incorporated by reference to Exhibit 4.1 of the Registrant's 
         Registration Statement on Form S-3, filed on October 31, 1997 (File
         No. 333-39171).
10.11    Lease,  dated as of February 27, 1998, between  the Company and
         SimFirst, L.P.,  Limited Partnership, incorporated by reference to
         Exhibit  10.35 of the  Registrant's  Form 10-Q for the period ended
         March 31, 1998.
10.12    Technology License and Development Agreement, dated as of January 1,
         1997, between the Company and BASF-LYNX Bioscience AG.**
10.12.1  First Amendment to Technology License and Development Agreement,
         dated as of January 1, 1997, between the Company and BASF-LYNX
         Bioscience AG.**
21.1     Subsidiaries of the Company.
23.1     Consent of Ernst & Young LLP, Independent Auditors.
24.1     Power of Attorney.  Reference is made to page 50.
27       Financial Data Table for the period ended December 31, 1998.

---------------
(+)      Management contract or compensatory plan or arrangement.
**       Portions of this agreement have been deleted pursuant to our request
         for confidential treatment.

(b)      Reports on Form 8-K
         Not applicable
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements of Section 13 or 15(d)  Securities Act of
1934,  the  Registrant  has duly caused this report on Form 10-K to be signed on
its behalf by the  undersigned, thereunto duly  authorized,  on the 31st day of
March 1999.

                                             LYNX THERAPEUTICS, INC.


                                              By:  /s/  Sam Eletr
                                                  -----------------------------
                                                         Sam Eletr, Ph.D.
                                                       Chairman of the Board

                                POWER OF ATTORNEY

         Each person whose signature  appears below constitutes and appoints Sam
Eletr and James C. Kitch his true and lawful  attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him and in
his  name,  place  and  stead,  in any and all  capacities,  to sign  any or all
amendments (including  post-effective  amendments) to the Registration Statement
on Form 10-K, and to file the same, with all exhibits thereto, and all documents
in connection therewith,  with the Securities and Exchange Commission,  granting
unto said  attorneys-in-fact  and  agents,  full power and  authority  to do and
perform each and every act and thing  requisite  and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person,  hereby ratifying and confirming all that said  attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes,  may lawfully do or
cause to be done by virtue hereof.

         Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following  persons on behalf of the Registrant and of the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
         Signature                       Title                    Date
---------------------------  ------------------------------  ---------------
<S>                          <C>                             <C>
/s/  Sam Eletr               Chief Executive Officer and     March 31, 1999
---------------------------  Chairman of the Board
     Sam Eletr               (Principal Executive Officer)


/s/  Edward C. Ablini        Chief Financial Officer and     March 31, 1999
---------------------------  Secretary (Principal Financial
     Edward C. Albini        and Accounting Officer)


/s/  William K. Bowes, Jr.   Director                        March 31, 1999
---------------------------
     William K. Bowes, Jr.


/s/  Sydney Brenner          Director                        March 31, 1999
---------------------------
     Sydney Brenner


/s/  James C. Kitch          Director                        March 31, 1999
---------------------------
     James C. Kitch


/s/  Kathleen D. La Porte    Director                        March 31, 1999
---------------------------
     Kathleen D. La Porte


/s/  Craig C. Taylor         Director                        March 31, 1999
---------------------------
     Craig C. Taylor

</TABLE>