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



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FORM 10-K

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

For the fiscal year ended December 31, 2001

OR

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

Commission file number 0-22570

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

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

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 per share

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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. [   ]

The number of shares of common stock of the Registrant outstanding as of
March 1, 2002, was 13,805,453. The aggregate market value of the common stock
of the Registrant held by non-affiliates of the Registrant, based upon the
closing price of the Common Stock reported on the Nasdaq National Market on
March 1, 2002, was $33,558,829.



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market For Registrants Common Equity and Related Stockholder Matters                
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|              | Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K                   
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 21.1 
|EXHIBIT 23.1 



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LYNX THERAPEUTICS, INC.

FORM 10-K ANNUAL REPORT

FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001

Table of Contents

|         |  |                                                                                       |  |   
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I  
|Item 1.  |  | Business                                                                              |  | 1 
|Item 2.  |  | Properties                                                                            |  | 18
|Item 3.  |  | Legal Proceedings                                                                     |  | 18
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 18
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 19
|Item 6.  |  | Selected Financial Data                                                               |  | 20
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 26
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                              |  | 27
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 48
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 49
|Item 11. |  | Executive Compensation                                                                |  | 51
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 53
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 55
|PART IV 
|Item 14. |  | Exhibits, Financial Statement, Schedules and Reports on Form 8-K                      |  | 56
|         |  | Signatures                                                                            |  | 60





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PART I




Item 1.Business

Except for the historical information contained herein, this report
contains certain information that is forward-looking in nature. Examples of
forward-looking statements include statements regarding Lynxs future financial
results, operating results, product successes, business strategies, projected
costs, future products, competitive positions and plans and objectives of
management for future operations. In some cases, you can identify
forward-looking statements by terminology, such as may, will, should,
expects, plans, anticipates, believes, estimates, predicts,
potential or continue or the negative of such terms and other comparable
terminology. In addition, statements that refer to expectations or other
characterizations of future events or circumstances are forward-looking
statements. These statements involve known and unknown risks and uncertainties
that may cause Lynxs or its industrys results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to such differences include, among others, those discussed under the captions
Business, Item 1. Business  Business
Risks and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations. These and many
other factors could affect the future financial and operating results of Lynx.
Lynx undertakes no obligation to update any forward-looking statement to
reflect events after the date of this report.

Lynx, MPSS, Megaclone, Megasort, Megatype, Protein ProFiler and the
Lynx logo are some of Lynx Therapeutics, Inc.s trademarks and service marks.

Overview

We believe that Lynx Therapeutics, Inc. is a leader in the development and
application of novel technologies for the discovery of gene expression patterns
and genomic variations important to the pharmaceutical, biotechnology and
agricultural industries. Gene expression patterns refer to the number of genes
and the extent a cell or tissue expresses those genes, and they represent a way
to move beyond DNA sequence data to understand the function of genes, the
proteins that they encode and the role they play in health and disease. Genomic
variations refer to the differences in the genetic sequences in the genomes of
different organisms. Megaclone, our unique and proprietary cloning procedure,
forms the foundation of these technologies. Megaclone transforms a sample
containing millions of DNA molecules into one made up of millions of
micro-beads, which are microscopic beads of latex, each of which carries
approximately 100,000 copies of one of the DNA molecules in the sample. In
contrast to conventional cloning, in which an individual DNA molecule is
selected from a sample and amplified into many copies for analysis or
identification, we can capture on one set of micro-beads clones of nearly all
the DNA sequences that characterize a sample. Once attached to the micro-beads,
these clones can be handled and subjected to experiments and analyses all at
the same time. Megaclone thereby enables many analyses or characterizations to
be conducted that would otherwise be too cumbersome or onerous to conduct using
conventional procedures where each clone must be addressed individually. Based
on Megaclone, we have developed a suite of applications that have the potential
to enhance the pace, scale and quality of genomics and genetics research
programs.

Technologies we have developed that leverage the power of Megaclone are:



| |  |  | Massively Parallel Signature Sequencing,or MPSS, which generates
simultaneously, from a million or more Megaclone micro-beads, gene
sequence information that uniquely identifies a samples DNA molecules
without the need for individual conventional sequencing reactions, and
produces a comprehensive quantitative profile of gene expression in
cells or tissues;                                                                                                                                                                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Megasort,which enables researchers to focus on potential target
genes by permitting, from a single experiment, the direct physical
isolation of nearly all the genes differentially expressed between
samples; and                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Megatype, which enables a single experiment to yield directly those
disease- or trait-associated single nucleotide polymorphisms, also known
as SNPs, which differentiate large populations of genomes. SNPs are
single nucleotide variations, or differences occurring in a single
subunit of DNA or RNA, in the genetic code that occur on average at
every 1,000 bases along the three billion nucleotides in the human
genome. Megatype experiments would not require genotyping, which is the
process of testing entire individual genomes for the presence or absence
of a set of SNPs.

We are developing additional applications of these technologies, as well
as new technologies aimed at addressing the needs of the pharmaceutical,
biotechnology and agricultural industries. Lynx is also developing a
proteomics technology, Protein ProFiler, which is expected to provide
high-resolution analysis of complex mixtures of proteins from cells or tissues.
Proteomics is the study of the number of proteins and the extent to which they
are expressed in cells or tissues.

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In addition to our
and our licensees work with collaborators and
customers, we have applied our suite of technologies in selected biological
areas to develop products internally to discover and then license or sell gene
targets, validated gene targets, genetic associations and other
products. For example, we have been pursuing projects directed to gene discovery and
target validation in immunopathology, atherosclerosis and breast
cancer.

Please see a discussion of our financing plans under
Item 1. Business  Business Risks and
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital Resources.

Industry Background

The publication of the first draft sequence of the human genome was a
milestone in the history of genetics and genomics. However, the remaining
challenge for researchers in industry and academia alike is to explore the
multitude of genomic variations and to discover, from the analysis of these
differences, the functions of genes and their roles in health and disease. It
is this work, post genome-sequencing, that is expected to lead to commercial
opportunities and ultimately to the discovery of new therapies for unmet
medical needs and to provide the basis for the emerging fields of
pharmacogenetics, which is the identification and assessment of genes that are
predictive of efficacy and toxicity of drug compounds or that may correlate
drug responses to individual genotypes, and individualized patient therapy.

Many diseases result from a malfunction of the genetically programmed
protective response to insults, such as trauma, infection, stress or an
inherited mutant gene. That malfunction may result in inadequate, misguided or
exaggerated gene expression, unfolding a complex pathogenic process that may
resolve itself, linger chronically or evolve with increasingly destructive
effects in a manner quite removed from, and even independent of, the original
insult. By analyzing which genes are expressed in a cell or tissue, the level
of expression can illustrate which physiological pathways are active in the
cell and to what degree. By understanding when and where abnormal gene
expression occurs and the changes in expression that a drug can cause, the
physiological pathways implicated in disease and drug action can be pinpointed.
This knowledge could be used to help discover drug targets, screen drug leads,
predict a compounds toxic effects, anticipate pharmacological responses to
drug leads and tailor clinical trials to the specific needs of subgroups within
a population. By recognizing gene expression patterns, researchers, and
ultimately physicians, may also be able to determine which treatments are
likely to be effective for a specific condition and which may be ineffective or
harmful.

Genomic approaches to therapeutics seek to identify genes connected to the
origin of a disease. Searches to identify such genes generally are laborious
and involve a very large amount of conventional DNA sequencing to identify
genes or gene fragments. This knowledge of genes is a first step only. While it
may pave the way for the development of better diagnostics, it may not
necessarily lead to a successful therapy. For example, while a particular gene,
or absence of a gene, may predispose a person to a cancer, an entirely
different set of genes is likely to govern the tumor and its metastases. Hence,
in addition to understanding the cause of disease, it is important to
understand entire networks of genes and their functions in both healthy and
diseased states in order to identify the optimal targets for therapy.

One approach to genomics research is based on the study of gene expression
and regulation of gene expression in cells in differing states or conditions.
Gene expression in a cell consists of transcription, the process that converts
the genetic information encoded in the double-stranded DNA of a gene into mRNA,
and translation, the process that converts the genetic information encoded in
mRNA into a specific protein molecule. At any one time, any particular human
cell expresses thousands of genes. A different number of copies of each mRNA
type will be present in each sample depending upon the particular cell, its
function and its environmental conditions at the time. Thus, a cell will
contain, at any one time, tens of thousands of different mRNAs, in various
quantities, for a total on the order of one million or more mRNA molecules.

Elucidating gene function involves not only determining which genes are
expressed in a healthy or diseased tissue, but also requires determining which
of the altered gene expressions cause a disease rather than result from the
disease. In general, only the most abundantly expressed genes are currently
accessible using conventional methods. In addition, conventional methods are
dependent on separating and cloning double-stranded copies of each individual
mRNA, or cDNA, prior to analysis. Thus, by conventional methods, it is
impractical to obtain a comprehensive, high-resolution analysis of gene
expression across one million or more mRNA molecules in cells of interest to
the researcher.

Another approach to genomics research is based on the study of human
genetic variations. It is well known that the incidence of human diseases and
their severity differ in different groups and individuals. There are many
common diseases in which several genes play a role in the initiation and
development of the pathological process, as well as in the responses of the
individual to a therapy. This approach studies gene association with diseases
by using a large assembly of specific gene variants called polymorphisms. The
most abundant of these are single nucleotide polymorphisms, or SNPs, which are
single-base mutations in the genome. A SNP is found, on average, once in every
1,000 bases. This means if any two individuals are compared, their genomes will
be found to differ at more than one million places. Genotyping refers to the
process of testing individual genomes for the presence or absence of a set of
SNPs.

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If a SNP correlation to a disorder is proven, it would point to those
regions of the genome in which the sequences responsible for the disorder may
be located. However, to discover such regions, it is currently believed that
one would have to test several hundred individual genomes for the presence or
absence of tens of thousands, if not more, SNPs. Thus, there is a real need to
employ a technology that can quickly and efficiently determine which of these
thousands of SNPs are significantly associated with diseases in large
populations of patients and thereby provide a relevant set of SNPs for
downstream genotyping of individuals.

Our Solution

We overcome many of the limitations of current technologies by capturing
essentially all of the different DNA molecules in a sample on micro-beads using
our Megaclone technology and applying our various analytical technologies to
conduct relevant comparisons and other analyses of the captured DNA molecules.
Thus, our patented Megaclone technology enables an automated, high-throughput
analysis of complex mixtures of DNA molecules.

Megaclone is a process that uses a proprietary library of approximately
16.7 million short synthetic DNA sequences, called tags, and their
complementary anti-tags, to uniquely mark and process each DNA molecule in a
sample. Each unique tag is a permanent identifier of the DNA molecule it is
attached to, and all of the tagged molecules in a sample are amplified together
to create multiple copies of the tagged molecules. We use another proprietary
process to generate five-micron diameter micro-beads, each of which carries
multiple copies of a short anti-tag DNA sequence complementary to one of the
16.7 million tags. Then, we collect the amplified tagged DNA molecules onto the
micro-beads through hybridization of the tags to the complementary anti-tags.
Each micro-bead carries on its surface enough complementary anti-tags to
collect approximately 100,000 identical copies of the corresponding tagged DNA
molecule.

By this process, each tagged DNA molecule in the original sample is
converted into a micro-bead carrying about 100,000 copies of the same sequence.
Therefore, in a few steps, our Megaclone technology can transform a complex
mixture of a million or more individual DNA molecules into a usable format that
provides the following benefits:



| |  |  | substantially all the different DNA molecules present in a sample are represented in the final micro-bead collection;
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | these million or more DNA molecules can be analyzed simultaneously in various applications; and                      
|
| |  |  | the need for storing and handling millions of individual DNA clones is eliminated.                                   

Megaclone is the foundation for our analytical applications, including
MPSS, which provides gene sequence information and high-resolution gene
expression information, Megasort, which provides focused sets of differentially
expressed genes, and Megatype, which provides SNP
disease- or trait-association information.

Our Business Strategy

We intend to apply our technologies to maximize the value of human, animal
and plant genomic information for our licensees, collaborators and customers
and ourselves through high-resolution gene expression analysis and in the
discovery and characterization of important genetic variations. Now that we
have reduced to practice the majority of our technologies, we intend to enlarge
our presence in the pharmaceutical, biotechnology, agricultural and other
commercially important markets. We believe many drug discovery and development
companies now recognize the need for significantly greater resolution and scope
in their genomics and genetics research.

The primary elements of our business strategy are:



| |  |  | Provide high-resolution gene expression information for use in
databases
| | - |  | ------------------------------------------------------------------------

We intend to use our technologies, particularly MPSS, to produce
high-resolution gene expression information from cells or tissues for inclusion
in databases. We believe the distinguishing feature of the information that
Lynx could produce is that it represents a comprehensive quantitative profile
of gene expression in cells or tissues. Our approach could be either to
assemble this information on our own or with a partner in a database format,
accessible to others for an access fee and/or continuing subscriptions, or to
provide this information to others for inclusion in their existing database
products, in return for services fees in producing the information and/or a
share of the revenues or profits from the commercialization of the database.

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| |  |  | Provide high-resolution gene expression information for the specific
programs of others
| | - |  | ---------------------------------------------------------------------------------------

With the assumed accessibility to databases containing high-resolution
gene expression information on cells or tissues for comparative purposes, we
expect that pharmaceutical, biotechnology, agricultural and other companies
will engage us to produce a comprehensive quantitative profile of gene
expression in cells or tissues for their specific interests, such as in
diseased, abnormal or induced states or conditions. In these arrangements, we
could provide information content for each companys specific internal database
or programs. In return, we could earn services fees in producing the
information and/or a share of the revenues or profits from the
commercialization of a product stemming from the use of the information by the
company.



| |  |  | Continue to grow our genomics discovery services
| | - |  | ------------------------------------------------

We have generated revenues through agreements for genomics discovery
services. We plan to continue to provide such services to pharmaceutical,
biotechnology and agricultural companies for use in their discovery,
development and commercialization efforts. The revenue sources from these
arrangements typically include technology access and services fees. We have
provided a license for the use of certain of our technologies to
Takara Shuzo Co. Ltd. The
license provides Takara with the right in Japan, Korea and China, including
Taiwan, to use our technologies exclusively for at least five years, and
non-exclusively thereafter, to provide genomics discovery services and to
manufacture and sell microarrays (small glass or silicon wafers with tens of
thousands of DNA molecules arrayed on the surface for subsequent analysis)
containing content identified by our technologies. Takara also receives from us
a non-exclusive license right to manufacture and sell such microarrays
elsewhere throughout the world.



| |  |  | Pursue selected internal programs to capture greater value
| | - |  | ----------------------------------------------------------

We have used our
technologies in programs designed to discover and develop gene targets,
validated gene targets, genetic associations or other products in selected
fields. Through these internal programs, we have endeavored to create valuable
drug discovery information and related intellectual property that we could
license to third parties. If successful, we could realize revenues from
licensing our discoveries through licensing fees, milestone payments and
royalties or profit-sharing. For example, we have programs directed to the
discovery and validation of targets in the fields of immunopathology,
atherosclerosis and breast cancer.



| |  |  | Collaborate with others with whom we can create value
| | - |  | -----------------------------------------------------

We will seek to collaborate with companies and research institutions under
arrangements in which we provide access to our technologies, and our
collaborators provide access to well-defined clinical samples and/or biological
expertise. Through these programs, we will endeavor to create valuable drug
discovery information and related intellectual property that could be licensed
to third parties. If successful, we could realize revenues through a share in
any licensing or commercialization by our collaborators or us.



| |  |  | Develop new technologies and additional applications of our
technologies
| | - |  | ------------------------------------------------------------------------

We intend to continue to develop creative solutions to complex biological
problems. We currently focus on reducing to commercial practice our Protein
ProFiler technology in order to provide a means of high-resolution analysis of
complex mixtures of proteins from cells or tissues.

Our Technologies and Applications

We have developed, or are developing, several important analytical
applications of our Megaclone technology to better address the need for
increased pace, scale and quality of genomics and genetics research programs.

Current Applications

Massively Parallel Signature Sequencing Technology. Our MPSS technology
addresses the need to generate sequence information from millions of DNA
fragments. At this extremely large scale, our MPSS approach eliminates the need
for individual sequencing reactions and the physical separation of DNA
fragments required by conventional sequencing methods.

MPSS enables the simultaneous identification of nearly all the DNA
molecules in a sample. MPSS uses flow cells, which are glass plates that are
micromachined, or fabricated, to very precise, small dimensions, to create a
grooved chamber for immobilizing

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microbeads in a planar microarray, which is a two-dimensional, dense
ordered array of DNA samples. With MPSS, one million or more Megaclone
micro-beads are fixed in a single layer array in a flow cell, so solvents and
reagents can be washed over the micro-beads in each cycle of the process. Our
proprietary protocol elicits from the Megaclone micro-beads sequence-dependent
fluorescent responses, which are recorded by a charged coupled device, or CCD,
camera after each cycle. The process produces short 16- to 20-base-pair
signature, or identifying, sequences, without requiring fragment separation and
separate sequencing reactions as in conventional DNA sequencing approaches. We
have developed proprietary instrumentation and software to automate the
delivery of reagents and solutions used in our sequencing process and to
compile, from the images obtained at each cycle, the signature sequences that
result from each experiment.

We believe MPSS has the following advantages over conventional DNA
sequencing methods:



| |  |  | it sequences DNA molecules on as many as one million or more Megaclone beads simultaneously;            
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | it eliminates the need for individual sequencing reactions and gels;                                    
|
| |  |  | it identifies each of the DNA molecules by a unique 16- to 20-base signature sequence;                  
|
| |  |  | it produces a comprehensive quantitative profile of gene expression in cells or tissues of interest; and
|
| |  |  | it identifies even the rarest expressed genes.                                                          

We currently have over 30 operational proprietary MPSS instruments. We are
utilizing MPSS to generate high-resolution expression data in several
biological systems for our collaborators and customers and for ourselves. These
data are being derived from tissues and samples that have been prioritized by
our collaborators and customers, in addition to those identified by our
research teams for our internal programs. We also intend to generate data that
can be delivered directly to our customers to identify new genes and otherwise
enhance their databases.

MPSS delivers gene sequence information and quantitative gene expression
information and could enable the construction of high-resolution gene
expression databases from cells or tissues of interest. Because MPSS delivers
quantitative gene expression information on virtually every gene that is active
in a cell or tissue, it allows researchers to do systems biology. Systems
biology is an approach in which researchers seek to gain a complete molecular
understanding of biological systems in health and disease.

Megasort Technology. Our Megasort technology provides a method to identify
and physically extract essentially all genes that differ in expression level
between two samples. The novelty of Megasort is that the identification and
extraction are performed in a single assay.

Megasort compares two DNA samples, each containing millions of molecules,
and extracts those DNA molecules that are present in different proportions in
the samples. These could be differentially expressed genes or DNA fragments
that are found in one sample but not the other. Because the comparison and
sorting require no prior knowledge of the sequences of the genes in either
sample, Megasort can be used with samples isolated from tissues or organisms
that are not well characterized. Megasort involves hybridizing two probes
prepared separately, one from each of the samples to be compared, with a
population of Megaclone micro-beads, each of which carries many copies of a
single DNA fragment or gene derived from either of the samples. Because each
probe is labeled with a different fluorescent marker, we can readily separate
by a fluorescence activated cell sorter, also referred to as a FACS, genes or
fragments that are under- or over-represented in either sample. Genes or
fragments of interest can then be recovered from the sorted micro-beads for
further study.

Megasort technology uses Megaclone micro-beads as a fluid microarray. In
a single experiment, Megasort can isolate nearly all the potential target genes
that are differentially expressed, and remove those that do not differ between
the samples. We believe Megasort has the following advantages over conventional
gene microarrays:



| |  |  | it interrogates all the expressed genes, including rarely expressed
genes, in the two samples being compared, whether known or not;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | it does not require advance knowledge about any of the genes in these
samples; and                                                 

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| |  |  | it extracts, at the end of the experiment, physical DNA clones of
those genes that are of interest attached to the micro-beads that were
sorted.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

Megasort delivers focused sets of differentially expressed genes.

Megatype Technology. Our Megatype technology permits the comparison of
collected genomes of two populations and enables the detection and recovery of
DNA fragments with the SNPs that distinguish these two populations. In contrast
to other SNP validation methods that require thousands or millions of assays,
only a single Megatype experiment should be required for SNP association with
disease or other traits.

Megatype identifies SNPs that are differentially represented in two
populations of individuals. We use a proprietary method to select DNA fragments
that exhibit a specific class of SNPs in the combined populations and to load
the fragments onto micro-beads with our Megaclone technology. Using
fluorescently labeled probes, prepared through the same proprietary method,
from the two separate populations, micro-beads bearing SNP-containing fragments
that are under- or over-represented in either of the two populations are easily
separated using the FACS. No prior knowledge of the SNP sequences or where they
are located in the genome is required to conduct this analysis.

We believe Megatypes advantages are from:



| |  |  | enabling simultaneous discovery of disease- or trait-associated SNPs without prior knowledge of SNP sequences;
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | identifying, in a single experiment, the genetic differences that distinguish large populations;              
|
| |  |  | extracting fragments containing over- or under-represented SNPs in different populations;                     
|
| |  |  | eliminating the need for millions of individual genotyping assays to determine SNP disease association; and   
|
| |  |  | bypassing the prior need for a comprehensive SNP map.                                                         

Megatype technology delivers information on the disease- or trait-association
of SNPs and should provide a cost-effective approach to drug discovery and
pharmacogenetics.

Technologies, Applications and Products Under Development

Proteomics.Proteomics is the study of the entire protein complement in
cells. Our Protein ProFiler proteomics technology aims to provide
high-resolution analysis of complex mixtures of proteins from cells or tissues.
Based on solution-phase electrophoresis in proprietary micro-channel plates,
the approach combines the speed of capillary electrophoresis, the process by
which electronically charged molecules are separated by their different
mobilities in an electric field, with the resolving power of conventional
two-dimensional gel-based techniques. Using this technology, we expect to
complement high-resolution gene expression measurements using our MPSS platform
with similar high-resolution analysis of a cells translated proteins. The
combined data from these measurements should provide a much more accurate and
comprehensive picture of cell and tissue physiology than is available using
current techniques. Our goal is to develop with a partner our Protein ProFiler
as a commercial instrument and to be a commercial-scale provider of the
reagents used in the Protein ProFilers processes. We may also use the
Protein ProFiler internally to discover drug targets, validate candidate
targets and correlate gene expression with protein expression in cells.

We believe Protein ProFilers advantages will include:



| |  |  | enhanced reproducibility over gel-based techniques;           
| | - |  | --------------------------------------------------------------
|
| |  |  | enhanced sensitivity to detect very small amounts of proteins;
|
| |  |  | precise quantitative measurement of protein expression levels;
|
| |  |  | high speed and high throughput protein separations;           

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We believe our Protein ProFiler technology will make a very substantial
contribution to the scientific field of endeavor known as proteomics by
offering a viable alternative to conventional gel-based protein separation
techniques.

Collaborations, Customers and Licensees

As of March 2002, we have 19 commercial collaborators, customers and licensees. The
following are summary descriptions of certain of these commercial
relationships.

BASF AG

In October 1996, we entered into an agreement
with BASF AG (BASF), as amended in October 1998, to provide BASF with
nonexclusive access to certain of our genomics
discovery services. In connection with certain technology development
accomplishments, BASF paid us a technology access fee of $4.5 million in the
fourth quarter of 1999. BASFs access to our genomics discovery services is for
a minimum of two years and requires BASF to purchase services at a minimum rate
of $4.0 million per year. At the end of the initial two-year service period,
BASF had the right to carryover for an additional two-year period a certain
level of previously unrequested genomics discovery services. BASF paid Lynx
$4.0 million in each of the fourth quarters of 1999 and 2000 for genomics
discovery services to be performed by Lynx. Through December 31, 2001, we have
received from BASF aggregate payments of $19 million under the agreement. We
could receive additional payments from BASF over the remaining term of the
agreement from our performance of genomics discovery services in excess of
those covered by the payments previously made by BASF.

E.I. DuPont de Nemours and Company

In October 1998, Lynx entered into a research collaboration agreement with
E.I. DuPont de Nemours and Company (DuPont) to apply our technologies on an exclusive basis to the study of
certain crops and their protection. Under the terms of the agreement, we could
receive payments over a five-year period for genomics discovery services, the
achievement of specific technology milestones and the delivery of genomic maps
of specified crops. An initial payment of $10 million for technology access was
received at the execution of the agreement, with additional minimum service
fees of $12 million to be received by us over a three-year
period, which
commenced in January 1999. DuPont has subsequently elected to continue the agreement with
us for a two-year period during which we should receive additional
minimum service fees of $8 million. In the fourth quarter of 1999, we achieved a technology milestone under
the agreement that resulted in a $5 million payment from DuPont.

