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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K

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

For the fiscal year ended December 31, 2002

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 |                                   |  | 94-3161073 | 
|(State or other jurisdiction of incorporation or organization) |          | (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. [X]

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

State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant computed by reference to the
price at which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the registrants
most recently completed second fiscal quarter: $22,543,575.1

The number of shares of common stock of the Registrant outstanding as of
March 3, 2003, was 4,654,245. 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 3,
2003, was $5,527,055.2



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|1 |  | Based on a closing price of $9.03 per share on June 28, 2002 and 4,058,850
shares outstanding (as adjusted to reflect the Registrants reverse stock
split effected in January 2003). Excludes 1,562,330 shares of the
Registrants common stock held by executive officers, directors and
stockholders whose ownership exceed 5% of the common stock outstanding at
June 28, 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|2 |  | Based on a closing price of $2.17 per share on March 3, 2003 and 4,654,245
shares outstanding. Excludes 2,107,215 shares of the Registrants common stock
held by executive officers, directors and stockholders whose ownership exceed
5% of the common stock outstanding at March 3, 2003.                                                                                       





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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. Consolidated 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 and Related Stockholder Matters
|                | Item 13. Certain Relationships and Related Transactions                                                
|                | Item 14. Controls and Procedures                                                                       
|PART IV        
|                | Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K                              
|SIGNATURES     
|CERTIFICATION  
|Exhibit Index  
|EXHIBIT 3.1.1  
|EXHIBIT 10.17.1
|EXHIBIT 10.35  
|EXHIBIT 21.1   
|EXHIBIT 23.1   
|EXHIBIT 99.1   



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LYNX THERAPEUTICS, INC.

FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002

Table of Contents

|         |  |                                                                                                |   
|-------- |  | ---------------------------------------------------------------------------------------------- | --
|PART I   |  |                                                                                                | 1 
|Item 1.  |  | Business                                                                                       | 1 
|Item 2.  |  | Properties                                                                                     | 16
|Item 3.  |  | Legal Proceedings                                                                              | 16
|Item 4.  |  | Submission of Matters to a Vote of Security
Holders                                            | 17
|PART II  |  |                                                                                                | 18
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder
Matters                          | 18
|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                                     | 28
|Item 8.  |  | Consolidated Financial Statements and Supplementary
Data                                       | 29
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure           | 51
|PART III |  |                                                                                                | 52
|Item 10. |  | Directors and Executive Officers of the
Registrant                                             | 52
|Item 11. |  | Executive
Compensation                                                                         | 54
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters | 58
|Item 13. |  | Certain Relationships and Related
Transactions                                                 | 61
|Item 14. |  | Controls and
Procedures                                                                        | 62
|PART IV  |  |                                                                                                | 63
|Item 15. |  | Exhibits, Financial Statement, Schedules and Reports on
Form 8-K                               | 63
|         |  | SIGNATURES                                                                                     | 67
|         |  | CERTIFICATIONS                                                                                 | 68





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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
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.

In January 2003, we received stockholder approval for, and effected, a
reverse stock split of our common stock at a ratio of 1-for-7 (the reverse
stock split). As a result of the reverse stock split, each outstanding share
of common stock automatically converted into one-seventh of a share of common
stock, with the par value of each share of common stock remaining at one cent
($.01) per share. Accordingly, common stock share and per share amounts for
all periods presented have been adjusted to reflect the impact of the reverse
stock split.

Overview

We believe that Lynx Therapeutics, Inc. is a leader in the development and
application of novel genomics analysis solutions that provide comprehensive and
quantitative digital gene expression information important to modern systems
biology research in the pharmaceutical, biotechnology and agricultural
industries. Gene expression refers to the number of genes and the extent a cell
or tissue expresses those genes, and represents 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. Systems biology is an
approach in which researchers seek to gain a complete molecular understanding
of biological systems in health and disease.

We believe that our Massively Parallel Signature Sequencing technology, or
MPSS, generates a complete, accurate and quantitative analysis of the
transcriptome (which is the full complement of activated genes, messenger RNAs
or transcripts in a particular tissue at a particular time) to enable systems
biology. Transcriptome analysis provides information about all the genes that
are expressed in a biological sample. MPSS generates simultaneously, from a
million or more Megaclone (our unique and proprietary cloning procedure)
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. MPSS is capable of finding and identifying genes that are expressed
at low levels in the cell, beyond the normal sensitivity levels of microarrays
(which are small glass or silicon wafers with tens of thousands of DNA
molecules arrayed on the surface for subsequent analysis and are the current
leading tool for gene expression analysis on the market). As a result, Lynx
believes that MPSS provides a highly reproducible, quantitative digital readout
for the activity of virtually every gene in a biological sample. Additionally,
unlike microarrays, which are limited to the genes represented on them, MPSS
does not require advance knowledge of genes or sequences and, therefore, has
broad potential commercial applicability to humans, animals, plants and other
commercially important organisms.

Our current business model is primarily focused on providing genomics
discovery services using MPSS. Our commercialization strategies, tactics and
target customers for MPSS generally involve expanding our work with scientific
thought leaders and genomics researchers and gaining additional customers in
the pharmaceutical, biotechnology and agricultural industries. Additionally,
our business development efforts include collaborating with information
technology (IT) companies that we believe can help design the software and
other tools to understand the large, complex MPSS-based data sets required to
enable systems biology.

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Megaclone, our unique and proprietary cloning procedure, is the foundation
technology for MPSS. Megaclone transforms a biological 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. Megasort, the other technology that
leverages the power of Megaclone and that we have developed and commercially
applied, 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.

We were incorporated in Delaware in February 1992. Please see a
discussion of our 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
pharmacogenomics (which is the identification and assessment of genes that are
predictive of the efficacy and/or toxicity of drug compounds or that may correlate
drug responses to the genotype, or genetic makeup, of an individual), 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 only a first step. 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 biological 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

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comprehensive, high-resolution analysis of gene
expression across one million or more mRNA molecules in cells of interest to
the researcher.

Our Solution

We believe that MPSS generates a complete, accurate and quantitative
analysis of the transcriptome to enable systems biology. Transcriptome
analysis provides information about all the genes that are expressed in a
biological sample. MPSS 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. MPSS is capable of finding and identifying genes that are
expressed at low levels in the cell, beyond the normal sensitivity levels of
microarrays. As a result, Lynx believes that MPSS provides a highly
reproducible, quantitative digital readout for the activity of virtually every
gene in a biological sample. Additionally, unlike microarrays, MPSS does not
require advance knowledge of genes or sequences and, therefore, has broad
potential commercial applicability to humans, animals, plants and other
commercially important organisms.

Our Commercialization Strategies, Tactics and Target Customers

Our commercialization strategies, tactics and target customers for MPSS
generally involve expanding our work with scientific thought leaders and
genomics researchers and gaining additional customers in the pharmaceutical,
biotechnology and agricultural industries. Additionally, our business
development efforts include collaborating with IT companies that we believe can
help design the software and other tools to understand the large, complex
MPSS-based data sets required to enable systems biology.

Expanding Our Genomics Discovery Services Business

Our current business model is primarily focused on providing MPSS genomics
discovery services to:



| |                    
| | -------------------
| | Research Institutes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We believe that scientific thought leaders in research institutes can
provide an immediate, significant and enduring source of revenue, both
directly from their institutes andfrom access to labs doing genomics
research in the larger scientific research community. More broadly, we
believe that we will benefit by having MPSS data placed in the public
domain by these researchers. The scientific thought leaders should provide
public and very visible exposure and validation of MPSS through their
commentary and publications in scientific journals.



| |                                                         
| | --------------------------------------------------------
| | Pharmaceutical, Biotechnology and Agricultural Companies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pharmaceutical, biotechnology and agricultural customers are an
integral component of our business development focus and commercialization
efforts. With the assumed accessibility to data sets containing gene
expression information for cells or tissues for comparative purposes
stemming from our work with scientific thought leaders and IT companies, we
expect that pharmaceutical, biotechnology and agricultural 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
programs.

We believe that MPSS can become the technology of choice to: (1)
accelerate drug discovery by identifying and validating drug targets and
identifying pathways and mode of action; (2) accelerate drug development
through lead (which is a representative of a compound series with sufficient
potential to progress to a drug development program) qualification and
optimization (which is the synthetic modification of a biologically active
compound to fulfill all of the necessary properties required for clinical
usefulness) by improving the success rate of getting products into clinical
testing and to the market by patient group stratification (which is the
division or arrangement of patients into representative subject populations
within the clinical trial) and toxicology; and (3) enable discovery of
biomarkers (which is a biochemical feature that can be used to measure the
progress of disease or the effects of treatment) for diagnostics and
pharmacogenomics. We believe that most of the important drug targets cannot be
reliably monitored by gene expression methods other than MPSS.

Our business development efforts to collaborate with IT companies are
founded on the comprehensive, quantitative and digital nature of MPSS data. We
envision performing genomics discovery services to provide the MPSS data
content, while the IT companies design the software and other tools to
understand the large, complex

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data sets required to enable systems biology. The IT companies would then market this MPSS-based data along with their
hardware and analysis tools to pharmaceutical, biotechnology and agricultural
companies and research institutes.

The revenue sources from genomics discovery service arrangements may
include technology access and services fees from performing MPSS analyses and
providing MPSS data. Additionally, we have provided a license, as amended in
December 2002, to Takara Bio Inc. (formerly Takara Shuzo Co. Ltd.) that
provides Takara with the right to use our technologies to provide genomics
discovery services and to manufacture and sell microarrays containing content
identified by our technologies in specific geographic territories. In December
2002, Lynx sold to Takara two MPSS instruments for Takaras use in providing
genomics discovery services in their licensed territories.

Our Technologies and 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 uses proprietary instruments and reagents developed by Lynx.

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 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 20 operational proprietary MPSS instruments.

Megasort Technology

Our Megasort technology provides a method to identify and physically
extract essentially all genes that differ in expression levels 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 extracted DNA molecules could be differentially expressed
genes or DNA fragments that are found in one sample but not in the other.
Because the comparison and sorting process requires no prior knowledge of the
sequences of the genes present in either sample, Megasort can be used with
samples isolated from tissues or organisms that are not well characterized.
Megasort involves hybridizing (which is a molecular technique that uses one
nucleic acid strand to locate another) 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

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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.

Megaclone Technology

Megaclone, our unique and proprietary cloning procedure, forms the
foundation of our technologies. Megaclone transforms a biological 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.

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 (typically one million or more) 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, principally
MPSS and Megasort.

Collaborations, Customers and Licensees

We have derived substantially all of our revenues from corporate
collaborations, customer agreements and licensing arrangements. For the year
ended December 31, 2002, revenues from DuPont, Takara, Geron Corporation, Bayer
CropScience and BASF accounted for 32%, 16%, 15%, 14% and 11%, respectively, of
our total revenues. The following are summary descriptions of our current key collaborators,
customers and licensees:

BASF AG

In October 1996, we entered into an agreement with BASF AG, 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 in
the fourth quarter of 2001, BASF exercised its right to carryover for an
additional two-year period to the fourth quarter of 2003, 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, 2002, we have received aggregate payments of $19.0
million from BASF under the agreement. We could receive additional payments
from BASF over the remaining term of the agreement, which ends in the fourth
quarter of 2003, 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 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. We received an

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initial payment of $10.0 million for technology access at the execution of the agreement, with
additional minimum service fees of $12.0 million to be received by us over a
three-year period, which commenced in January 1999. DuPont subsequently elected
to continue the agreement with us for a two-year period during which we should
receive additional minimum service fees of $8.0 million through the fourth
quarter of 2003. In the fourth quarter of 1999, we achieved a technology
milestone under the agreement that resulted in a $5.0 million payment from
DuPont.

Through December 31, 2002, we have received aggregate payments of $32.0
million from DuPont under the agreement. We expect to receive minimum
additional payments of $3.0 million from DuPont over the remaining term of the
agreement, primarily from our continuing performance of genomics discovery
services for DuPont.

Bayer CropScience (formerly 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, which is now
Bayer CropScience. We received an initial payment for genomics discovery
services to be performed by us for Bayer CropScience. The service
period was renewed in March 2000, extended in March 2002 for an additional
five-year period, and amended in September 2002. Related to
the five-year extension, Bayer CropScience and Lynx plan to jointly
develop and commercialize a novel assay based on Lynxs proprietary bead-based
technologies. Lynx and Bayer 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 Bayer CropScience. Additionally,
we will derive revenues from performing genomics discovery services for Bayer
CropScience during the development and commercialization phase of the
agreement.

Through
December 31, 2002, we have received aggregate payments of $6.0
million from Bayer CropScience under the above agreements. We could receive
additional payments from Bayer CropSciences from our performance of genomics
discovery services in excess of those covered by the payments previously made
by Bayer CropSciences or from the sales of services or products based on the
assay technology to Bayer CropScience.

Takara Bio Inc. (formerly Takara Shuzo Co., Ltd.).

In November 2000, we entered into a collaboration and license agreement
with Takara Bio Inc. of Japan. The license, as amended in December 2002,
provides Takara with the right in Japan, Korea and China, including Taiwan, to
use our proprietary Megaclone, Megasort and MPSS technologies exclusively until
the expiration of the relevant Lynx patents to provide genomics discovery
services and to manufacture and sell microarrays containing content identified
by our technologies. Under the terms of the original license agreement, Takara
has a nonexclusive license right to manufacture and sell such microarrays
elsewhere throughout the world. In connection with the amended collaboration,
Takara was also granted a royalty-bearing, nonexclusive right to provide
genomics discovery services to customers in France and Italy.

At the
end of three years from the effective date of the agreement, in the fourth quarter of 2003, 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 payments from
Takara for technology access fees, royalties on sales of microarrays and
revenues from genomics discovery services, the sale to Takara of proprietary
instruments and 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 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 December 2002, Lynx sold two MPSS
instruments to Takara for Takaras use in providing genomics discovery services
in licensed territories. As part of the amended collaboration, Takara
accelerated its technology access fee payments to Lynx and equity purchases of
Lynx common stock. The previously scheduled 2003 payment was made to Lynx in
December 2002, and the previously scheduled 2004 and 2005 payments are now
planned to be made to Lynx in 2003 and 2004, respectively.

In both September and December 2002, in connection with the collaboration
agreement, we issued and sold 291,545 shares of common stock, at a purchase
price of $3.43 per share, to Takara in private placements pursuant to the terms
and conditions of common stock purchase agreements. In October 2001, in
connection with the collaboration agreement, we issued and sold 45,787 shares
of common stock, at a purchase price of $21.84 per share, to Takara in a
private placement pursuant to the terms and conditions of a common stock
purchase agreement.

Through December 31, 2002, we have received aggregate payments of $11.2
million, net of foreign withholding taxes, from Takara under the collaboration
agreement. We could receive additional payments from Takara of

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approximately $4.0 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 instruments and
reagents used in applying our technologies.

Axaron Bioscience AG, formerly BASF-LYNX Bioscience AG

In 1996, Lynx and BASF established Axaron Bioscience AG, 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 $26.6 million based on a December 2002 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 $10.0 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 nonexclusively in Axarons neuroscience, toxicology and
microbiology programs until December 31, 2007. The agreement also positions
Axaron to apply our technologies to specific disorders in the neuroscience
field. Under the terms of the agreement, we received a $5.0 million technology
license fee from Axaron. We intend to furnish to Axaron, initially without
charge and later for a fee, Megaclone technology micro-beads, other reagents
and additional MPSS instruments for use in Axarons research
programs.

In 2001, Lynx and BASF agreed to continue their support of Axarons
growth, including an increase in the capital of Axaron. We made an additional
investment of $4.5 million in Axaron, which maintained our 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 Accounting Principles Board No. 18, The Equity
Method of Accounting for Investments in Common Stock.

Through December 31, 2002, we have received aggregate payments of $9.3
million from Axaron under all related agreements. We recorded revenue of $0.8
million in 2002 and $0.4 million in 2001 from Axaron, 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. 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
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 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.

Many of our competitors have substantially greater capital resources,
research and development staffs, facilities, manufacturing and marketing
experience, distribution channels and human resources than we do. 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 that 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

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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,
2002, we owned or controlled 72 issued patents and 113 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 may 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 $20.8 million for the year ended
December 31, 2002, $24.7 million for the year ended December 31, 2001 and $19.8
million for the year ended December 31, 2000.

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 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 the principal inventor of Lynxs bead-based technologies. 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 Nobel Prize in Physiology or Medicine for 2002, the
Albert Lasker Medical Research Award (2000 and 1991), the Genetics Society of
America Medal (1987) and the Kyoto Prize (1990).

Employees

As of December 31, 2002, we employed 128 full-time employees, of which 109
were engaged in production and research and development activities. In January
2003, we announced a reduction of approximately 25% of our workforce, or
32 people. The groups affected primarily by this action included
research and development personnel based at Lynx GmbH in Germany, and those
working in our proteomics group in California.

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The workforce reduction was intended to further focus our financial and human resources on expanding the
commercial use of MPSS. 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.

Available Information

We maintain a site on the World Wide Web at www.lynxgen.com; however,
information found on our website is not incorporated by reference into this
report. We make available free of charge on or through our website our annual
report of Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.