Through December 31, 2001, we have received from DuPont aggregate payments
of $28 million under the agreement. We could receive additional payments from
DuPont, which could total approximately $35 million over the remaining term of
the agreement. Our receipt of these payments is contingent on our continuing
performance of genomics discovery services, the achievement of specific
technology milestone by us and the delivery of genomic maps of specified crops
by us.

Aventis CropScience GmbH

In March 1999, Aventis Pharmaceuticals, formerly Hoechst Marion Roussel,
Inc., obtained nonexclusive access to certain of our genomics discovery
services for the benefit of its affiliate, Aventis CropScience GmbH
(Aventis CropScience). We received an
initial payment for genomics discovery services to be performed by us for
Aventis CropScience. The service period, which was renewed in March
2000, was extended in March 2002 for an additional five-year period.
Related to this extension, Aventis CropScience and Lynx plan to
jointly develop and commercialize a novel assay based on
Lynxs
proprietary bead-based technologies. Lynx and Aventis CropScience
will own the assay technology jointly. We will manufacture and sell
the services or products based on the assay technology, and will pay
related royalties to Aventis CropScience. Additionally, we will
derive revenues from performing genomics discovery service for
Aventis CropScience during the development and commercialization
phase of the agreement.

In September 1999, we signed a three-year research collaboration agreement
with Aventis CropScience. Aventis CropScience will receive exclusive access to
certain of our genomics discovery services for the study of certain plants,
which are aimed at developing new crop varieties and other agricultural
products. Under the terms of the agreement, Aventis CropScience paid us a
technology access fee upon execution of the agreement. We can earn additional
fees for the performance of genomics discovery services, the delivery of
genomic maps of certain plants and milestone payments and licensing fees
related to the discovery of trait-associated SNPs for the subject plants.

To date, we have received from Aventis CropScience aggregate payments of
$8 million under the above agreements. We could receive additional payments
from Aventis CropScience, which could total approximately $20 million over the
remaining term of the agreements. Our receipt of these payments is contingent
on our continuing performance of genomics discovery services, the delivery of
genomic maps of certain plants and milestone payments and licensing fees
related to the discovery of trait-associated SNPs for the subject plants.

Takara Shuzo Co., Ltd.

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In November 2000, we
entered into a collaboration agreement with
Takara Shuzo Co., Ltd. (Takara) of Japan. The license provides Takara with the right in
Japan, Korea and China, including Taiwan, to use our proprietary Megaclone,
Megasort and MPSS technologies exclusively for at least five years, and
non-exclusively thereafter, to provide genomics discovery services and to
manufacture and sell microarrays containing content identified by our
technologies. Takara also receives from us a non-exclusive license right to
manufacture and sell such microarrays elsewhere throughout the world. At the
end of three years from the effective date of the agreement, Takara can
terminate the agreement with no further payment obligations to us other than
those accrued prior to the termination. Under the terms of the agreement, we
will receive from Takara payments for technology access fees, royalties on
sales of microarrays and revenues from genomics discovery services, the sale to
Takara of proprietary reagents used in applying our technologies and purchases
of Lynx common stock. In the event of improvements made by Takara that increase
the efficiency of the our technologies by a defined amount, Lynx and Takara
have agreed to negotiate in good faith a limited reduction to the royalty rate
applicable to the above royalties.

In October 2001, in
connection with the collaboration agreement between Takara and us, we issued and sold 320,512
shares of common stock, at a purchase price of $3.12 per share, to Takara in a
private placement pursuant to the terms and conditions of a common stock
purchase agreement.

Through December 31, 2001, we have received from Takara aggregate payments
of $6.9 million under the agreement. We could receive additional payments from
Takara of approximately $8 million over the remaining term of the agreement
from technology access fees and purchases of Lynx common stock. Also,
we may
receive payments from Takara for royalties on sales of microarrays and revenues
from genomics discovery services and the sale to Takara of proprietary reagents
used in applying our technologies.

Axaron Bioscience AG, formerly BASF-LYNX Bioscience AG

In 1996, Lynx and
BASF established Axaron Bioscience AG (Axaron), a joint
venture company in Heidelberg, Germany. Axaron began operations in 1997 and is
employing our technologies in its neuroscience, toxicology and microbiology
research programs. Upon the establishment of Axaron, we contributed access to
our technologies to Axaron in exchange for an initial 49% equity ownership.
BASF, by committing to provide research funding to Axaron of DM50 million (or
approximately $23.1 million based on a December 2001 exchange rate) over a
five-year period beginning in 1997, received an initial 51% equity ownership in
Axaron. In 1998, BASF agreed to provide an additional $10 million in research
funding to Axaron, of which $4.3 million was paid to us for technology assets
related to a central nervous system program.

In June 2001, we extended our technology licensing agreement with Axaron.
The license extends Axarons right to use our proprietary MPSS and Megasort
technologies non-exclusively in Axarons neuroscience, toxicology and
microbiology programs until December 31, 2007. The agreement also uniquely
positions Axaron to apply our technologies to specific disorders in the
neuroscience field. Under the terms of the agreement, we received from Axaron
a $5.0 million technology license fee. We will furnish Axaron, initially
without charge and later for a fee, with Megaclone technology micro-beads,
other reagents and additional MPSS technology instruments for use in Axarons
research programs.

Lynx and BASF AG have agreed to continue their support of Axarons
growth, including an increase in the capital of Axaron. Lynxs
additional investment in 2001 of $4.5 million in Axaron will maintain Lynxs ownership
interest in Axaron at approximately 40%. Given our ownership share of Axaron
and our ability to exercise significant influence over Axarons operating and
accounting policies, we have accounted for the investment under the equity
method in accordance with APB Opinion No. 18.

Through December 31, 2001, we have received from Axaron aggregate
payments of $9.3 million under all related agreements. We recorded revenue of
$0.4 million from Axaron in 2001 as the technology license fee from Axaron is
being recognized as revenue on a straight-line basis over the noncancelable
term of the technology licensing agreement. We did not recognize any revenue
from Axaron in 2000 and 1999. We may receive additional payments from Axaron
over the remaining term of the technology licensing agreement from the sale to
Axaron of proprietary reagents and additional MPSS technology instruments for
use in Axarons research programs.

Competition

Competition among entities attempting to identify the genes associated
with specific diseases and to develop products based on such discoveries is
intense. We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural

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companies, such as Affymetrix, Inc., Celera Genomics Group, Incyte
Genomics, Inc., Gene Logic, Inc., Genome Therapeutics Corporation and Hyseq,
Inc., 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. We are aware that certain entities are using a variety of
gene expression analysis methodologies, including 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 our competitors. Competition among such entities is intense
and is expected to increase. In order to successfully compete against existing
and future technologies, we will need to demonstrate to potential customers
that our technologies and capabilities are superior to those of our
competitors.

Some of our competitors have substantially greater capital resources,
research and development staffs, facilities, manufacturing and marketing
experience, distribution channels and human resources than us. These
competitors may discover, characterize or develop important genes, drug targets
or drug leads, drug discovery technologies or drugs in advance of our customers
or us or which are more effective than those developed by our collaborators and
customers or us. They may also obtain regulatory approvals for their drugs more
rapidly than our collaborators or customers will, any of which could have a
material adverse effect on our business. Moreover, our competitors may obtain
patent protection or other intellectual property rights that could limit our
rights or our collaborators and customers abilities to use our technologies
or commercialize therapeutic, diagnostic or agricultural products. We also face
competition from these and other entities in gaining access to cells, tissues
and nucleic acid samples for use in our discovery programs.

Intellectual Property

We are pursuing a strategy designed to obtain United States and foreign
patent protection for our core technologies. Our long-term commercial success
will be dependent in part on our ability to obtain commercially valuable patent
claims and to protect our intellectual property portfolio. As of December 31,
2001, we owned or controlled 82 issued patents and 120 pending patent
applications in the United States and foreign countries relating to our
genomics and proteomics technologies.

In addition to acquiring patent protection for our core analysis
technologies, as part of our business strategy, we intend to file for patent
protection on sets of genes, both known and newly discovered, that have
diagnostic or prognostic applications, novel genes that may serve as drug
development targets, genetic maps and sets of genetic markers, such as SNPs,
that are associated with traits or conditions of medical or economic
importance. However, there is substantial uncertainty regarding the
availability of such patent protection.

Patent law relating to the scope of claims in the technology field in
which we operate is still evolving. The degree to which we will be able to
protect our technology with patents, therefore, is uncertain. Others may
independently develop similar or alternative technologies, duplicate any of our
technologies and, if patents are licensed or issued to us, design around the
patented technologies licensed to or developed by us. In addition, we could
incur substantial costs in litigation if we are required to defend ourselves in
patent suits brought by third parties or if we initiate such suits.

With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We intend
to maintain several important aspects of our technology platform as trade
secrets. While we require all employees, consultants, collaborators, customers
and licensees to enter into confidentiality agreements, we cannot be certain
that proprietary information will not be disclosed or that others will not
independently develop substantially equivalent proprietary information.

Research and Development Expenditures

We have devoted our efforts primarily to research and development.
Research and development expenses were $24.7 million for the year ended
December 31, 2001, $19.8 million for the year ended December 31, 2000 and $15.5
million for the year ended December 31, 1999.

Scientific Advisor

Sydney Brenner, M.B., D.Phil.,our principal scientific advisor,is a
distinguished Professor at the Salk Institute of Biological Studies in La
Jolla, California. From July 1996 to January 2001, Dr. Brenner served as
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

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Professor of Genetic Medicine, University of Cambridge School of Clinical
Medicine, Cambridge, England. Dr. Brenner is known for his work on 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 (1995) 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 (2000 and 1991), the
Genetics Society of America Medal (1987) and the Kyoto Prize (1990). Dr.
Brenner is the principal inventor of Lynxs bead-based technologies.

Employees

As of
December 31, 2001, we employed 182 full-time employees, of which
150 were
engaged in research and development activities. We believe we have been successful in attracting
skilled and experienced scientific personnel; however, competition for such
personnel is intense. None of our employees are covered by collective
bargaining agreements, and management considers relations with our employees to
be good.

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Business Risks

Our business faces significant risks. These risks include those
described below and may include additional risks of which we are not currently
aware or which we currently do not believe are material. If any of the
events or circumstances described in the following risks actually occurs, our
business, financial condition or results of operations could be materially
adversely affected. These risks should be read in conjunction with the other
information set forth in this report.

Our auditors report on the
financial statements for the year ended December 31, 2001
contains a going concern explanatory paragraph, and we will need
to raise additional capital quickly.

Our auditors' report
on our financial statements for the year ended December 31, 2001
contains an explanatory paragraph expressing uncertainty about our
ability to continue as a going concern. We have been largely dependent on equity financing
to sustain our operations to date. Cash and cash equivalents and
short-term investments were $5.5 million at December 31,
2001 and will soon be exhausted if we fail to secure additional
financing within a month. While we have entered into a
non-binding letter of intent for a convertible preferred stock
financing and are negotiating definitive agreements related to such,
we cannot assure you that a financing can be completed on acceptable
terms, or at all. If this financing cannot be completed, we will not
be able to continue our operations and will be forced to sell some or
all of our assets.

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

We have incurred net losses each year since our inception in 1992,
including net losses of approximately $6.7 million in 1999, $13.3 million in
2000 and $16.7 million in 2001. As of December 31, 2001, we had an accumulated
deficit of approximately $83.4 million. We expect these losses to continue for
at least the next several years. The size of these net losses will depend, in
part, on the rate of growth, if any, in our revenues and on the level of our
expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect research
and development expenses to increase due to planned spending for ongoing
technology development and implementation, as well as new applications. As a
result, we will need to generate significant additional revenues to achieve
profitability. Even if we do increase our revenues and achieve profitability,
we may not be able to sustain profitability.

Our ability to generate revenues and achieve profitability depends on many
factors, including:



| |  |  | our ability to continue existing customer relationships and enter into additional corporate collaborations and agreements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to discover genes and targets for drug discovery;                                                             
|
| |  |  | our ability to expand the scope of our research into new areas of pharmaceutical, biotechnology and agricultural research;
|
| |  |  | our collaborators ability to develop diagnostic and therapeutic products from our drug discovery targets; and            
|
| |  |  | the successful clinical testing, regulatory approval and commercialization of such products.                              

The time required to reach profitability is highly uncertain. We may not
achieve profitability on a sustained basis, if at all.

We will need additional funds in the future, which may not be available to us.

We have invested significant capital in our scientific and business
development activities. Our future capital requirements will be substantial as
we expand our operations, and will depend on many factors, including:



| |  |  | the progress and scope of our collaborative and independent research and development projects;                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | payments received under collaborative agreements;                                                                                    
|
| |  |  | our ability to establish and maintain collaborative arrangements;                                                                    
|
| |  |  | the progress of the development and commercialization efforts under our collaborations and corporate agreements;                     
|
| |  |  | 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.

Changes to our
current operating plan may require us to consume available capital
resources significantly sooner than we expect. If our capital
resources are insufficient to meet future capital requirements, we
will have to raise additional funds. We do not know if we will be
able to raise sufficient additional capital on acceptable terms, or
at all. If we raise additional capital by issuing equity or
convertible debt securities, our existing stockholders may experience
substantial dilution.

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If we fail to
obtain adequate funds on reasonable terms, we may have to curtail operations
significantly or obtain funds, if such funds are at all available, by entering into financing or collaborative
agreements on unattractive terms or we will not be able to fund our
operations.

Our technologies are new and unproven and may not allow our collaborators or us
to identify genes, proteins or targets for drug discovery.

You must evaluate us in light of the uncertainties and complexities
affecting an early stage genomics and proteomics company. Our technologies are
new and unproven. The application of these technologies is in too early a stage
to determine whether it can be successfully implemented. These technologies
assume that information about gene expression, protein expression and gene
sequences may enable scientists to better understand complex biological
processes. Our technologies also depend on the successful integration of
independent technologies, each of which has its own development risks.
Relatively few therapeutic products based on gene discoveries have been
successfully developed and commercialized. Our technologies may not enable us
or our collaborators to identify genes, proteins or targets for drug discovery.
To date, neither we nor our collaborators have identified any targets for drug
discovery based on our technologies.

We are dependent on our collaborations and will need to find additional
collaborators in the future to develop and commercialize diagnostic or
therapeutic products.

Our strategy for the development and commercialization of our technologies
and potential products includes entering into collaborations, subscription
arrangements or licensing arrangements with pharmaceutical, biotechnology and
agricultural companies. We do not have the resources to develop or
commercialize diagnostic or therapeutic products on our own. If we cannot
negotiate additional collaborative arrangements or contracts on acceptable
terms, or at all, or such collaborations or relationships are not successful,
we may never become profitable.

We have derived substantially all of our revenues from corporate
collaborations and agreements. Revenues from collaborations and related
agreements depend upon continuation of the collaborations, the achievement of
milestones and royalties derived from future products developed from our
research and technologies. To date, we have received a significant portion of
our revenues from a small number of collaborators and customers. For the year
ended December 31, 2001, revenues from DuPont, BASF, Takara and the Institute
of Molecular and Cell Biology accounted for 37%, 24%, 12% and 12%,
respectively, of our total revenues. For the year ended December 31, 2000,
revenues from DuPont, BASF and Aventis CropScience accounted for 51%, 29% and
11%, respectively, of our total revenues. For the year ended December 31, 1999,
revenues from DuPont, Aventis CropScience and BASF accounted for 81%, 13% and
5%, respectively, of our total revenues. If we fail to successfully achieve
milestones or our collaborators fail to develop successful products, we will
not earn the revenues contemplated under such collaborative agreements. If our
collaborators or customers do no renew existing agreements, we lose one of
these collaborators or customers and we do not attract new collaborators or
customers or we are unable to enter into new collaborative agreements on
commercially acceptable terms, our revenues may decrease, and our activities
may fail to lead to commercialized products.

Our dependence on collaborative arrangements with third parties subjects
us to a number of risks. We have limited or no control over the resources that
our collaborators may choose to devote to our joint efforts. Our collaborators
may breach or terminate their agreements with us or fail to perform their
obligations thereunder. Further, our collaborators may elect not to develop
products arising out of our collaborative arrangements or may fail to devote
sufficient resources to the development, manufacture, marketing or sale of such
products. While we do not currently compete directly with any of our
collaborators, some of our collaborators could become our competitors in the
future if they internally develop DNA or protein analysis technologies or if
they acquire other genomics or proteomics companies and move into the genomics
and proteomics industries. We will not earn the revenues contemplated under our
collaborative arrangements, if our collaborators:



| |  |  | do not develop commercially successful products using our technologies;
| | - |  | -----------------------------------------------------------------------
|
| |  |  | develop competing products;                                            
|
| |  |  | preclude us from entering into collaborations with their competitors;  
|
| |  |  | fail to obtain necessary regulatory approvals; or                      
|
| |  |  | terminate their agreements with us.                                    

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We depend on a sole supplier to manufacture flow cells used in our MPSS
technology.

Flow cells are glass plates that are micromachined, or fabricated to very
precise, small dimensions, to create a grooved chamber for immobilizing
microbeads in a planar microarray, which is a two-dimensional, dense ordered
array of DNA samples. We use flow cells in our Massively Parallel Signature
Sequencing, or MPSS, technology. We currently purchase the flow cells used in
our MPSS technology from a single supplier, although the flow cells are
potentially available from multiple suppliers. While we believe that
alternative suppliers for flow cells exist, identifying and qualifying new
suppliers could be an expensive and time-consuming process. Our reliance on
outside vendors involves several risks, including:



| |  |  | the inability to obtain an adequate supply of required components due
to manufacturing capacity constraints, a discontinuance of a product by
a third-party manufacturer or other supply constraints;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | reduced control over quality and pricing of components; and                                                                                                                                          
|
| |  |  | delays and long lead times in receiving materials from vendors.                                                                                                                                      

We operate in an intensely competitive industry with rapidly evolving
technologies, and our competitors may develop products and technologies that
make ours obsolete.

The biotechnology industry is highly fragmented and is characterized by
rapid technological change. In particular, the area of genomics and proteomics
research is a rapidly evolving field. Competition among entities attempting to
identify genes and proteins associated with specific diseases and to develop
products based on such discoveries is intense. Many of our competitors have
substantially greater research and product development capabilities and
financial, scientific and marketing resources than we do.

We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural companies, as well as academic research
institutions, clinical reference laboratories and government agencies. Some of
our competitors, such as Affymetrix, Inc., Celera Genomics Group, Incyte
Genomics, Inc., Gene Logic, Inc., Genome Therapeutics Corporation and Hyseq,
Inc., may be:



| |  |  | attempting to identify and patent randomly sequenced genes and gene
fragments and proteins;                                                                                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | pursuing a gene identification, characterization and product
development strategy based on positional cloning, which uses disease
inheritance patterns to isolate the genes that are linked to the
transmission of disease from one generation to the next; and
|
| |  |  | using a variety of different gene and protein expression analysis
methodologies, including the use of chip-based systems, to attempt to
identify disease-related genes and proteins.                                                                           

In addition, numerous pharmaceutical, biotechnology and agricultural
companies are developing genomics and proteomics research programs, either
alone or in partnership with our competitors. Our future success will depend on
our ability to maintain a competitive position with respect to technological
advances. Rapid technological development by others may make our technologies
and future products obsolete.

Any products developed through our technologies will compete in highly
competitive markets. Our competitors may be more effective at using their
technologies to develop commercial products. Further, our competitors may
obtain intellectual property rights that would limit the use of our
technologies or the commercialization of diagnostic or therapeutic products
using our technologies. As a result, our competitors products or technologies
may render our technologies and products, and those of our collaborators,
obsolete or noncompetitive.

If we fail to adequately protect our proprietary technologies, third parties
may be able to use our technologies, which could prevent us from competing in
the market.

Our success depends in part on our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies
and products. The patent positions of biotechnology companies, including our
patent position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our proprietary rights from unauthorized
use by third parties only to the extent that our proprietary technologies are
covered by valid and enforceable patents or are effectively maintained

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as trade secrets. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the U.S., and many
companies have encountered significant problems in protecting and defending
their proprietary rights in foreign jurisdictions. We have applied and will
continue to apply for patents covering our technologies, processes and products
as and when we deem appropriate. However, third parties may challenge these
applications, or these applications may fail to result in issued patents. Our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patents. In addition, our patents may be
challenged or invalidated or fail to provide us with any competitive advantage.

We also rely on trade secret protection for our confidential and
proprietary information. However, trade secrets are difficult to protect. We
protect our proprietary information and processes, in part, with
confidentiality agreements with employees, collaborators and consultants.
However, third parties may breach these agreements, we may not have adequate
remedies for any such breach or our trade secrets may still otherwise become
known by our competitors. In addition, our competitors may independently
develop substantially equivalent proprietary information.

Litigation or third-party claims of intellectual property infringement could
require us to spend substantial time and money and adversely affect our ability
to develop and commercialize our technologies and products.

Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering
genes, gene fragments, proteins, the analysis of gene expression and protein
expression and the manufacture and use of DNA chips or microarrays, which are
tiny glass or silicon wafers on which tens of thousands of DNA molecules can be
arrayed on the surface for subsequent analysis. We intend to continue to apply
for patent protection for methods relating to gene expression and protein
expression and for the individual disease genes and proteins and drug discovery
targets we discover. If patents covering technologies required by our
operations are issued to others, we may have to rely on licenses from third
parties, which may not be available on commercially reasonable terms, or at
all.

Third parties may accuse us of employing their proprietary technology
without authorization. In addition, third parties may obtain patents that
relate to our technologies and claim that use of such technologies infringes
these patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought
against us, we may need to pay damages and obtain one or more licenses from
third parties. We may not be able to obtain these licenses at a reasonable
cost, or at all. Defense of any lawsuit or failure to obtain any of these
licenses could adversely affect our ability to develop and commercialize our
technologies and products and thus prevent us from achieving profitability.

We have limited experience in sales and marketing and thus may be unable to
further commercialize our technologies and products.

Our ability to achieve profitability depends on attracting collaborators
and customers for our technologies and products. There are a limited number of
pharmaceutical, biotechnology and agricultural companies that are potential
collaborators and customers for our technologies and products. To market our
technologies and products, we must develop a sales and marketing group with
the appropriate technical expertise. We may not successfully build such a
sales force. If our sales and marketing efforts fail to be successful, our
technologies and products may fail to gain market acceptance.

Our sales cycle is lengthy, and we may spend considerable resources on
unsuccessful sales efforts or may not be able to enter into agreements on the
schedule we anticipate.

Our ability to obtain collaborators and customers for our technologies
and products depends in significant part upon the perception that our
technologies and products can help accelerate their drug discovery and
genomics and proteomics efforts. Our sales cycle is typically lengthy because
we need to educate our potential collaborators and customers and sell the
benefits of our products to a variety of constituencies within such companies.
In addition, we may be required to negotiate agreements containing terms
unique to each collaborator or customer. We may expend substantial funds and
management effort with no assurance that we will successfully sell our
technologies and products. Actual and proposed consolidations of
pharmaceutical companies have negatively affected, and may in the future
negatively affect, the timing and progress of our sales efforts.

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We may have difficulty managing our growth.

We may experience significant growth in the number of our employees and
the scope of our operations. This growth may place a significant strain on our
management and operations. As our operations expand, we expect that we will
need to manage additional relationships with various collaborators and
customers, suppliers and other third parties. Our ability to manage our
operations and growth effectively requires us to continue to improve our
operational, financial and management controls, reporting systems and
procedures. We may not successfully implement improvements to our management
information and control systems in an efficient or timely manner and may
discover deficiencies in existing systems and controls.

The loss of key personnel or the inability to attract and retain additional
personnel could impair the growth of our business.

We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these persons services might adversely
impact the achievement of our objectives and the continuation of existing
collaborations. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. There is currently a shortage of skilled executives and employees
with technical expertise, and this shortage is likely to continue. As a result,
competition for skilled personnel is intense and turnover rates are high.
Competition for experienced scientists from numerous companies, academic and
other research institutions may limit our ability to attract and retain such
personnel. We depend on our President and Chief Executive Officer, Norman J.W.
Russell, Ph.D., the loss of whose services could have a material adverse effect
on our business. Although we have an employment agreement with Dr. Russell in
place, currently we do not maintain key person insurance for him or any other
key personnel.

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

Our research and development processes involve the controlled use of
hazardous materials, including chemicals and radioactive and biological
materials. Our operations produce hazardous waste products. We cannot
eliminate the risk of accidental contamination or discharge and any resultant
injury from these materials. Federal, state and local laws and regulations
govern the use, manufacture, storage, handling and disposal of hazardous
materials. We may be sued for any injury or contamination that results from
our use or the use by third parties of these materials, and our liability may
exceed our insurance coverage and our total assets. Compliance with
environmental laws and regulations may be expensive, and current or future
environmental regulations may impair our research, development and production
efforts.

Ethical, legal and social issues may limit the public acceptance of, and demand
for, our technologies and products.

Our collaborators and customers may seek to develop diagnostic products
based on genes or proteins we discover. The prospect of broadly available
gene-based diagnostic tests raises ethical, legal and social issues regarding
the appropriate use of gene-based diagnostic testing and the resulting
confidential information. 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. These ethical, legal and social
concerns about genetic testing and target identification may delay or prevent
market acceptance of our technologies and products.

Although our technology does not depend on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. The
subject of genetically modified food has received negative publicity, which
has aroused public debate. Adverse publicity has resulted in greater
regulation internationally and trade restrictions on imports of genetically
altered agricultural products. Claims that genetically engineered products are
unsafe for consumption or pose a danger to the environment may influence
public attitudes and prevent genetically engineered products from gaining
public acceptance. The commercial success of our future products may depend,
in part, on public acceptance of the use of genetically engineered products,
including drugs and plant and animal products.

If we develop products with our collaborators, and if product liability
lawsuits are successfully brought against us, we could face substantial
liabilities that exceed our resources.

We may be held liable, if any product we develop with our collaborators
causes injury or is otherwise found unsuitable during product testing,
manufacturing, marketing or sale. Although we have general liability and
product liability insurance, this insurance may become prohibitively expensive
or may not fully cover our potential liabilities. Inability to obtain
sufficient insurance coverage at

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an acceptable cost or to otherwise protect us against potential product
liability claims could prevent or inhibit our ability to commercialize
products developed with our collaborators.

Healthcare reform and restrictions on reimbursements may limit our returns on
diagnostic or therapeutic products that we may develop with our collaborators.

If we successfully validate targets for drug discovery, products that we
develop with our collaborators based on those targets may include diagnostic or
therapeutic products. The ability of our collaborators to commercialize such
products may depend, in part, on the extent to which reimbursement for the cost
of these products will be available from government health administration
authorities, private health insurers and other organizations. In the U.S.,
third-party payors are increasingly challenging the price of medical products
and services. The trend towards managed healthcare in the U.S., legislative
healthcare reforms and the growth of organizations such as health maintenance
organizations that may control or significantly influence the purchase of
healthcare products and services, may result in lower prices for any products
our collaborators may develop. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products. If adequate
third-party coverage is not available in the future, our collaborators may fail
to maintain price levels sufficient to realize an appropriate return on their
investment in research and product development.

Our facilities are located near known earthquake fault zones, and the
occurrence of an earthquake or other catastrophic disaster could cause damage
to our facilities and equipment, which could require us to cease or curtail
operation.

Our facilities are located near known earthquake fault zones and are
vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities
could cause significant delays in our programs and make it difficult for us to
recover from a disaster. The insurance we maintain may not be adequate to cover
our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely
harm our ability to conduct business.

Our stock price may be extremely volatile.

We believe that the market price of our common stock will remain highly
volatile and may fluctuate significantly due to a number of factors. The market
prices for securities of many publicly-held, early-stage biotechnology
companies have in the past been, and can in the future be expected to be,
especially volatile. For example, during the two-year period from January 1,
2000 to December 31, 2001, the closing sales price of our common stock as
quoted on the Nasdaq National Market fluctuated from a low of $2.33 to a high
of $96.875 per share. 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. The following
factors and events may have a significant and adverse impact on the market
price of our common stock:



| |  |  | fluctuations in our operating results;                                                         
| | - |  | -----------------------------------------------------------------------------------------------
|
| |  |  | announcements of technological innovations or new commercial products by us or our competitors;
|
| |  |  | release of reports by securities analysts;                                                     
|
| |  |  | developments or disputes concerning patent or proprietary rights;                              
|
| |  |  | developments in our relationships with current or future collaborators or customers; and       
|
| |  |  | general market conditions.                                                                     

Many of these factors are beyond our control. These factors may cause a
decrease in the market price of our common stock, regardless of our operating
performance.

Anti-takeover provisions in our charter documents and under Delaware law may
make it more difficult to acquire us or to effect a change in our management,
even though an acquisition or management change may be beneficial to our
stockholders.

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Under our certificate of incorporation, our board of directors has the
authority, without further action by the holders of our common stock, to issue
2,000,000 additional shares of preferred stock from time to time in series and
with preferences and rights as it may designate. These preferences and rights
may be superior to those of the holders of our common stock. For example, the
holders of preferred stock may be given a preference in payment upon our
liquidation or for the payment or accumulation of dividends before any
distributions are made to the holders of common stock.

Any authorization or
issuance of preferred stock, while providing
desirable flexibility in connection with financings, possible acquisitions and other
corporate purposes, could also have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock or making
it more difficult to remove directors and effect a change in management. The
preferred stock may have other rights, including economic rights senior to
those of our common stock, and, as a result, an issuance of additional
preferred stock could lower the market value of our common stock. Provisions of
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.

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Item 2.Properties

In February 1998, we entered into a noncancelable operating lease for
facilities space of approximately 111,000 square-feet in two buildings in
Hayward, California. Currently, our 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 our growth. The lease runs through December 2008. We have an
option to extend the lease for an additional five-year period, subject to
certain conditions. We have leased approximately 37,000 square feet of
additional space in one of the buildings for further expansion purposes.

In June 1998, Lynx GmbH entered into a noncancelable operating lease for
facilities space of approximately 6,300 square-feet in Heidelberg, Germany, to
house its operations. The space will be developed and occupied in phases,
depending on the growth of the organization. The lease terminates in June 2005.
A portion of this space is currently being subleased by Axaron.

In August 1993, we entered into a noncancelable operating lease, which
expires on July 31, 2003, for another facility. In 1998, we entered into an
agreement to sublease a portion of this space, and in 1999, through a
subsequent agreement, subleased the remaining portion of the facility. The term
of the sublease runs through July 2003. Rent from the sublease is sufficient to
cover the rent and other operating expenses incurred by Lynx under the terms of
the 1993 lease.




Item 3.Legal Proceedings

We are 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 during the quarter
ended December 31, 2001.

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PART II




Item 5.Market For Registrants Common Equity and Related Stockholder Matters

Our common stock trades on the Nasdaq National Market under the symbol
LYNX. The following table sets forth, for the periods indicated, the high and
low closing bid information for our common stock as reported by the Nasdaq
National Market:

|                             |                |  |                    |       |     |  |   |       | 
|---------------------------- | -------------- |  | ------------------ | ----- | --- |  | - | ----- | 
|                             |                |  | Common Stock Price
|                             |                |  |                   
|                             |                |  | High               |       | Low
|                             |                |  |                    |       |    
|Year ended December 31, 2000 |                |  |                    |       |     |  |   |      
|                             | First Quarter  |  | $                  | 99.50 |     |  | $ | 21.63 | 
|                             | Second Quarter |  |                    | 47.88 |     |  |   | 13.50 | 
|                             | Third Quarter  |  |                    | 51.50 |     |  |   | 22.50 | 
|                             | Fourth Quarter |  |                    | 32.00 |     |  |   | 6.56  | 
|Year ended December 31, 2001 |                |  |                    |       |     |  |   |      
|                             | First Quarter  |  | $                  | 15.13 |     |  | $ | 6.38  | 
|                             | Second Quarter |  |                    | 8.80  |     |  |   | 5.00  | 
|                             | Third Quarter  |  |                    | 7.75  |     |  |   | 2.05  | 
|                             | Fourth Quarter |  |                    | 4.48  |     |  |   | 2.23  | 

As of March 1, 2002, there were approximately 1,900 stockholders of record
of our common stock. On March 1, 2002, the last reported sale price of our
common stock was $2.60.

We have never declared or paid any cash dividends on our common stock. We
currently intend to retain earnings to support the development of our business
and do not anticipate paying cash dividends for the foreseeable future. Any
future determination to pay dividends will be at the discretion of our board of
directors.

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Item 6.Selected Financial Data

This section presents our selected consolidated historical financial data.
You should read carefully the consolidated financial statements and
the related notes
included in this report and Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.

The consolidated
statement of operations data for the years ended December
31, 1999, 2000 and 2001 and the consolidated balance sheet data as of December
31, 2000 and 2001 have been derived from our audited consolidated financial
statements included elsewhere in this report. The consolidated statement of
operations data for the years ended December 31, 1997 and 1998 and the
consolidated balance sheet data as of December 31, 1997, 1998 and 1999 have
been derived from our audited financial statements that are not included in
this report. Historical results are not necessarily indicative of future
results. See the notes to consolidated financial statements for an explanation
of the method used to determine the number of shares used in computing basic
and diluted net loss per share.

|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |        |        | 
|------------------------------------------------- | ----------------------------------- | ---------------------------------- | ------- | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                  |                                     |                                    |         | Year Ended December 31,              
|                                                  |                                     |                                    |         |                                      
|                                                  |                                     |                                    |         | 1997                                  |        | 1998 |        | 1999   |        | 2000 |        | 2001  
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |       
|                                                  |                                     |                                    |         | (in thousands, except per share data)
|Consolidated Statements of Operations Data:       |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|Revenues:                                         |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|                                                  | Technology access and services fees |                                    | $       | 3,875                                 |        |      | $      | 2,625  |        |      | $      | 7,833  |        |   | $       | 12,389 |        |   | $       | 18,372 |       
|                                                  | License fee from related party      |                                    |         |                                      |        |      |        |       |        |      |        |       |        |   |         |       |        |   |         | 453    |       
|                                                  | Collaborative
research and other    |                                    |         | 707                                   |        |      |        | 4,380  |        |      |        | 5,042  |        |   |         | 235    |        |   |         | 429    |       
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|                                                  |                                     | Total revenues                     |         |                                       | 4,582  |      |        |        | 7,005  |      |        |        | 12,875 |   |         |        | 12,624 |   |         |        | 19,254 | 
|Operating costs and expenses:                     |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|                                                  | Cost of services fees               |                                    |         |                                      |        |      |        |       |        |      |        | 828    |        |   |         | 3,652  |        |   |         | 4,118  |       
|                                                  | Research and development            |                                    |         | 14,226                                |        |      |        | 13,166 |        |      |        | 15,510 |        |   |         | 19,761 |        |   |         | 24,660 |       
|                                                  | General and administrative          |                                    |         | 1,930                                 |        |      |        | 2,141  |        |      |        | 4,175  |        |   |         | 6,170  |        |   |         | 7,503  |       
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|                                                  |                                     | Total operating costs and expenses |         |                                       | 16,156 |      |        |        | 15,307 |      |        |        | 20,513 |   |         |        | 29,583 |   |         |        | 36,281 | 
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|Loss from operations                              |                                     |                                    | (11,574 | )                                     |        |      | (8,302 | )      |        |      | (7,638 | )      |        |   | (16,959 | )      |        |   | (17,027 | )     
|Interest and other income, net                    |                                     |                                    | 753     |                                       |        |      | 4,106  |        |        |      | 1,232  |        |        |   | 4,158   |        |        |   | 378     |       
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|Loss before provision for income taxes            |                                     |                                    | (10,821 | )                                     |        |      | (4,196 | )      |        |      | (6,406 | )      |        |   | (12,801 | )      |        |   | (16,649 | )     
|Provision for income taxes                        |                                     |                                    |        |                                       |        |      | 151    |        |        |      | 258    |        |        |   | 500     |        |        |   | 81      |       
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|Net loss                                          |                                     | $                                  | (10,821 | )                                     |        | $    | (4,347 | )      |        | $    | (6,664 | )      |        | $ | (13,301 | )      |        | $ | (16,730 | )     
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share              |                                     | $                                  | (3.09   | )                                     |        | $    | (0.45  | )      |        | $    | (0.60  | )      |        | $ | (1.17   | )      |        | $ | (1.31   | )     
|Shares used in per share computation              |                                     |                                    | 3,501   |                                       |        |      | 9,642  |        |        |      | 11,128 |        |        |   | 11,388  |        |        |   | 12,754  |       
|                                                 
|                                                  |                                     |                                    |         | December 31,                         
|                                                  |                                     |                                    |         |                                      
|                                                  |                                     |                                    |         | 1997                                  |        | 1998 |        | 1999   |        | 2000 |        | 2001  
|                                                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |       
|                                                  |                                     |                                    |         | (in thousands)                       
|Consolidated Balance Sheet Data:                  |                                     |                                    |         |                                       |        |      |        |        |        |      |        |        |        |   |         |        |        |   |         |       
|Cash, cash equivalents and short-term investments |                                     | $                                  | 24,930  |                                       |        | $    | 23,862 |        |        | $    | 30,786 |        |        | $ | 18,798  |        |        | $ | 5,509   |       
|Working
capital (deficit)                         |                                     |                                    | 21,875  |                                       |        |      | 20,834 |        |        |      | 25,042 |        |        |   | 10,887  |        |        |   | (488    | )     
|Total assets                                      |                                     |                                    | 29,267  |                                       |        |      | 40,334 |        |        |      | 51,638 |        |        |   | 39,215  |        |        |   | 32,502  |       
|Notes payable  noncurrent portion                |                                     |                                    |        |                                       |        |      |       |        |        |      | 3,471  |        |        |   | 3,077   |        |        |   | 1,806   |       
|Stockholders equity                              |                                     | $                                  | 25,590  |                                       |        | $    | 23,457 |        |        | $    | 19,646 |        |        | $ | 6,222   |        |        | $ | 4,714   |       

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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. When used herein, the words believe, anticipate, expect,
estimate and similar expressions are intended to identify such
forward-looking statements. There can be no assurance that these statements
will prove to be correct. Our 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. We
undertake no obligation to update any of the forward-looking statements
contained herein to reflect any future events or developments.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in our financial statements and accompanying notes. The items in our
financial statements requiring significant estimates and judgments include
determining the useful lives of fixed assets for depreciation and amortization
calculations, assumptions for valuing options and warrants and estimated lives
of license and collaborative agreements related to deferred revenue. Actual
results could differ materially from these estimates.

Revenue Recognition

Technology access fees have generally resulted from upfront
payments from collaborators, customers and licensees who are provided access
to Lynxs technologies for specified periods. We receive service
fees from collaborators and customers for genomics discovery services
performed by us on the biological samples they send to Lynx. Collaborative
research revenues are payments received under various agreements and include
such items as milestone payments. Milestone payments are recognized
as revenue pursuant
to collaborative agreements upon the achievement of specified technology
developments, representing the culmination of the earnings process. Other revenues include the proceeds from the
sale of proprietary reagents and grant revenue.

Technology access and
license fees are deferred and recognized as revenue on a
straight-line basis over the noncancelable term of the agreement to which they
relate. Payments for services and/or materials provided by Lynx are recognized
as revenues when earned over the period in which the services are performed
and/or materials are delivered, provided no other obligations, refunds or
credits to be applied to future work exist. Revenues from the sales of products and reagents,
which have been immaterial to date, are recognized upon shipment to the
customer.

Investments in Equity Securities

We hold a minority investment in Inex, a publicly-owned life
sciences company. This company faces significant operational and
financial risks. We record an investment impairment charge when
we believe that the value of the investment has experienced a
decline in value that is other than temporary (e.g., a decline
in value below our cost basis for two consecutive quarters).
Determination of the impairment charge requires comparing our
cost basis in the investment to the current market value of the
Inex common stock at the date an impairment charge may be
recorded. Additionally, a determination of impairment may
involve consideration of such factors as assumptions regarding
the future operating results of Inex, assumptions of
progress and revenue potential of existing commercial
technologies and technologies under development, and the ability
of Inex to access capital as may be necessary. Future adverse
changes in market conditions or deteriorating operating results
of Inex may require additional impairment charges in the future,
resulting in losses and further reductions in carrying values.

We account for our equity investment in Inex using the cost
method because our ownership is less than 20% and we have
determined that we do not have the ability to exercise
significant influence over the operating, investing and
financing decisions of Inex. Under the cost method, we do
not record our pro-rata share of Inex losses, but rather, we
record the initial investment at cost and adjust our investment to
fair market value each reporting period, with any unrealized gain or
loss recorded as a component of accumulated other comprehensive
income (loss). Additionally, we periodically review
the investment for impairment. Significant judgement is required
to determine whether or not we have the ability to exercise
significant influence, which could have a material impact on our
consolidated operating results. If it were determined we had the
ability to exercise significant influence over Inex, we would
have to record our pro rata share of losses or income of Inex as
incurred.

As of December 31, 2001, we hold approximately a 40% equity
interest in Axaron Bioscience AG, a company owned primarily by us and
BASF AG. We account for our equity investment in Axaron using the
equity method because our ownership is greater than 20% and we
have the ability to exercise significant influence over the
operating, investing and financing decisions of Axaron. Under
the equity method, we record our pro-rata share of Axarons
income or losses and adjust the basis of our investment accordingly. Although we have the ability to exercise
significant influence over the operations of Axaron, we may
choose not to exercise such influence or may not have influence
over certain operating matters. Consequently, Axarons
operating results could differ significantly from our
expectations and our pro rata share of Axarons income or
losses that we record in the future could be material.

Overview

We believe that we are a leader in the development and application of
novel technologies for the discovery of gene expression patterns and genomic
variations important to the pharmaceutical, biotechnology and agricultural
industries. These technologies are based on Megaclone, our unique and
proprietary cloning procedure. Megaclone 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. Based on Megaclone, we have developed a suite of applications that have
the potential to enhance the pace, scale and quality of genomics and genetics
research programs. As of March 2002, we have 19 commercial collaborators, customers and
licensees.

We have incurred net losses each year since our inception in 1992. As of
December 31, 2001, we had an accumulated deficit of approximately $83.4
million. We expect these losses to continue for at least the next several
years. The size of these losses will depend, in part, on the rate of growth, if
any, in our revenues and on the level of our expenses.

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To date, we have received, and expect to continue to receive in the
future, a significant portion of our revenues from a small number of
collaborators and customers. During 2001, revenues from four collaborators and
customers accounted for 37%, 24%, 12% and 12% of total revenues. During 2000,
revenues from three collaborators and customers accounted for 51%, 29% and 11%
of total revenues. During 1999, revenues from three collaborators and customers
accounted for 81%, 13% and 5% of total revenues.

Revenues in each quarterly and annual period have in the past, and could
in the future, fluctuate due to: the timing and amount of any technology access
fee and the period over which the revenue is recognized; the level of service
fees, which is tied to the number and timing of biological samples received
from our collaborators and customers, as well as our performance of the related
genomics discovery services on the samples; the timing of achievement of
milestones and the amount of related payments to us; and the number, type and
timing of new, and the termination of existing, agreements with collaborators,
customers and licensees.

Our operating costs
and expenses include cost of service fees, research and development
expenses and general and administrative expenses. Cost of services fees includes the costs of direct labor, materials and
supplies, outside expenses, equipment and overhead incurred by us in performing
our genomics discovery services for our collaborators and customers. Research
and development expenses include the costs of personnel, materials and
supplies, outside expenses, equipment and overhead incurred by us in our
technology and application development efforts. We expect research and
development expenses to increase due to planned spending for ongoing technology
development and implementation, as well as new applications. General and
administrative expenses include the costs of personnel, materials and supplies,
outside expenses, equipment and overhead incurred by us primarily in our
administrative, business development, legal and investor relations activities.
We expect general and administrative expenses to increase in support of our
research and development, commercial and business development efforts.

We account for our investment in Axaron on the equity method. Prior to
our cash capital contribution of approximately $4.5 million in 2001, such
investment had a carrying value of zero in the financial statements. Since
September 1, 2001, we have recognized our share of Axarons operating results
in the accompanying statements of operations. Our share of Axarons operating
results for 2001 were immaterial.

Results of Operations

Years Ended December 31, 2001 and 2000

Revenues

We had total revenues of $19.3 million for the year ended December 31,
2001, compared to $12.6 million for the year ended December 31, 2000. Revenues
for 2001 included technology access fees and service fees of
$18.4 million, $0.4 million of collaborative research and
other revenue and license fees of $0.5 million from Axaron, a
related party. Revenues for 2000
included technology access fees and service fees of $12.4 million and
collaborative research and other revenue of $0.2 million.

Operating Costs and Expenses

Our total operating costs and expenses were $36.3 million for the year
ended December 31, 2001, compared to $29.6 million for the year ended December
31, 2000. Cost of services fees were $4.1 million for the year ended December
31, 2001, compared to $3.7 million for the year ended December 31, 2000, and
reflect the costs of providing our genomics discovery services. Research and
development expenses were $24.7 million in 2001 and $19.8 million in 2000. The
increase in research and development expenses in 2001, as compared to 2000, is
due primarily to higher personnel-related and facilities expenses and an
increase in materials consumed in research and development efforts. Our efforts
in 2001 were directed toward the expansion of the commercial applications of
our genomics technologies and the continued development of our proteomics
technology. These activities included work under new collaborations and other agreements,
and on internal discovery projects. We expect research and development expenses to increase due to planned spending for ongoing technology development
and implementation, as well as new applications. Our spending plans
assume we can secure needed financing in the near term (see
Liquidity and Capital Resources).

Lynxs research
and development expenses of $24.7 million for 2001 are comprised
of $5.3 million in research expenses related to
internal discovery projects, and $19.4 million in development
expenses, including $2.4 million on the
Megatype and $1.6 million on the
Protein ProFiler
technologies.

Megatype technology for DNA analysis has successfully completed its feasibility studies
in a model organism. As of December 31, 2001, Lynx had provided commercial access to its
Megatype technology to five customers. Megatype technology will permit the comparison
of collected genomes (all of the DNA coded genetic material in chromosomes) of two
populations. Megatype technology is designed to enable the
detection and recovery of DNA fragments
with disease- or trait-associated single nucleotide polymorphisms, or SNPs, that distinguish
these two populations. SNPs are single nucleotide variations in the genetic code that are
believed to occur, on average, about every 1,000 bases along the three billion nucleotides
in the human genome. Lynx believes its Megatype technology will deliver information on the
disease- or trait-association of SNPs, and should provide a cost-effective approach to
pharmacogenetics, which is the identification and assessment of genes that are predictive
of efficacy and toxicity of drug compounds or that may correlate drug responses to
individual genotypes (the particular genetic pattern seen in the DNA of an individual).

Lynxs protein analysis or proteomics technology, Protein ProFiler, is in the late stages of
development. Proteomics is the study of the entire protein complement in cells. Our Protein
ProFiler proteomics technology aims to provide high-resolution analysis of complex mixtures
of proteins from cells or tissues. Our goal is to develop with a partner our Protein ProFiler as
a commercial instrument and to be a commercial-scale provider of the reagents used in the Protein
ProFilers processes. We may also use the Protein ProFiler internally to discover drug
targets, validate candidate targets and correlate gene expression with protein expression
in cells. While advancing its development efforts, we expect to enter an initial commercialization
phase with our Protein ProFiler technology.

These technologies
assume that information about gene expression, protein expression and
gene sequences may enable scientists to better understand complex
biological processes. Our technologies also depend on the successful
integration of independent technologies, each of which has its own
development risks. Relatively few therapeutic products based on gene
discoveries have been successfully developed or commercialized.
Because of these risks and uncertainties, we cannot predict when or
whether we will successfully complete the development of these
technologies or the ultimate technology development costs.

General and administrative expenses were $7.5 million for the year ended
December 31, 2001, compared to $6.2 million for the year ended December 31,
2000. The increase was primarily due to higher personnel-related expenses and
increased costs for outside services related to business development activities
and marketing programs. We expect general and administrative expenses to
change in response of our future research and development, commercial and business
development efforts.

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Interest and Other Income

Net interest expense was $0.1 million in the year ended December 31, 2001,
compared to net interest income of $0.9 million in the year ended December 31,
2000. The decrease was primarily due to lower average cash, cash equivalents
and investment balances during 2001, as compared to 2000, and increased
interest expense incurred on equipment-related debt outstanding in 2001. Other
income was $0.5 million in the year ended December 31, 2001, compared to $3.3
million in the year ended December 31, 2000. In 2001, other income was due
primarily to a gain of approximately $1.1 million from the receipt of shares of
common stock from Inex Pharmaceuticals Corporation, as part of the proceeds
related to the March 1998 sale of our former antisense program and a gain of
$1.1 million from the sale of previously held shares, partially offset by a
$1.6 million write down in the value of previously held shares. In 2000, other
income was due primarily to a gain of approximately $3.1 million from the
receipt of shares of common stock from Inex Pharmaceuticals Corporation, as
part of the proceeds related to the March 1998 sale of our former antisense
program.

Income Taxes

The provisions for
income taxes of approximately $81,000 and $500,000 for
2001 and 2000, respectively, consisted entirely of foreign withholding tax due
on a payment received from one of our customers, collaborators and licensees.