In 2003, we intend to adopt a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We intend to post the text
of our code of ethics on our website at www.lynxgen.com in connection with
Investor Resources materials. In addition, we intend to promptly disclose
(1) the nature of any amendment to our code of ethics that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions and (2) the
nature of any waiver, including an implicit waiver, from a provision of our
code of ethics that is granted to one of these specified officers, the name of
such person who is granted the waiver and the date of the waiver on our website
in the future.

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.

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 $15.5 million in 2002,
$16.7 million in
2001 and $13.3 million in 2000. As of December 31, 2002, we had an accumulated
deficit of approximately $98.9 million. Net losses may continue for at least
the next several years. The presence and size of these potential 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. Research and
development expenses may increase due to spending for ongoing technology
development and implementation, as well as new applications. 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 expand the scope of our products and services into new areas of pharmaceutical, biotechnology and agricultural research;                   
|
| |  | our customers and collaborators abilities to develop diagnostic,
therapeutic and other commercial products from the application of our
technologies; and
|
| |  | the successful clinical testing, regulatory approval and
commercialization of such products by our customers and collaborators.                           

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

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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 conduct our operations, and will depend on many factors including:



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

We believe that our current cash and cash equivalents and funding
anticipated to be received from customers, collaborators and licensees will
enable us to maintain our operations through at least December 31, 2003.
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, 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 customers,
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 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 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 our customers, collaborators or us to identify
genes, proteins or targets for drug discovery. To date, neither our customers
nor we have identified any targets for drug discovery based on our
technologies.

We are dependent on our customers and collaborators and will need to find
additional customers and 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, customer
agreements or licensing arrangements with pharmaceutical, biotechnology and
agricultural companies and research institutes. 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, customer agreements and licensing arrangements. Revenues from
such agreements depend upon continuation of the related relationships, our
performance of genomics discovery services, 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, customers and licensees. For the year
ended December 31, 2002, revenues from DuPont, Takara, Geron Corporation, Bayer
CropScience and BASF accounted for 32%, 16%, 15%, 14% and 11%, respectively, of
our total revenues. 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 Bayer CropScience
accounted for 51%, 29% and 11%, respectively, of our total revenues. If we fail
to perform genomics

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discovery services or successfully achieve milestones or
our collaborators fail to develop successful products, we will not earn the
revenues contemplated under such agreements. If our collaborators, customers or
licensees do not renew existing agreements, we lose one of these collaborators,
customers or licensees, we do not attract new collaborators, customers or
licensees or we are unable to enter into new collaborative, customer or license
agreements on commercially acceptable terms, our revenues may decrease, and our
activities may fail to lead to commercialized products.

Our dependence on
collaborations 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 customers
and collaborators, some of our customers and collaborators could become our
competitors in the future if they internally develop DNA analysis technologies
or if they acquire other genomics companies and move into the genomics
industry. We will not earn the revenues contemplated under our customer and
collaborative arrangements, if our customers and 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.                                    

We depend on a single 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
micro-beads in a planar microarray, which is a two-dimensional, dense ordered
array of DNA samples. We use flow cells in our 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 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

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| |  | 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 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.

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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 and research
institutes 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 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 without any 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.

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
customer, collaborative and license agreements. 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, Kevin P. Corcoran, the loss of whose services could
have a material adverse effect on our business. Although we have an employment
agreement with Mr. Corcoran 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. 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. Federal, state and
local laws and regulations govern the use, manufacture, storage, handling and
disposal of hazardous materials. 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. 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 or
protein expression profiles. Similarly, employers could discriminate against
employees with gene or protein 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

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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 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
operations.

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,
2001 to December 31, 2002, the closing sales price of our common stock as
quoted on the Nasdaq National Market fluctuated from a low of $2.73 to a high
of $105.91 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;
| | - | --------------------------------------

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| |  | 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, customers or licensees; 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.

If we are unable to maintain our Nasdaq National Market listing, the liquidity
of our common stock would be seriously impaired and we would become subject to
various statutory requirements, which would likely harm our business.

On September 12, 2002, we received a letter from Nasdaq advising us that
our common stock had not met Nasdaqs minimum $1.00 closing bid price
requirement for 30 consecutive trading days and that, if we were unable to
demonstrate compliance with this requirement during the 90-calendar day grace
period ending December 9, 2002, our common stock may be subject to delisting from
the Nasdaq National Market. We failed to regain compliance with the minimum bid
price requirement during the 90-day grace period, and subsequently received a
delisting letter from Nasdaq on December 13, 2002. On December 20, 2002, we
requested an oral hearing before a Nasdaq Listing Qualifications Panel to
appeal our potential delisting. At the oral hearing on January 23, 2003, we
informed Nasdaq that we believed we had regained compliance with the Nasdaq
National Market continued listing requirements following a 1-for-7 reverse
split of our common stock effected on January 15, 2003.

On February 21, 2003, we received a letter from Nasdaq advising us that
the Nasdaq Listing Qualifications Panel acknowledged that we had regained
compliance with the requirements for continued listing on the Nasdaq National
Market. The Nasdaq Listing Qualifications Panel determined to continue the
listing of our securities on the Nasdaq National Market provided that we file
our annual report on Form 10-K for the fiscal year ended December 31, 2002 with
the Securities and Exchange Commission and Nasdaq evidencing shareholders
equity of at least $10,000,000 and that we demonstrate compliance with all
requirements for continued listing on the Nasdaq National Market at that time.
At December 31, 2002, we had total stockholders equity of $12,056,000. The
Nasdaq Listing Qualifications Panel reserves the right to modify or terminate
this decision upon a review of our reported financial results. In the event
that we fail to comply with any terms of this decision, our securities may be
transferred to the Nasdaq SmallCap Market, provided we are able to demonstrate
compliance with all applicable maintenance criteria and an ability to sustain
long-term compliance. In the event we are unable to do so, our securities will
be delisted from the Nasdaq Stock Market.

Transferring to the Nasdaq SmallCap Market would make us subject to
certain adverse consequences as described below. In addition, we would still be
required to satisfy various listing maintenance standards for our common stock
to be quoted on the Nasdaq SmallCap Market, including the minimum bid price
requirement. If we fail to meet such standards, our common stock would likely
be delisted from the Nasdaq SmallCap Market and trade on the over-the-counter
bulletin board, commonly referred to as the pink sheets. Such alternatives
are generally considered less efficient markets and would seriously impair the
liquidity of our common stock and limit our potential to raise future capital
through the sale of our common stock, which could materially harm our business.

If we are delisted from the Nasdaq National Market, we will face a variety
of legal and other consequences that would likely negatively affect our
business including, without limitation, the following:



| |  | we may lose our exemption from the provisions of Section 2115 of the
California Corporations Code, which imposes aspects of California
corporate law on certain non-California corporations operating within
California. As a result, (i) our stockholders would be entitled to
cumulative voting and (ii) we would be subject to more stringent
stockholder approval requirements and more stockholder-favorable
dissenters rights in connection with certain strategic transactions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the state securities law exemptions available to us would be more
limited, and, as a result, future issuances of our securities may require
time-consuming and costly registration statements and qualifications;                                                                                                                                                                                                                                                                      

15



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| |  | due to the application of different securities law exemptions and
provisions, we may be required to amend our stock option and stock
purchase plans and comply with time-consuming and costly administrative
procedures;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the coverage of Lynx by securities analysts may decrease or cease entirely; and                                                                                                                                         
|
| |  | we may lose current or potential investors.                                                                                                                                                                             

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.

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.




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 lease terminates in June 2005. Axaron is currently
subleasing a portion of this space. With the workforce reduction at Lynx GmbH
in January 2003, we are evaluating alternative uses for the facilities space,
which include subleasing all or a significant portion of the vacant space to a
new tenant or terminating the lease. In the event of lease termination, we
will be obliged to make the monthly lease payments on the facilities space for
up to six months if the space remains without a new lessee and to pay the
remaining unamortized balance of tenant improvements financed by the landlord
over the term of the lease. Additionally, we may be required to pay up to EURO
51,000 (or approximately $54,000 based on a December 31, 2002 exchange rate)
for the costs necessary to alter the facilities space to permit or enable
another party to lease such space. If we choose to terminate the lease, we
estimate that the total payments, including possible alteration costs, will be
approximately $150,000.

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.

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Item 4.Submission of Matters to a Vote of Security Holders

At Lynxs 2002 Special Meeting of Stockholders held on January 14, 2003,
Lynx stockholders voted on the following matter:



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Proposal I Approval of amendments to Lynxs Amended and Restated Certificate
of Incorporation to effect a reverse stock split of Lynxs common stock:

|          |  |               |        |             |  |                   |       |  |  |  |     | 
|--------- |  | ------------- | ------ | ----------- |  | ----------------- | ----- |  |  |  | --- | 
|Votes For |  | Votes Against |        | Abstentions |  | Broker Non- Votes
|          |  |               |        |             |  |                  
|2,763,245 |  |               | 47,829 |             |  |                   | 3,369 |  |  |  | 573 | 

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##### Table of Contents






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, as adjusted to reflect the effect of a 1-for-7 reverse split
of our common stock effected on January 15, 2003:

|                             |                |  |                    |        |     |  |   |       | 
|---------------------------- | -------------- |  | ------------------ | ------ | --- |  | - | ----- | 
|                             |                |  | Common Stock Price
|                             |                |  |                   
|                             |                |  | High               |        | Low
|                             |                |  |                    |        |    
|Year ended December 31, 2001 |                |  |                    |        |     |  |   |      
|                             | First Quarter  |  | $                  | 105.91 |     |  | $ | 44.66 | 
|                             | Second Quarter |  |                    | 61.60  |     |  |   | 35.00 | 
|                             | Third Quarter  |  |                    | 54.25  |     |  |   | 14.35 | 
|                             | Fourth Quarter |  |                    | 31.36  |     |  |   | 15.61 | 
|Year ended December 31, 2002 |                |  |                    |        |     |  |   |      
|                             | First Quarter  |  | $                  | 32.89  |     |  | $ | 14.14 | 
|                             | Second Quarter |  |                    | 14.77  |     |  |   | 7.84  | 
|                             | Third Quarter  |  |                    | 8.61   |     |  |   | 2.94  | 
|                             | Fourth Quarter |  |                    | 5.95   |     |  |   | 2.73  | 

As of March 3, 2003, there were approximately 1,600 stockholders of record
of our common stock. On March 3, 2003, the last reported sale price of our
common stock was $2.17.

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.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides certain information with respect to all of
our equity compensation plans in effect as of December 31, 2002:

Equity Compensation Plan Information

|                                                            |                                   |                   |  |                   |         |                         |   |                         |       |                      |  |         |         | 
|----------------------------------------------------------- | --------------------------------- | ----------------- |  | ----------------- | ------- | ----------------------- | - | ----------------------- | ----- | -------------------- |  | ------- | ------- | 
|                                                            |                                   |                   |  | Number of         |         |                         |   |                         |       | Number of Securities
|                                                            |                                   |                   |  | securities to be  |         | Weighted-               |   | remaining available for
|                                                            |                                   |                   |  | issued upon       |         | average exercise        |   | future issuance under  
|                                                            |                                   |                   |  | exercise of       |         | price of                |   | equity compensation    
|                                                            |                                   | outstanding       |  | outstanding       |         | plans (excluding       
|                                                            |                                   | options, warrants |  | options, warrants |         | securities reflected in
|Plan Category                                               |                                   | and rights        |  | and rights        |         | column (a))            
|                                                            |                                   |                   |  |                   |         |                        
|                                                            |                                   |                   |  | (a)               |         | (b)                     |   | (c)                    
|Equity compensation plans approved
by security holders:     |                                   |                   |  |                   |         |                         |   |                         |       |                      |  |        
|                                                            | 1992 Stock Option Plan            |                   |  | 360,587           |         |                         | $ | 72.51                   |       |                      |  | 175,556 |        
|                                                            | 1998 Employee Stock Purchase Plan |                   |  | N/A               |         |                         |   | N/A                     |       |                      |  | 7,471   |        
|Equity compensation plans not
approved by security holders: |                                   |                   |  |                   |         |                         |   |                         |       |                      |  |        
|                                                            | None                              |                   |  | 0                 |         |                         |   | 0                       |       |                      |  | 0       |        
|                                                            |                                   |                   |  |                   |         |                         |   |                         |       |                      |  |         |        
|                                                            |                                   | Total             |  |                   | 360,587 |                         |   | $                       | 72.51 |                      |  |         | 183,027 | 
|                                                            |                                   |                   |  |                   |         |                         |   |                         |       |                      |  |         |        

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Recent Sales of Unregistered
Securities

On December 26, 2002, Lynx sold 291,545 newly issued shares of our common
stock at a purchase price of $3.43 per share to Takara Bio Inc. (formerly
Takara Shuzo Co., Ltd.) in a private placement, for an aggregate purchase price
of approximately $1.0 million. Lynx issued the shares of common stock in
connection with the collaboration agreement, dated as of October 1, 2000, as
amended, with Takara and in reliance upon an exemption from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof and
Regulation D promulgated thereunder.

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##### Table of Contents






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, 2000, 2001 and 2002 and the consolidated balance sheet data as of December
31, 2001 and 2002 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, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998, 1999 and 2000 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, which have been adjusted in the consolidated
statement of operations table to reflect the effect of a 1-for-7 reverse split
of our common stock effected on January 15, 2003:

|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |        |        | 
|------------------------------------------- | -------------------------------------------- | ---------------------------------- | ------ | ------------------------------------- | ------ | ---- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                            |                                              |                                    |        | Year Ended December 31,              
|                                            |                                              |                                    |        |                                      
|                                            |                                              |                                    |        | 1998                                  |        | 1999 |        | 2000   |        | 2001 |         | 2002  
|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |       
|                                            |                                              |                                    |        | (in thousands, except per share data)
|Consolidated Statements of Operations Data: |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|Revenues:                                   |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                            | Technology access and services fees          |                                    | $      | 2,625                                 |        |      | $      | 7,833  |        |      | $       | 12,389 |        |   | $       | 18,372 |        |   | $       | 13,026 |       
|                                            | License fee from related party               |                                    |        |                                      |        |      |        |       |        |      |         |       |        |   |         | 453    |        |   |         | 759    |       
|                                            | Collaborative research and other             |                                    |        | 4,380                                 |        |      |        | 5,042  |        |      |         | 235    |        |   |         | 429    |        |   |         | 3,621  |       
|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                            |                                              | Total revenues                     |        |                                       | 7,005  |      |        |        | 12,875 |      |         |        | 12,624 |   |         |        | 19,254 |   |         |        | 17,406 | 
|Operating costs and expenses:               |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                            | Cost of services fees and other              |                                    |        |                                      |        |      |        | 828    |        |      |         | 3,652  |        |   |         | 4,118  |        |   |         | 3,499  |       
|                                            | Research and development                     |                                    |        | 13,166                                |        |      |        | 15,510 |        |      |         | 19,761 |        |   |         | 24,660 |        |   |         | 20,813 |       
|                                            | General and administrative                   |                                    |        | 2,141                                 |        |      |        | 4,175  |        |      |         | 6,170  |        |   |         | 7,503  |        |   |         | 6,271  |       
|                                            | Restructuring charge for workforce reduction |                                    |        |                                      |        |      |        |       |        |      |         |       |        |   |         |       |        |   |         | 530    |       
|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                            |                                              | Total operating costs and expenses |        |                                       | 15,307 |      |        |        | 20,513 |      |         |        | 29,583 |   |         |        | 36,281 |   |         |        | 31,113 | 
|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|Loss from operations                        |                                              |                                    | (8,302 | )                                     |        |      | (7,638 | )      |        |      | (16,959 | )      |        |   | (17,027 | )      |        |   | (13,707 | )     
|Interest and other income (expense), net    |                                              |                                    | 4,106  |                                       |        |      | 1,232  |        |        |      | 4,158   |        |        |   | 378     |        |        |   | (1,922  | )     
|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|Loss before income tax provision (benefit)  |                                              |                                    | (4,196 | )                                     |        |      | (6,406 | )      |        |      | (12,801 | )      |        |   | (16,649 | )      |        |   | (15,629 | )     
|Income tax provision (benefit)              |                                              |                                    | 151    |                                       |        |      | 258    |        |        |      | 500     |        |        |   | 81      |        |        |   | (98     | )     
|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net loss                                    |                                              | $                                  | (4,347 | )                                     |        | $    | (6,664 | )      |        | $    | (13,301 | )      |        | $ | (16,730 | )      |        | $ | (15,531 | )     
|                                            |                                              |                                    |        |                                       |        |      |        |        |        |      |         |        |        |   |         |        |        |   |         |        |       
|Basic and diluted net loss per share        |                                              | $                                  | (3.15  | )                                     |        | $    | (4.19  | )      |        | $    | (8.18   | )      |        | $ | (9.18   | )      |        | $ | (4.50   | )     
|Shares used in per share computation        |                                              |                                    | 1,377  |                                       |        |      | 1,589  |        |        |      | 1,626   |        |        |   | 1,822   |        |        |   | 3,455   |       

|                                                  |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |   |  |   |        | 
|------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | - |  | - | ------ | 
|                                                  |  | December 31,  
|                                                  |  |               
|                                                  |  | 1998           |        | 1999 |  | 2000 |        | 2001 |  | 2002
|                                                  |  |                |        |      |  |      |        |      |  |     
|                                                  |  | (in thousands)
|Consolidated Balance Sheet Data:                  |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |   |  |   |        | 
|Cash, cash equivalents and short-term investments |  | $              | 23,862 |      |  | $    | 30,786 |      |  | $    | 18,798 |  |  | $ | 5,509  |   |  | $ | 11,735 | 
|Working capital (deficit)                         |  |                | 20,834 |      |  |      | 25,042 |      |  |      | 10,887 |  |  |   | (488   | ) |  |   | 7,057  | 
|Total assets                                      |  |                | 40,334 |      |  |      | 51,638 |      |  |      | 39,215 |  |  |   | 32,502 |   |  |   | 31,987 | 
|Equipment
loans  noncurrent portion              |  |                |       |      |  |      | 3,471  |      |  |      | 3,077  |  |  |   | 1,806  |   |  |   | 1,093  | 
|Stockholders equity                              |  | $              | 23,457 |      |  | $    | 19,646 |      |  | $    | 6,222  |  |  | $ | 4,714  |   |  | $ | 12,056 | 

20



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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
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.

Overview

We believe that Lynx Therapeutics, Inc. is a leader in the development and
application of novel genomics analysis solutions that provide comprehensive and
quantitative digital gene expression information important to modern systems
biology research in the pharmaceutical, biotechnology and agricultural
industries. These solutions are based on Megaclone and Massively Parallel
Signature Sequencing, or MPSS, Lynxs unique and proprietary cloning and
sequencing technologies. Gene expression refers to the number of genes and the
extent a cell or tissue expresses those genes, and represents 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. Systems biology is an
approach in which researchers seek to gain a complete molecular understanding
of biological systems in health and disease.

We have incurred net losses each year since our inception in 1992. As of
December 31, 2002, we had an accumulated deficit of approximately $98.9
million. Net losses may continue for at least the next several years. The size
of these losses will depend on the rate of growth, if any, in our revenues and
on the level of our expenses.

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, customers and licensees. For the year ended December 31, 2002,
revenues from DuPont, Takara, Geron Corporation, Bayer CropScience and BASF
accounted for 32%, 16%, 15%, 14% and 11%, respectively, of our total revenues.
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 Bayer CropScience accounted for 51%, 29% and
11%, respectively, of our 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
fees 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, customers and licensees.
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 and process improvement efforts.
Research and development expenses may increase due to spending for ongoing
technology development and implementation, as well as new applications,
primarily for MPSS. 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. General and administrative expenses may increase
in support of our research and development, commercial and business development
efforts.

We account for our investment in Axaron Bioscience AG, a company owned
primarily by BASF AG and us, using 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. For the year ended December 31, 2002, our pro-rata
share of Axarons losses was approximately $2.5 million.

As of December 31, 2002, we employed 128 full-time employees, of which 109
were engaged in production and research and development activities. In January
2003, we announced a reduction of approximately 25% of our total

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workforce, or 32 people. The groups affected primarily by this action included
research and development personnel based at Lynx GmbH in Germany and our
proteomics group in California. The workforce reduction was intended to further
focus our financial and human resources on expanding the commercial use of
MPSS.

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 technology assets, the sale of proprietary
instruments and 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 that no other obligations,
refunds or credits to be applied to future work exist. Revenues from the sale
of technology assets are recognized upon the transfer of the assets to the
purchaser. Revenues from the sales of instruments and reagents are recognized
upon shipment to the customer.

Investments in Equity Securities

As of December 31, 2002, we held an approximate 40% equity interest in
Axaron Bioscience 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.

Results of Operations

Years Ended December 31, 2002 and 2001

Revenues

We had total revenues of $17.4 million for the year ended December 31,
2002, compared to $19.3 million for the year ended December 31, 2001. Revenues
for 2002 included technology access fees and service fees of $13.0 million,
license fees of $0.8 million from Axaron, a related party, and $3.6 million of
collaborative research and other revenue, primarily from the sale of certain of
Lynxs technology assets to Geron Corporation and the sale of MPSS instruments
to Takara. Revenues for 2001 included technology access fees and service fees
of $18.4 million, license fees of $0.5 million from Axaron, a related party,
and $0.4 million of collaborative research and other revenue. Our revenues have
historically fluctuated from quarter to quarter and year to year and may
continue to fluctuate in future periods due primarily to our service fees,
which are impacted principally by the timing and number of biological samples
received from existing customers and collaborators, as well as our performance
of

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related services on these samples. Additionally, the number, type and
timing of new collaborations and agreements and the related demand for, and
delivery of, our services or products will impact the level of future revenues.

Operating Costs and Expenses

Our total operating costs and expenses were $31.1 million for the year
ended December 31, 2002, compared to $36.3 million for the year ended December
31, 2001. Cost of services fees and other were $3.5 million for the year ended
December 31, 2002, compared to $4.1 million for the year ended December 31,
2001, and reflect the costs of providing our genomics discovery services and
the cost of the MPSS instruments sold to Takara. Research and development
expenses were $20.8 million in 2002 and $24.7 million in 2001. The decrease in
research and development expenses in 2002 reflects a decrease in materials
consumed in research and development efforts and lower personnel expenses,
primarily resulting from the workforce reduction that occurred in the second
quarter of 2002. Our efforts in 2002 were directed primarily toward the
expansion of the commercial applications of, and process improvements for, our
genomics technologies and the continued development of our proteomics
technology. Research and development expenses may increase due to planned
spending for ongoing technology development and implementation, as well as new
applications, primarily for MPSS.

Lynxs research and development expenses of $20.8 million for 2002 were
comprised of $4.4 million in research expenses related primarily to internal
discovery projects and $16.4 million in development expenses, including $0.9
million for the Megatype technology and $1.6 million for the Protein ProFiler
technology.

In April 2002, we discontinued our development effort on Megatype, a
technology that was being developed to permit the comparison of collected
genomes of two populations and enable the detection and recovery of DNA
fragments with the single nucleotide polymorphisms, or SNPs, that distinguish
these two populations. 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. In January 2003, we discontinued our development work on our
proteomics technology, Protein ProFiler, which was intended 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. The primary reason for discontinuing our
development efforts on both Megatype and Protein ProFiler was to focus our
financial and human resources on expanding the commercial use of MPSS, which we
believe will have the greatest commercial value to us.

We anticipate that our research and development efforts in the future will
be directed primarily toward the expansion of the commercial applications of,
and process improvements for, our genomics technologies, principally MPSS.
These technologies assume that information about gene 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 costs of such efforts.

General and administrative expenses were $6.3 million for the year ended
December 31, 2002, compared to $7.5 million for the year ended December 31,
2001. The decrease in general and administrative expenses from the 2001 period
to the 2002 period reflects lower personnel expenses and lower outside service
costs. The restructuring charge of $0.5 million in the year ended December 31,
2002, was comprised primarily of severance charges for former Lynx employees
who were part of Lynxs workforce reduction of approximately 30% of our
domestic workforce, or 45 people, in the second quarter of 2002.
The group affected primarily by this action was research and development
personnel in California. The workforce reduction was intended to focus our
financial and human resources on expanding the commercial use of MPSS. In
terms of compensation, benefits and employer taxes that would have been paid
to, and on behalf of, such former employees had they remained employed by Lynx,
we anticipate annualized cost savings of approximately $3.0 million. General
and administrative expenses may increase in support of our research and
development, commercial and business development efforts.

Interest and Other Income

Net interest expense was $0.3 million in the year ended December 31, 2002,
compared to $0.1 million for the year ended December 31, 2001. The 2002 net
interest expense reflects primarily increased expense incurred on
equipment-related debt outstanding in 2002 and a decrease in interest income
due to the decline in interest rates during 2002 as compared to the 2001
period. Other income was $0.9 million for the year ended December 31, 2002,
compared to $0.5 million for the year ended December 31, 2001. The 2002 other
income was related primarily to the

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gain on the sale of our equity investment in Inex Pharmaceuticals Corporation. In 2001, other income was due primarily
to a gain of $1.1 million from the receipt of shares of common stock from Inex,
as part of the proceeds related to the March 1998 sale of our former antisense
program, and a realized gain of $1.1 million from the sale of previously held
Inex shares, partially offset by an other-than-temporary write down in the
value of previously held Inex shares of $1.6 million.

Equity Share of Loss of Related Party

The equity share of loss of related party of $2.5 million for the year
ended December 31, 2002 reflects Lynxs pro-rata share of the net loss of
Axaron, a joint venture investee, for the same period. Lynxs pro-rata share
of Axarons losses was immaterial for 2001.

Income Taxes

Income tax benefit was $98,000 in the year ended December 31, 2002,
compared to the provision for income taxes of $81,000 for the year ended
December 31, 2001. The 2002 income tax benefit related primarily to a refund
received for federal alternative minimum taxes paid in prior periods, offset by
foreign withholding tax due on payments received from our licensee, Takara.
The 2001 income tax provision consisted entirely of foreign withholding tax on
a payment received from our licensee, Takara.

As of December 31, 2002, we had a federal net operating loss carryforward
of approximately $63.0 million, which will expire at various dates from 2010
through 2022, if not utilized. We had a state net operating loss carryforward
of approximately $2.0 million, which will expire in the years
2004 through 2012.

As of December 31, 2002, we also had federal and California research and
development and other tax credit carryforwards of approximately $2.7 million
and $2.6 million, respectively. The federal research and development credit
will expire at various dates from 2018 through 2021, if not utilized.

Utilization of our 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.

Subsequent Events

In January 2003, we announced a reduction of approximately 25% of our
workforce, or 32 people. The groups affected primarily by this
action include research and development personnel based at Lynx
Therapeutics GmbH in
Germany and in our proteomics group in California. The workforce reduction is
intended to further focus our financial and human resources on expanding the
commercial use of MPSS. We estimate the portion of the charge related to
severance payments to our former employees to be approximately $0.3 million and
will be recorded in the first quarter of 2003. In terms of compensation,
benefits and employer taxes that would have been paid to, and on
behalf of, such
former employees had they remained employed by Lynx, we anticipate annualized
cost savings of approximately $2.0 million.

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. The
increase in revenues from 2000 to 2001 was due primarily to higher service fees
from the greater number of biological samples received from and analyzed for
our customers and collaborators, including from new service agreements entered
into or activated during 2001. Revenues for 2001 included technology access
fees and service fees of $18.4 million, license fees of $0.5 million from
Axaron, a related party, and $0.4 million of collaborative research and other
revenue. 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, was
due

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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.

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

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.

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 for 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 for the year ended December 31, 2001, compared to $3.3
million for the year ended December 31, 2000. In 2001, other income was due
primarily to a gain of $1.1 million from the receipt of shares of common stock
from Inex, 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
Inex shares, partially offset by a $1.6 million write down in the value of
previously held Inex shares. In 2000, other income was due primarily to a gain
of $3.1 million from the receipt of shares of common stock from Inex, 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 our licensee, Takara.

Liquidity and Capital Resources

Cash and cash equivalents held at December 31, 2002 totaled $11.7 million.
Net cash used in operating activities was $16.2 million for the year ended
December 31, 2002, as compared to $15.4 million for fiscal year 2001. The
change between 2002 and 2001 was due primarily to a higher decrease in deferred
revenues and a decrease, rather than an increase, in accounts payable and other
liabilities during 2002 as compared to 2001, partially offset by a lower net
loss, excluding the impact of depreciation and amortization and the non-cash
gains and losses. The amount of net cash used in operating activities differed
from the 2002 net loss due primarily to decreases in deferred revenue and
accounts payable, offset partially by depreciation and amortization of fixed
assets and leasehold improvements, the net impact of certain non-cash gains and
losses and a decrease in inventory. Net cash used in operating activities was
$15.4 million for the year ended December 31, 2001, as compared to $9.0 million
for fiscal year 2000. The change between 2001 and 2000 was due primarily to a
higher decrease in deferred revenues, a lower decrease in accounts receivable
and a lower increase in accounts payable and other liabilities during 2001 as
compared to 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.

Net cash provided by investing activities of $1.4 million for the year
ended December 31, 2002 was due primarily to proceeds from the sale of equity
investments and repayment of notes receivable from employees, partially offset
by expenditures for capital equipment. Net cash used in investing activities
of $0.4 million for the year ended December 31, 2001, was due primarily to
expenditures for capital equipment and leasehold improvements and our
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 capital equipment and leasehold improvements,
partially offset by net maturities of short-term investments.

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Net cash provided by financing activities in 2002 of $23.3 million was due
primarily to the issuance of Lynx common stock in three private placements.
Net cash provided by financing activities in 2001 of $11.1 million was due
primarily to the issuance of Lynx common stock in two private placements. Net
cash provided by financing activities in 2000 of $1.1 million was due primarily
to the issuance of Lynx common stock from the exercise of employee stock
options.

In both September and December 2002, in connection with our collaboration
agreement with Takara, we issued and sold 291,545 shares of common stock, at a
purchase price of $3.43 per share, to Takara in private placements pursuant to
the terms and conditions of common stock purchase agreements.

In April 2002, we completed a private placement of common stock and
warrants to purchase common stock. The financing included the sale of 2.1
million newly issued shares of common stock, at a purchase price of $10.85 per
share, resulting in gross proceeds of $22.6 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 0.8 million shares of
common stock at an exercise price of $13.58 per share. Additionally, Lynx
issued a warrant to purchase up to an aggregate of 41,714 shares of common
stock at an exercise price of $10.85 per share to Friedman, Billings, Ramsey &
Co., Inc. (FBR), as partial consideration, in addition to other customary fees,
for services rendered by FBR as sole manager for the private equity financing.

In October 2001, in connection with our collaboration agreement with
Takara, we issued and sold 45,787 shares of common stock, at a purchase price
of $21.84 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 249,605 newly
issued shares of common stock, at a purchase price of $44.59 per share,
resulting in net proceeds of $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 62,399 shares of common stock
at an exercise price of $ 64.41 per share.

In October 2002, we entered into a loan and security agreement with a
financial institution, Comerica Bank-California, for an equipment line of
credit of up to $2.0 million with a draw-down period of one year. Under the
initial advance, we drew down $1.6 million in November 2002 related to the
purchase of equipment made in previous periods. Lynx granted Comerica
Bank-California a security interest in all items Lynx financed under this
agreement. The initial advance under the loan to finance the purchase of
equipment made in previous periods has a term of 24 months from the date of
advance and bears interest at a rate of 7.25%. Pursuant to the terms of the
agreement, we are required to maintain a minimum cash balance of unrestricted
cash and cash equivalents in an account at Comerica Bank-California of at least
$5.0 million until Comerica Bank-California receives payment in full of all
outstanding obligations, and there is a liquidity requirement that we have a
balance of unrestricted cash at each months end that is greater than our net
decrease in cash during the preceding four months. As of December 31, 2002, the
principal balance under loans outstanding under this agreement was $1.5
million. We believe that we are in compliance with all terms of the agreement.

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, 2002, the
principal balance under loans outstanding under this agreement was $1.8
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                   |  | $                | 3,039 |           |  | $                                | 8,225 |               |  | $              | 5,564 |  |  | $ |  |  |  | $ | 16,828 | 
|Equipment loans                    |  |                  | 2,250 |           |  |                                  | 1,093 |               |  |                |      |  |  |   |  |  |  |   | 3,343  | 
|                                   |  |                  |       |           |  |                                  |       |               |  |                |       |  |  |   |   |  |  |  
|Total contractual cash obligations |  | $                | 5,289 |           |  | $                                | 9,318 |               |  | $              | 5,564 |  |  | $ |  |  |  | $ | 20,171 | 
|                                   |  |                  |       |           |  |                                  |       |               |  |                |       |  |  |   |   |  |  |   |       



---

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

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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 2003 will be
less than $1.0 million and will be comprised primarily of equipment purchases
required in the normal course of business. 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, 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 further our technologies; our ability to generate revenues
through expanding existing collaborations, customer and licensee arrangements
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 commercial and research and development activities; 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
experienced operating losses since our inception of $98.9 million,
including a net loss of $15.5 million for the year ended December 31,
2002. Net losses may continue as Lynx proceeds with the
commercialization and additional development of our technologies. Our
cash and cash equivalents were $11.7 million at December 31, 2002. We
believe that our current cash and cash equivalents and funding
anticipated to be received from customers, collaborators and licensees
will enable us to maintain our operations through at least December
31, 2003. 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 may
seek additional financing, as needed, through arrangements with
customers, collaborators and licensees and equity or debt offerings.
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 are
unable to secure additional financing on reasonable terms, or are
unable to generate sufficient new sources of revenue through
arrangements with customers, collaborators and licensees, management
may be forced to take substantial restructuring actions, which may
include significantly reducing Lynx's anticipated level of
expenditures, the sale of some or all of our assets, or obtaining
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 Financial Accounting Standards Board (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 is prohibited. We adopted this statement during
the first quarter of fiscal 2002, and the adoption did not have a material
effect on our 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. We adopted
this statement during the first quarter of fiscal 2002, and the adoption did
not have a material effect on our 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. We adopted this
statement during the first quarter of fiscal 2002, and the adoption did not
have a material effect on our 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 31, 2001 (January 2002 for calendar year-end
companies) with transition provisions for certain matters. We adopted this
statement during the first quarter of fiscal 2002, and the adoption did not
have a material effect on our operating results or financial position.