As of
December 31, 2001, we had a federal net operating loss carryforward
of approximately $56.6 million, which will expire at various
dates from 2010
through 2021, if not utilized. We have a state net operating loss carryforward
of approximately $1.9 million, which will expire in 2011.

As of
December 31, 2001, we also had federal and California research and
development and other tax credit carryforwards of approximately $3.3 million
and $3.0 million, respectively. The federal research and development credit
will expire at various dates from 2007 through 2021, if not utilized.

Utilization of the
Company's net operating loss may be subject to substantial annual
limitation due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss
before 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.

Years Ended December 31, 2000 and 1999

Revenues

We had total revenues of $12.6 million for the year ended December 31,
2000, compared to $12.9 million for the year ended December 31, 1999. Revenues
for 2000 included technology access fees and service fees of $12.4 million and
collaborative research and other revenue of $0.2 million. Revenues for 1999
included technology access and service fees of $7.8 million and collaborative
research revenue from a $5.0 million milestone fee.

Operating Costs and Expenses

Our total operating costs and expenses were $29.6 million for the year
ended December 31, 2000, compared to $20.5 million for the year ended December
31, 1999. Cost of services fees were $3.7 million for the year ended December
31, 2000, compared to $0.8 million for the year ended December 31, 1999, and
reflect the costs of providing our genomics discovery services. Research and
development expenses were $19.8 million in 2000 and $15.5 million in 1999. The
increase in research and development expenses in 2000, as compared to 1999, is
due primarily to higher personnel-related and facilities expenses and an
increase in materials consumed in research and development efforts. Our efforts
in 2000 were directed toward the expansion of the commercial applications of
our genomics technologies. These activities included work under new collaborations and
other agreements, internal discovery projects and an internal investment in
building a store of human genomic information. We also continued our
development work on our Megatype and Protein ProFiler technologies.

General and administrative expenses were $6.2 million for the year ended
December 31, 2000, compared to $4.2 million for the year ended December 31,
1999. The increase was primarily due to higher personnel-related expenses and
increased costs for outside services.

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Interest and Other Income

Net interest income decreased to $0.9 million in the year ended December
31, 2000, from $1.1 million in the year ended December 31, 1999, primarily due
to lower average cash, cash equivalents and investment balances during 2000, as
compared to 1999, and increased interest expense incurred on equipment-related
debt outstanding in 2000. Other income was $3.3 million in the year ended
December 31, 2000, compared to $0.1 million in the year ended December 31,
1999. In 2000, other income was due primarily to a gain of approximately $3.1
million from the receipt of shares of common stock from Inex Pharmaceuticals
Corporation, as part of the proceeds related to the March 1998 sale of our
former antisense program. In 1999, other income was attributable to a gain on
the sale of certain fixed assets no longer used in our operations.

Income Taxes

The provision for income taxes of approximately $500,000 for 2000
consisted entirely of foreign withholding tax due on a payment received from
one of our customers, collaborators and licensees. The provision for income
taxes of approximately $258,000 for 1999 consisted entirely of alternative
minimum tax.

Liquidity and Capital Resources

Net cash used in
operating activities was $15.6 million for the year ended
December 31, 2001, as compared to $9.0 million for the same period in 2000.
The amount of net cash used in operating activities differed from the 2001 net
loss due primarily to the depreciation and amortization of fixed assets and
leasehold improvements, the amortization of deferred compensation and the write
down of an equity investment, partially offset by a decrease in deferred
revenue and a gain on the sale of the antisense business. The amount of net cash used in operating activities differed from the
2000 net loss due primarily to the depreciation and amortization of fixed
assets and leasehold improvements and the collection of accounts receivable.
The 1999 net cash provided by operating activities differed from the 1999 net
loss due primarily to an increase in deferred revenue and collection of
accounts receivable, partially offset by a decrease in current liabilities.

Net cash used in
investing activities of $0.2 million for the year ended
December 31, 2001, was due primarily to expenditures for leasehold improvements
and purchases of equipment and
the Company's investment in Axaron, partially
offset by proceeds from the sale of Inex securities and net maturities of short-term investments. Net cash used in investing
activities of $2.3 million for the year ended December 31, 2000, was due
primarily to expenditures for leasehold improvements and purchases of
equipment, partially offset by net maturities of short-term investments. Net
cash used in investing activities of $10.7 million for the year ended December
31, 1999, was primarily due to net purchases of short-term investments and
leasehold improvements and equipment purchases.

Net cash provided by financing activities in 2001 of $11.1 million was due
primarily to the issuance of common stock from two private placements. Net cash
provided by financing activities in 2000 of $1.1 million was due primarily to
the issuance of common stock from the exercise of employee stock options. Net cash
provided by financing activities in 1999 of $4.8 million resulted primarily
from borrowings under an equipment loan arrangement. Cash and cash equivalents
and short-term investments were $5.5 million at December 31, 2001.

In October 2001, in connection with a collaboration
agreement between Takara and the Company, we issued and sold 320,512
shares of common stock, at a purchase price of $3.12 per share, to
Takara in a private placement pursuant to the terms and conditions of
a common stock purchase Agreement.

In May 2001, we completed a private placement of common stock and warrants
to purchase common stock. The financing included the sale of 1,747,248 newly
issued shares of common stock at a purchase price of $6.37 per share, resulting
in net proceeds of approximately $10.5 million, pursuant to a common stock
purchase agreement between Lynx and certain investors. In connection with this
transaction, we issued warrants to purchase up to 436,808 shares of common
stock at an exercise price of $9.2011 per share. We filed with the Securities
and Exchange Commission a resale registration statement related to the
privately placed securities. The net proceeds from the financing are being used
to support ongoing commercial, business development and research and
development activities. Our research and development efforts focus on
completing development of the Megatype technology and on the continuing
development of the Protein ProFiler technology, as well as on internal
discovery projects.

In late 1998, we entered into a financing agreement with a financial
institution, Transamerica Business Credit Corporation, under which we drew down
$4.8 million during 1999 for the purchase of equipment and certain other
capital expenditures. We granted the lender a security interest in all items
financed by it under this agreement. Each draw down under the loan has a term
of 48 months from the date of the draw down. As of December 31, 2001, the
principal balance under loans outstanding under this agreement was
approximately $3.3 million. The draw down period under the agreement expired on
March 31, 2000.

Our contractual obligations for the next five years, and thereafter are as
follows:

|                                   |  |                                  |       |           |  |           |       |               |  |       |       |  |  |   |       |  |  |   |        | 
|---------------------------------- |  | -------------------------------- | ----- | --------- |  | --------- | ----- | ------------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                   |  | Principal Payments Due by Period
|                                   |  |                                 
|Contractual Obligations (1)        |  | Less than 1 year                 |       | 1-3 Years |  | 4-5 Years |       | After 5 Years |  | Total
|                                   |  |                                  |       |           |  |           |       |               |  |      
|                                   |  | (in thousands)                  
|Operating leases                   |  | $                                | 3,202 |           |  | $         | 5,789 |               |  | $     | 5,709 |  |  | $ | 5,730 |  |  | $ | 20,430 | 
|Equipment
loan                     |  |                                  | 1,445 |           |  |           | 1,806 |               |  |       |      |  |  |   |      |  |  |   | 3,251  | 
|                                   |  |                                  |       |           |  |           |       |               |  |       |       |  |  |   |       |  |  |   |        | 
|Total contractual cash obligations |  | $                                | 4,647 |           |  | $         | 7,595 |               |  | $     | 5,709 |  |  | $ | 5,730 |  |  | $ | 23,681 | 
|                                   |  |                                  |       |           |  |           |       |               |  |       |       |  |  |   |       |  |  |   |        | 



---

|(1) |  | This table does not include
any payment obligations under research license
agreements as the timing and likelihood of such payments are not known.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

We plan to use available funds for ongoing commercial and research and
development activities, working capital and other general corporate purposes
and capital expenditures. We expect capital investments during 2002 will be
comprised primarily of equipment

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purchases required in the normal course of business and expenditures for
leasehold improvements. We intend to invest our excess cash in
investment-grade, interest-bearing securities.

We have obtained funding for our operations primarily through sales of
preferred and common stock to venture capital investors, institutional
investors and collaborators, payments under contractual arrangements with
customers, collaborators and licensees and interest income.
Consequently, investors in our equity securities and our
customers, collaborators and licensees are significant sources of
liquidity for us. Therefore, our ability to maintain liquidity is
dependent upon a number of uncertain factors, including but not
limited to the following: our ability to advance and commercialize
our technologies; our ability to generate revenues through expanding
existing collaborations and obtaining significant new customers,
collaborators and licensees; and the receptivity of capital markets
toward our equity or debt securities. The cost, timing
and amount of funds required for specific uses by us cannot be precisely
determined at this time and will be based upon the progress and the scope of
our collaborative and independent research and development projects; payments
received under customer, collaborative and license agreements; our ability to
establish and maintain customer, collaborative and license agreements; costs of
protecting intellectual property rights; legal and administrative costs;
additional facilities capacity needs and the availability of alternate methods
of financing.

We have been largely
dependent on equity financing to sustain our operations to date. Cash
and cash equivalents and short-term investments were $5.5 million at
December 31, 2001 and will soon be exhausted if we fail to secure
additional financing within a month. While we have entered into a
non-binding letter of intent for a convertible preferred stock
financing and are negotiating definitive agreements related to such,
we cannot assure you that a financing can be completed on acceptable
terms, or at all. If this financing cannot be completed, we will not be
able to continue our operations and will be forced to sell some or
all of our assets.

Changes to our
current operating plan may require us to consume available capital
resources significantly sooner than we expect. If our capital
resources are insufficient to meet future capital requirements, we
will have to raise additional funds. We do not know if we will be
able to raise sufficient additional capital on acceptable terms, or
at all. If we raise additional capital by issuing equity or
convertible debt securities, our existing stockholders may experience
substantial dilution. If we fail to obtain adequate funds on
reasonable terms, we may have to curtail operations significantly or
obtain funds by entering into financing or collaborative agreements
on unattractive terms or we will not be able to fund
operations.

Recent Accounting Pronouncements

In July 2001, the FASB issued Statement of Financial Accounting Standard No. 141, Business Combinations.
SFAS 141 establishes new standards for accounting and reporting for business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. Lynx expects to adopt this statement during the
first quarter of fiscal 2002 and does not believe that SFAS 141 will have a
material effect on its operating results or financial position.

In July 2001, the FASB issued Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets, which supercedes APB Opinion No. 17, Intangible Assets. 
SFAS 142 establishes new standards for goodwill, including the elimination of
goodwill amortization to be replaced with methods of periodically evaluating
goodwill for impairment. Lynx expects to adopt this statement during the
first quarter of fiscal 2002 and does not believe that SFAS 142 will have a
material effect on its operating results or financial position.

In August 2001, the FASB issued Statement of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. Lynx expects to adopt this statement during the first quarter of
fiscal 2002 and does not believe that SFAS 143 will have a material effect on
its operating results or financial position.

In October 2001, the
FASB issued Statement of Financial Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of.
SFAS 144 establishes a single accounting model for long-lived
assets to be disposed of and is applicable to financial statements
issued for fiscal years beginning after December 31, 2001
(January 2002 for calendar year-end companies) with transition
provisions for certain matters. Lynx expects to adopt this statement
during the first quarter of fiscal 2002 and does not believe that
SFAS 144 will have a material effect on its operating results or
financial position.

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Item 7A.Quantitative and Qualitative Disclosures about Market Risk

Short-Term Investments

The primary objective of our investment activities is to preserve
principal while, at the same time, maximizing yields without significantly
increasing risk. To achieve this objective, we invest in highly liquid and
high-quality debt securities. Our investments in debt securities are subject to
interest rate risk. To minimize the exposure due to adverse shifts in interest
rates, we invest in short-term securities and maintain an average maturity of
less than one year. As a result, we do not believe we are subject to
significant interest rate risk.

We hold an investment in an equity security that is subject to market
volatility. The fair value of the equity security recorded at December 31, 2001
and 2000 was $2.3 million and $2.6 million, respectively.

Foreign Currency Rate Fluctuations

The functional currency for our German subsidiary is the deutsche mark.
Our German subsidiarys accounts are translated from the German deutsche mark
to the U.S. dollar using the current exchange rate in effect at the balance
sheet date, for balance sheet accounts, and using the average exchange rate
during the period, for revenues and expense accounts. The effects of
translation are recorded as a separate component of stockholders equity, and
to date, have not been material. Our German subsidiary conducts its business in
local European currencies. Exchange gains and losses arising from these
transactions are recorded using the actual exchange differences on the date of
the transaction. We have not taken any action to reduce our exposure to changes
in foreign currency exchange rates, such as options or futures contracts, with
respect to transactions with our German subsidiary or transactions with our
European collaborators and customers.

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Item 8.Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

|                                                                                                     |  |      |    | 
|---------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                     |  | Page
|                                                                                                     |  |     
|Report of Ernst & Young LLP, Independent Auditors                                                    |  |      | 28 | 
|Consolidated Balance Sheets as of December 31, 2001 and 2000                                         |  |      | 29 | 
|Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999           |  |      | 30 | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2001, 2000 and 1999 |  |      | 31 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999           |  |      | 32 | 
|Notes to Consolidated Financial Statements                                                           |  |      | 33 | 

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Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Lynx Therapeutics, Inc.

We have audited the accompanying consolidated balance sheets of Lynx
Therapeutics, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders equity and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, financial statements referred to above
present fairly, in all material respects, the consolidated financial position of Lynx
Therapeutics, Inc. at December 31, 2001 and 2000, and the
consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

The accompanying
financial statements have been prepared assuming that Lynx
Therapeutics, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred cumulative
operating losses from inception through December 31, 2001 of
$83.4 million (including a loss of $16.7 million for the
year ended December 31, 2001), and expects operating losses to
continue into the foreseeable future. In addition, the Companys
cash, cash equivalents and short-term investments decreased from
$18.8 million at December 31, 2000 to $5.5 million at
December 31, 2001. These conditions raise substantial doubt
about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

| |  |     |  |                  
| |  | --- |  | -----------------
| |  | /s/ |  | Ernst & Young LLP

Palo Alto, California
February 1, 2002

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LYNX THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |         |        | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ----- | ---- | ------ | ------- | ------ | 
|                                     |                                                                                                                                                                  |                            |        | December 31,
|                                     |                                                                                                                                                                  |                            |        |             
|                                     |                                                                                                                                                                  |                            |        | 2001         |       | 2000
|                                     |                                                                                                                                                                  |                            |        |              |       |     
|Assets                               |                                                                                                                                                                  |                            |        |              |       |      |        |        
|Current assets:                      |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     | Cash and cash equivalents                                                                                                                                        |                            | $      | 3,199        |       |      | $      | 7,875   |       
|                                     | Short-term investments                                                                                                                                           |                            |        | 2,310        |       |      |        | 10,923  |       
|                                     | Accounts receivable                                                                                                                                              |                            |        | 1,152        |       |      |        | 1,539   |       
|                                     | Inventory                                                                                                                                                        |                            |        | 1,718        |       |      |        | 1,868   |       
|                                     | Other current assets                                                                                                                                             |                            |        | 897          |       |      |        | 402     |       
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     |                                                                                                                                                                  | Total current assets       |        |              | 9,276 |      |        |         | 22,607 | 
|Property and equipment:              |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     | Leasehold improvements                                                                                                                                           |                            |        | 12,225       |       |      |        | 11,527  |       
|                                     | Laboratory and other equipment                                                                                                                                   |                            |        | 20,284       |       |      |        | 13,555  |       
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     |                                                                                                                                                                  |                            | 32,509 |              |       |      | 25,082 |        
|                                     | Less accumulated depreciation and amortization                                                                                                                   |                            |        | (14,283      | )     |      |        | (9,263  | )     
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|Net property and equipment           |                                                                                                                                                                  |                            | 18,226 |              |       |      | 15,819 |        
|Investment
in related party          |                                                                                                                                                                  |                            | 4,452  |              |       |      |       |        
|Other non-current assets             |                                                                                                                                                                  |                            | 548    |              |       |      | 789    |        
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     |                                                                                                                                                                  | $                          | 32,502 |              |       | $    | 39,215 |        
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|Liabilities and Stockholders Equity |                                                                                                                                                                  |                            |        |              |       |      |        |        
|Current liabilities:                 |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     | Accounts payable                                                                                                                                                 |                            | $      | 2,037        |       |      | $      | 1,640   |       
|                                     | Accrued compensation                                                                                                                                             |                            |        | 694          |       |      |        | 614     |       
|                                     | Deferred revenues  current portion                                                                                                                              |                            |        | 5,259        |       |      |        | 7,219   |       
|                                     | Note payable  current portion                                                                                                                                   |                            |        | 1,445        |       |      |        | 1,319   |       
|                                     | Other accrued liabilities                                                                                                                                        |                            |        | 329          |       |      |        | 928     |       
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     |                                                                                                                                                                  | Total current liabilities  |        |              | 9,764 |      |        |         | 11,720 | 
|Deferred revenues                    |                                                                                                                                                                  |                            | 15,115 |              |       |      | 17,467 |        
|Note payable                         |                                                                                                                                                                  |                            | 1,806  |              |       |      | 3,077  |        
|Other non-current liabilities        |                                                                                                                                                                  |                            | 1,103  |              |       |      | 729    |        
|Commitments                          |                                                                                                                                                                  |                            |        |              |       |      |        |        
|Stockholders equity:                |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     | Preferred stock, $0.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding                                                                  |                            |        |             |       |      |        |        |       
|                                     | Common stock, $0.01 par value; 60,000,000 shares
authorized, 13,769,477 and 11,443,702 shares issued and
outstanding at December 31, 2001 and 2000,
respectively |                            |        | 87,951       |       |      |        | 75,851  |       
|                                     | Notes receivable from stockholders                                                                                                                               |                            |        | (250         | )     |      |        | (263    | )     
|                                     | Deferred compensation                                                                                                                                            |                            |        | (744         | )     |      |        | (1,557  | )     
|                                     | Accumulated other comprehensive income (loss)                                                                                                                    |                            |        | 1,139        |       |      |        | (1,157  | )     
|                                     | Accumulated deficit                                                                                                                                              |                            |        | (83,382      | )     |      |        | (66,652 | )     
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     |                                                                                                                                                                  | Total stockholders equity |        |              | 4,714 |      |        |         | 6,222  | 
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        
|                                     |                                                                                                                                                                  | $                          | 32,502 |              |       | $    | 39,215 |        
|                                     |                                                                                                                                                                  |                            |        |              |       |      |        |        

See accompanying notes.

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LYNX THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |        |        | 
|-------------------------------------- | ----------------------------------- | ---------------------------------- | ------- | ----------------------- | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                       |                                     |                                    |         | Year Ended December 31,
|                                       |                                     |                                    |         |                        
|                                       |                                     |                                    |         | 2001                    |        | 2000 |         | 1999  
|                                       |                                     |                                    |         |                         |        |      |         |       
|Revenues:                              |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|                                       | Technology access and services fees |                                    | $       | 18,372                  |        |      | $       | 12,389 |        |   | $      | 7,833  |       
|                                       | License fee from related party      |                                    |         | 453                     |        |      |         |       |        |   |        |       |       
|                                       | Collaborative
research and other    |                                    |         | 429                     |        |      |         | 235    |        |   |        | 5,042  |       
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|                                       |                                     | Total revenues                     |         |                         | 19,254 |      |         |        | 12,624 |   |        |        | 12,875 | 
|Operating costs and expenses:          |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|                                       | Cost of services fees               |                                    |         | 4,118                   |        |      |         | 3,652  |        |   |        | 828    |       
|                                       | Research and development            |                                    |         | 24,660                  |        |      |         | 19,761 |        |   |        | 15,510 |       
|                                       | General and administrative          |                                    |         | 7,503                   |        |      |         | 6,170  |        |   |        | 4,175  |       
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|                                       |                                     | Total operating costs and expenses |         |                         | 36,281 |      |         |        | 29,583 |   |        |        | 20,513 | 
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|Loss from operations                   |                                     |                                    | (17,027 | )                       |        |      | (16,959 | )      |        |   | (7,638 | )     
|Interest income (expense), net         |                                     |                                    | (86     | )                       |        |      | 900     |        |        |   | 1,125  |       
|Other income                           |                                     |                                    | 464     |                         |        |      | 3,258   |        |        |   | 107    |       
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|Loss before provision for income taxes |                                     |                                    | (16,649 | )                       |        |      | (12,801 | )      |        |   | (6,406 | )     
|Provision for income taxes             |                                     |                                    | 81      |                         |        |      | 500     |        |        |   | 258    |       
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|Net loss                               |                                     | $                                  | (16,730 | )                       |        | $    | (13,301 | )      |        | $ | (6,664 | )     
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|Basic and diluted net loss per share   |                                     | $                                  | (1.31   | )                       |        | $    | (1.17   | )      |        | $ | (0.60  | )     
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       
|Shares used in per share computation   |                                     |                                    | 12,754  |                         |        |      | 11,388  |        |        |   | 11,128 |       
|                                       |                                     |                                    |         |                         |        |      |         |        |        |   |        |       

See accompanying notes.

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LYNX THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share amounts)

|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |         |     | 
|-------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------------ | ---------- | ------------ | - | ---------- | ------ | ------------ | - | ------------- | ---- | ------------- | - | ------------- | ------ | ------ | --- | ----------- | ------ | ------ | - | - | ------- | ------- | - | - | ------- | ------- | --- | 
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      | Notes         |   |               |        |        |     | Accumulated |        |        |   |   |         |         |   |  
|                                                                                             |                                   |                                                              |            | Common Stock |   | Receivable |        |              |   |               |      | Other         |   |               |        |        |     | Total      
|                                                                                             |                                   |                                                              |            |              |   | from       |        | Deferred     |   | Comprehensive |      | Accumulated   |   | Stockholders'
|                                                                                             |                                   |                                                              |            | Shares       |   | Amount     |        | Stockholders |   | Compensation  |      | Income (Loss) |   | Deficit       |        | Equity
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |       
|Balance at December 31, 1998                                                                 |                                   |                                                              | 11,132,815 |              |   | $          | 74,329 |              |   | $             | (436 | )             |   | $             | (3,742 | )      |     | $           | (7     | )      |   | $ | (46,687 | )       |   | $ | 23,457  |        
|Comprehensive loss:                                                                          |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|                                                                                             | Net loss                          |                                                              |            |             |   |            |        |             |   |               |      |              |   |               |        |       |     |             |        |       |   |   |         | (6,664  | ) |   |         | (6,664  | )  
|                                                                                             | Net unrealized gain on securities |                                                              |            |             |   |            |        |             |   |               |      |              |   |               |        |       |     |             |        | 1,135  |   |   |         |        |   |   |         | 1,135   |    
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Comprehensive loss                                                                           |                                   |                                                              |           |              |   |            |       |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | (5,529  | )      
|Employee stock purchase plan issuance                                                        |                                   |                                                              | 17,379     |              |   |            | 182    |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 182     |        
|Exercise of stock options for cash and repayment of
note receivable                          |                                   |                                                              | 68,994     |              |   |            | 196    |              |   |               | 143  |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 339     |        
|Amortization of deferred compensation, including forfeitures                                 |                                   |                                                              |           |              |   |            | (188   | )            |   |               |     |               |   |               | 1,298  |        |     |             |       |        |   |   |        |         |   |   | 1,110   |        
|Consulting and service expense related to stock option grants                                |                                   |                                                              |           |              |   |            | 87     |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 87      |        
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Balance at December 31, 1999                                                                 |                                   |                                                              | 11,219,188 |              |   |            | 74,606 |              |   |               | (293 | )             |   |               | (2,444 | )      |     |             | 1,128  |        |   |   | (53,351 | )       |   |   | 19,646  |        
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Comprehensive loss:                                                                          |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|                                                                                             | Net loss                          |                                                              |            |             |   |            |        |             |   |               |      |              |   |               |        |       |     |             |        |       |   |   |         | (13,301 | ) |   |         | (13,301 | )  
|                                                                                             | Net unrealized loss on securities |                                                              |            |             |   |            |        |             |   |               |      |              |   |               |        |       |     |             |        | (2,285 | ) |   |         |        |   |   |         | (2,285  | )  
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Comprehensive loss                                                                           |                                   |                                                              |           |              |   |            |       |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | (15,586 | )      
|Net exercise of warrants                                                                     |                                   |                                                              | 29,597     |              |   |            |       |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   |        |        
|Employee stock purchase plan issuance                                                        |                                   |                                                              | 16,532     |              |   |            | 288    |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 288     |        
|Exercise of stock options for cash and repayment of
note receivable                          |                                   |                                                              | 178,385    |              |   |            | 843    |              |   |               | 30   |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 873     |        
|                                                                                             |                                   | Amortization of deferred compensation, including forfeitures |            |              |  |            |        |              |  |               |      |               |  |               |        |        | 887 |             |        |        |  |   |         |         |  |   |         |         | 887 | 
|Consulting and service expense related to stock option grants                                |                                   |                                                              |           |              |   |            | 114    |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 114     |        
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Balance at December 31, 2000                                                                 |                                   |                                                              | 11,443,702 |              |   |            | 75,851 |              |   |               | (263 | )             |   |               | (1,557 | )      |     |             | (1,157 | )      |   |   | (66,652 | )       |   |   | 6,222   |        
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Comprehensive loss:                                                                          |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|                                                                                             | Net loss                          |                                                              |            |             |   |            |        |             |   |               |      |              |   |               |        |       |     |             |        |       |   |   |         | (16,730 | ) |   |         | (16,730 | )  
|                                                                                             | Net unrealized gain on securities |                                                              |            |             |   |            |        |             |   |               |      |              |   |               |        |       |     |             |        | 2,296  |   |   |         |        |   |   |         | 2,296   |    
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Comprehensive loss                                                                           |                                   |                                                              |           |              |   |            |       |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | (14,434 | )      
|Employee stock purchase plan issuance                                                        |                                   |                                                              | 40,083     |              |   |            | 314    |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 314     |        
|Exercise of stock options for cash and repayment of
note receivable                          |                                   |                                                              | 217,932    |              |   |            | 458    |              |   |               | 13   |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 471     |        
|Issuance of common stock in connection with private placement,
net of issuance costs of $619 |                                   |                                                              | 2,067,760  |              |   |            | 11,511 |              |   |               |     |               |   |               |       |        |     |             |       |        |   |   |        |         |   |   | 11,511  |        
|Amortization of deferred compensation, including forfeitures                                 |                                   |                                                              |           |              |   |            | (183   | )            |   |               |     |               |   |               | 813    |        |     |             |       |        |   |   |        |         |   |   | 630     |        
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        
|Balance at December 31, 2001                                                                 |                                   |                                                              | 13,769,477 |              |   | $          | 87,951 |              |   | $             | (250 | )             |   | $             | (744   | )      |     | $           | 1,139  |        |   | $ | (83,382 | )       |   | $ | 4,714   |        
|                                                                                             |                                   |                                                              |            |              |   |            |        |              |   |               |      |               |   |               |        |        |     |             |        |        |   |   |         |         |   |   |         |        

See accompanying notes.