In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (SFAS
146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including

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Certain Costs Incurred in a
Restructuring). SFAS 146 is effective for exit and disposal
activities initiated after December 31, 2002. We expect to adopt this
statement during the first quarter of fiscal 2003 and do not believe that SFAS
146 will have a material effect on our operating results or financial position.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Others. FIN No. 45 clarifies the guarantors requirements
relating to the guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees and requires the guarantor to recognize at the
inception of a guarantee a liability for the fair value of the guarantee
obligation. The provisions for the initial recognition and measurement of
guarantees are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002. The accounting profession and regulatory
agencies continue to discuss various provisions of this pronouncement with the
objective of providing additional guidance on its application. These
discussions and the issuance of any new interpretations, once finalized, could
lead to an unanticipated impact on our future financial results. Therefore,
although we currently do not believe these provisions will have a material
effect on our operating results or financial position, we will continue to
evaluate the impact of FIN 45.

In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148, Accounting for Stock-Based CompensationTransition and
Disclosurean amendment of FASB Statement No. 123
(SFAS 148). SFAS 148 amends
FASB Statement No. 123, Accounting for Stock-Based Compensation
(SFAS 123), to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require expanded and
more prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. While SFAS 148 does not amend
SFAS 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of SFAS 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of
SFAS 123 or the
intrinsic value method of APB 25. Since we account for our stock-based
compensation under APB 25, and have no current plans to
switch to SFAS 123,
the impact of SFAS 148 will be limited to the interim reporting of the effects
on net loss and loss per share if we accounted for stock-based
compensation under SFAS 123. SFAS 148 is effective for fiscal years ending
after December 15, 2002.




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.

Foreign Currency Rate Fluctuations

The functional currency for our German subsidiary is the Euro. Our German
subsidiarys accounts are translated from the Euro 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 primarily in Euros. 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.Consolidated Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

|                                                                                                     |  |      |    | 
|---------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                     |  | Page
|                                                                                                     |  |     
|Report of Ernst & Young LLP, Independent Auditors                                                    |  |      | 30 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                         |  |      | 31 | 
|Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000           |  |      | 32 | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2002, 2001 and 2000 |  |      | 33 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  |      | 34 | 
|Notes to Consolidated Financial Statements                                                           |  |      | 35 | 

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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, 2002 and 2001, and the related
consolidated statements of operations, stockholders equity and cash flows for
each of the three years in the period ended December 31, 2002. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Lynx Therapeutics, Inc. at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

|                                       |  |                         |  | 
|-------------------------------------- |  | ----------------------- |  | 
|                                       |  | /s/   Ernst & Young LLP
|                                       |  |                         |  | 
|Palo Alto, California
February 7, 2003 |  |                         |  | 

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LYNX THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |         |       |  |       | 
|------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------ | -------------------------- | ----- | ------------ | ------ | ------- | ----- |  | ----- | 
|                                      |                                                                                                                                                                |                                   |        |                            |       | December 31,
|                                      |                                                                                                                                                                |                                   |        |                            |       |             
|                                      |                                                                                                                                                                |                                   |        |                            |       | 2002         |        | 2001   
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|Assets                                |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|Current assets:                       |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      | Cash and cash equivalents                                                                                                                                      |                                   | $      | 11,735                     |       |              | $      | 3,199   |      
|                                      | Short-term investments                                                                                                                                         |                                   |        |                           |       |              |        | 2,310   |      
|                                      | Accounts receivable                                                                                                                                            |                                   |        | 836                        |       |              |        | 1,152   |      
|                                      | Inventory                                                                                                                                                      |                                   |        | 1,030                      |       |              |        | 1,718   |      
|                                      | Other current assets                                                                                                                                           |                                   |        | 714                        |       |              |        | 897     |      
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      |                                                                                                                                                                |                                   |        | Total current assets       |       |              | 14,315 |         |       |  | 9,276 | 
|Property and equipment:               |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      | Leasehold improvements                                                                                                                                         |                                   |        | 12,238                     |       |              |        | 12,225  |      
|                                      | Laboratory and other equipment                                                                                                                                 |                                   |        | 22,972                     |       |              |        | 20,284  |      
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      |                                                                                                                                                                |                                   | 35,210 |                            |       |              | 32,509 |        
|                                      | Less accumulated depreciation and amortization                                                                                                                 |                                   |        | (19,640                    | )     |              |        | (14,283 | )    
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|Net property and equipment            |                                                                                                                                                                |                                   | 15,570 |                            |       |              | 18,226 |        
|Investment in related party           |                                                                                                                                                                |                                   | 1,930  |                            |       |              | 4,452  |        
|Other non-current assets              |                                                                                                                                                                |                                   | 172    |                            |       |              | 548    |        
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      |                                                                                                                                                                | $                                 | 31,987 |                            |       | $            | 32,502 |        
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |         |      
|Liabilities and Stockholders Equity  |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|Current liabilities:                  |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      | Accounts payable                                                                                                                                               |                                   | $      | 962                        |       |              | $      | 2,037   |      
|                                      | Accrued compensation                                                                                                                                           |                                   |        | 516                        |       |              |        | 694     |      
|                                      | Deferred revenues                                                                                                                                              |                                   |        | 2,926                      |       |              |        | 5,259   |      
|                                      |                                                                                                                                                                | Equipment loans  current portion |        |                            | 2,250 |              |        |         | 1,445 | 
|                                      | Other accrued liabilities                                                                                                                                      |                                   |        | 604                        |       |              |        | 329     |      
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      |                                                                                                                                                                |                                   |        | Total current liabilities  |       |              | 7,258  |         |       |  | 9,764 | 
|Deferred revenues                     |                                                                                                                                                                |                                   | 10,634 |                            |       |              | 15,115 |        
|Equipment loans, less current portion |                                                                                                                                                                |                                   | 1,093  |                            |       |              | 1,806  |        
|Other non-current liabilities         |                                                                                                                                                                |                                   | 946    |                            |       |              | 1,103  |        
|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; 4,646,784 and 1,973,957 shares issued and outstanding at December 31, 2002 and 2001, respectively |                                   |        | 110,978                    |       |              |        | 87,951  |      
|                                      | Notes receivable from stockholders                                                                                                                             |                                   |        |                           |       |              |        | (250    | )    
|                                      | Deferred compensation                                                                                                                                          |                                   |        | (9                         | )     |              |        | (744    | )    
|                                      | Accumulated other comprehensive income                                                                                                                         |                                   |        |                           |       |              |        | 1,139   |      
|                                      | Accumulated deficit                                                                                                                                            |                                   |        | (98,913                    | )     |              |        | (83,382 | )    
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      |                                                                                                                                                                |                                   |        | Total stockholders equity |       |              | 12,056 |         |       |  | 4,714 | 
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |        
|                                      |                                                                                                                                                                | $                                 | 31,987 |                            |       | $            | 32,502 |        
|                                      |                                                                                                                                                                |                                   |        |                            |       |              |        |         |      

See accompanying notes.

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LYNX THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)


|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |        |        | 
|------------------------------------- | -------------------------------------------- | ---------------------------------- | ------- | ----------------------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                      |                                              |                                    |         | Year Ended December 31,
|                                      |                                              |                                    |         |                        
|                                      |                                              |                                    |         | 2002                    |        | 2001 |         | 2000  
|                                      |                                              |                                    |         |                         |        |      |         |       
|Revenues:                             |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|                                      | Technology access and services fees          |                                    | $       | 13,026                  |        |      | $       | 18,372 |        |   | $       | 12,389 |       
|                                      | License fee from related party               |                                    |         | 759                     |        |      |         | 453    |        |   |         |       |       
|                                      | Collaborative research and other             |                                    |         | 3,621                   |        |      |         | 429    |        |   |         | 235    |       
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|                                      |                                              | Total revenues                     |         |                         | 17,406 |      |         |        | 19,254 |   |         |        | 12,624 | 
|Operating costs and expenses:         |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|                                      | Cost of services fees and other              |                                    |         | 3,499                   |        |      |         | 4,118  |        |   |         | 3,652  |       
|                                      | Research and development                     |                                    |         | 20,813                  |        |      |         | 24,660 |        |   |         | 19,761 |       
|                                      | General and administrative                   |                                    |         | 6,271                   |        |      |         | 7,503  |        |   |         | 6,170  |       
|                                      | Restructuring charge for workforce reduction |                                    |         | 530                     |        |      |         |       |        |   |         |       |       
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|                                      |                                              | Total operating costs and expenses |         |                         | 31,113 |      |         |        | 36,281 |   |         |        | 29,583 | 
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|Loss from operations                  |                                              |                                    | (13,707 | )                       |        |      | (17,027 | )      |        |   | (16,959 | )     
|Equity share of loss of related party |                                              |                                    | (2,522  | )                       |        |      |        |        |        |   |        |       
|Interest income (expense), net        |                                              |                                    | (282    | )                       |        |      | (86     | )      |        |   | 900     |       
|Other income                          |                                              |                                    | 882     |                         |        |      | 464     |        |        |   | 3,258   |       
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|Loss before income taxes              |                                              |                                    | (15,629 | )                       |        |      | (16,649 | )      |        |   | (12,801 | )     
|Income tax provision (benefit)        |                                              |                                    | (98     | )                       |        |      | 81      |        |        |   | 500     |       
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|Net loss                              |                                              | $                                  | (15,531 | )                       |        | $    | (16,730 | )      |        | $ | (13,301 | )     
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share  |                                              | $                                  | (4.50   | )                       |        | $    | (9.18   | )      |        | $ | (8.18   | )     
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       
|Shares used in per share computation  |                                              |                                    | 3,455   |                         |        |      | 1,822   |        |        |   | 1,626   |       
|                                      |                                              |                                    |         |                         |        |      |         |        |        |   |         |       

See accompanying notes.

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LYNX THERAPEUTICS, INC.

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

|                                                                                                |                                   |                                                              |           |              |   |                     |         |              |   |                               |      |               |   |                    |        |        |     |   |        |        |   |   |         |         |   |   |         |         |     | 
|----------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------------ | --------- | ------------ | - | ------------------- | ------- | ------------ | - | ----------------------------- | ---- | ------------- | - | ------------------ | ------ | ------ | --- | - | ------ | ------ | - | - | ------- | ------- | - | - | ------- | ------- | --- | 
|                                                                                                |                                   |                                                              |           | Common
Stock |   | NotesReceivablefrom |         | Deferred     |   | AccumulatedOtherComprehensive |      | Accumulated   |   | TotalStockholders
|                                                                                                |                                   |                                                              |           | Shares       |   | Amount              |         | Stockholders |   | Compensation                  |      | Income (Loss) |   | Deficit            |        | Equity
|                                                                                                |                                   |                                                              |           |              |   |                     |         |              |   |                               |      |               |   |                    |        |       
|Balance at January 1, 2000                                                                      |                                   |                                                              | 1,602,342 |              |   | $                   | 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                                                                        |                                   |                                                              | 4,228     |              |   |                     |        |              |   |                               |     |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   |        |        
|Employee stock purchase plan issuance                                                           |                                   |                                                              | 2,298     |              |   |                     | 288     |              |   |                               |     |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | 288     |        
|Exercise of stock options for cash and
repayment of note receivable                             |                                   |                                                              | 25,449    |              |   |                     | 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                                                                    |                                   |                                                              | 1,634,317 |              |   |                     | 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                                                           |                                   |                                                              | 5,665     |              |   |                     | 314     |              |   |                               |     |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | 314     |        
|Exercise of stock options for cash and
repayment of note receivable                             |                                   |                                                              | 31,122    |              |   |                     | 458     |              |   |                               | 13   |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | 471     |        
|Issuance of common stock in connection
with private placements, net of issuance costs of $619   |                                   |                                                              | 295,392   |              |   |                     | 11,511  |              |   |                               |     |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | 11,511  |        
|Amortization of deferred compensation,
including forfeitures                                    |                                   |                                                              |          |              |   |                     | (183    | )            |   |                               |     |               |   |                    | 813    |        |     |   |       |        |   |   |        |         |   |   | 630     |        
|                                                                                                |                                   |                                                              |           |              |   |                     |         |              |   |                               |      |               |   |                    |        |        |     |   |        |        |   |   |         |         |   |   |         |        
|Balance at December 31, 2001                                                                    |                                   |                                                              | 1,966,496 |              |   |                     | 87,951  |              |   |                               | (250 | )             |   |                    | (744   | )      |     |   | 1,139  |        |   |   | (83,382 | )       |   |   | 4,714   |        
|Comprehensive loss:                                                                             |                                   |                                                              |           |              |   |                     |         |              |   |                               |      |               |   |                    |        |        |     |   |        |        |   |   |         |         |   |   |         |        
|                                                                                                | Net loss                          |                                                              |           |             |   |                     |         |             |   |                               |      |              |   |                    |        |       |     |   |        |       |   |   |         | (15,531 | ) |   |         | (15,531 | )  
|                                                                                                | Net unrealized loss on securities |                                                              |           |             |   |                     |         |             |   |                               |      |              |   |                    |        |       |     |   |        | (1,139 | ) |   |         |        |   |   |         | (1,139  | )  
|                                                                                                |                                   |                                                              |           |              |   |                     |         |              |   |                               |      |               |   |                    |        |        |     |   |        |        |   |   |         |         |   |   |         |        
|Comprehensive loss                                                                              |                                   |                                                              |          |              |   |                     |        |              |   |                               |     |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | (16,670 | )      
|Employee stock purchase plan issuance                                                           |                                   |                                                              | 10,489    |              |   |                     | 143     |              |   |                               |     |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | 143     |        
|Exercise of stock options for cash and
repayment of note receivable                             |                                   |                                                              | 1,011     |              |   |                     | 3       |              |   |                               | 250  |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | 253     |        
|Issuance of common stock in connection
with private placements, net of issuance costs of
$1,700 |                                   |                                                              | 2,668,788 |              |   |                     | 23,075  |              |   |                               |     |               |   |                    |       |        |     |   |       |        |   |   |        |         |   |   | 23,075  |        
|Amortization of deferred compensation,
including forfeitures                                    |                                   |                                                              |          |              |   |                     | (194    | )            |   |                               |     |               |   |                    | 735    |        |     |   |       |        |   |   |        |         |   |   | 541     |        
|                                                                                                |                                   |                                                              |           |              |   |                     |         |              |   |                               |      |               |   |                    |        |        |     |   |        |        |   |   |         |         |   |   |         |        
|Balance at December 31, 2002                                                                    |                                   |                                                              | 4,646,784 |              |   | $                   | 110,978 |              |   | $                             |     |               |   | $                  | (9     | )      |     | $ |       |        |   | $ | (98,913 | )       |   | $ | 12,056  |        
|                                                                                                |                                   |                                                              |           |              |   |                     |         |              |   |                               |      |               |   |                    |        |        |     |   |        |        |   |   |         |         |   |   |         |        

See accompanying notes.

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LYNX THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |        |   | 
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------- |  | ----------------------- |  | ---- | ------- | ------ | ------ | - | ------- | ------ | - | - | ------- | ------ | - | 
|                                                                                          |                                                                          |                                                         |  | Year Ended December 31,
|                                                                                          |                                                                          |                                                         |  |                        
|                                                                                          |                                                                          |                                                         |  | 2002                    |  | 2001 |         | 2000  
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |       
|Cash flows from operating activities                                                      |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Net loss                                                                                  |                                                                          |                                                         |  |                         |  | $    | (15,531 | )      |        | $ | (16,730 | )      |   | $ | (13,301 | )     
|Adjustments to reconcile net loss to net
cash provided by (used in) operating activities: |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|                                                                                          | Depreciation and amortization of fixed
assets and leasehold improvements |                                                         |  |                         |  |      |         | 5,357  |        |   |         | 5,020  |   |   |         | 3,769  |  
|                                                                                          | Issuance of stock options to non-employees
in exchange for services      |                                                         |  |                         |  |      |         |       |        |   |         |       |   |   |         | 114    |  
|                                                                                          | Amortization of deferred compensation                                    |                                                         |  |                         |  |      |         | 541    |        |   |         | 630    |   |   |         | 887    |  
|                                                                                          | Forgiveness of principal and interest on loans                           |                                                         |  |                         |  |      |         | 181    |        |   |         | 224    |   |   |         | 55     |  
|                                                                                          | Pro-rata share of net loss of related party                              |                                                         |  |                         |  |      |         | 2,522  |        |   |         |       |   |   |         |       |  
|                                                                                          | Gain on sale of antisense business                                       |                                                         |  |                         |  |      |         | (1,009 | )      |   |         | (2,113 | ) |   |         | (3,119 | )
|                                                                                          |                                                                          | Non-cash portion of gain from sale of technology assets |  |                         |  |      |         |        | (1,586 | ) |         |        |  |   |         |        |  | 
|                                                                                          | Loss on sale of equity investment                                        |                                                         |  |                         |  |      |         | 64     |        |   |         |       |   |   |         |       |  
|                                                                                          | Loss on write down of equity investment                                  |                                                         |  |                         |  |      |         |       |        |   |         | 1,605  |   |   |         |       |  
|Changes in operating assets and liabilities                                               |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Accounts receivable                                                                       |                                                                          |                                                         |  |                         |  |      | 316     |        |        |   | 387     |        |   |   | 2,506   |       
|Inventory                                                                                 |                                                                          |                                                         |  |                         |  |      | 688     |        |        |   | 150     |        |   |   |        |       
|Other current assets                                                                      |                                                                          |                                                         |  |                         |  |      | 183     |        |        |   | (495    | )      |   |   | (891    | )     
|Accounts payable                                                                          |                                                                          |                                                         |  |                         |  |      | (1,075  | )      |        |   | 397     |        |   |   | 1,000   |       
|Accrued liabilities                                                                       |                                                                          |                                                         |  |                         |  |      | 97      |        |        |   | (519    | )      |   |   | 396     |       
|Deferred revenues                                                                         |                                                                          |                                                         |  |                         |  |      | (6,814  | )      |        |   | (4,312  | )      |   |   | (648    | )     
|Other non-current liabilities                                                             |                                                                          |                                                         |  |                         |  |      | (157    | )      |        |   | 374     |        |   |   | 272     |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Net cash provided by (used in) operating activities                                       |                                                                          |                                                         |  |                         |  |      | (16,223 | )      |        |   | (15,382 | )      |   |   | (8,960  | )     
|Cash flows from investing activities                                                      |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Purchases of short-term investments                                                       |                                                                          |                                                         |  |                         |  |      | (3,261  | )      |        |   | (3,808  | )      |   |   | (8,097  | )     
|Maturities of short-term investments                                                      |                                                                          |                                                         |  |                         |  |      | 3,261   |        |        |   | 12,153  |        |   |   | 12,543  |       
|Proceeds from sale of equity securities                                                   |                                                                          |                                                         |  |                         |  |      | 3,702   |        |        |   | 3,072   |        |   |   |        |       
|Leasehold improvements and equipment
purchases, net of retirements and sale to licensee   |                                                                          |                                                         |  |                         |  |      | (2,701  | )      |        |   | (7,427  | )      |   |   | (6,710  | )     
|Payments received on notes receivable from officers and
employees                         |                                                                          |                                                         |  |                         |  |      | 456     |        |        |   | 70      |        |   |   | 1       |       
|Investment in related party                                                               |                                                                          |                                                         |  |                         |  |      |        |        |        |   | (4,452  | )      |   |   |        |       
|Other assets                                                                              |                                                                          |                                                         |  |                         |  |      | (11     | )      |        |   | (40     | )      |   |   | (64     | )     
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Net cash provided by (used in ) investing activities                                      |                                                                          |                                                         |  |                         |  |      | 1,446   |        |        |   | (432    | )      |   |   | (2,327  | )     
|Cash flows from financing activities                                                      |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Issuance of common stock, net of repurchases                                              |                                                                          |                                                         |  |                         |  |      | 23,221  |        |        |   | 12,283  |        |   |   | 1,131   |       
|Proceeds from equipment loan                                                              |                                                                          |                                                         |  |                         |  |      | 1,588   |        |        |   |        |        |   |   | 950     |       
|Repayment of equipment loan                                                               |                                                                          |                                                         |  |                         |  |      | (1,496  | )      |        |   | (1,145  | )      |   |   | (969    | )     
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Net cash provided by financing activities                                                 |                                                                          |                                                         |  |                         |  |      | 23,313  |        |        |   | 11,138  |        |   |   | 1,112   |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Net increase (decrease) in cash and cash equivalents                                      |                                                                          |                                                         |  |                         |  |      | 8,536   |        |        |   | (4,676  | )      |   |   | (10,175 | )     
|Cash and cash equivalents at beginning of year                                            |                                                                          |                                                         |  |                         |  |      | 3,199   |        |        |   | 7,875   |        |   |   | 18,050  |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Cash and cash equivalents at end of year                                                  |                                                                          |                                                         |  |                         |  | $    | 11,735  |        |        | $ | 3,199   |        |   | $ | 7,875   |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Supplemental disclosures of cash flow
information                                         |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Income taxes paid                                                                         |                                                                          |                                                         |  |                         |  | $    |        |        |        | $ |        |        |   | $ | 110     |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Interest paid                                                                             |                                                                          |                                                         |  |                         |  | $    | 308     |        |        | $ | 399     |        |   | $ | 128     |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Inex stock received                                                                       |                                                                          |                                                         |  |                         |  | $    |        |        |        | $ | 1,060   |        |   | $ | 3,119   |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       
|Geron stock received                                                                      |                                                                          |                                                         |  |                         |  | $    | 1,586   |        |        | $ |        |        |   | $ |        |       
|                                                                                          |                                                                          |                                                         |  |                         |  |      |         |        |        |   |         |        |   |   |         |       

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 genomics analysis solutions
that provide comprehensive and quantitative digital gene expression information
important to modern systems biology research in the pharmaceutical,
biotechnology and agricultural industries. These solutions are based on
Megaclone and Massively Parallel Signature Sequencing, or MPSS, Lynxs unique
and proprietary cloning and sequencing technologies. Gene expression refers to
the number of genes and the extent a cell or tissue expresses those genes, and
represents 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. Systems biology is an approach in which researchers seek to gain a
complete molecular understanding of biological systems in health and disease.

The Companys consolidated financial statements have been presented on a
basis that contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has experienced
operating losses since its inception of $98.9 million, including a net loss of
$15.5 million for the year ended December 31, 2002. Net losses may continue as
Lynx proceeds with the commercialization and additional development of its
technologies. The Companys cash and cash equivalents were $11.7 million at
December 31, 2002. Management believes that Lynxs current cash and cash
equivalents and funding anticipated to be received from customers,
collaborators and licensees will be sufficient to enable the Company to meet
its projected operating and capital requirements through at least December 31,
2003. Additionally, Lynx may seek additional financing, as needed, through
arrangements with customers, collaborators and licensees and equity or debt
offerings. There can be no assurance that additional financing, if required,
will be available on satisfactory terms or at all. If the Company is unable to
secure additional financing on
reasonable terms, or is unable to generate sufficient new sources of
revenue through arrangements with customers, collaborators and licensees,
management may be forced to take substantial restructuring actions, which may
include significantly reducing the Company's anticipated level of
expenditures, the
sale of some or all of the Companys assets, or obtaining funds
by entering into financing or collaborative agreements on
unattractive terms, or it will not be able to fund operations.

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.

In
January 2003, Lynx received stockholder approval for, and effected, a
reverse stock split of the Company's common stock at a ratio of 1-for-7 (the reverse
stock split). As a result of the reverse stock split, each outstanding share
of common stock automatically converted into one-seventh of a share of common
stock, with the par value of each share of common stock remaining at one cent
($.01) per share. Accordingly, common stock share and per share amounts for
all periods presented have been adjusted to reflect the impact of the reverse
stock split.

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, 2002 and 2001 were immaterial.

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Concentration of Credit Risk

Financial instruments that potentially subject Lynx to concentration of
credit risk consist principally of cash equivalents, short-term investments and
trade receivables. 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.

Pharmaceutical companies and other research institutions account for a
substantial portion of the Companys trade receivables. The Company provides
credit in the normal course of business to its customers and collateral for
these receivables is generally not required. The Company monitors the
creditworthiness of its customers to which it grants credit terms in the normal
course of business. The Company has not experienced significant credit losses
to date.

Lynx depends on a single supplier to manufacture flow cells used in its
MPSS technology. Lynx currently purchases the flow cells from a single
supplier, although the flow cells are potentially available from multiple
suppliers. While Lynx believes that alternative suppliers for flow cells exist,
identifying and qualifying new suppliers could be an expensive and
time-consuming process. Lynxs 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.

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.

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, 2002 and 2001, 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 component of accumulated other comprehensive income. If a decline in the fair
value of a short-term investment 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 investment 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 investments 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, 2002 and 2001
were classified as raw materials and consisted primarily of reagents and other
chemicals utilized while performing genomics discovery services. Inventory is
charged to cost of services fees and other as consumed.

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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 are 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. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), 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 fees have generally resulted from upfront payments from
collaborators, customers and licensees who are provided access to Lynxs
technologies for specified periods. Lynx receives service fees from
collaborators and customers for genomics discovery services performed by the
Company 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 technology assets, the sale of
proprietary instruments and 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 that no other obligations,
refunds or credits to be applied to future work exist. Revenues from the sale
of technology assets are recognized upon the transfer of the assets to the
purchaser. Revenues from the sales of instruments and reagents are recognized
upon shipment to the customer.

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

|                                        |  |                         |    |      |  |      |    |   |  |  |    |  
|--------------------------------------- |  | ----------------------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                        |  | Year Ended December 31,
|                                        |  |                        
|                                        |  | 2002                    |    | 2001 |  | 2000
|                                        |  |                         |    |      |  |     
|E.I. DuPont de Nemours and Company      |  |                         | 32 | %    |  |      | 37 | % |  |  | 51 | %
|Takara Bio Inc.                         |  |                         | 16 | %    |  |      | 12 | % |  |  | 4  | %
|Geron Corporation                       |  |                         | 15 | %    |  |      |   |   |  |  |   |  
|Bayer CropScience                       |  |                         | 14 | %    |  |      | 4  | % |  |  | 11 | %
|BASF AG                                 |  |                         | 11 | %    |  |      | 24 | % |  |  | 29 | %
|Institute of Molecular and Cell Biology |  |                         |   |      |  |      | 12 | % |  |  | 2  | %

Net Loss Per Share

Basic and diluted net loss per share have been computed using the
weighted-average number of shares of common stock outstanding during the
period, less shares subject to repurchase. Basic and diluted net loss per share
amounts are the same in each year 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):

|                                                              |  |                         |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                              |  | Year Ended December 31,
|                                                              |  |                        
|                                                              |  | 2002                    |         | 2001 |  | 2000
|                                                              |  |                         |         |      |  |     
|Net loss                                                      |  | $                       | (15,531 | )    |  | $    | (16,730 | ) |  | $ | (13,301 | )
|                                                              |  |                         |         |      |  |      |         |   |  |   |         |  
|Basic and diluted:                                            |  |                         |         |      |  |      |         |   |  |   |         |  
|Weighted-average shares of common stock outstanding           |  |                         | 3,455   |      |  |      | 1,823   |   |  |   | 1,629   |  
|Less weighted-average shares subject to repurchase            |  |                         |        |      |  |      | (1      | ) |  |   | (3      | )
|                                                              |  |                         |         |      |  |      |         |   |  |   |         |  
|Shares used in computing basic and diluted net
loss per share |  |                         | 3,455   |      |  |      | 1,822   |   |  |   | 1,626   |  
|Basic and diluted net loss per share                          |  | $                       | (4.50   | )    |  | $    | (9.18   | ) |  | $ | (8.18   | )
|                                                              |  |                         |         |      |  |      |         |   |  |   |         |  

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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 are
approximately 1,338,000, 443,000 and 348,000 shares related to options and
warrants to purchase common stock at December 31, 2002, 2001 and 2000,
respectively, prior to the application of the treasury stock method. Such
shares have been excluded because they are anti-dilutive for all periods
presented.

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 SFAS
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 years ended December 31, 2002 and 2001, and $114,000 for the year ended
December 31, 2000.

Pro forma information regarding net loss and net loss per share required
by Statement of Financial Accounting Standard No. 123, Accounting for
Stock-based Compensation (SFAS 123), as amended by SFAS 148, is presented below
and has been determined as if the Company had accounted for awards under its
stock option and employee stock purchase plans using the fair value method:

|                                                                                               |  |                                          |         |      |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                               |  |                                         
|                                                                                               |  | Year Ended December 31,                 
|                                                                                               |  |                                         
|                                                                                               |  | 2002                                     |         | 2001 |  | 2000
|                                                                                               |  |                                          |         |      |  |     
|                                                                                               |  | (in thousands, except per share amounts)
|Net loss, as reported                                                                          |  | $                                        | (15,531 | )    |  | $    | (16,730 | ) |  | $ | (13,301 | )
|Stock-based employee compensation, net of taxes,
as reported                                   |  |                                          | 541     |      |  |      | 630     |   |  |   | 887     |  
|Stock based employee compensation, net of taxes,
as if fair value method applied to all awards |  | $                                        | (4,765  | )    |  | $    | (5,976  | ) |  | $ | (3,538  | )
|                                                                                               |  |                                          |         |      |  |      |         |   |  |   |        
|Net loss, pro forma as if fair value method
applied to all awards                              |  | $                                        | (19,755 | )    |  | $    | (22,076 | ) |  | $ | (15,952 | )
|                                                                                               |  |                                          |         |      |  |      |         |   |  |   |        
|Basic and diluted net loss per share, as reported                                              |  | $                                        | (4.50   | )    |  | $    | (9.18   | ) |  | $ | (8.18   | )
|                                                                                               |  |                                          |         |      |  |      |         |   |  |   |        
|Basic and diluted net loss per share, pro forma
as if fair value method applied to all awards  |  | $                                        | (5.72   | )    |  | $    | (12.12  | ) |  | $ | (9.81   | )
|                                                                                               |  |                                          |         |      |  |      |         |   |  |   |        

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):

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|              |                |   |                         |       |      |   |                |       |  |   |        |       | 
|------------- | -------------- | - | ----------------------- | ----- | ---- | - | -------------- | ----- |  | - | ------ | ----- | 
|              |                |   | Year Ended December 31,
|              |                |   |                        
|              |                |   | 2002                    |       | 2001 |   | 2000          
|              |                |   |                         |       |      |   |               
|              |                |   |                         |       |      |   | (in thousands) |       |  |   |       
|United States |                | $ | 8,906                   |       |      | $ | 7,520          |       |  | $ | 6,480  |      
|Europe        |                |   |                         |       |      |   |                |       |  |   |        |      
|              | Germany        |   |                         | 5,570 |      |   |                | 6,346 |  |   |        | 5,394 | 
|              | France         |   |                         | 35    |      |   |                | 696   |  |   |        |      | 
|              | United Kingdom |   |                         |      |      |   |                | 100   |  |   |        |      | 
|              | Norway         |   |                         | 30    |      |   |                |      |  |   |        |      | 
|Asia          |                |   |                         |       |      |   |                |       |  |   |        |      
|              | Japan          |   |                         | 2,865 |      |   |                | 2,322 |  |   |        | 500   | 
|              | Singapore      |   |                         |      |      |   |                | 2,270 |  |   |        | 250   | 
|              |                |   |                         |       |      |   |                |       |  |   |        |      
|              |                | $ | 17,406                  |       |      | $ | 19,254         |       |  | $ | 12,624 |      
|              |                |   |                         |       |      |   |                |       |  |   |        |      

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, 2002 and 2001. The
Company intends to evaluate the realizability of the deferred tax assets on a
quarterly basis. See Note 10 to the Consolidated Financial Statements.

Investments in Equity Securities

As of December 31, 2002, Lynx held an approximate 40% equity interest in
Axaron Bioscience AG. In 2001, Lynx made a capital investment in Axaron of
approximately $4.5 million. Lynx accounts for its equity investment in Axaron
using the equity method in accordance with Accounting Principles Board No. 18,
The Equity Method of Accounting for Investments in Common Stock
(APB 18)
because Lynxs ownership is greater than 20% and Lynx has the ability to
exercise significant influence over the operating, investing and financing
decisions of Axaron. Under the equity method, Lynx records its pro-rata share
of Axarons income or losses and adjusts the basis of its investment
accordingly.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (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 is prohibited. Lynx adopted this statement during
the first quarter of fiscal 2002, and the adoption did not have a material
effect on the Company's 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 adopted
this statement during the first quarter of fiscal 2002, and the adoption did
not have a material effect on the Company's 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 adopted this
statement during the first quarter of fiscal 2002, and the adoption did not
have a material effect on the Company's 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

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fiscal years beginning after December 31, 2001 (January 2002 for calendar
year-end companies) with transition provisions for certain matters.
Lynx adopted
this statement during the first quarter of fiscal 2002, and the adoption did
not have a material effect on the Company's operating results or financial position.

In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 is effective for exit and disposal
activities initiated after December 31, 2002. Lynx expects to adopt this
statement during the first quarter of fiscal 2003, and Lynx does not
believe that SFAS 146 will have a material effect on the
Company's operating results or financial position.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Others. FIN No. 45 clarifies the guarantors requirements
relating to the guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees and requires the guarantor to recognize at the
inception of a guarantee a liability for the fair value of the guarantee
obligation. The provisions for the initial recognition and measurement of
guarantees are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002. The accounting profession and regulatory
agencies continue to discuss various provisions of this pronouncement with the
objective of providing additional guidance on its application. These
discussions and the issuance of any new interpretations, once finalized, could
lead to an unanticipated impact on the Company's future financial results. Therefore,
although Lynx currently does not believe these provisions will have a material
effect on the Company's operating results or financial position, Lynx will continue to
evaluate the impact of FIN 45.

In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148, Accounting for Stock-Based CompensationTransition and
Disclosurean amendment of FASB Statement No. 123
(SFAS 148). SFAS 148 amends
FASB Statement No. 123, Accounting for Stock-Based Compensation
(SFAS 123), to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require expanded and
more prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. While SFAS 148 does not amend
SFAS 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of SFAS 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS 123 or the
intrinsic value method of APB 25. Since Lynx accounts for our stock-based
compensation under APB 25, and has no current plans to switch to SFAS 123,
the impact of SFAS 148 will be limited to the interim reporting of the effects
on net loss and loss per share if the Company accounted for stock-based
compensation under SFAS 123. SFAS 148 is effective for fiscal years ending
after December 15, 2002.