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LYNX THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |        |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | - | ----------------------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                          |                                                                          |   | Year Ended December 31,
|                                                                                          |                                                                          |   |                        
|                                                                                          |                                                                          |   | 2001                    |        | 2000 |   | 1999   
|                                                                                          |                                                                          |   |                         |        |      |   |        
|Cash flows from operating activities                                                      |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Net loss                                                                                  |                                                                          | $ | (16,730                 | )      |      | $ | (13,301 | )      |   | $ | (6,664  | )     
|Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|                                                                                          | Depreciation and amortization of fixed assets and
leasehold improvements |   |                         | 5,020  |      |   |         | 3,769  |   |   |         | 1,964  |  
|                                                                                          | Issuance of stock options to non-employees in exchange for
services      |   |                         |       |      |   |         | 114    |   |   |         | 87     |  
|                                                                                          | Amortization of deferred compensation                                    |   |                         | 630    |      |   |         | 887    |   |   |         | 1,110  |  
|                                                                                          | Gain
on sale of antisense business                                       |   |                         | (2,113 | )    |   |         | (3,119 | ) |   |         |       |  
|                                                                                          | Loss on write down of equity investment                                  |   |                         | 1,605  |      |   |         |       |   |   |         |       |  
|                                                                                          | Other                                                                    |   |                         |       |      |   |         |       |   |   |         |       |  
|Changes in operating assets and liabilities                                               |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|                                                                                          | Accounts receivable                                                      |   |                         | 387    |      |   |         | 2,506  |   |   |         | 1,271  |  
|                                                                                          | Inventory                                                                |   |                         | 150    |      |   |         |       |   |   |         |       |  
|                                                                                          | Other current assets                                                     |   |                         | (495   | )    |   |         | (891   | ) |   |         | (701   | )
|                                                                                          | Accounts payable                                                         |   |                         | 397    |      |   |         | 1,000  |   |   |         | (1,130 | )
|                                                                                          | Accrued liabilities                                                      |   |                         | (519   | )    |   |         | 396    |   |   |         | (3,106 | )
|                                                                                          | Deferred revenues                                                        |   |                         | (4,312 | )    |   |         | (648   | ) |   |         | 14,667 |  
|                                                                                          | Other non-current liabilities                                            |   |                         | 374    |      |   |         | 272    |   |   |         | 269    |  
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Net cash provided by (used in) operating activities                                       |                                                                          |   | (15,606                 | )      |      |   | (9,015  | )      |   |   | 7,767   |       
|Cash flows from investing activities                                                      |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Purchases
of short-term investments                                                       |                                                                          |   | (3,808                  | )      |      |   | (8,097  | )      |   |   | (22,121 | )     
|Maturities of short-term investments                                                      |                                                                          |   | 12,153                  |        |      |   | 12,543  |        |   |   | 17,016  |       
|Proceeds
from sale of equity securities                                                   |                                                                          |   | 3,072                   |        |      |   |        |        |   |   |        |       
|Leasehold improvements and equipment purchases, net of
retirements                        |                                                                          |   | (7,427                  | )      |      |   | (6,710  | )      |   |   | (5,205  | )     
|Notes receivable from officers and employees                                              |                                                                          |   | 254                     |        |      |   | 30      |        |   |   | (248    | )     
|Investment
in related party                                                               |                                                                          |   | (4,452                  | )      |      |   |        |        |   |   |        |       
|Other assets                                                                              |                                                                          |   |                        |        |      |   | (38     | )      |   |   | (122    | )     
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Net cash used in investing activities                                                     |                                                                          |   | (208                    | )      |      |   | (2,272  | )      |   |   | (10,680 | )     
|Cash flows from financing activities                                                      |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Issuance of common stock, net of repurchases                                              |                                                                          |   | 12,283                  |        |      |   | 1,131   |        |   |   | 378     |       
|Proceeds from equipment loan                                                              |                                                                          |   |                        |        |      |   | 950     |        |   |   | 4,838   |       
|Repayment of equipment loan                                                               |                                                                          |   | (1,145                  | )      |      |   | (969    | )      |   |   | (423    | )     
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Net cash provided by financing activities                                                 |                                                                          |   | 11,138                  |        |      |   | 1,112   |        |   |   | 4,793   |       
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Net increase (decrease) in cash and cash equivalents                                      |                                                                          |   | (4,676                  | )      |      |   | (10,175 | )      |   |   | 1,880   |       
|Cash and cash equivalents at beginning of year                                            |                                                                          |   | 7,875                   |        |      |   | 18,050  |        |   |   | 16,170  |       
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Cash and cash equivalents at end of year                                                  |                                                                          | $ | 3,199                   |        |      | $ | 7,875   |        |   | $ | 18,050  |       
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Supplemental disclosures of cash flow information                                         |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Income taxes paid                                                                         |                                                                          | $ |                        |        |      | $ | 110     |        |   | $ | 303     |       
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Interest paid                                                                             |                                                                          | $ | 399                     |        |      | $ | 128     |        |   | $ | 174     |       
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       
|Inex stock received                                                                       |                                                                          | $ | 1,060                   |        |      | $ | 3,119   |        |   | $ |        |       
|                                                                                          |                                                                          |   |                         |        |      |   |         |        |   |   |         |       

See accompanying notes.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies and Basis of Presentation

Business and Basis of Presentation

Lynx Therapeutics,
Inc. (Lynx or the Company) believes that it is a leader in the development and application of
novel technologies for the discovery of gene expression patterns and genomic
variations important to the pharmaceutical, biotechnology and agricultural
industries. These technologies are based on Megaclone, Lynxs unique and
proprietary cloning procedure. Megaclone 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. Based on Megaclone, Lynx has developed a suite of
applications that has
the potential to enhance the pace, scale and quality of genomics and genetics
research programs. As of March 2002, Lynx has 19 commercial collaborators, customers and
licensees.

The Companys consolidated financial statements have been presented on a
basis that contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has experienced
operating losses since its inception of $83.4 million, including a net loss of
$16.7 million in the year ended December 31, 2001, and expects such losses to
continue into the foreseeable future as it proceeds with the development and
commercialization of its technologies. The Companys cash, cash equivalents
and short-term investments decreased from $18.8 million at December 31, 2000 to
$5.5 million at December 31, 2001. The Company is
actively pursuing various options, which include securing additional equity
financing and obtaining new collaborators and customers, and believes that
sufficient funding will be available to meet its projected operating and
capital requirements through December 31, 2002. There can be no assurance that
additional financing will be available on satisfactory terms or at all. If the
Company is unable to secure needed financing, or is unable to generate
sufficient new sources of revenue through arrangements with collaborators,
customers and licensees, management would be forced to take substantial
restructuring actions which may include significantly reducing its anticipated
level of expenditures and/or the sale of some or all of the
Companys assets.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.

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 the current year 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.

Foreign Currency Translation

Assets and
liabilities of the Companys wholly owned foreign subsidiary
are translated from its local currency at exchange rates
in effect at the balance sheet date, and revenues and expenses are translated
at average exchange rates prevailing during the year. Any material resulting
translation adjustments are reflected as a separate component of stockholders
equity. Translation adjustments as of December 31, 2001 and
2000 were immaterial.

Concentration of Credit Risk

Financial instruments that potentially subject Lynx to concentration of
credit risk consist principally of cash equivalents and short-term
investments. 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 interest-rate risk. The Company, by
corporate policy, limits the amount of credit exposure to any one issuer and to
any one type of investment.

Fair Value of Debt Obligations

The fair value of short-term and long-term obligations is estimated based
on current interest rates available to Lynx for debt instruments with similar
terms, degrees of risk and remaining maturities. The carrying values of these
obligations approximate their fair values.

33



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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

1. Summary of Significant Accounting Policies and Basis of Presentation (continued)

Cash, Cash Equivalents and Short-term Investments

The Company considers all investments in money market mutual funds,
commercial paper and corporate bonds and notes with maturities at
the date of purchase of 90 days or less as cash equivalents.
Investments in debt securities with
maturities beyond 90 days, but less than one year and
investments in publicly traded equity securities 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 money market
mutual funds, commercial paper, equity securities and corporate bonds and
notes at the time of purchase and reevaluates such designation as of each
balance sheet date. As of December 31, 2001 and 2000, the
Company had
classified its entire cash equivalent and short-term 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. If a decline in the fair
value of a short-term equity security is below its cost for two consecutive
quarters or if the decline is due to a significant adverse event, it is
considered to be an other-than-temporary decline. Accordingly, the equity
security is written down to its estimated fair value. Other-than-temporary
declines in fair value on short-term investments are charged against interest
income.

The cost of investment in commercial paper and corporate bonds and notes is adjusted for the
amortization of premiums and accretion of discounts to maturity, which is
included in interest income. The cost of securities sold, if any, is based on
the specific identification method.

Inventory

Inventory is stated at the lower of standard cost (which approximates
first-in, first out cost) or market. The balances at December 31, 2001 and
2000 are classified as raw materials and consist entirely of reagents and other
chemicals utilized while performing genomics discovery services. Inventory is
charged to cost of services as consumed.

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.

Long-lived Assets

In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets to be
Disposed of (FAS
121) the Company identifies and records impairment losses, as circumstances
dictate, on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the discounted cash flows
estimated to be generated by those assets are less than the carrying amounts
of those assets. No such impairments have been identified with respect to the
Companys long-lived assets, which consist primarily of property
and equipment.

Revenue Recognition

Technology access and license fees have generally resulted from upfront
payments from collaborators, customers and licensees who are provided access to
Lynxs technologies for specified periods. The Company receives service fees
from collaborators and customers for genomics discovery services performed by
Lynx on the biological samples they send to Lynx. Collaborative research
revenues are payments received under various agreements and include such items
as milestone payments. Milestone payments are recognized as revenue pursuant to
collaborative agreements upon the achievement of specified technology
developments, representing the culmination of the earnings process. Other revenues include the proceeds from the
sale of proprietary reagents and grant revenue.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

1. Summary of Significant Accounting Policies and Basis of Presentation (continued)

Technology access and
license fees are deferred and recognized as revenue on a
straight-line basis over the noncancelable term of the agreement to which they
relate. Payments for services and/or materials provided by Lynx are recognized
as revenues when earned over the period in which the services are performed
and/or materials are delivered, provided no other obligations, refunds or
credits to be applied to future work exist. Revenues from the sales of products and reagents,
which have been immaterial to date, are recognized upon shipment to the
customer

Revenue from
significant collaborators and customers represented the
following percentages of total revenue:

|                    |  |                         |    |      |  |      |    |   |  |  |    |  
|------------------- |  | ----------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                    |  | Year Ended December 31,
|                    |  |                        
|                    |  | 2001                    |    | 2000 |  | 1999
|                    |  |                         |    |      |  |     
|DuPont              |  |                         | 37 | %    |  |      | 51 | % |  |  | 81 | %
|BASF                |  |                         | 24 | %    |  |      | 29 | % |  |  | 5  | %
|Takara              |  |                         | 12 | %    |  |      | 4  | % |  |  |   | %
|IMCB                |  |                         | 12 | %    |  |      | 2  | % |  |  |   | %
|Aventis
CropScience |  |                         | 4  | %    |  |      | 11 | % |  |  | 13 | %

Net Loss Per Share

Basic and diluted net loss per share are presented in conformity with the
FASBs Statement of Financial Accounting Standards No. 128, Earnings Per
Share (FAS 128), for all periods presented. In accordance with FAS 128,
basic and diluted net loss per share had been computed using the
weighted-average number of shares of common stock outstanding during the
period, less shares subject to repurchase as the Company incurred a
net loss for all periods presented.

The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share amounts):

|                                     |                                                               |   |                          |        |      |   |         |        |   |   |        |        |  
|------------------------------------ | ------------------------------------------------------------- | - | ------------------------ | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                                     |                                                               |   | Years Ended December 31,
|                                     |                                                               |   |                         
|                                     |                                                               |   | 2001                     |        | 2000 |   | 1999   
|                                     |                                                               |   |                          |        |      |   |        
|Net loss                             |                                                               | $ | (16,730                  | )      |      | $ | (13,301 | )      |   | $ | (6,664 | )     
|Basic and diluted:                   |                                                               |   |                          |        |      |   |         |        |   |   |        |       
|                                     | Weighted-average shares of common stock
outstanding           |   |                          | 12,763 |      |   |         | 11,404 |   |   |        | 11,183 |  
|                                     | Less weighted-average shares subject to repurchase            |   |                          | (9     | )    |   |         | (16    | ) |   |        | (55    | )
|                                     |                                                               |   |                          |        |      |   |        
|                                     | Shares used in computing basic and diluted net
loss per share |   |                          | 12,754 |      |   |         | 11,388 |   |   |        | 11,128 |  
|Basic and diluted net loss per share |                                                               | $ | (1.31                    | )      |      | $ | (1.17   | )      |   | $ | (0.60  | )     
|                                     |                                                               |   |                          |        |      |   |        

Had Lynx been in a net income position, diluted earnings per share would
have included the impact of outstanding shares subject to repurchase and the
dilutive impact of outstanding options and warrants to purchase common stock.
Excluded from the computation of basic and diluted net loss per share
attributable to common stockholders are approximately 3,101,000, 2,456,000 and
1,992,000 shares related to options and warrants to
purchase common stock at December 31, 2001, 2000 and 1999,
respectively, prior to the
application of the treasury stock method. Such shares have been excluded
because they are anti-dilutive for all periods presented.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

1. Summary of Significant Accounting Policies and Basis of Presentation (continued)

Stock-Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related Interpretations. Under APB 25, because the exercise price of the
Companys employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

All stock option awards to non-employees are accounted for at the fair
value of the consideration received or the fair value of the equity instrument
issued, as calculated using the Black-Scholes model, in accordance with FAS 123
and Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. The option arrangements are
subject to periodic remeasurement over their vesting terms. The Company
recorded compensation expense related to option grants to non-employees of $0
for the year ended December 31, 2001, $114,000 for the year ended December 31,
2000 and $87,000 for the year ended December 31, 1999.

Segment Reporting

Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), establishes
standards for the way that public business enterprises report information about
operating segments in financial statements. 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 and commercialization of
technologies aimed at handling and/or analyzing the DNA molecules or fragments
in 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 long-lived assets are located in
the United States. To date, revenues have been derived primarily from contracts
with companies located in North America, Europe and Asia, as follows (revenue
is attributed to geographic areas based on the location of the customers):

|              |                |   |                         |       |      |   |        |     |  |   |        |   | 
|------------- | -------------- | - | ----------------------- | ----- | ---- | - | ------ | --- |  | - | ------ | - | 
|              |                |   | Year Ended December 31,
|              |                |   |                        
|              |                |   | 2001                    |       | 2000 |   | 1999  
|              |                |   |                         |       |      |   |       
|              |                |   | (in thousands)         
|United States |                | $ | 7,520                   |       |      | $ | 6,480  |     |  | $ | 10,440 |  
|Europe        |                |   |                         |       |      |   |        |     |  |   |        |  
|              | Germany        |   | 6,346                   |       |      |   | 5,394  |     |  |   | 2,435  |  
|              | France         |   |                         | 696   |      |   |        |    |  |   |        |  | 
|              | United Kingdom |   |                         | 100   |      |   |        |    |  |   |        |  | 
|Asia          |                |   |                         |       |      |   |        |     |  |   |        |  
|              | Japan          |   | 2,322                   |       |      |   | 500    |     |  |   |       |  
|              | Singapore      |   |                         | 2,270 |      |   |        | 250 |  |   |        |  | 
|              |                |   |                         |       |      |   |        |     |  |   |        |  
|              |                | $ | 19,254                  |       |      | $ | 12,624 |     |  | $ | 12,875 |  
|              |                |   |                         |       |      |   |        |     |  |   |        |  

Income Taxes

Under Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109), deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. SFAS 109 provides for
the recognition of deferred tax assets if realization of such assets is more
likely than not. Based upon the weight of available evidence, which includes
the Companys historical operating performance and the reported cumulative net
losses for the prior three years, the Company has provided a full valuation
against its net deferred tax assets as of December 31, 2001 and 2000. The
Company intends to evaluate the realizability of the deferred tax assets on a
quarterly basis. See Note 10 to the Consolidated Financial Statements.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

1. Summary of Significant Accounting Policies and Basis of Presentation (continued)

Recent Accounting Pronouncements

In July 2001, the
FASB issued Statement of Financial Accounting Standard No. 141,
Business Combinations (SFAS 141). SFAS 141 establishes new standards for
accounting and reporting for business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited. Lynx
expects to adopt this statement during the first quarter of fiscal 2002 and
does not believe that SFAS 141 will have a material effect on its operating
results or financial position.

In July 2001, the FASB issued Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets (SFAS 142), which supercedes
APB Opinion No. 17, Intangible Assets. SFAS 142 establishes new standards
for goodwill, including the elimination of goodwill amortization to be
replaced with methods of periodically evaluating goodwill for impairment.
Lynx expects to adopt this statement during the first quarter of fiscal 2002
and does not believe that SFAS 142 will have a material effect on its
operating results or financial position.

In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 143, Accounting for Asset Retirement Obligations (SFAS 143).
SFAS 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. Lynx
expects to adopt this statement during the first quarter of fiscal 2002 and
does not believe that SFAS 143 will have a material effect on its operating
results or financial position.

In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), which supersedes FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. SFAS 144 establishes a single accounting model for long-lived assets to
be disposed of and is applicable to financial statements issued for fiscal
years beginning after December 15, 2001 (January 2002 for calendar year-end
companies) with transition provisions for certain matters. Lynx expects to
adopt this statement during the first quarter of fiscal 2002 and does not
believe that SFAS 144 will have a material effect on its operating results or
financial position.

2. Cash Equivalents and Short-term Investments

The following is a summary of available-for-sale securities:

|                          |  |                               |        |            |  |            |       |       |  |           |        |   |  |   |        | 
|------------------------- |  | ----------------------------- | ------ | ---------- |  | ---------- | ----- | ----- |  | --------- | ------ | - |  | - | ------ | 
|                          |  | Available-for-Sale Securities
|                          |  |                              
|                          |  |                               |        |            |  | Gross      |       | Gross |  | Estimated
|                          |  | Amortized                     |        | Unrealized |  | Unrealized |       | Fair 
|                          |  | Cost                          |        | Gains      |  | Losses     |       | Value
|                          |  |                               |        |            |  |            |       |      
|                          |  | (in thousands)               
|December 31, 2001         |  |                               |        |            |  |            |       |       |  |           |        |   |  |   |        | 
|Equity securities         |  | $                             | 1,171  |            |  | $          | 1,139 |       |  | $         |       |   |  | $ | 2,310  | 
|                          |  |                               |        |            |  |            |       |       |  |           |        |   |  |   |        | 
|December 31, 2000         |  |                               |        |            |  |            |       |       |  |           |        |   |  |   |        | 
|Equity securities         |  | $                             | 3,791  |            |  | $          |      |       |  | $         | (1,164 | ) |  | $ | 2,627  | 
|Money market mutual funds |  |                               | 6,951  |            |  |            |      |       |  |           |       |   |  |   | 6,951  | 
|Corporate bonds and notes |  |                               | 8,297  |            |  |            | 7     |       |  |           |       |   |  |   | 8,304  | 
|                          |  |                               |        |            |  |            |       |       |  |           |        |   |  |   |        | 
|                          |  | $                             | 19,039 |            |  | $          | 7     |       |  | $         | (1,164 | ) |  | $ | 17,882 | 
|                          |  |                               |        |            |  |            |       |       |  |           |        |   |  |   |        | 

As of
December 31, 2001, short-term investments consisted only of
marketable equity securities. As of
December 31, 2000, $7.0 million of the available-for-sale securities were classified as
cash equivalents, and $10.9 million were classified as short-term investments.
All short-term investments have maturities of less than one year.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

3. Investment in Related Party

The Company holds an
equity investment in Axaron Bioscience AG
(Axaron) (See Note 4). As of December 31, 2001, Lynx held approximately a
40% ownership in Axaron and has the ability to
exercise significant influence over its operating and accounting
policies. Lynx has accounted for the investment under the equity method in accordance with
APB Opinion No. 18. Under the equity method the Company records
its prorata share of the income or losses of Axaron. The Companys
share of earnings of the joint venture was immaterial for the three years ended
December 31, 2001, 2000 and 1999. Axaron is engaged in employing
Lynxs technologies in its
neuroscience, toxicology and microbiology research programs. See
Note 4 for further discussion of the joint venture.

Summarized unaudited financial information of Axaron is as follows (in thousands):

|                                            |   |              |   |      |   |       |   |  |   |       |   | 
|------------------------------------------- | - | ------------ | - | ---- | - | ----- | - |  | - | ----- | - | 
|                                            |   | December 31,
|                                            |   |             
|                                            |   | 2001         |   | 2000 |   | 1999 
|                                            |   |              |   |      |   |      
|Condensed
Balance Sheet Data:               |   |              |   |      |   |       |   |  |   |       |   | 
|Current assets                              | $ | 11,502       |   |      | $ | 541   |   |  | $ | 1,403 |   | 
|Noncurrent assets                           |   | 5,665        |   |      |   | 1,308 |   |  |   | 3,551 |   | 
|Total
liabilities                           |   | 3,269        |   |      |   | 1,782 |   |  |   | 4,880 |   | 
|Stockholders equity                        |   | 13,898       |   |      |   | 67    |   |  |   | 74    |   | 
|Condensed
Statements of Operations Data:    |   |              |   |      |   |       |   |  |   |       |   | 
|Net sales                                   |   | 9,486        |   |      |   | 8,072 |   |  |   | 5,748 |   | 
|Operating
costs and expenses                |   | 9,525        |   |      |   | 8,098 |   |  |   | 5,771 |   | 
|Income or (loss) from continuing operations |   | (39          | ) |      |   | (26   | ) |  |   | (23   | ) | 
|Net income (loss)                           | $ | 65           |   |      | $ | 5     |   |  | $ | 16    |   | 

4. Collaborators, Customers and Licensees

BASF AG

In October 1996, Lynx entered into an agreement
with BASF AG (BASF), as amended in October 1998, to
provide BASF with nonexclusive access to certain of its genomics
discovery services. In connection with certain technology development
accomplishments, BASF paid Lynx a technology access fee of $4.5 million in the
fourth quarter of 1999. BASFs access to Lynx's genomics discovery services is for
a minimum of two years and requires BASF to purchase services at a minimum rate
of $4.0 million per year. At the end of the initial two-year service period,
BASF has the right to carryover for an additional two-year period a certain
level of previously unrequested genomics discovery services. BASF paid Lynx
$4.0 million in each of the fourth quarters of 1999 and 2000 for genomics
discovery services to be performed by Lynx. Through December 31,
2001, Lynx has
received from BASF aggregate payments of $19 million under the
agreement. Lynx
could receive additional payments from BASF over the remaining term of the
agreement from the Companys performance of genomics discovery services in excess of
those covered by the payments previously made by BASF.