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, 2002         |  |                               |       |            |  |            |       |       |  |           |   |  |  |   |       | 
|Money market mutual funds |  | $                             | 9,179 |            |  | $          |      |       |  | $         |  |  |  | $ | 9,179 | 
|                          |  |                               |       |            |  |            |       |       |  |           |   |  |  |   |       | 
|December 31, 2001         |  |                               |       |            |  |            |       |       |  |           |   |  |  |   |       | 
|Equity securities         |  | $                             | 1,171 |            |  | $          | 1,139 |       |  | $         |  |  |  | $ | 2,310 | 
|Money market mutual funds |  |                               | 2,703 |            |  |            |      |       |  |           |  |  |  |   | 2,703 | 
|                          |  |                               |       |            |  |            |       |       |  |           |   |  |  |   |       | 
|                          |  | $                             | 3,874 |            |  | $          | 1,139 |       |  | $         |  |  |  | $ | 5,013 | 
|                          |  |                               |       |            |  |            |       |       |  |           |   |  |  |   |       | 

As of December 31, 2002, there were no short-term investments. As of
December 31, 2001, short-term investments consisted only of marketable equity
securities.

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3. Investment in and Transactions
with Related Parties

Axaron Bioscience AG

The Company holds an equity investment in Axaron Bioscience AG (Axaron)
(See Note 4). As of December 31, 2002, Lynx held approximately a 40% ownership
interest in Axaron and had the ability to exercise significant influence over
Axarons 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 pro-rata share of the income or
losses of Axaron. 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,
|                                            |  |             
|                                            |  |              |  |  |  | 2002 |        | 2001 |  | 2000
|                                            |  |              |  |  |  |      |        |      |  |     
|Condensed Balance Sheet Data:               |  |              |  |  |  |      |        |      |  |      |        |   |  |   |       |  
|Current assets                              |  |              |  |  |  | $    | 7,459  |      |  | $    | 11,502 |   |  | $ | 541   |  
|Noncurrent assets                           |  |              |  |  |  |      | 5,727  |      |  |      | 5,665  |   |  |   | 1,308 |  
|Current liabilities                         |  |              |  |  |  |      | 1,872  |      |  |      | 3,269  |   |  |   | 1,782 |  
|Stockholders equity                        |  |              |  |  |  |      | 11,314 |      |  |      | 13,898 |   |  |   | 67    |  
|Condensed Statements of Operations Data:    |  |              |  |  |  |      |        |      |  |      |        |   |  |   |       |  
|Net sales                                   |  |              |  |  |  |      | 2,539  |      |  |      | 9,486  |   |  |   | 8,072 |  
|Operating costs and expenses                |  |              |  |  |  |      | 8,911  |      |  |      | 9,525  |   |  |   | 8,098 |  
|Income or (loss) from continuing operations |  |              |  |  |  |      | (6,372 | )    |  |      | (39    | ) |  |   | (26   | )
|Net income (loss)                           |  |              |  |  |  |      | (6,131 | )    |  |      | 65     |   |  |   | 5     |  

In 2001, Lynx 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. Lynx 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 year ended December 31, 2002 and 2001 was
$759,000 and $443,000, respectively. 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 approximately $4.5 million. For
the year ended December 31, 2002, Lynxs pro-rata share of Axarons losses was
approximately $2.5 million. Lynxs pro-rata share of Axarons losses was
immaterial for 2001.

The Company also subleases certain offices in Germany to Axaron. During
2002 and 2001, the Company received an immaterial amount of sublease income
from Axaron.

Other Transactions with Related
Parties

For
legal services tendered during the calendar year ended
December 31, 2002, Lynx paid approximately $471,000 to Cooley
Godward LLP, Lynx's counsel, of which, a director of
Lynx, is a partner.

4. Collaborators, Customers and Licensees

BASF AG

In October 1996, Lynx entered into an agreement with BASF AG, as amended
in October 1998, to provide BASF with nonexclusive access to certain
of the Company's
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 in the fourth quarter of 2001, BASF exercised its right to carryover for
an additional two-year period to the fourth quarter of 2003, 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, 2002, Lynx has received aggregate payments of $19.0
million from BASF under the agreement. Lynx could receive additional payments
from BASF over the remaining term of the agreement, which ends in the fourth
quarter of 2003, from Lynx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 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

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services, the achievement of specific technology milestones and the
delivery of genomic maps of specified crops. Lynx received an initial payment
of $10.0 million for technology access at the execution of the agreement, with
additional minimum service fees of $12.0 million to be received by Lynx over a
three-year period, which commenced in January 1999. DuPont subsequently elected
to continue the agreement with Lynx for a two-year period during which Lynx
should receive additional minimum service fees of $8.0 million
through the fourth quarter of 2003. In the fourth quarter of 1999, Lynx achieved a technology milestone under
the agreement that resulted in a $5.0 million payment from DuPont.

Through December 31, 2002, Lynx has received aggregate payments of $32.0
million from DuPont under the agreement. Lynx expects to receive
minimum additional
payments of $3.0 million from DuPont over the remaining term of the agreement,
primarily from Lynxs continuing performance of genomics discovery services for
DuPont.

Bayer CropScience (formerly 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, which is now
Bayer CropScience. Lynx received an initial payment for genomics discovery
services to be performed for Bayer CropScience. The service period was
renewed in March 2000, extended in March 2002 for an additional five-year
period, and amended in September 2002. Related to the five-year extension, Bayer CropScience and Lynx plan to jointly
develop and commercialize a novel assay based on Lynxs proprietary bead-based
technologies. Lynx and Bayer 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 Bayer CropScience. Additionally,
Lynx will derive revenues from performing genomics discovery services for Bayer
CropScience during the development and commercialization phase of the
agreement.

Through
December 31, 2002, Lynx has received aggregate payments of $6.0
million from Bayer CropScience under the above agreements. Lynx could receive
additional payments from Bayer CropSciences from Lynxs performance of genomics
discovery services in excess of those covered by the payments previously made
by Bayer CropSciences or from the sales of services or products based on the
assay technology to Bayer CropScience.

Takara Bio Inc. (formerly Takara Shuzo Co., Ltd.).

In November 2000, Lynx entered into a collaboration and license agreement
with Takara Bio Inc. of Japan. The license, as amended in December 2002,
provides Takara with the right in Japan, Korea and China, including Taiwan, to
use Lynxs proprietary Megaclone, Megasort and MPSS technologies exclusively
through the expiration of the relevant Lynx patents to provide genomics
discovery services and to manufacture and sell microarrays containing content
identified by Lynxs technologies. Under the terms of the original license
agreement, Takara has a non-exclusive license right to manufacture and sell
such microarrays elsewhere throughout the world. In connection with the
amended collaboration, Takara was also granted a royalty-bearing, nonexclusive
right to provide genomics discovery services to customers in France and Italy.

At the end of three years from the effective date of the agreement in the
fourth quarter 2003, Takara can terminate the agreement with no further payment
obligations to Lynx other than those accrued prior to the termination. Under
the terms of the agreement, Lynx will receive payments from Takara for
technology access fees, royalties on sales of microarrays and revenues from
genomics discovery services, the sale to Takara of proprietary instruments and
reagents used in applying Lynxs technologies and purchases of Lynx common
stock. In the event of improvements made by Takara that increase the efficiency
of Lynx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 December 2002, Lynx sold two MPSS instruments to
Takara for Takaras use in providing genomics discovery services in their
licensed territories. As part of the amended collaboration, Takara accelerated
its technology access fee payments to Lynx and equity purchases of Lynx common
stock. The previously scheduled 2003 payment was made to Lynx in December
2002, and the previously scheduled 2004 and 2005 payments are now planned to be
made to Lynx in 2003 and 2004, respectively.

In both September and December 2002, in connection with the collaboration
agreement, Lynx issued and sold 291,545 shares of common stock, at a purchase
price of $3.43 per share, to Takara in private placements pursuant to the
terms and conditions of common stock purchase agreements. In October 2001, in
connection with the collaboration agreement, Lynx issued and sold 45,787 shares
of common stock, at a purchase price of $21.84 per share, to Takara in a
private placement pursuant to the terms and conditions of a common stock
purchase agreement.

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Through December 31, 2002, Lynx has received aggregate payments of $11.2
million, net of foreign withholding taxes, from Takara under the agreement.
Lynx could receive additional payments from Takara of approximately $4.0
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 instruments and reagents used in
applying Lynxs technologies.

Axaron Bioscience AG, formerly BASF-LYNX Bioscience AG

In 1996, Lynx and BASF established Axaron Bioscience AG, 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, Lynx contributed access to
its 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 $26.6 million based on a December 2002 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 $10.0 million in research
funding to Axaron, of which $4.3 million was paid to Lynx for technology assets
related to a central nervous system program.

In June 2001, Lynx extended its technology licensing agreement with
Axaron. The license extends Axarons right to use Lynxs proprietary MPSS and
Megasort technologies nonexclusively 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 agreement, Lynx received a $5.0 million
technology license fee from Axaron. Lynx intends to furnish to Axaron,
initially without charge and later for a fee, with Megaclone technology
micro-beads, other reagents and additional MPSS instruments for use
in Axarons research programs.

In 2001, Lynx and BASF agreed to continue their support of Axarons
growth, including an increase in the capital of Axaron. Lynx made an additional
investment of $4.5 million in Axaron, which maintained Lynxs ownership
interest in Axaron at approximately 40%. Given Lynxs ownership share of Axaron
and its ability to exercise significant influence over Axarons operating and
accounting policies, Lynx has accounted for the investment under the equity
method in accordance with Accounting Principles Board No. 18, The Equity Method
of Accounting for Investments in Common Stock (APB 18).

Through December 31, 2002, Lynx has received aggregate payments of $9.3
million from Axaron under all related agreements. Lynx recorded revenue of $0.8
million in 2002 and $0.4 million in 2001 from Axaron, 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. Lynx did not
recognize any revenue from Axaron in 2000. Lynx 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
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 $3.0 million in cash and 1.2 million shares of Inex common stock,
in three equal installments of 400,000 shares in each of March 1998, March 2000
and March 2001.

Lynx recorded the 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 and recognized a gain of $1.0 million. The
2001 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 value of Inex
shares. In the first quarter of 2002, the Company sold its remaining 437,000
shares of Inex common stock and recognized a gain of approximately $1.0
million.

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6. Sale of Technology Assets

On March 6, 2002, Lynx sold its intellectual property rights under the
N3-P5 phosphoramidate patent estate to Geron Corporation (Geron) in
exchange for $1.0 million in cash and 210,000 shares of Geron common stock. The
agreement with Geron involves the sale of a family of patents covering process
and compositional matter claims related to oligonucleotides containing
phosphoramidate backbone linkages. The Company recognized proceeds of
approximately $2.6 million from the sale of this technology to Geron, reflected
in the statement of operations as collaborative research and other revenue. The
Company sold all of the Geron stock in April 2002, realizing a loss upon sale
of approximately $64,000.

7. Restructuring Charges

On April 18, 2002, Lynx implemented a reduction of approximately 30% of
its domestic workforce (or 45 people). The Company recorded a
workforce reduction charge of $0.5 million related primarily to severance
compensation expense for former Lynx employees in the second quarter of 2002.

8. 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 30 to 90 days
notice. The expenses associated with licenses were approximately $60,000,
$75,000 and $90,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.

9. Notes Receivable from Officers

In 1999, the Company entered into loan agreements with certain officers of
the Company. The aggregate loans totaled $360,000, were secured by second
mortgages on real property, had interest accruable at rates of 4.83% to 6.02%
per annum and were subject to early repayment under specified circumstances.
The principal and interest on the loans were to be forgiven, based on the
officers continuous employment over a four-year period, in the following
amounts: 50% on the second anniversary date of employment; and 25% on each of
the third and fourth anniversary dates of employment. The loans were either
paid in full or forgiven in 2002 under the terms of the agreements.

In August 1998, Lynx entered into two loan agreements with an officer of
the Company. Each loan was 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 were to be forgiven, based on the officers
continuous employment over a four-year period, in the following amounts: 50% on
the second anniversary date of employment; and 25% on each of the third and
fourth anniversary dates of employment. The second loan was 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 first loan was
forgiven under the terms of the agreement, and the second loan was paid in full
in 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 were pledged as collateral. The
outstanding principal amount was due and payable in full in April 2002, subject
to an obligation to repay under specified circumstances. Interest was payable
upon the expiration or termination of the note and accrued at the rate of 6.49%
per annum, and $81,125 in interest was forgiven in 2002. The loans
principal was paid in full in 2002.

10. Stockholders Equity

Common Stock

In
January 2003, Lynx received stockholder approval for, and effected, a
reverse stock split of the Company's common stock at a ratio of 1-for-7 (the reverse
stock split). As a result of the reverse stock split, each outstanding share
of common stock automatically converted into one-seventh of a share of common
stock, with the par value of each

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share of common stock remaining at one cent ($.01) per share.
Accordingly, common stock share and per share amounts for all periods presented
have been adjusted to reflect the impact of the reverse stock split.

At December 31, 2002, Lynx had reserved 1,520,682 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     |  |  | 360,587   | 
|Shares available for option grants  |  |  | 175,556   | 
|Employee stock purchase plan shares |  |  | 7,471     | 
|Warrants                            |  |  | 977,068   | 
|                                    |  |  |           | 
|                                    |  |  | 1,520,682 | 
|                                    |  |  |           | 

In both September and December 2002, in connection with the collaboration
agreement, Lynx issued and sold 291,545 shares of common stock, at a purchase
price of $3.43 per share, to Takara in private placements pursuant to the
terms and conditions of common stock purchase agreements.

In April 2002, Lynx completed a $22.6 million private placement of common
stock and warrants to purchase common stock (the financing) resulting in
proceeds of $20.9 million, net of commissions and expenses. The financing
included the sale of 2.1 million newly issued shares of common stock at $10.85
per share and the issuance of warrants to purchase approximately 0.8 million
shares of common stock at an exercise price of $13.58 per share. In connection
with the financing, the Company issued a warrant to purchase up to an aggregate
of 41,714 shares of the Companys common stock at an exercise price of $10.85
per share to Friedman, Billings, Ramsey & Co., Inc. (FBR), as partial
consideration, in addition to other customary fees, for services rendered by
FBR as sole manager for the private equity financing.

In October 2001, in
connection with the collaboration agreement, Lynx issued and sold 45,787 shares
of common stock, at a purchase price of $21.84 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 249,605
newly issued shares of common stock at a purchase price of $44.59 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 101,082 shares of
common stock at an exercise price of $39.76 per share.

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 was 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 has been charged ratably to expense
as the repurchase rights expired over the period of 1997 through 2002.

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 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 has been charged to expense over the respective vesting
periods of the grants from 1997 through 2002.

In
December 1997, Lynx's board of directors (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 has been charged to expense over the period beginning
December 1997, through the end of the five-year vesting period.

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1992 Stock Option Plan

In July 1992, 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
September 2002, 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 785,714 shares to 871,428 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 the fair
market value of Lynxs common stock 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).

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 January 1, 2000   |                   |  | 55,536              |          |                    |  | 276,768          |          |   | $ | 51.14 |       
|                             | Shares authorized |  |                     | 85,714   |                    |  |                  |         |   |   |       |       | 
|                             | Options granted   |  |                     | (105,135 | )                  |  |                  | 105,135  |   |   | $     | 184.96 | 
|                             | Options exercised |  |                     |         |                    |  |                  | (25,449  | ) |   | $     | 33.06  | 
|                             | Options canceled  |  |                     | 5,789    |                    |  |                  | (7,956   | ) |   | $     | 60.52  | 
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |       
|Balance at December 31, 2000 |                   |  | 41,904              |          |                    |  | 348,498          |          |   | $ | 92.61 |       
|                             | Shares authorized |  |                     | 100,000  |                    |  |                  |         |   |   |       |       | 
|                             | Options granted   |  |                     | (97,115  | )                  |  |                  | 97,115   |   |   | $     | 54.90  | 
|                             | Options exercised |  |                     |         |                    |  |                  | (31,122  | ) |   | $     | 14.71  | 
|                             | Options canceled  |  |                     | 34,187   |                    |  |                  | (34,248  | ) |   | $     | 77.48  | 
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |       
|Balance at December 31, 2001 |                   |  | 78,976              |          |                    |  | 380,243          |          |   | $ | 90.72 |       
|                             | Shares authorized |  |                     | 85,714   |                    |  |                  |         |   |   |       |       | 
|                             | Options granted   |  |                     | (129,120 | )                  |  |                  | 129,120  |   |   | $     | 9.29   | 
|                             | Options exercised |  |                     |         |                    |  |                  | (1,011   | ) |   | $     | 2.50   | 
|                             | Options canceled  |  |                     | 139,986  |                    |  |                  | (147,765 | ) |   | $     | 64.60  | 
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |       
|Balance at December 31, 2002 |                   |  | 175,556             |          |                    |  | 360,587          |          |   | $ | 72.51 |       
|                             |                   |  |                     |          |                    |  |                  |          |   |   |       |       

As of December 31, 2002, all options granted under the 1992 Plan were
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, 2002, 2001 and 2000, there were zero, 477
and 2,230 shares outstanding that were subject to repurchase, respectively.

The options outstanding at December 31, 2002 have been segregated into
ranges for additional disclosure as follows:

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|                  |  |                     |         |                     |  |           |      |                   |  |           |        |  |  |  |         |  |  |   |        | 
|----------------- |  | ------------------- | ------- | ------------------- |  | --------- | ---- | ----------------- |  | --------- | ------ |  |  |  | ------- |  |  | - | ------ | 
|                  |  | 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   |  | 2002                |         | (in years)          |  | price     |      | 2002              |  | price    
|                  |  |                     |         |                     |  |           |      |                   |  |          
|$2.66 - $8.05     |  |                     | 42,494  |                     |  |           | 8.84 |                   |  | $         | 7.02   |  |  |  | 5,263   |  |  | $ | 5.04   | 
|$10.01 - $10.01   |  |                     | 63,194  |                     |  |           | 9.35 |                   |  | $         | 10.01  |  |  |  | 6,773   |  |  | $ | 10.01  | 
|$10.78 - $35.07   |  |                     | 44,556  |                     |  |           | 3.99 |                   |  | $         | 18.91  |  |  |  | 39,593  |  |  | $ | 18.52  | 
|$36.75 - $56.98   |  |                     | 46,453  |                     |  |           | 7.24 |                   |  | $         | 46.52  |  |  |  | 22,701  |  |  | $ | 45.59  | 
|$58.63 - $73.50   |  |                     | 39,271  |                     |  |           | 6.08 |                   |  | $         | 64.54  |  |  |  | 30,999  |  |  | $ | 63.63  | 
|$74.41 - $86.66   |  |                     | 43,174  |                     |  |           | 7.08 |                   |  | $         | 78.97  |  |  |  | 24,813  |  |  | $ | 79.61  | 
|$89.67 - $110.25  |  |                     | 43,140  |                     |  |           | 6.45 |                   |  | $         | 105.88 |  |  |  | 31,645  |  |  | $ | 105.46 | 
|$112.00 - $341.25 |  |                     | 26,307  |                     |  |           | 7.59 |                   |  | $         | 203.04 |  |  |  | 12,596  |  |  | $ | 204.40 | 
|$386.75 - $386.75 |  |                     | 571     |                     |  |           | 7.11 |                   |  | $         | 386.75 |  |  |  | 313     |  |  | $ | 386.75 | 
|$537.25 - $537.25 |  |                     | 11,427  |                     |  |           | 7.15 |                   |  | $         | 537.25 |  |  |  | 5,688   |  |  | $ | 537.25 | 
|                  |  |                     |         |                     |  |           |      |                   |  |           |        |  |  |  |         |  |  |   |        | 
|$2.66 - $537.25   |  |                     | 360,587 |                     |  |           | 7.18 |                   |  | $         | 72.51  |  |  |  | 180,384 |  |  | $ | 82.60  | 
|                  |  |                     |         |                     |  |           |      |                   |  |           |        |  |  |  |         |  |  |   |        | 

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 28,369 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, 2002, a total of 20,898 shares of common stock had been issued
to employees at an aggregate purchase price of $909,425 and a weighted-average
purchase price of $43.52 per share pursuant to offerings under the Purchase
Plan, and 7,471 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), as amended by SFAS 148, 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 2002, 2001 and 2000 was
$6.99, $41.68 and $147.96 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 2.98%, 4.35% and 6.0% for 2002, 2001
and 2000, respectively; a weighted-average expected life of five years for
2002, 2001 and 2000 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 106% for 2002, 109% for 2001 and 100% for 2000.

Under SFAS 123, the fair value for the Purchase Plan
purchase rights was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2002, 2001
and 2000, respectively: risk-free interest rate of 2.98%, 2.2% and 6.0%; no
dividend yields; volatility factor of the expected market price of the
Companys common stock of 106%, 109% and 100%; and a weighted-average expected
life of 0.50, 0.47 and 0.55 years. The weighted-average fair value of those
purchase rights granted in 2002, 2001 and 2000, respectively, was
$17.74,
$58.00 and $67.55.

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
estimates, 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.

Preferred Stock

Under
Lynx's certificate of incorporation, the Board has the
authority, without further action by the holders of Lynxs 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

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holders of Lynxs common stock. For example, the holders of preferred
stock may be given a preference in payment upon Lynxs 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 Lynxs 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 Lynxs common stock, and, as a result, an issuance of
additional preferred stock could lower the market value of Lynxs common stock.
Provisions of Delaware law may also discourage, delay or prevent someone from
acquiring or merging with Lynx.

11. Restructuring Charges

On April 18, 2002, Lynx announced a reduction of approximately 30% of its
domestic workforce, or 45 people. The Company recorded a
workforce reduction charge of $0.5 million related primarily to severance
compensation expense for former Lynx employees in the second quarter of 2002.
The entire $0.5 million charge was paid during 2002.

12. Income Taxes

The income tax benefit of $98,000 for 2002 relates primarily to a refund
received for federal alternative minimum taxes paid in prior periods, offset by
foreign withholding tax due on payments received from Lynxs licensee. The provision for income taxes of $81,000 and
$500,000 for 2001 and 2000, respectively, relate entirely to foreign taxes.

In the accompanying statements of operations, Loss before provision for
income taxes includes the following components for the years ended December
31, 2002, 2001 and 2000 (in thousands):

|         |  |                         |         |      |  |      |         |   |  |   |         |  
|-------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2002                    |         | 2001 |  | 2000
|         |  |                         |         |      |  |     
|Domestic |  | $                       | (14,426 | )    |  | $    | (15,705 | ) |  | $ | (12,071 | )
|Foreign  |  |                         | (1,203  | )    |  |      | (944    | ) |  |   | (730    | )
|         |  |                         |         |      |  |      |         |   |  |   |         |  
|         |  | $                       | (15,629 | )    |  | $    | (16,649 | ) |  | $ | (12,801 | )
|         |  |                         |         |      |  |      |         |   |  |   |         |  

The provision (benefit) for income taxes consists of the following:

|                          |                     |   |                         |      |      |   |      |    |  |   |     |     | 
|------------------------- | ------------------- | - | ----------------------- | ---- | ---- | - | ---- | -- |  | - | --- | --- | 
|                          |                     |   | Year Ended December 31,
|                          |                     |   |                        
|                          |                     |   | 2002                    |      | 2001 |   | 2000
|                          |                     |   |                         |      |      |   |     
|Current:                  |                     |   |                         |      |      |   |      |    |  |   |     |    
|                          | Federal             |   |                         |     |      |   |      |   |  |   |     |    | 
|                          | State               |   | $                       | (38  | )    |   |      |   |  |   |     |    | 
|                          | Alternative Minimum |   |                         | (270 | )    |   |      |   |  |   |     |    | 
|                          | Taxes               |   |                         |     |      |   |      |   |  |   |     |    | 
|                          | Foreign             |   |                         | 210  |      |   |      | 81 |  |   |     | 500 | 
|                          |                     |   |                         |      |      |   |      |    |  |   |     |    
|Total Current             |                     | $ | (98                     | )    |      | $ | 81   |    |  | $ | 500 |    
|Deferred:                 |                     |   |                         |      |      |   |      |    |  |   |     |    
|                          | Federal             |   |                         |     |      |   |      |   |  |   |     |    | 
|                          | State               |   |                         |     |      |   |      |   |  |   |     |    | 
|                          |                     |   |                         |      |      |   |      |    |  |   |     |    
|Total Deferred            |                     |   |                        |      |      |   |     |    |  |   |    |    
|Total provision (benefit) |                     | $ | (98                     | )    |      | $ | 81   |    |  | $ | 500 |    
|                          |                     |   |                         |      |      |   |      |    |  |   |     |    

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, 2002, 2001 and
2000 is as follows (in thousands):

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|                                                        |  |                         |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2002                    |        | 2001 |  | 2000
|                                                        |  |                         |        |      |  |     
|Tax provision (benefit) at U.S. statutory rate          |  | $                       | (5,314 | )    |  | $    | (5,675 | ) |  | $ | (4,352 | )
|Alternative minimum tax                                 |  |                         | (308   | )    |  |      |       |   |  |   |       |  
|Foreign taxes                                           |  |                         | 210    |      |  |      | 81     |   |  |   | 500    |  
|Loss for which no tax benefit is currently recognizable |  |                         | 5,314  |      |  |      | 5,675  |   |  |   | 4,352  |  
|                                                        |  |                         |        |      |  |      |        |   |  |   |        |  
|                                                        |  | $                       | (98    | )    |  | $    | 81     |   |  | $ | 500    |  
|                                                        |  |                         |        |      |  |      |        |   |  |   |        |  

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):

|                                               |                                                   |   |      |         |      |   |   |         |  
|---------------------------------------------- | ------------------------------------------------- | - | ---- | ------- | ---- | - | - | ------- | -
|                                               |                                                   |   | 2002 |         | 2001
|                                               |                                                   |   |      |         |     
|Deferred tax assets:                           |                                                   |   |      |         |      |   |   |        
|                                               | Net operating loss carryforwards                  |   | $    | 21,400  |      |   | $ | 19,350  |  
|                                               | Research and development tax credit carryforwards |   |      | 4,540   |      |   |   | 5,310   |  
|                                               | Alternative minimum tax credit carryforwards      |   |      |        |      |   |   | 270     |  
|                                               | Capitalized research and development expenditures |   |      | 3,110   |      |   |   | 2,820   |  
|                                               | Deferred revenues                                 |   |      | 5,424   |      |   |   | 8,180   |  
|                                               | Reserves and accruals                             |   |      | 570     |      |   |   | 630     |  
|                                               | Valuation allowance                               |   |      | (35,044 | )    |   |   | (36,560 | )
|                                               |                                                   |   |      |         |      |   |   |        
|Deferred tax assets net of valuation allowance |                                                   |   |     |         |      |   |  |        
|Deferred tax liabilities:                      |                                                   |   |      |         |      |   |   |        
|Other                                          |                                                   |   |     |         |      |   |  |        
|                                               |                                                   |   |      |         |      |   |   |        
|Net deferred tax assets                        |                                                   | $ |     |         |      | $ |  |        
|                                               |                                                   |   |      |         |      |   |   |        

Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets as of December 31,
2002 and 2001 has been established to reflect these uncertainties. The change
in the valuation allowance was a net decrease of $1.5 million
for the fiscal year
ended December 31, 2002 and a net increase of $5.9 million and $9.6 million for
the fiscal years ended December 31, 2001 and 2000, respectively. Deferred tax
assets related to carryforwards at December 31, 2002 include approximately $4.1
million associated with stock option activity for which any subsequently
recognized tax benefits will be credited directly to stockholders equity.

As of December 31, 2002, the Company had a federal net operating loss
carryforward of approximately $63.0 million, which will expire at various dates
from 2010 through 2022, if not utilized. The Company had a state net operating
loss carryforward of approximately $2.0 million, which will expire in the years
2004 through 2012.

As of December 31, 2002, the Company also had federal and California
research and development and other tax credit carryforwards of approximately
$2.7 million and $2.6 million, respectively. The federal research and
development credit will expire at various dates from 2018 through 2021, if not
utilized. The California research and development credits do not expire.

Utilization of the Companys net operating loss and credit carryforwards
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 and credits before utilization.

13. 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 were 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

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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 lease terminates in June 2005. Axaron is currently
subleasing a portion of such space.

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  
|                           |  |             |        |         
|2003                       |  |             | 3,039  |          |  |   | 682 | 
|2004                       |  |             | 2,753  |          |  |   |    | 
|2005                       |  |             | 2,741  |          |  |   |    | 
|2006                       |  |             | 2,731  |          |  |   |    | 
|2007                       |  |             | 2,803  |          |  |   |    | 
|Thereafter                 |  |             | 2,761  |          |  |   |    | 
|                           |  |             |        |          |  |   |     | 
|                           |  | $           | 16,828 |          |  | $ | 682 | 
|                           |  |             |        |          |  |   |     | 

Rent expense for facilities and equipment under operating leases was
$2,752,000, $2,854,000 and $2,055,000 for the years ended December 31, 2002,
2001 and 2000, respectively. Rental income for the facilities under sublease
was approximately $1,266,000, $1,227,000 and $1,127,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.

14. 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
Internal Revenue Code) 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 2002, 2001 and 2000, the
Company contributed $98,900, $99,500 and $74,000, respectively.

15. Equipment Financing

In October 2002, Lynx entered into a loan and security agreement with a
financial institution, Comerica Bank-California, for an equipment line of
credit of up to $2.0 million with a draw-down period of one year. Under the
initial advance, Lynx drew down $1.6 million in November 2002 related to the
purchase of equipment made in previous periods. Lynx granted Comerica
Bank-California a security interest in all items Lynx financed under this
agreement. The initial advance under the loan to finance the purchase of
equipment made in previous periods has a term of 24 months from the date of
advance and bears interest at a rate of 7.25%. Pursuant to the terms of the
agreement, Lynx is required to maintain a minimum cash balance of unrestricted
cash and cash equivalents in an account at Comerica Bank-California of at least
$5.0 million until Comerica Bank-California receives payment in full of all
outstanding obligations, and there is a liquidity requirement that Lynx have a
balance of unrestricted cash at each months end that is greater than Lynxs
net decrease in cash during the preceding four months. Lynx believes
that it is in compliance
with all terms of the agreement. As of December 31, 2002, the principal balance
under loans outstanding under this agreement was $1.5 million. Accumulated
depreciation relating to these assets amounted to $0.1 million for the year
ended December 31, 2002.

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 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 and
bears interest at 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, 2002, the principal balance

50



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##### Table of Contents



under loans outstanding under this
agreement was approximately $1.8
million. Accumulated depreciation relating to these assets amounted to $5.5 and
$4.4 million for the years ended December 31, 2002 and 2001, respectively.

The carrying amounts of the Companys borrowings under its equipment
financings 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,
2002 are (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 2,250 | 
|2004 |  |   | 1,093 | 
|     |  |   |       | 
|     |  | $ | 3,343 | 
|     |  |   |       | 

16. Quarterly Results (Unaudited)

|                                     |  |                                       |        |         |  |          |        |         |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                     |  | Fiscal Year 2002 Quarter Ended       
|                                     |  |                                      
|                                     |  | Mar. 31                               |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                     |  |                                       |        |         |  |          |        |        
|                                     |  | (in thousands, except per share data)
|Statement of Operations Data:        |  |                                       |        |         |  |          |        |         |  |   |        |   |  |   |        |  
|Revenues                             |  | $                                     | 5,022  |         |  | $        | 2,853  |         |  | $ | 4,833  |   |  | $ | 4,698  |  
|Loss from operations                 |  |                                       | (3,898 | )       |  |          | (4,927 | )       |  |   | (2,086 | ) |  |   | (2,796 | )
|Net loss                             |  |                                       | (3,759 | )       |  |          | (5,476 | )       |  |   | (3,274 | ) |  |   | (3,022 | )
|Basic and diluted net loss per share |  | $                                     | (1.91  | )       |  | $        | (1.61  | )       |  | $ | (0.80  | ) |  | $ | (0.69  | )

|                                     |  |                                       |        |         |  |          |        |         |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                     |  | 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 |  | $                                     | (3.48  | )       |  | $        | (2.58  | )       |  | $ | (1.92  | ) |  | $ | (1.41  | )

Net loss per share amounts have been restated to reflect the effect of a
1-for-7 reverse split of Lynxs common stock effected on January 15, 2003.
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.

17. Subsequent Events

In January 2003, Lynx announced a reduction of approximately 25% of our
workforce, or 32 people. The groups affected primarily by this
action include research and development personnel based at Lynx
Therapeutics GmbH in
Germany and those working in the Company's proteomics group in California. The workforce
reduction is intended to further focus Lynx's financial and human resources on
expanding the commercial use of MPSS.








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

Not applicable.

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PART III




Item 10.Directors and Executive Officers of the Registrant

Our executive officers and directors, and their ages as of February 10,
2003, are as follows:

|                               |  |     |    |          |  |                                                 
|------------------------------ |  | --- | -- | -------- |  | ------------------------------------------------
|Name                           |  | Age |    | Position
|                               |  |     |    |         
|Kevin P. Corcoran              |  |     | 44 |          |  | President, Chief Executive Officer and Director 
|Edward C. Albini               |  |     | 45 |          |  | Chief Financial Officer and Secretary           
|Jen-i Mao, Ph.D.               |  |     | 50 |          |  | Vice President, Genetic Analysis                
|Kathy A. San Roman             |  |     | 49 |          |  | Vice President, Human Resources & Administration
|Thomas J. Vasicek, Ph.D.       |  |     | 44 |          |  | Vice President, Business Development            
|Craig C. Taylor (1) (2)        |  |     | 52 |          |  | Chairman of the Board                           
|Sydney Brenner, M.B., D. Phil  |  |     | 76 |          |  | Director and Principal Scientific Advisor       
|Leroy Hood, M.D., Ph.D.        |  |     | 64 |          |  | Director                                        
|James C. Kitch (2)             |  |     | 55 |          |  | Director                                        
|Marc D. Kozin (1)              |  |     | 41 |          |  | Director                                        
|David C. UPrichard, Ph.D. (1) |  |     | 54 |          |  | Director                                        
|Richard P. Woychik, Ph.D.      |  |     | 50 |          |  | Director                                        



---

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

Kevin P. Corcoranhas served as a director of Lynx since July 2002. Mr.
Corcoran was appointed President and Chief Executive Officer of Lynx in June
2002. He joined Lynx in September 1995 as Staff Software Engineer, and from
January 1999 to June 2002, Mr. Corcoran served as Vice President, Operations.
Prior to joining Lynx, Mr. Corcoran held various managerial positions with
Applied Biosystems, Inc., an instrumentation company, from July 1992 to
September 1995. His most recent role at Applied Biosystems, Inc. was Group
Leader for Genetic Analysis software. Mr. Corcoran received a B.S. in Computer
Science from California State University, Hayward.