E.I. DuPont de NeMours and Company

In October 1998, Lynx
entered into a research collaboration agreement with E.I. DuPont de
Nemours and Company (DuPont) to apply Lynxs technologies on an exclusive basis to the study of
certain crops and their protection. Under the terms of the agreement,
Lynx could
receive payments over a five-year period for genomics discovery services, the
achievement of specific technology milestones and the delivery of genomic maps
of specified crops. An initial payment of $10 million for technology access was
received at the execution of the agreement, with additional minimum service
fees of $12 million to be received by Lynx over a three-year
period, which
commenced in January 1999. DuPont has subsequently elected to continue the agreement with
Lynx for a two-year period during which the Company should receive additional
minimum service fees of $8 million. In the fourth quarter of 1999, Lynx achieved a technology milestone under
the agreement that resulted in a $5 million payment from DuPont.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

4. Collaborators, Customers, and Licensees (continued)

Through
December 31, 2001, the Company has received from DuPont aggregate payments
of $28 million under the agreement. Lynx could receive additional payments from
DuPont, which could total approximately $35 million over the remaining term of
the agreement. Lynx's receipt of these payments is contingent on its continuing
performance of genomics discovery services, the achievement of specific
technology milestone by Lynx and the delivery of genomic maps of specified crops
by Lynx.

Aventis
CropScience GmbH

In March 1999, Aventis Pharmaceuticals, formerly Hoechst Marion Roussel,
Inc., obtained nonexclusive access to certain of Lynx's genomics discovery
services for the benefit of its affiliate, Aventis CropScience GmbH
(Aventis CropScience). The Company received an
initial payment for genomics discovery services to be performed by Lynx for
Aventis CropScience. The service period, which was renewed in March
2000, was extended in March 2002 for an additional five-year period.
Related to this extension, Aventis CropScience and Lynx plan to
jointly develop and commercialize a novel assay based on Lynx's
proprietary bead-based technologies. Lynx and Aventis CropScience
will own the assay technology jointly. Lynx will manufacture and sell
the services or products based on the assay technology, and will pay
related royalties to Aventis CropScience. Additionally, Lynx will
derive revenues from performing genomics discovery services for
Aventis CropScience during the development and commercialization
phase of the agreement.

In September 1999,
Lynx signed a three-year research collaboration agreement
with Aventis CropScience. Aventis CropScience will receive exclusive access to
certain of Lynx's genomics discovery services for the study of certain plants,
which are aimed at developing new crop varieties and other agricultural
products. Under the terms of the agreement, Aventis CropScience paid the
Company a technology access fee upon execution of the agreement. Lynx can earn additional fees for the
performance of genomics discovery services, the delivery of genomic maps of
certain plants and milestone payments and licensing fees related to the
discovery of trait-associated SNPs for the subject plants.

To date, the Company
has  received from Aventis CropScience aggregate payments of
$8 million under the above agreements. Lynx could receive additional payments
from Aventis CropScience, which could total approximately $20 million over the
remaining term of the agreements. The Companys receipt of these payments is contingent
on its continuing performance of genomics discovery services, the delivery of
genomic maps of certain plants and milestone payments and licensing fees
related to the discovery of trait-associated SNPs for the subject plants.

Takara Shuzo Co., Ltd.

In November 2000, we
entered into a technology collaboration with
Takara Shuzo Co. Ltd. of Japan (Takara). The license provides Takara with the right in
Japan, Korea and China, including Taiwan, to use Lynx's proprietary Megaclone,
Megasort and MPSS technologies exclusively for at least five years, and
non-exclusively thereafter, to provide genomics discovery services and to
manufacture and sell microarrays containing content identified by
Lynx's technologies. Takara also receives from Lynx a non-exclusive license right to
manufacture and sell such microarrays elsewhere throughout the world. At the
end of three years from the effective date of the agreement, Takara can
terminate the agreement with no further payment obligations to the
Company other than
those accrued prior to the termination. Under the terms of the
agreement, the Company will receive from Takara payments for technology access fees, royalties on
sales of microarrays and revenues from genomics discovery services, the sale to
Takara of proprietary reagents used in applying our technologies and purchases
of Lynx common stock. In the event of improvements made by Takara that increase
the efficiency of the Company's technologies by a defined amount, Lynx and Takara
have agreed to negotiate in good faith a limited reduction to the royalty rate
applicable to the above royalties.

In October 2001,
in connection with the collaboration between Takara and the
Company, Lynx issued and sold 320,512
shares of common stock, at a purchase price of $3.12 per share, to Takara in a
private placement pursuant to the terms and conditions of a common stock
purchase agreement.

Through
December 31, 2001, the Company has received from Takara aggregate
payments of $6.9 million under the agreement. Lynx could receive additional
payments from Takara of approximately $8 million over the remaining term of
the agreement from technology access fees and purchases of Lynx common stock.
Also, Lynx may receive payments from Takara for royalties on sales of
microarrays and revenues from genomics discovery services and the sale to
Takara of proprietary reagents used in applying Lynxs technologies.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

4. Collaborators, Customers, and Licensees (continued)

Axaron Bioscience AG, formerly BASF-LYNX Bioscience AG

In 1996, Lynx and
BASF established Axaron Bioscience AG (Axaron), a joint
venture company in Heidelberg, Germany. Axaron began operations in 1997 and is
employing Lynx's technologies in its neuroscience, toxicology and microbiology
research programs. Upon the establishment of Axaron, the Company contributed access to
Lynx's technologies through May 2001 to Axaron in exchange for an initial 49%
equity ownership. BASF, by committing to provide research funding to Axaron of
DM50 million (or approximately $23.1 million based on a December 2001 exchange
rate) over a five-year period beginning in 1997, received an initial 51% equity
ownership in Axaron. In 1998, BASF agreed to provide an additional $10 million
in research funding to Axaron, of which $4.3 million was paid to the Company for
technology assets related to a central nervous system program.

In June 2001, the
Company extended Lynxs technology licensing agreement with Axaron.
The license extends Axarons right to use Lynxs proprietary MPSS and Megasort
technologies non-exclusively in Axarons neuroscience, toxicology and
microbiology programs until December 31, 2007. The agreement also positions Axaron to apply Lynxs technologies to specific disorders in the
neuroscience field. Under the terms of the extended agreement, the Company received from Axaron
a $5.0 million technology license fee funded entirely by BASF. Throughout the
license the Company will furnish Axaron with Megaclone technology micro-beads, other
reagents and additional MPSS technology instruments for use in Axarons
research programs. The Company is recognizing the license fee ratably
over the term of the license.

Lynx and BASF AG have agreed to continue their support of Axarons growth,
including an increase in the capital of Axaron.
Lynxs additional investment in 2001 of $4.5 million in Axaron will maintain Lynxs ownership interest
in Axaron at approximately 40%. Given our ownership share of Axaron and Lynxs
ability to exercise significant influence over Axarons operating and
accounting policies, the Company has accounted for the investment under the equity
method in accordance with APB Opinion No. 18. (See Note 3)

Through
December 31, 2001, the Company has received from Axaron aggregate
payments of $9.3 million under all related agreements. The
Company
recorded license fee revenue of
$0.4 million from Axaron in 2001. Lynx did not recognize any revenue
from Axaron in 2000 and 1999. The Company may receive additional payments from Axaron
over the remaining term of the technology licensing agreement from the sale to
Axaron of proprietary reagents and additional MPSS technology instruments for
use in Axarons research programs.

5. Sale of the Antisense Business

In March 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 1.2 million shares of Inex
common stock, in three equal installments, with the first 400,000 shares
received in March 1998, the second 400,000 shares received in
March 2000 and the third installment of 400,000 shares received in March 2001. The Inex
common stock received by Lynx was subject to certain restrictions on trading
for specific periods of time following receipt by Lynx. All such restrictions
have either expired or have been relieved.

Lynx recorded installments of the Inex common stock received on March 31,
2001 and 2000, at fair value, in other income when received. The Company
recognized other income of $1.1 million in 2001 and $3.1 million in 2000 related to the receipt of shares. During
fiscal year 2001, the Company sold 763,000 shares of Inex common stock. In
connection with these sales the Company recognized gains of
$1.0 million. These gains were offset by a loss of $1.6 million recorded in 2001 as a result of
charges related to other than temporary declines in the fair values of Inex
shares. At December 31, 2001 the Company held 437,000 shares of Inex stock.

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##### Table of Contents



LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

6. 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. The expenses associated with licenses were approximately $75,000,
$90,000 and $86,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

7. Notes Receivable from Officers

In 1999, the Company
entered into loan agreements with certain officers of the Company.
The aggregate loans total $360,000, are secured by second mortgages on real
property, have interest accruable at rates of 4.83% to 6.02% per annum and
are subject to early repayment under specified circumstances. The principal
and interest on the loans will be forgiven, based on the officers continuous
employment over a four-year period, in the following amounts: 50% on the
second anniversary dates of employment; and 25% on each of the third and
fourth anniversary dates of employment.

In August 1998, Lynx 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 are 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. The second loan was paid in full in January 2002.

In April 1997, Lynx 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.

8. Related Party Transactions

In 2001, the Company
extended its technology licensing agreement with Axaron. The
license extends Axarons right to use Lynx's proprietary MPSS and Megasort
technologies non-exclusively in Axarons neuroscience, toxicology and
microbiology programs until December 31, 2007. The Company received from Axaron a $5.0
million technology license fee which was recorded as deferred revenue and
is being recognized on a straight-line basis over the noncancelable term of the
agreement. The recorded revenue for 2001 was $443,000. The Company
performed genomics
discovery services for Axaron in 2001, and recorded service revenue of $10,000.
In 2001, Lynx made a capital investment in Axaron of $4.5 million.

The Company also
subleases certain offices in Germany to Axaron. During 2001, 2000 and
1999, the Company received an immaterial amount of sublease income from Axaron. (See
Note 3, 4 and 11)

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

9. Stockholders Equity

Common Stock

At December 31, 2001, Lynx had reserved 3,778,405 shares of common stock
for issuance upon the exercise of outstanding employee and non-employee stock
options, upon the issuance of shares to be purchased pursuant to the employee
stock purchase plan and upon the exercise of outstanding warrants as noted
below:

|                                    |  |  |           | 
|----------------------------------- |  |  | --------- | 
|Stock option grants outstanding     |  |  | 2,664,116 | 
|Shares available for option grants  |  |  | 551,475   | 
|Employee stock purchase plan shares |  |  | 126,006   | 
|Warrants                            |  |  | 436,808   | 
|                                    |  |  |           | 
|                                    |  |  | 3,778,405 | 
|                                    |  |  |           | 

In October 2001, in
connection with a collaboration agreement between Takara and the
Company, the Company issued
and sold 320,512 shares of common stock, at a purchase price of $3.12 per
share, to Takara in a private placement pursuant to the terms and conditions
of a common stock purchase agreement.

In May 2001, Lynx completed a private placement of common stock and
warrants to purchase common stock. The financing included the sale of
1,747,248 newly issued shares of common stock at a purchase price of $6.37 per
share, resulting in net proceeds of approximately $10.5 million, pursuant to a
common stock purchase agreement between Lynx and certain investors. In
connection with this transaction, Lynx issued warrants to purchase up to
436,808 shares of common stock at an exercise price of $9.2011 per share.
Lynx filed with the Securities and Exchange Commission a resale registration
statement related to the privately placed securities.

In November 1996, Lynx issued common stock and options in exchange for
shares of Spectragen, Inc. common stock and options held by certain officers,
employees and one consultant of Spectragen, pursuant to an Agreement of Merger
between Lynx and Spectragen. Spectragen was a wholly-owned subsidiary of Lynx
at the time of the exchange. A portion of the shares were subject to repurchase
rights, which expired ratably over a five-year period. Pursuant to the merger,
and in accordance with APB 25, Lynx
recorded 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.

Also in November 1996, Lynx issued options to purchase shares of Lynx
common stock in exchange for options to purchase shares of Spectragen common stock
pursuant to the Agreement of Merger by and 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 exchange. The
deferred compensation is being charged to expense over the respective vesting
periods of the grants.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

9. Stockholders Equity (continued)

1992 Stock Option Plan

In July 1992, the Board of Directors of the Company (the Board) adopted,
and the stockholders subsequently approved, the Companys 1992 Stock Option
Plan (the 1992 Plan). In May 1996, the stockholders approved an amendment to
the 1992 Plan extending the term of the 1992 Plan until March 2006. In May
2001, the stockholders approved an amendment to the 1992 Plan, authorizing the
increase in the number of shares authorized for issuance under the 1992 Plan
from a total of 4,800,000 shares to 5,500,000 shares.

Under the 1992 Plan, the exercise price of incentive stock 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 Lynxs 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 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.

The stock option activity under the 1992 Plan was as follows:

|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |       | 
|---------------------------- | ----------------- |  | ------------------- | -------- | ------------------ |  | ---------------- | -------- | - | - | ----- | ----- | 
|                             |                   |  | Options Outstanding
|                             |                   |  |                    
|                             |                   |  | Available for       |          | Number of Shares   |  | Weighted Average
|                             |                   |  | Grant               |          | Subject to Options |  | Exercise Price  
|                             |                   |  |                     |          |                    |  |                 
|Balance at December 31, 1998 |                   |  | 785,841             |          |                    |  | 1,429,722        |          |   | $ | 5.35  |      
|                             | Shares authorized |  |                     | 200,000  |                    |  |                  |         |   |   |       |      | 
|                             | Options granted   |  |                     | (639,000 | )                  |  |                  | 639,000  |   |   | $     | 11.20 | 
|                             | Options exercised |  |                     |         |                    |  |                  | (68,994  | ) |   | $     | 2.70  | 
|                             | Options canceled  |  |                     | 40,246   |                    |  |                  | (57,231  | ) |   | $     | 7.10  | 
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |      
|Balance at December 31, 1999 |                   |  | 387,087             |          |                    |  | 1,942,497        |          |   | $ | 7.32  |      
|                             | Shares authorized |  |                     | 600,000  |                    |  |                  |         |   |   |       |      | 
|                             | Options granted   |  |                     | (736,500 | )                  |  |                  | 736,500  |   |   | $     | 26.42 | 
|                             | Options exercised |  |                     |         |                    |  |                  | (178,385 | ) |   | $     | 4.72  | 
|                             | Options canceled  |  |                     | 42,004   |                    |  |                  | (44,079  | ) |   | $     | 11.31 | 
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |      
|Balance at December 31, 2000 |                   |  | 292,591             |          |                    |  | 2,456,533        |          |   | $ | 13.16 |      
|                             | Shares authorized |  |                     | 700,000  |                    |  |                  |         |   |   |       |      | 
|                             | Options granted   |  |                     | (680,200 | )                  |  |                  | 680,200  |   |   | $     | 7.84  | 
|                             | Options exercised |  |                     |         |                    |  |                  | (217,932 | ) |   | $     | 2.10  | 
|                             | Options canceled  |  |                     | 239,084  |                    |  |                  | (254,685 | ) |   | $     | 11.07 | 
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |      
|Balance at December 31, 2001 |                   |  | 551,475             |          |                    |  | 2,664,116        |          |   | $ | 12.96 |      
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |      

To date, all options granted under the 1992 Plan are nonqualified options.
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, 2001, 3,334 shares outstanding were subject to repurchase.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

9. Stockholders Equity (continued)

The options outstanding at December 31, 2001 have been segregated into
ranges for additional disclosure as follows:

|                |  |                     |           |                     |  |           |      |                   |  |           |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | --------- | ---- | ----------------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  | Options             |           | Weighted-average    |  | Weighted- |      | Options currently |  | Weighted-
|                |  | outstanding at      |           | remaining           |  | average   |      | exercisable at    |  | average  
|Range of        |  | December 31,        |           | contractual life    |  | exercise  |      | December 31,      |  | exercise 
|exercise prices |  | 2001                |           | (in years)          |  | price     |      | 2001              |  | price    
|                |  |                     |           |                     |  |           |      |                   |  |          
|$0.10 - $0.10   |  |                     | 574       |                     |  |           | 0.50 |                   |  | $         | 0.10  |  |  |  | 574       |  |  | $ | 0.10  | 
|$0.38 - $1.54   |  |                     | 270,698   |                     |  |           | 4.49 |                   |  | $         | 1.41  |  |  |  | 196,542   |  |  | $ | 1.36  | 
|$2.00 - $6.00   |  |                     | 283,456   |                     |  |           | 5.57 |                   |  | $         | 4.78  |  |  |  | 216,800   |  |  | $ | 4.93  | 
|$6.10 - $8.14   |  |                     | 322,000   |                     |  |           | 9.34 |                   |  | $         | 6.79  |  |  |  | 27,466    |  |  | $ | 7.19  | 
|$8.38 - $9.06   |  |                     | 273,000   |                     |  |           | 7.49 |                   |  | $         | 8.78  |  |  |  | 115,064   |  |  | $ | 8.61  | 
|$9.13 - $10.63  |  |                     | 344,608   |                     |  |           | 8.29 |                   |  | $         | 10.16 |  |  |  | 106,029   |  |  | $ | 9.92  | 
|$10.75 - $11.50 |  |                     | 378,567   |                     |  |           | 7.63 |                   |  | $         | 11.36 |  |  |  | 170,839   |  |  | $ | 11.37 | 
|$11.56 - $15.75 |  |                     | 448,313   |                     |  |           | 7.52 |                   |  | $         | 14.49 |  |  |  | 241,812   |  |  | $ | 14.43 | 
|$16.00 - $55.25 |  |                     | 262,900   |                     |  |           | 8.59 |                   |  | $         | 29.56 |  |  |  | 71,115    |  |  | $ | 29.85 | 
|$76.75 - $76.75 |  |                     | 80,000    |                     |  |           | 8.15 |                   |  | $         | 76.75 |  |  |  | 26,832    |  |  | $ | 76.75 | 
|                |  |                     |           |                     |  |           |      |                   |  |           |       |  |  |  |           |  |  |   |       | 
|$0.10 - $76.75  |  |                     | 2,664,116 |                     |  |           | 7.46 |                   |  | $         | 12.96 |  |  |  | 1,173,073 |  |  | $ | 11.24 | 
|                |  |                     |           |                     |  |           |      |                   |  |           |       |  |  |  |           |  |  |   |       | 

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. As of
December 31, 2001, a total of 73,994 shares of common stock have
been issued to employees at an aggregate purchase price of $782,437
and weighted-average purchase price of $10.57 per share pursuant to
offerings under the Purchase Plan, and 126,006 shares remained
available for future issuance.

Pro Forma Information

Pro forma information regarding net loss and net loss per share is
required by Statement of Financial Accounting Standard No. 123,
Accounting for Stock-based Compensation
(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
2001, 2000 and 1999 was $7.84, $20.38 and $7.87 per share, respectively. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model for the single option approach with the
following weighted-average assumptions: a risk-free interest rate of
4.35%, 6.0%
and 4.97% for 2001, 2000 and 1999, respectively; a weighted-average expected
life of five years for 2001, 2000 and 1999 grants; an expected dividend yield
of zero for all three years; and a volatility factor of the expected market
price of the Companys common stock of 109% for 2001, 100% for 2000 and 86%
for 1999.

Under SFAS 123, the fair value for the 1998 Employee Stock Purchase Plan
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2001, 2000 and 1999,
respectively: risk-free interest rate of 2.2%, 6.0% and 4.97%; no dividend
yields; volatility factor of the expected market price of the Companys common
stock of 109%, 100% and 86%; and a weighted-average expected life of 0.47, 0.55
and 0.49 years. The weighted-average fair value of those purchase rights
granted in 2001, 2000 and 1999, respectively, was $8.31, $7.58 and $5.13.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that 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.

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LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

9. Stockholders Equity (continued)

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:

|                   |            |  |                                          |         |      |  |      |         |   |  |   |        |  
|------------------ | ---------- |  | ---------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                   |            |  | Year Ended December 31,                 
|                   |            |  |                                         
|                   |            |  | 2001                                     |         | 2000 |  | 1999
|                   |            |  |                                          |         |      |  |     
|                   |            |  | (in thousands, except per share amounts)
|Net loss           |            |  |                                          |         |      |  |      |         |   |  |   |       
|                   | Historical |  | $                                        | (16,730 | )    |  | $    | (13,301 | ) |  | $ | (6,664 | )
|                   | Pro forma  |  | $                                        | (22,706 | )    |  | $    | (16,839 | ) |  | $ | (7,874 | )
|Net loss per share |            |  |                                          |         |      |  |      |         |   |  |   |       
|                   | Historical |  | $                                        | (1.31   | )    |  | $    | (1.17   | ) |  | $ | (0.60  | )
|                   | Pro forma  |  | $                                        | (1.78   | )    |  | $    | (1.48   | ) |  | $ | (0.71  | )

10. Income Taxes

The provision for
income taxes of $81,000 for 2001 consists of foreign
withholding tax due on a payment received from one of Lynxs customers. The
provision for income taxes of $81,000 and $500,000 for 2001 and 2000,
respectively relate entirely to foreign taxes. The provision of $258,000 for
1999 consists entirely of alternative minimum tax.

In the accompanying
statements of operations, Loss before provision for income taxes
includes the following components for the years ended December 31 (in
thousands):

|         |  |                         |         |      |  |      |         |   |  |   |        |  
|-------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2001                    |         | 2000 |  | 1999
|         |  |                         |         |      |  |     
|Domestic |  | $                       | (15,705 | )    |  | $    | (12,071 | ) |  | $ | (5,936 | )
|Foreign  |  |                         | (944    | )    |  |      | (730    | ) |  |   | (470   | )
|         |  |                         |         |      |  |      |         |   |  |   |        |  
|         |  | $                       | (16,649 | )    |  | $    | (12,801 | ) |  | $ | (6,406 | )
|         |  |                         |         |      |  |      |         |   |  |   |        |  

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, 2001, 2000 and
1999 is as follows (in thousands):

|                                                        |  |                         |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2001                    |        | 2000 |  | 1999
|                                                        |  |                         |        |      |  |     
|Tax provision (benefit) at U.S. statutory rate          |  | $                       | (5,675 | )    |  | $    | (4,352 | ) |  | $ | (2,178 | )
|Alternative minimum tax                                 |  |                         |       |      |  |      |       |   |  |   | 258    |  
|Foreign taxes                                           |  |                         | 81     |      |  |      | 500    |   |  |   |       |  
|Loss for which no tax benefit is currently recognizable |  |                         | 5,675  |      |  |      | 4,352  |   |  |   | 2,178  |  
|                                                        |  |                         |        |      |  |      |        |   |  |   |        |  
|                                                        |  | $                       | 81     |      |  | $    | 500    |   |  | $ | 258    |  
|                                                        |  |                         |        |      |  |      |        |   |  |   |        |  

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):

|                     |                                                   |  |      |         |      |  |   |         |  
|-------------------- | ------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                     |                                                   |  | 2001 |         | 2000
|                     |                                                   |  |      |         |     
|Deferred tax assets: |                                                   |  |      |         |      |  |   |        
|                     | Net operating loss carryforwards                  |  | $    | 19,350  |      |  | $ | 13,427  |  
|                     | Research and development tax credit carryforwards |  |      | 5,310   |      |  |   | 5,124   |  
|                     | Alternative minimum tax credit carryforwards      |  |      | 270     |      |  |   | 218     |  
|                     | Capitalized research and development expenditures |  |      | 2,820   |      |  |   | 1,422   |  
|                     | Deferred revenues                                 |  |      | 8,180   |      |  |   | 9,865   |  
|                     | Reserves and accruals                             |  |      | 630     |      |  |   | 741     |  
|                     | Valuation allowance                               |  |      | (36,560 | )    |  |   | (30,623 | )
|                     |                                                   |  |      |         |      |  |   |        

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|                                               |  |   |      |  |      |   |     |  | 
|---------------------------------------------- |  | - | ---- |  | ---- | - | --- |  | 
|                                               |  |   | 2001 |  | 2000
|                                               |  |   |      |  |     
|Deferred
tax assets net of valuation allowance |  |   |     |  |      |   | 174 | 
|Deferred tax liabilities:                      |  |   |      |  |      |   |     | 
|Other                                          |  |   |     |  |      |   | 174 | 
|                                               |  |   |      |  |      |   |     | 
|Net deferred tax assets                        |  | $ |     |  |      | $ |    | 
|                                               |  |   |      |  |      |   |     | 

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 assets as of December 31,
2001 and 2000 has been established to reflect these uncertainties. The change
in the valuation allowance was a net increase of approximately
$5.9 million,  $9.6  million and $3.6 million for the
fiscal years ended December 31, 2001, 2000 and 1999,
respectively. Approximately $4.1 million of the valuation allowance for
deferred tax assets relates to benefits of stock option deductions which, when
recognized will be allocated directly to contributed capital.

As of
December 31, 2001, the Company had a federal net operating loss
carryforward of approximately $56.6 million, which will expire at various dates
from 2010 through 2021, if not utilized. The Company has a state net operating
loss carryforward of approximately $1.9 million, which will
expire in 2011.

As of
December 31, 2001, the Company also had federal and California
research and development and other tax credit carryforwards of approximately
$3.3 million and $3.0 million, respectively. The federal research and
development credit will expire at various dates from 2007 through 2021, if not
utilized.

Utilization of the Companys net operating cost may be subject
to substantial annual limitation due to ownership change limitations
provided by the Internal Revenue Code and similar state provisions.
Such an annual limitation could result in the expiration of the net
operating loss before 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.

11. Obligations under Operating Leases

In August 1993, the Company entered into a noncancelable operating lease
for facilities that expires on July 31, 2003. In 1998, the Company entered
into an agreement to sublease a portion of this space, and in 1999, through a
subsequent agreement, subleased the remaining portion of the facility. The term
of the sublease runs through July 2003. Rent from the sublease is sufficient to
cover 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 24 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.

In June 1998, Lynx GmbH entered into a noncancelable operating lease for
facilities space of approximately 6,300 square feet in Heidelberg, Germany, to
house its operations. The space will be developed and occupied in phases,
depending on the growth of the organization. The lease terminates in June 2005.
A portion of such space is currently being subleased by Axaron.

The Company also leases equipment under various operating lease agreements
subject to minimum annual lease payments. Minimum annual rental commitments and
sublease income under non-cancelable operating leases are as follows (in
thousands):

|                          |  |             |        |          |  |   |       | 
|------------------------- |  | ----------- | ------ | -------- |  | - | ----- | 
|                          |  | Lease       |        | Sublease
|Years Ending December 31: |  | Commitments |        | Income  
|                          |  |             |        |         
|2002                      |  | $           | 3,202  |          |  | $ | 1,144 | 
|2003                      |  |             | 3,037  |          |  |   | 682   | 
|2004                      |  |             | 2,752  |          |  |   |      | 
|2005                      |  |             | 2,817  |          |  |   |      | 
|2006                      |  |             | 2,892  |          |  |   |      | 
|Thereafter                |  |             | 5,730  |          |  |   |      | 
|                          |  |             |        |          |  |   |       | 
|                          |  | $           | 20,430 |          |  | $ | 1,826 | 
|                          |  |             |        |          |  |   |       | 

46



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##### Table of Contents



LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

11. Obligations under Operating Leases (continued)

Rent expense for facilities and equipment under operating leases was
$2,854,000, $2,055,000 and $1,733,000 for the years ended December 31, 2001,
2000 and 1999, respectively. Rental income for the facilities under sublease
was $1,227,000, $1,127,000 and $990,000 for the years ended December 31, 2001,
2000 and 1999, respectively.

12. 401(k) Plan

In October 1992, Lynx adopted a 401(k) Plan covering all of its employees.
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. 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 2001, 2000 and 1999, the Company contributed
$99,500, $74,000 and $52,000, respectively.

13. Equipment Financing

In 1998, the Company entered into a financing agreement with a financial
institution, TransAmerica Business Credit Corporation
(TransAmerica) under which Lynx drew down $4.8 million during 1999 for
the purchase of equipment and certain other capital expenditures. Lynx granted
the TransAmerica a security interest in all items financed by the Company under this
agreement. Each draw down under the loan has a term of 48 months from the date
of the draw down at interest rates ranging from 10.9% to 11.8%. The original
draw down period under the agreement expired on March 31, 2000. In September
2000, Lynx obtained additional financing of $950,000 under an amendment to the
original financing agreement. As of December 31, 2001, the principal balance
under loans outstanding under this agreement was approximately $3.3 million.
Accumulated depreciation relating to these assets amounted to $4.4 million and
$2.5 million for the years ended December 31, 2001 and 2000, respectively. The
carrying amounts of the Companys borrowings under its equipment financing
approximate their fair values. The fair values are estimated using a discounted
cash flow analysis based on the Companys current incremental borrowing rates
for similar types of borrowing arrangements.

Principal payments based on equipment loans outstanding at December 31,
2001 are (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2002 |  | $ | 1,445 | 
|2003 |  |   | 1,542 | 
|2004 |  |   | 264   | 
|     |  |   |       | 
|     |  | $ | 3,251 | 
|     |  |   |       | 

14. Quarterly Results (Unaudited)

|                                     |  |                                       |        |         |  |          |        |         |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                     |  | Fiscal Year 2001 Quarter Ended       
|                                     |  |                                      
|                                     |  | Mar. 31                               |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                     |  |                                       |        |         |  |          |        |        
|                                     |  | (in thousands, except per share data)
|Statement of Operations Data:        |  |                                       |        |         |  |          |        |         |  |   |        |   |  |   |        |  
|Revenues                             |  | $                                     | 3,395  |         |  | $        | 4,357  |         |  | $ | 5,764  |   |  | $ | 5,738  |  
|Loss from operations                 |  |                                       | (5,218 | )       |  |          | (4,634 | )       |  |   | (3,673 | ) |  |   | (3,502 | )
|Net loss                             |  |                                       | (5,698 | )       |  |          | (4,576 | )       |  |   | (3,690 | ) |  |   | (2,766 | )
|Basic and diluted net loss per share |  | $                                     | (0.50  | )       |  | $        | (0.37  | )       |  | $ | (0.27  | ) |  | $ | (0.21  | )

|                                     |  |                                       |        |         |  |          |        |         |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                     |  | Fiscal Year 2000 Quarter Ended       
|                                     |  |                                      
|                                     |  | Mar. 31                               |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                     |  |                                       |        |         |  |          |        |        
|                                     |  | (in thousands, except per share data)
|Statement of Operations Data:        |  |                                       |        |         |  |          |        |         |  |   |        |   |  |   |        |  
|Revenues                             |  | $                                     | 3,016  |         |  | $        | 2,834  |         |  | $ | 3,425  |   |  | $ | 3,349  |  
|Loss from operations                 |  |                                       | (3,918 | )       |  |          | (3,421 | )       |  |   | (5,177 | ) |  |   | (4,443 | )
|Net loss                             |  |                                       | (481   | )       |  |          | (3,167 | )       |  |   | (4,966 | ) |  |   | (4,687 | )
|Basic and diluted net loss per share |  | $                                     | (0.04  | )       |  | $        | (0.28  | )       |  | $ | (0.44  | ) |  | $ | (0.41  | )

47



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##### Table of Contents



LYNX THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)

14. Quarterly Results (Unaudited) (continued)

Basic and diluted net
loss per share is computed independently for each
of the quarters presented. Therefore, the sum of the
quarters may not be equal to the full year net loss per share amounts.

15. Subsequent Events (Unaudited)

In March 2002, the
Company sold its intellectual property rights under the N3-P5
phosphoramidate patent estate to Geron Corporation. Lynx received approximately
$2.5 million in a combination of cash and common stock from Geron for the direct sale
of the Lynx patent estate. The agreement with Geron covers the sale of a
family of patents covering process and compositional matter claims related to
oligonucleotides containing phosphoramidate backbone linkages.




Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

48



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##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

Our executive
officers and directors, and their ages as
of February 1, 2002 are as follows:

|                              |  |     |    |          |  |                                                
|----------------------------- |  | --- | -- | -------- |  | -----------------------------------------------
|Name                          |  | Age |    | Position
|                              |  |     |    |         
|Craig C. Taylor(1)(2)         |  |     | 51 |          |  | Chairman of the Board                          
|Norman J. W. Russell, Ph.D.   |  |     | 49 |          |  | President, Chief Executive Officer and Director
|Edward C. Albini              |  |     | 44 |          |  | Chief Financial Officer and Secretary          
|Richard P. Woychik, Ph.D.     |  |     | 49 |          |  | Chief Scientific Officer                       
|William K. Bowes, Jr.(1)(2)   |  |     | 75 |          |  | Director                                       
|Sydney Brenner, M.B., D. Phil |  |     | 75 |          |  | Director and Principal Scientific Advisor      
|Leroy Hood, M.D., Ph.D.       |  |     | 63 |          |  | Director                                       
|James C. Kitch(1)(2)          |  |     | 54 |          |  | Director                                       
|David C. UPrichard, Ph.D.    |  |     | 53 |          |  | Director                                       



---

|(1) |  | Member of the Audit Committee.       
|--- |  | -------------------------------------
|   
|   
|   
|   
|(2) |  | Member of the Compensation Committee.

Craig C. Taylorwas elected Chairman of the Board of Directors of Lynx in
December 2000, has served as a director since March 1994 and served 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, a venture
capital firm. 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 Pharmacyclics, Inc.,
a biotechnology company, and several private companies.

Norman J. W. Russell, Ph.D.,joined Lynx in October 1999 as President and
Chief Executive Officer and was elected to the Board of Directors in December
1999. Prior to joining Lynx, he was Head of Biological Science and Technology
at AstraZeneca Pharmaceuticals, a pharmaceutical company. His previous
positions in 20 years at AstraZeneca included Head of Target Discovery, Head of
International Genomics and Head of Biotechnology. Dr. Russell earned a Ph.D. in
Physiology from Glasgow University, Scotland.

Edward C. Albinihas served as Chief Financial Officer of Lynx since April
1997 and was elected Secretary 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 B.S.
degree in Accounting from Santa Clara University and an M.B.A. degree from the
Walter A. Haas School of Business at the University of California, Berkeley.
Mr. Albini is also a certified public accountant.

Richard P. Woychik, Ph.D.,joined Lynx in January 2001 as Chief Scientific
Officer. Prior to joining Lynx, Dr. Woychik was Senior Director and Head of
the Global R&D Molecular Genetics Research Center at Pfizer, a pharmaceutical
company, from 1998 to 2000. From 1997 to 1998, Dr. Woychik was a Professor in
the Departments of Pediatrics, Genetics and Pharmacology and Vice Chairman for
Research in Pediatrics at Case Western Reserve University and from 1987 to
1997, he was a research scientist at the Oak Ridge National Laboratory. Dr.
Woychik earned his Ph.D. in Molecular Biology at Case Western Reserve
University.

William K. Bowes, Jr.,has served as a director of Lynx 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 U.S. Venture Partners privately owned portfolio
company.

Sydney Brenner, M.B., D.Phil.,has served as a director of Lynx since
October 1993. He is a distinguished Professor at the Salk Institute of
Biological Studies in La Jolla, California. He served as Director and
President of The Molecular Sciences Institute, a non-profit research institute
in Berkeley, California from July 1996 to January 2001, when he retired as
Director of Research. 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. Dr. Brenner is
the principal inventor of Lynxs bead-based technologies.

49



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##### Table of Contents



Leroy Hood, M.D., Ph.D.,has served as a director of Lynx since May 2000.
In December 1999, he founded the Institute of Systems Biology, a private
nonprofit research institute, and currently serves as the President and a
director. From 1992 to 1999, he was the Chair of the Molecular Biotechnology
Department at the University of Washington and the William Gates III Professor
of Biomedical Sciences. Dr. Hood received his M.D. from Johns Hopkins Medical
School and Ph.D. from the California Institute of Technology. He has been a
member of the National Academy of Sciences and the American Academy of Arts and
Sciences since 1982.

James C. Kitchhas served as a director of Lynx since February 1993 and
Secretary of Lynx from February 1992 to December 1997. Since 1979, he has been
a partner at Cooley Godward LLP, a law firm, which has provided legal services
to Lynx.

David C. UPrichard, Ph.D.has served as a director of Lynx since March
2001. Since September 1999, he has served as the Chief Executive Officer of
3-Dimensional Pharmaceuticals, Inc., a pharmaceutical company. From 1997 until
1999, he served as the President, Research and Development, for SmithKline
Beecham Pharmaceuticals, a pharmaceutical company. Prior to joining SmithKline
Beecham, from 1994 to 1997, Dr. UPrichard served as International Research
Director of Zeneca Pharmaceuticals, Inc., and, from 1991 to 1994, he managed
research groups at ICI Pharmaceuticals, Inc. and Zeneca, both in the U.S. and
U.K. Dr. UPrichard received a B.Sc. in Pharmacology from the University of
Glasgow in 1970, and a Ph.D. in Pharmacology from University of Kansas in 1975.
He currently serves as a director of 3-Dimensional Pharmaceuticals and several
private companies.

Compliance with the Reporting Requirements of Section 16(a)

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

To our knowledge, based solely on a review of the copies of such reports
furnished to us, during the calendar year ended December 31, 2001, all Section
16(a) filing requirements applicable to our officers, directors and greater
than ten percent (10%) beneficial owners were complied with, except for Dr.
UPrichards Form 3 that was filed late.

50



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##### Table of Contents






Item 11.Executive Compensation

The following table sets forth certain compensation paid by Lynx during
the calendar years ended December 31, 2001, 2000 and 1999, to our (i) Chief
Executive Officer; (ii) other most highly compensated executive officers whose
compensation exceeded $100,000; and (iii) one former executive
officer who
departed Lynx during the fiscal year 2001 (the Named Executive
Officers):

Summary Compensation Table

|                             |                                      |      |      |      |  |     |                     |                  |                               |     |        |             |        |                  |            |        |           |  |            |   |   |  |         |         |  |  |   |   | 
|---------------------------- | ------------------------------------ | ---- | ---- | ---- |  | --- | ------------------- | ---------------- | ----------------------------- | --- | ------ | ----------- | ------ | ---------------- | ---------- | ------ | --------- |  | ---------- | - | - |  | ------- | ------- |  |  | - | - | 
|                             |                                      |      |      |      |  |     | Annual Compensation |                  | Long-Term Compensation Awards
|                             |                                      |      |      |      |  |     |                     |                  |                              
|                             |                                      |      |      |      |  |     |                     |                  |                               |     |        |             |        |                  |            |        |           |  | Restricted |   |   |  |         |         |  |  |  
|                             |                                      |      |      |      |  |     |                     |                  |                               |     |        |             |        |                  | Other      |        | Stock     |  | Securities |   |   |  |        
|                             |                                      |      |      |      |  |     | Salary              |                  | Bonus                         |     | Annual |             | Awards |                  | Underlying |        | All Other
|Name and Principal Position  |                                      | Year |      | ($)  |  | ($) |                     | Compensation ($) |                               | ($) |        | Options (#) |        | Compensation ($)
|                             |                                      |      |      |      |  |     |                     |                  |                               |     |        |             |        |                 
|Norman J. W. Russell, Ph.D., |                                      |      | 2001 |      |  | $   | 290,192             |                  |                               |     |       |             |        | $                | 100,000    | (1)    |           |  |            |  |   |  |        |         |  |  |  |  
|                             | President & Chief Executive          |      |      | 2000 |  |     | $                   | 262,571          |                               |     |        |            |        |                  |            |       |           |  |            |   |  |  |         |        |  |  |   |  | 
|                             | Officer                              |      |      | 1999 |  |     | $                   | 109,527          |                               |     |        |            |        |                  | $          | 33,212 | (2)       |  |            |   |  |  |         | 200,000 |  |  |   |  | 
|                             |                                      |      |     
|Edward C. Albini,            |                                      |      | 2001 |      |  | $   | 205,185             |                  |                               |     |       |             |        | $                | 750        | (3)    |           |  |            |  |   |  |        |         |  |  |  |  
|                             | Chief Financial Officer              |      |      | 2000 |  |     | $                   | 196,405          |                               |     |        |            |        |                  | $          | 750    | (3)       |  |            |   |  |  |         | 70,000  |  |  |   |  | 
|                             |                                      |      |      | 1999 |  |     | $                   | 163,730          |                               |     |        |            |        |                  | $          | 750    | (3)       |  |            |   |  |  |         |        |  |  |   |  | 
|                             |                                      |      |     
|William Wong, Ph.D.,         |                                      |      | 2001 |      |  | $   | 198,570             |                  |                               |     |       |             |        | $                | 40,750     | (3)(4) |           |  |            |  |   |  | 100,000 |         |  |  |  |  
|                             | Vice President, Business Development |      |      |      |  |     |                     |                  |                               |     |        |             |        |                  |            |        |           |  |            |   |   |  |         |         |  |  |   |   | 
|                             |                                      |      |     
|Richard P. Woychik, Ph.D.,   |                                      |      | 2001 |      |  | $   | 209,796             |                  |                               |     |       |             |        | $                | 60,750     | (3)(5) |           |  |            |  |   |  | 100,000 |         |  |  |  |  
|                             | Chief Scientific Officer             |      |      |      |  |     |                     |                  |                               |     |        |             |        |                  |            |        |           |  |            |   |   |  |         |         |  |  |   |   | 



---

|(1) |  | Pursuant to Dr. Russells employment agreement, a portion of his loan of
$250,000 was forgiven in October 2001.                                                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Dr. Russell joined Lynx as President and Chief Executive Officer in
October 1999. Prior to this time, Dr. Russell was employed by Lynx
Therapeutics GmbH, our wholly-owned subsidiary, beginning in July 1999.
Dr. Russells compensation received while employed by Lynx GmbH is
reflected under Other Annual Compensation.
|   
|   
|   
|   
|(3) |  | Includes contribution made by Lynx to the 401(k) Plan on behalf of such
employee.                                                                                                                                                                                                                                           
|   
|   
|   
|   
|(4) |  | Includes a sign-on bonus received by Dr. Wong when he joined Lynx in
January 2001. Dr. Wong terminated his employment with us in November 2001,
and repaid a portion of his sign-on bonus.                                                                                                                                  
|   
|   
|   
|   
|(5) |  | Includes a sign-on bonus received by Dr. Woychik when he joined Lynx in
January 2001.                                                                                                                                                                                                                                       

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 us during the
year ended December 31, 2001, to any of the Named Executive Officers.

Stock Option Grants and Exercises

We grant options to our executive officers under our 1992 Stock Option
Plan, as amended. As of February 1, 2002, options to purchase a total of
2,664,116 shares were outstanding under the 1992 Stock Option Plan, and options
to purchase 551,475 shares remained available for grant thereunder.

51



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##### Table of Contents



The following table sets forth, for each of the Named Executive Officers,
certain information regarding options granted to, exercised by and held during
the year ended December 31, 2001.

Option Grants in Last Fiscal Year

|                          |  |                      |         |                                                  |  |             |       |            |  |       |      |                     |  |  |          |  |  |  |         |  |  |  |           | 
|------------------------- |  | -------------------- | ------- | ------------------------------------------------ |  | ----------- | ----- | ---------- |  | ----- | ---- | ------------------- |  |  | -------- |  |  |  | ------- |  |  |  | --------- | 
|                          |  | Individual Grants    |         | Potential Realizable Valueat Assumed Annual Rate
|                          |  |                      |         | of Stock Price Appreciation                     
|                          |  | Number of Securities |         | % of Total Options                               |  | Exercise or |       |            |  |       |      | for Option Term (2)
|                          |  | Underlying Options   |         | Granted to Employees                             |  | Base Price  |       | Expiration |  |      
|Name(3)                   |  | Granted              |         | in Fiscal Year(1)                                |  | ($/sh)      |       | Date       |  | 5%($) |      | 10%($)             
|                          |  |                      |         |                                                  |  |             |       |            |  |       |      |                    
|William Wong, Ph.D.       |  |                      | 100,000 |                                                  |  |             | 14.70 | %          |  |       | 9.06 |                     |  |  | 01/08/11 |  |  |  | 569,779 |  |  |  | 1,443,931 | 
|Richard P. Woychik, Ph.D. |  |                      | 100,000 |                                                  |  |             | 14.70 | %          |  |       | 9.06 |                     |  |  | 01/08/11 |  |  |  | 569,779 |  |  |  | 1,443,931 | 



---

|(1) |  | Based on options for an aggregate of 680,200 shares granted to employees
of, and consultants to, Lynx during the year ended December 31, 2001,
including the Named Executive Officer.                                                                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | 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 the
option is exercised and sold on the last day of the term for the
appreciated stock price.
|   
|   
|   
|   
|(3) |  | No options were granted to or
exercised by Norman J. W. Russell or Edward C. Albini during the year
ended December 31, 2001.                                                                                                                                                                                                                                                                 

The following table sets forth certain information concerning the number
of options exercised by the Named Executive Officers during the year ended
December 31, 2001, 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 our common stock as of December 31, 2001 ($4.03 per share).

Aggregated Option Exercises in the Year Ended December 31, 2001 and Option Values

|                            |  |             |   |              |  |             |   |                     |  |                       |        |                         |  |  |         |  |  |                      |   |  |  |  |   | 
|--------------------------- |  | ----------- | - | ------------ |  | ----------- | - | ------------------- |  | --------------------- | ------ | ----------------------- |  |  | ------- |  |  | -------------------- | - |  |  |  | - | 
|                            |  |             |   |              |  |             |   |                     |  |                       |        |                         |  |  |         |  |  | Value of Unexercised
|                            |  |             |   |              |  |             |   |                     |  | Number of Unexercised |        | In-the-Money Options at
|                            |  | Shares      |   |              |  |             |   | Options at Year-End |  | Year-End (1)         
|                            |  | Acquired on |   | Value        |  |             |   |                    
|Name                        |  | Exercise    |   | Realized (1) |  | Exercisable |   | Unexercisable       |  | Exercisable           |        | Exercisable            
|                            |  |             |   |              |  |             |   |                     |  |                       |        |                        
|Norman J. W. Russell, Ph.D. |  |             |  |              |  |             |  |                     |  |                       | 96,666 |                         |  |  | 103,334 |  |  |                      |  |  |  |  |  | 
|Edward C. Albini            |  |             |  |              |  |             |  |                     |  |                       | 38,333 |                         |  |  | 11,667  |  |  |                      |  |  |  |  |  | 
|                            |  |             |  |              |  |             |  |                     |  |                       | 14,666 |                         |  |  | 25,334  |  |  |                      |  |  |  |  |  | 
|                            |  |             |  |              |  |             |  |                     |  |                       | 9,500  |                         |  |  | 20,500  |  |  |                      |  |  |  |  |  | 
|William Wong, Ph.D.         |  |             |  |              |  |             |  |                     |  |                       |       |                         |  |  | 100,000 |  |  |                      |  |  |  |  |  | 
|Richard P. Woychik, Ph.D.   |  |             |  |              |  |             |  |                     |  |                       |       |                         |  |  | 100,000 |  |  |                      |  |  |  |  |  | 



---

|(1) |  | Based on the fair market value of our common stock at December 31, 2001
($4.03), minus the exercise price of the options, multiplied by the number
of shares underlying the options.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment, Severance and Change of Control Agreements

In October 1999, we entered into an employment agreement with Dr. Norman
J. W. Russell, President and Chief Executive Officer, providing for an annual
compensation of $255,000 per year and an option to purchase 200,000 shares of
common stock at an exercise price of $11.31 per share, subject to a five-year
vesting schedule. If Dr. Russell is terminated due to a change in control of
Lynx, Dr. Russells shares covered by the option shall accelerate so that fifty
percent of the then unvested shares covered by the option shall immediately
vest and become exercisable upon the effective date of the change in control.
We also provided Dr. Russell with a loan in the amount of $250,000 for the sole
purpose of the purchase of a house, which loan shall be secured by the
property, and is forgivable over a four-year period.

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##### Table of Contents



Compensation of Directors

We do not compensate directors for services as directors. Non-employee
directors are eligible to participate in our 1992 Stock Option Plan. Options
granted to non-employee directors under our 1992 Stock Option Plan are
discretionary and intended by the Company not to qualify as incentive stock
options under the Code.

During the last fiscal year, we granted options covering 20,000 shares to
Dr. UPrichard, at an exercise price per share of $10.34. The fair market
value of the common stock on the last market trading day prior to the date of
grant was $10.34 per share (based on the closing sales price reported on the
Nasdaq National Market. As of February 1, 2002, no options have been exercised
by non-employee directors under our 1992 Stock Option Plan.

In June 2001, Dr. Brenner entered into a consulting agreement with us.
Pursuant to the agreement, Dr. Brenner performs consulting services of at least
eight to sixteen hours per month in consideration of his standard consulting fee. In
2001, Dr. Brenner received $33,000 in consulting fees for services performed
for us.

Compensation Committee Interlocks and Insider Participation

Our Compensation Committee was established in March 1994 and is currently
composed of three non-employee directors: Messrs. Bowes, Kitch and Taylor.
Mr. Taylor served as Acting Chief Financial Officer of Lynx from July 1994 to
April 1997. There were no officers or employees of Lynx who participated in
deliberations of the Compensation Committee concerning executive officer
compensation during the year ended December 31, 2001.

Limitations of Liability and Indemnification

Our Bylaws provide that the we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to
the fullest extent permitted by Delaware law. We are also empowered under our
Bylaws to enter into indemnification agreements with our directors and officers
and to purchase insurance on behalf of any person whom we are required or
permitted to indemnify. Pursuant to this provision, we have entered into
indemnity agreements with each of our directors and executive officers.

In addition, our Certificate of Incorporation provides that, to the
fullest extent permitted by Delaware law, our directors will not be liable for
monetary damages for breach of the directors fiduciary duty of care to Lynx
and our 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 Lynx, 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 Lynx or our 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 Lynx or our
stockholders when the director was aware or should have been aware of a risk of
serious injury to Lynx or our stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the directors duty to Lynx or our stockholders, for improper transactions
between the director and Lynx 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 Lynx as to which indemnification is being
sought exists, and we are 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 February 1, 2002 by (i) each stockholder
who is known by us to own beneficially more than 5% of the common stock; (ii)
each Named Executive Officer; (iii) each director of Lynx; and (iv) all of our
current directors and executive officers as a group.

|                               |  |                  |         |         |  |  |    | 
|------------------------------ |  | ---------------- | ------- | ------- |  |  | -- | 
|                               |  | Common Stock (1)
|                               |  |                 
|                               |  | Number           |         |         |  | 
|Name of Beneficial Owner       |  | of Shares        |         | Percent
|                               |  |                  |         |        
|Norman J. W. Russell, Ph.D.(2) |  |                  | 110,000 |         |  |  | ** | 

53



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|                                                       |  |                  |           |         |  |  |     |  
|------------------------------------------------------ |  | ---------------- | --------- | ------- |  |  | --- | -
|                                                       |  | Common Stock (1)
|                                                       |  |                 
|                                                       |  | Number           |           |         |  | 
|Name of Beneficial Owner                               |  | of Shares        |           | Percent
|                                                       |  |                  |           |        
|Edward C. Albini(3)                                    |  |                  | 119,219   |         |  |  | **  |  
|Richard P. Woychik, Ph.D.(4)                           |  |                  | 23,333    |         |  |  | **  |  
|William
Wong, Ph.D.(5)                                 |  |                  | 0         |         |  |  | **  |  
|Craig C. Taylor(6)                                     |  |                  | 437,158   |         |  |  | 3.2 | %
|William K. Bowes, Jr.(7)                               |  |                  | 185,163   |         |  |  | 1.3 | %
|Sydney Brenner, M.B., D. Phil.(8)                      |  |                  | 342,000   |         |  |  | 2.5 | %
|Leroy Hood, M.D., Ph.D.(9)                             |  |                  | 19,117    |         |  |  | **  |  
|James
C. Kitch(10)                                     |  |                  | 41,909    |         |  |  | **  |  
|David C. UPrichard, Ph.D.(11)                         |  |                  | 7,321     |         |  |  | **  |  
|All
directors and officers as a group (10 persons)(12) |  |                  | 1,285,220 |         |  |  | 9.1 | %



---

|**   |  | Less than one percent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(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. Percentage of beneficial ownership is based on 13,805,453
shares of common stock outstanding as of February 1, 2002, 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 February 1, 2002, are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of beneficial ownership of
any other person.
|    
|    
|    
|    
|(2)  |  | Consists of 110,000 shares of common stock issuable upon exercise of
stock options held by Dr. Russell that are exercisable within 60 days of
February 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|    
|    
|    
|(3)  |  | Includes 68,499 shares of common stock issuable upon exercise of stock
options held by Mr. Albini that are exercisable within 60 days of February
1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|    
|    
|    
|(4)  |  | Includes 23,333 shares of common stock issuable upon exercise of stock
options held by Dr. Woychik that are exercisable within 60 days of
February 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(5)  |  | None of the options granted to
Dr. Wong in January 2001 were exercised prior to the date he terminated his
employment with us in November 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|    
|    
|    
|(6)  |  | Includes 53,243 shares of common stock, 10,000 shares of common stock
issuable upon exercise of stock options and 9,811 shares of common stock
issuable upon exercise of a warrant held by Mr. Taylor. Also includes
364,104 shares of common stock held by Asset Management Associates 1989
L.P. Mr. Taylor, the Chairman of the Board of Lynx, is a general partner
of AMC Partners 89, which is the general partner of Asset Management
1989 L.P. Mr. Taylor shares the power to vote and control the disposition of shares held
by Asset Management 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.                                                                                                                                                            
|    
|    
|    
|    
|(7)  |  | Includes 35,401 shares of common stock held by Mr. Bowes, 17,606 shares
of common stock held by the William K. Bowes Charitable Remainder Trust,
of which Mr. Bowes is Trustee, and 10,000 shares of common stock issuable
upon exercise of stock options held by Mr. Bowes. Also includes 122,156
shares of common stock held by entities affiliated with U.S. Venture
Partners IV, L.P., or U.S.V.P. IV. Mr. Bowes, a director of Lynx, 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.                                                                                              
|    
|    
|    
|    
|(8)  |  | Includes 112,000 shares of common stock issuable upon exercise of stock
options held by Dr. Brenner that are exercisable within 60 days of
February 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|    
|    
|    
|(9)  |  | Includes 12,221 shares of common stock issuable upon exercise of stock
options held by Dr. Hood that are exercisable within 60 days of February
1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|    
|    
|    
|(10) |  | Includes 17,985 shares of common stock, 3,924 shares of common stock
issuable upon exercise of a warrant held by Mr. Kitch and 20,000 shares of
common stock issuable upon exercise of stock options, held by Mr. Kitch
for the benefit of Cooley Godward LLP. He 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.                                                                                                                                                                                                                                                                                                                                                                                         

54



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|(11) |  | Includes 7,221 shares of common stock issuable upon exercise of stock
options held by Dr. UPrichard that are exercisable within 60 days of
February 1, 2002.                                                                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(12) |  | Includes 486,260 shares of common stock held by entities affiliated with
certain directors and 387,009 shares of common stock issuable upon
exercise of stock options and warrants held by directors and officers that
are exercisable within 60 days of February 1, 2002. See Notes 2 through
10 above.




Item 13.Certain Relationships and Related Transactions

In November 1999, we entered into a loan agreement with Norman J. W.
Russell, Ph.D., President, Chief Executive Officer and a director. The loan is
in the amount of $250,000, secured by a second mortgage on real property, with
interest accruable at the rate of 6.02% per annum, and subject to early
repayment under specified circumstances. The principal and interest on the
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. In November 2001, $100,000 was forgiven. At February 1, 2002, the
outstanding principal and accrued interest on the loan was $142,391.

In April 1997,we entered into a full-recourse loan agreement with Edward
C. Albini, our Chief Financial Officer and Secretary. 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. At February 1, 2002, the outstanding principal
and accrued interest on the loan was $326,438.

For legal services rendered during the calendar year ended December 31,
2001, we paid approximately $394,000 to Cooley Godward LLP, Lynxs counsel, of
which Mr. Kitch, a director of Lynx, is a partner.

Our Bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to
the fullest extent permitted by Delaware law. We are also empowered under our
Bylaws to enter into indemnification agreements with our directors and officers
and to purchase insurance on behalf of any person whom we are required or
permitted to indemnify. Pursuant to this provision, we have entered into
indemnity agreements with each of our directors and executive officers and
certain employees.

55



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##### Table of Contents






Item 14.Exhibits, Financial Statements, Schedules and Reports on Form 8-K

(a)  Financial Statements, Schedules and Exhibits

| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) The following index, Report of Ernst & Young LLP, Independent
Auditors, and financial statements set forth on pages 26 through 31 of this
report are being filed as part of this report:

| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | (i) Report of Ernst & Young LLP, Independent Auditors.                                                    
|
| | (ii) Consolidated Balance Sheets as of December 31, 2001 and 2000                                         
|
| | (iii) Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.         
|
| | (iv) Consolidated Statements of Stockholders Equity for the years
ended December 31, 2001, 2000 and 1999.
|
| | (v) Consolidated Statements of Cash Flows for the years ended December
31, 2001, 2000 and 1999.           
|
| | (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 being filed as part of this report:

|            |  |                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | 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
Companys Current Report on Form 8-K filed on March 24, 1998.
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company,
incorporated by reference to the indicated exhibit of the
Companys Form 10-Q for the period ended June 30, 2000.                                                          
|3.2         |  | Bylaws of the Company, as amended, incorporated by reference to
the indicated exhibit of the Companys Form 10-Q for the period
ended June 30, 2000.                                                                                         
|4.1         |  | Form of Common Stock Certificate, incorporated by reference to
Exhibit 4.2 of the Company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 Company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 Company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 Company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 Company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, by and between the Company and ABI,
incorporated by reference to Exhibit 10.11                                                                     

56



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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                
|            |  | of the Company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 Exhibit 10.30 of
the Companys Form 10-K for the period ended December 31, 1995.                                                                                                                                                    
|10.7+       |  | Technology Development and Services Agreement, dated as of
October 2, 1995, by and among the Company, Hoechst
Aktiengesellschaft and its subsidiary, Hoechst Marion Roussel,
Inc., incorporated by reference to Exhibit 10.28 of the Companys
Form 10-K for the period ended December 31, 1995.                                               
|10.7.1+     |  | Amended and Restated First Amendment to Technology Development
and Services Agreement, dated May 1, 1998, by and between the
Company and Hoechst Marion Roussel, Inc., incorporated by
reference to Exhibit 10.36 of the Companys Form 10-Q for the
period ended June 30, 1998.                                                               
|10.7.2+     |  | Second Amendment to Technology Development and Services
Agreement, dated March 1, 1999, by and among the Company, Hoechst
Marion Roussel, Inc. and its affiliate Hoechst Schering AgrEvo
GmbH, incorporated by reference to the indicated exhibit of the
Company's Form 10-K/A filed on August 24, 2001 for the period ended
December 31, 2001.
|10.7.3+     |  | Third Amendment to Technology Development and
Services Agreement, dated December 20, 1999, by and among the
Company, Aventis Pharmaceutical Inc. and its affiliate Aventis
CropScience GmbH, incorporated by reference to the indicated exhibit of the
Company's Form 10-K/A filed on August 24, 2001 for the period ended
December 31, 2001.  
|10.8**      |  | Stock Purchase Agreement dated as of April 14, 1997, by and
between the Company and Edward C. Albini, incorporated by
reference to Exhibit 10.32 of the Companys Form 10-K for the
period ended December 31, 1997.                                                                                                                            
|10.9        |  | 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
Companys Registration Statement on Form S-3, filed on October
31, 1997 (File No. 333-39171)                                                             
|10.10       |  | Lease dated as of February 27, 1998, by and between the Company
and SimFirst, L.P., Limited Partnership, incorporated by
reference to Exhibit 10.35 of the Companys Form 10-Q for the
period ended March 31, 1998.                                                                                                                            
|10.11       |  | The Companys 1998 Employee Stock Purchase Plan (the Purchase
Plan), incorporated by reference to Exhibit 99.1 of the
Companys Form S-8 (File No. 333-59163)                                                                                                                                                                                
|10.12+      |  | Research Collaboration Agreement, dated as of October 29, 1998,
by and between the Company and E.I. Dupont de Nemours and Co.,
incorporated by reference to Exhibit 10.13 of the
Companys Form 10-K/A filed on August 24, 2001 for the period
ended December 31, 2001.                                                                        
|10.13       |  | Master Loan and Security Agreement, dated as of October 26, 1998,
by and between the Company and Transamerica Business Credit
Corporation, incorporated by reference to Exhibit 10.14
of the Companys Form 10-K/A filed on August 24, 2001 for the
period ended December 31, 2001.                                                            
|10.14       |  | Promissory Note No. 7, dated as of September 29, 2000, issued by
the Company to Transamerica Business Credit Corporation,
incorporated by reference to Exhibit 10.15 of the
Companys Form 10-K/A filed on August 24, 2001 for the period
ended December 31, 2001.                                                                             
|10.15+      |  | Collaboration Agreement, dated as of September 30, 1999, by and
between the Company and Hoechst Schering AgrEvo GmbH,
incorporated by reference to Exhibit 10.16                                                                                                                                                                               

57



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|            |  |                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                      
|            |  | of the
Companys Form 10-K/A filed on August 24, 2001 for the period
ended December 31, 2001.                                                                                                                                                        
|10.16**     |  | Employment Agreement dated as of October 18, 1999, by and between
the Company and Norman John Wilkie Russell, Ph.D., incorporated
by reference to Exhibit 10.13 of the Companys Form 10-Q for the
period ended September 30, 1999.                  
|10.17+      |  | Collaboration Agreement, dated as of October 1, 2000, by and
between the Company and Takara Shuzo Co., Ltd,, incorporated by
reference to Exhibit 10.18 of the Companys Form 10-K/A
filed on August 24, 2001 for the period ended December 31, 2001.
|10.18       |  | Securities Purchase Agreement, dated as of May 24, 2001, by and
among the Company and the investors listed therein, incorporated
by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K, filed on June 4, 2001.                    
|10.19       |  | Registration Rights Agreement, dated as of May 24, 2001, by and
among the Company and the investors listed therein, incorporated
by reference to Exhibit 10.2 of the Companys Current Report on
Form 8-K, filed on June 4, 2001.                    
|10.20       |  | Form of Warrant issued by the Company in favor of each investor
thereto, incorporated by reference to Exhibit 10.3 of the
Companys Current Report on Form 8-K, filed on June 4, 2001.                                                               
|10.21+      |  | Joint Venture Agreement, dated as of June 29, 2001, by and
between the Company and BASF Aktiengesellschaft, incorporated by
reference to Exhibit 10.18 of the Companys Form 10-Q for the
period ended June 30, 2001.                                
|10.22+      |  | First Amendment to Joint Venture Agreement, by and between the
Company and BASF Aktiengesellschaft, dated as of August 14, 2001,
incorporated by reference to Exhibit 10.22.2 of the Companys
Form 10-Q for the period ended September 30, 2001.    
|10.23+      |  | Technology License Agreement, dated as of June 1, 2001, by and
between the Company and BASF-LYNX Bioscience AG, incorporated by
reference to Exhibit 10.19 of the Companys Form 10-Q for the
period ended June 30, 2001.                            
|10.24       |  | Common Stock Purchase Agreement, by and between the Company and
Takara Shuzo Co., Ltd., dated as of October 1, 2001, incorporated
by reference to Exhibit 10.24 of the Companys Form 10-Q for the
period ended September 30, 2001.                  
|10.25+      |  | Purchase Agreement, dated as of March 5, 2002, by and between
Geron Corporation and Lynx Therapeutics, Inc., incorporated by
reference to Exhibit 10.26 of the Companys Current
Report on From 8-K filed on March 18, 2002.                         
|10.26+      |  | Common Stock Purchase Agreement, dated as of March 5, 2002, by
and between Geron Corporation and Lynx Therapeutics, Inc.,
incorporated by to Exhibit 10.27 of the Companys Current
Report on From 8-K filed on March 18, 2002.                      
|21.1        |  | Subsidiaries of the Company.                                                                                                                                                                                                                         
|23.1*       |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                                  
|24.1        |  | Power of Attorney. Reference is made to the signature page.                                                                                                                                                                                          

58



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---

|*  |  | Being filed herewith; all other exhibits previously filed.                                          
|-- |  | ----------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | 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

None.

59



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) Securities Exchange
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 1st
day of April 2002.

| |  |                         |  |                                                                
| |  | ----------------------- |  | ---------------------------------------------------------------
| |  | LYNX THERAPEUTICS, INC.
|
| |  | By:                     |  | /s/ Norman J.W. Russell, Ph.D.                                 
| |  |                         |  |                                                                
| |  |                         |  | Norman J.W. Russell, Ph.D.President and Chief Executive Officer

POWER OF ATTORNEY

Know All Persons by These Presents,that each person whose signature
appears below constitutes and appoints Edward C. Albini and James C. Kitch, and
each or any of them, as 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 to the Report 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 Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

|                                                |  |                                                                                   |  |              
|----------------------------------------------- |  | --------------------------------------------------------------------------------- |  | -------------
|Signature                                       |  | Title                                                                             |  | Date         
|                                                |  |                                                                                   |  |              
|                                               
|/s/ Norman J.W. Russell
Norman J.W. Russell     |  | President, Chief Executive Officer and Director(Principal Executive Officer)      |  | April 1, 2002
|                                               
|/s/ Craig C. Taylor
Craig C. Taylor             |  | Chairman of the Board                                                             |  | April 1, 2002
|                                               
|/s/ Edward C. Albini
Edward C. Albini           |  | Chief Financial Officer and Secretary(Principal Financial and Accounting Officer) |  | April 1, 2002
|                                               
|/s/ William K. Bowes, Jr.
William K. Bowes, Jr. |  | Director                                                                          |  | April 1, 2002
|                                               
|/s/ Sydney Brenner
Sydney Brenner               |  | Director                                                                          |  | April 1, 2002
|                                               
|/s/ James C. Kitch
James C. Kitch               |  | Director                                                                          |  | April 1, 2002
|                                               
|/s/ Leroy Hood
Leroy Hood                       |  | Director                                                                          |  | April 1, 2002
|                                               
|/s/ David C. UPrichard
David C. UPrichard     |  | Director                                                                          |  | April 1, 2002

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EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | 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
Companys Current Report on Form 8-K filed on March 24, 1998.                                                                                                  
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company,
incorporated by reference to the indicated exhibit of the
Companys Form 10-Q for the period ended June 30, 2000.                                                                                                                                                            
|3.2         |  | Bylaws of the Company, as amended, incorporated by reference to
the indicated exhibit of the Companys Form 10-Q for the period
ended June 30, 2000.                                                                                                                                                                                           
|4.1         |  | Form of Common Stock Certificate, incorporated by reference to
Exhibit 4.2 of the Company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 Company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 Company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 Company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 Company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, by and between the Company and ABI,
incorporated by reference to Exhibit 10.11 of the Company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 Exhibit 10.30 of
the Companys Form 10-K for the period ended December 31, 1995.                                                                                                                                                    
|10.7+       |  | Technology Development and Services Agreement, dated as of
October 2, 1995, by and among the Company, Hoechst
Aktiengesellschaft and its subsidiary, Hoechst Marion Roussel,
Inc., incorporated by reference to Exhibit 10.28 of the Companys
Form 10-K for the period ended December 31, 1995.                                               
|10.7.1+     |  | Amended and Restated First Amendment to Technology Development
and Services Agreement, dated May 1, 1998, by and between the
Company and Hoechst Marion Roussel, Inc., incorporated by
reference to Exhibit 10.36 of the Companys Form 10-Q for the
period ended June 30, 1998.                                                               
|10.7.2+     |  | Second Amendment to Technology Development and Services
Agreement, dated March 1, 1999, by and among the Company, Hoechst
Marion Roussel, Inc. and its affiliate Hoechst Schering AgrEvo
GmbH, incorporated by reference to the indicated exhibit of the
Companys Form 10-K/A filed on August 24, 2001 for the
period ended December 31, 2001.
|10.7.3+     |  | Third Amendment to Technology Development and
Services Agreement, dated December 20, 1999, by and among the                                                                                                                                                                                                                                    

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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                            
|            |  | Company, Aventis Pharmaceutical Inc. and its affiliate Aventis
CropScience GmbH, incorporated by reference to the indicated exhibit
of the company's Form 10-K/A filed on August 24, 2001 for
the period ended December 31, 2001.                                                          
|10.8**      |  | Stock Purchase Agreement dated as of April 14, 1997, by and
between the Company and Edward C. Albini, incorporated by
reference to Exhibit 10.32 of the Companys Form 10-K for the
period ended December 31, 1997.                                                                        
|10.9        |  | 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
Companys Registration Statement on Form S-3, filed on October
31, 1997 (File No. 333-39171)         
|10.10       |  | Lease dated as of February 27, 1998, by and between the Company
and SimFirst, L.P., Limited Partnership, incorporated by
reference to Exhibit 10.35 of the Companys Form 10-Q for the
period ended March 31, 1998.                                                                        
|10.11       |  | The Companys 1998 Employee Stock Purchase Plan (the Purchase
Plan), incorporated by reference to Exhibit 99.1 of the
Companys Form S-8 (File No. 333-59163)                                                                                                                            
|10.12+      |  | Research Collaboration Agreement, dated as of October 29, 1998,
by and between the Company and E.I. Dupont de Nemours and Co.,
incorporated by reference to the indicated exhibit of the
Companys Form 10-K/A filed on August 24, 2001 for the period
ended December 31, 2001.            
|10.13       |  | Master Loan and Security Agreement, dated as of October 26, 1998,
by and between the Company and Transamerica Business Credit
Corporation, incorporated by reference to the indicated exhibit
of the Companys Form 10-K/A filed on August 24, 2001 for the
period ended December 31, 2001.
|10.14       |  | Promissory Note No. 7, dated as of September 29, 2000, issued by
the Company to Transamerica Business Credit Corporation,
incorporated by reference to the indicated exhibit of the
Companys Form 10-K/A filed on August 24, 2001 for the period
ended December 31, 2001.                 
|10.15+      |  | Collaboration Agreement, dated as of September 30, 1999, by and
between the Company and Hoechst Schering AgrEvo GmbH,
incorporated by reference to the indicated exhibit of the
Companys Form 10-K/A filed on August 24, 2001 for the period
ended December 31, 2001.                     
|10.16**     |  | Employment Agreement dated as of October 18, 1999, by and between
the Company and Norman John Wilkie Russell, Ph.D., incorporated
by reference to Exhibit 10.13 of the Companys Form 10-Q for the
period ended September 30, 1999.                                                        
|10.17+      |  | Collaboration Agreement, dated as of October 1, 2000, by and
between the Company and Takara Shuzo Co., Ltd,, incorporated by
reference to the indicated Exhibit 10.18 of the Companys Form 10-K/A
filed on August 24, 2001 for the period ended December 31, 2001.                        
|10.18       |  | Securities Purchase Agreement, dated as of May 24, 2001, by and
among the Company and the investors listed therein, incorporated
by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K, filed on June 4, 2001.                                                          
|10.19       |  | Registration Rights Agreement, dated as of May 24, 2001, by and
among the Company and the investors listed therein, incorporated
by reference to Exhibit 10.2 of the Companys Current Report on
Form 8-K, filed on June 4, 2001.                                                          

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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                  
|10.20       |  | Form of Warrant issued by the Company in favor of each investor
thereto, incorporated by reference to Exhibit 10.3 of the
Companys Current Report on Form 8-K, filed on June 4, 2001.                                                           
|10.21+      |  | Joint Venture Agreement, dated as of June 29, 2001, by and
between the Company and BASF Aktiengesellschaft, incorporated by
reference to Exhibit 10.18 of the Companys Form 10-Q for the
period ended June 30, 2001.                            
|10.22+      |  | First Amendment to Joint Venture Agreement, by and between the
Company and BASF Aktiengesellschaft, dated as of August 14, 2001,
incorporated by reference to Exhibit 10.22.2 of the Companys
Form 10-Q for the period ended September 30, 2001.
|10.23+      |  | Technology License Agreement, dated as of June 1, 2001, by and
between the Company and BASF-LYNX Bioscience AG, incorporated by
reference to Exhibit 10.19 of the Companys Form 10-Q for the
period ended June 30, 2001.                        
|10.24       |  | Common Stock Purchase Agreement, by and between the Company and
Takara Shuzo Co., Ltd., dated as of October 1, 2001, incorporated
by reference to Exhibit 10.24 of the Companys Form 10-Q for the
period ended September 30, 2001.              
|10.25+      |  | Purchase Agreement, dated as of March 5, 2002, by and between
Geron Corporation and Lynx Therapeutics, Inc., incorporated by
reference to the indicated Exhibit 10.26 of the Companys Current
Report on From 8-K filed on March 18, 2002.       
|10.26+      |  | Common Stock Purchase Agreement, dated as of March 5, 2002, by
and between Geron Corporation and Lynx Therapeutics, Inc.,
incorporated by to the indicated Exhibit 10.27 of the Companys Current
Report on From 8-K filed on March 18, 2002.    
|21.1        |  | Subsidiaries of the Company.                                                                                                                                                                                                                     
|23.1*       |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                                                                              
|24.1        |  | Power of Attorney. Reference is made to the signature page.                                                                                                                                                                                      



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|*  |  | Being filed herewith; all other exhibits previously filed.                                          
|-- |  | ----------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Management contract or compensatory plan or arrangement.                                            
|  
|  
|  
|  
|   |  | (+) Portions of this agreement have been deleted pursuant to our request for
confidential treatment.

63