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

Jen-i Mao, Ph.D.,has served as Vice President, Genetic Analysis of Lynx
since June 1998. Prior to joining Lynx, from 1981 to 1998, Dr. Mao held
various management positions at Genome Therapeutics, Inc., a biotechnology
company. Her most recent role at Genome Therapeutics, Inc. was as Vice
President of Genetics and Technology Development. From 1991 through 1998, Dr.
Mao also served as Principal Investigator of the National Institute of
Health-funded Genome Science Technology Center to map and sequence human
chromosome 10. Dr. Mao received a B.S. in Agricultural Chemistry from the
National Taiwan University and a Ph.D. in Molecular Biophysics and Biochemistry
from Yale University.

Kathy A. San Romanjoined Lynx in August 1992 as Director of
Administration and was appointed Vice President, Human Resources and
Administration in January 1999. Prior to joining Lynx, from June 1982 through
July 1989, Ms. San Roman held numerous positions at Applied Biosystems, Inc.,
including most recently as Corporate Secretary. From February 1991 to July
1992, Ms. San Roman was Associate Director, Investor Relations at Informix
Corporation, a software development company.

Thomas J. Vasicek, Ph.D., joined Lynx in June 2002 as Vice President,
Business Development. Prior to joining Lynx, Dr. Vasicek served as Chief
Scientific Officer at LabSeek Scientific Collaborative, a biotech company, from
May 2000 to October 2001. He also served as the Director, Commercial
Technology for the Corning Advanced Life Sciences Products Division of Corning,
Inc. a manufacturing company, from January 1999 to May 2000, and was a Sr.
Scientist at Millennium Pharmaceuticals, a pharmaceutical company, from June
1996 to January 1999. Dr. Vasicek received a B.S. in chemistry from the
Massachusetts Institute of Technology and a Ph.D. in Genetics from Harvard
University.

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Craig C. Taylorwas elected Chairman of the Board of Lynx in December
2000, has served as a director of Lynx 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.

Sydney Brenner, M.B., D.Phil.,has served as a director of Lynx since
October 1993 and as Lynxs principal scientific advisor. 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
nonprofit 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 School of Clinical Medicine, Cambridge, England. 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 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 Nobel
Prize in Physiology or Medicine for 2002, 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.

Leroy Hood, M.D., Ph.D.,has served as a director of Lynx since May 2000.
In December 1999, he founded the Institute for 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 GatesIII Professor
of Biomedical Sciences. Dr. Hood received an M.D. from John Hopkins Medical
School and a 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. He currently serves as a director of Paradigm Genetics, a
biotechnology company.

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

Marc D. Kozinhas served as a director of Lynx since July 2002. Since
1996, Mr. Kozin has served as President of the North American practice for
L.E.K. Consulting LLC, a business consulting company. In this position, he
leads L.E.K.s life science strategic planning services. Mr. Kozin received a
B.A. in Economics from Duke University and an M.B.A. from The Wharton School,
University of Pennsylvania. He also serves as a member of the Board of
Governors at New England Medical Center.

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 in the U.S. and U.K. at ICI Pharmaceuticals, Inc. and Zeneca,
both of which are pharmaceutical companies. Dr. UPrichard received a B.Sc. in
Pharmacology from the University of Glasgow and a Ph.D. in Pharmacology from
the University of Kansas. He currently serves as a director of 3-Dimensional
Pharmaceuticals and several private companies.

Richard P. Woychik, Ph.D.,has served as a director of Lynx since July
2002. Since August 2002, Dr. Woychik has served as the director of The Jackson
Laboratory in Bar Harbor, Maine. Prior to joining The Jackson Laboratory, Dr.
Woychik served as Chief Scientific Officer at Lynx, a position that he held
since joining Lynx in January 2001. Prior to joining Lynx, from 1998 to 2000,
Dr. Woychik was Senior Director and Head of the Alameda Global R&D Molecular
Genetics Research Center at Pfizer Inc., a pharmaceutical company. 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 received a Ph.D. in Molecular
Biology from Case Western Reserve University.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 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 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
that 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, 2002, all Section
16(a) filing requirements applicable to our officers, directors and greater
than 10% beneficial owners were complied with.




Item 11.Executive Compensation

The following table sets forth certain compensation paid by Lynx during
the calendar years ended December 31, 2002, 2001 and 2000, to our (i) Chief
Executive Officer; (ii) other four most highly compensated executive officers
whose compensation exceeded $100,000; and (iii) two former executive officers
who departed Lynx during the fiscal year 2002 (the Named Executive Officers):

Summary Compensation Table

|                                |  |      |      |     |  |                     |         |                               |  |              |   |             |  |            |              |              |  |            |   |           |  |  |        |  |  |  |   | 
|------------------------------- |  | ---- | ---- | --- |  | ------------------- | ------- | ----------------------------- |  | ------------ | - | ----------- |  | ---------- | ------------ | ------------ |  | ---------- | - | --------- |  |  | ------ |  |  |  | - | 
|                                |  |      |      |     |  | Annual Compensation |         | Long-Term Compensation
Awards
|                                |  |      |      |     |  |                     |         |                              
|                                |  |      |      |     |  |                     |         |                               |  |              |   |             |  | Other      |              | Restricted   |  |            |   |           |  |  |        | 
|                                |  |      |      |     |  |                     |         |                               |  |              |   |             |  | Annual     |              | Stock        |  | Securities |   | All Other
|                                |  |      |      |     |  | Salary              |         | Bonus                         |  | Compensation |   | Awards      |  | Underlying |              | Compensation
|Name and Principal Position     |  | Year |      | ($) |  | ($)                 |         | ($)                           |  | ($)          |   | Options (#) |  | ($)       
|                                |  |      |      |     |  |                     |         |                               |  |              |   |             |  |           
|Kevin P.
Corcoran               |  |      | 2002 |     |  | $                   | 220,544 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  | 5,000  |  |  |  |  | 
|President and Chief
Executive   |  |      | 2001 |     |  | $                   | 176,654 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  |       |  |  |  |  | 
|Officer
(1)                     |  |      | 2000 |     |  | $                   | 150,000 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  | 2,857  |  |  |  |  | 
|                               
|Edward C.
Albini                |  |      | 2002 |     |  | $                   | 221,552 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  | 7,142  |  |  |  |  | 
|Chief Financial
Officer         |  |      | 2001 |     |  | $                   | 205,185 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  |       |  |  |  |  | 
|                                |  |      | 2000 |     |  | $                   | 196,405 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  | 5,714  |  |  |  |  | 
|                               
|Jen-i Mao, Ph.D.                |  |      | 2002 |     |  | $                   | 179,879 |                               |  |              |  |             |  | $          | 25,750(2)(3) |              |  |            |  |           |  |  | 2,142  |  |  |  |  | 
|Vice President, Genetic         |  |      | 2001 |     |  | $                   | 179,723 |                               |  |              |  |             |  | $          | 50,750(2)(3) |              |  |            |  |           |  |  |       |  |  |  |  | 
|Analysis                        |  |      | 2000 |     |  | $                   | 160,000 |                               |  |              |  |             |  | $          | 25,750(2)(3) |              |  |            |  |           |  |  |       |  |  |  |  | 
|                               
|Kathy A. San
Roman              |  |      | 2002 |     |  | $                   | 159,032 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  | 5,000  |  |  |  |  | 
|Vice President, Human           |  |      | 2001 |     |  | $                   | 157,500 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  |       |  |  |  |  | 
|Resources &
Administration      |  |      | 2000 |     |  | $                   | 142,500 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  | 3,571  |  |  |  |  | 
|                               
|Thomas J. Vasicek,
Ph.D.        |  |      | 2002 |     |  | $                   | 108,416 |                               |  |              |  |             |  | $          | 15,750(2)(4) |              |  |            |  |           |  |  | 17,142 |  |  |  |  | 
|Vice President,
Business        |  |      | 2001 |     |  |                     |        |                               |  |              |  |             |  |            |             |              |  |            |  |           |  |  |       |  |  |  |  | 
|Development                     |  |      | 2000 |     |  |                     |        |                               |  |              |  |             |  |            |             |              |  |            |  |           |  |  |       |  |  |  |  | 
|                               
|Norman J. W. Russell,
Ph.D.     |  |      | 2002 |     |  | $                   | 141,607 |                               |  |              |  |             |  | $          | 246,665(6)   |              |  |            |  |           |  |  | 14,285 |  |  |  |  | 
|Former President and
Chief      |  |      | 2001 |     |  | $                   | 290,192 |                               |  |              |  |             |  | $          | 125,000(7)   |              |  |            |  |           |  |  |       |  |  |  |  | 
|Executive Officer
(5)           |  |      | 2000 |     |  | $                   | 262,571 |                               |  |              |  |             |  |            |             |              |  |            |  |           |  |  |       |  |  |  |  | 
|                               
|Richard P. Woychik,
Ph.D.       |  |      | 2002 |     |  | $                   | 135,187 |                               |  |              |  |             |  | $          | 750(2)       |              |  |            |  |           |  |  | 7,142  |  |  |  |  | 
|Former Chief Scientific
Officer |  |      | 2001 |     |  | $                   | 209,796 |                               |  |              |  |             |  | $          | 60,750(2)(9) |              |  |            |  |           |  |  | 14,285 |  |  |  |  | 
|(8)                             |  |      | 2000 |     |  |                     |        |                               |  |              |  |             |  |            |             |              |  |            |  |           |  |  |       |  |  |  |  | 



---

| | (1) |  | Kevin P. Corcoran was promoted to President and Chief Executive
Officer on June 3, 2002.                                        
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Includes contributions of $750 made by Lynx to its 401(k) Plan on
behalf of such employee.                                      
|
| | (3) |  | Pursuant to Dr. Maos offer of employment with Lynx, a portion of her
loan of $100,000 was forgiven in June 2000, 2001 and 2002.
|
| | (4) |  | Includes a sign-on bonus received by Dr. Vasicek when he joined Lynx
in June 2002.                                              

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| | (5) |  | Norman J.W. Russell, Ph.D. resigned as President and Chief Executive
Officer and a director of Lynx on May 31, 2002.                                                                                                           
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (6) |  | Pursuant to the terms and conditions of the separation agreement, Dr.
Russell received a gross severance payment of $246,665, or $127,440, net
of taxes, of which $60,000 was paid in cash and $67,440 was applied to
his loan.
|
| | (7) |  | Pursuant to Dr. Russells employment agreement with Lynx, a portion
of his $250,000 loan was forgiven in November 2001.                                                                                                        
|
| | (8) |  | Richard P. Woychik, Ph.D. resigned as Chief Scientific Officer on
August 16, 2002.                                                                                                                                             
|
| | (9) |  | Includes a sign-on bonus received by Dr. Woychik when he joined Lynx
in January 2001.                                                                                                                                          

Except as disclosed above, we did not pay any compensation characterized
as long-term compensation, including restricted stock awards issued at a price
below fair market value or long-term incentive plan payouts, during the year
ended December 31, 2002 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 10, 2003, options to purchase a total of
338,784 shares were outstanding under the 1992 Stock Option Plan, and options
to purchase 195,402 shares remained available for grant thereunder.

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, 2002.

Option Grants in Last Fiscal Year

|                           |  |                               |        |                                                   |  |              |       |            |  |        |       |                                                |  |  |          |  |  |   |        |  |  |   |         | 
|-------------------------- |  | ----------------------------- | ------ | ------------------------------------------------- |  | ------------ | ----- | ---------- |  | ------ | ----- | ---------------------------------------------- |  |  | -------- |  |  | - | ------ |  |  | - | ------- | 
|                           |  | Individual Grants             |        | Potential
Realizable Valueat Assumed Annual Rates
|                           |  | Number
ofSecuritiesUnderlying |        | % of
TotalOptionsGranted to                       |  | Exercise     |       |            |  |        |       | of Stock Price
Appreciationfor Option Term (2)
|                           |  | Options                       |        | Employees                                         |  | Price Per    |       | Expiration |  |        |       |                                                |  |  |          | 
|Name                       |  | Granted (#)                   |        | in 2002 (1)                                       |  | Share ($/sh) |       | Date       |  | 5% ($) |       | 10% ($)                                       
|                           |  |                               |        |                                                   |  |              |       |            |  |        |       |                                               
|Kevin P. Corcoran          |  |                               | 5,000  |                                                   |  |              | 3.87  | %          |  | $      | 10.01 |                                                |  |  | 05/08/12 |  |  | $ | 31,476 |  |  | $ | 79,767  | 
|Edward C. Albini           |  |                               | 7,142  |                                                   |  |              | 5.53  | %          |  | $      | 10.01 |                                                |  |  | 05/08/12 |  |  | $ | 44,961 |  |  | $ | 113,939 | 
|Jen-i Mao, Ph.D.           |  |                               | 2,142  |                                                   |  |              | 1.66  | %          |  | $      | 10.01 |                                                |  |  | 05/08/12 |  |  | $ | 13,484 |  |  | $ | 34,172  | 
|Kathy A. San Roman         |  |                               | 5,000  |                                                   |  |              | 3.87  | %          |  | $      | 10.01 |                                                |  |  | 05/08/12 |  |  | $ | 31,476 |  |  | $ | 79,767  | 
|Thomas J. Vasicek, Ph.D.   |  |                               | 17,142 |                                                   |  |              | 13.28 | %          |  | $      | 8.05  |                                                |  |  | 06/17/12 |  |  | $ | 86,783 |  |  | $ | 219,925 | 
|Norman J.W. Russell, Ph.D. |  |                               | 14,285 |                                                   |  |              | 11.06 | %          |  | $      | 10.01 |                                                |  |  | 05/08/12 |  |  | $ | 89,927 |  |  | $ | 227,894 | 
|Richard P. Woychik, Ph.D.  |  |                               | 7,142  |                                                   |  |              | 5.53  | %          |  | $      | 10.01 |                                                |  |  | 05/08/12 |  |  | $ | 44,961 |  |  | $ | 113,939 | 



---

| | (1) |  | Based on options for an aggregate of 129,120 shares granted to our
employees and consultants during the year ended December 31, 2002,
including the Named Executive Officers.                                                                                                                                                                                                                                                                                             
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (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. The assumed annual rates of appreciation
are for illustrative purposes only.

The following table sets forth certain information concerning the number
of options exercised by the Named Executive Officers during the year ended
December 31, 2002, and the number of shares covered by both exercisable and
unexercisable stock options held by the Named Executive Officers.

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Aggregated Option Exercises in
the Year Ended December 31, 2002 and Option Values

|                            |  |                   |   |          |  |                                          |   |                                                     |  |             |        |             |  |  |        |  |  |  |   |  |  |  |   | 
|--------------------------- |  | ----------------- | - | -------- |  | ---------------------------------------- | - | --------------------------------------------------- |  | ----------- | ------ | ----------- |  |  | ------ |  |  |  | - |  |  |  | - | 
|                            |  |                   |   |          |  |                                          |   |                                                     |  |             |        |             |  |  |        |  |  | 
|                            |  |                   |   |          |  |                                          |   |                                                     |  |             |        |            
|                            |  | SharesAcquired on |   | Value    |  | Number
of UnexercisedOptions at
Year-End |   | Value of UnexercisedIn-the-Money Options atYear
End
|Name                        |  | Exercise          |   | Realized |  | Exercisable                              |   | Unexercisable                                       |  | Exercisable |        | Exercisable
|                            |  |                   |   |          |  |                                          |   |                                                     |  |             |        |            
|Kevin P. Corcoran           |  |                   |  |          |  |                                          |  |                                                     |  |             | 5,457  |             |  |  | 7,420  |  |  |  |   |  |  |  |   | 
|Edward C. Albini            |  |                   |  |          |  |                                          |  |                                                     |  |             | 13,186 |             |  |  | 11,097 |  |  |  |  |  |  |  |  | 
|Jen-i Mao, Ph.D.            |  |                   |  |          |  |                                          |  |                                                     |  |             | 13,105 |             |  |  | 3,322  |  |  |  |  |  |  |  |  | 
|Kathy A. San Roman          |  |                   |  |          |  |                                          |  |                                                     |  |             | 9,563  |             |  |  | 7,802  |  |  |  |  |  |  |  |  | 
|Thomas J. Vasicek, Ph.D.    |  |                   |  |          |  |                                          |  |                                                     |  |             |       |             |  |  | 17,142 |  |  |  |  |  |  |  |  | 
|Norman J. W. Russell, Ph.D. |  |                   |  |          |  |                                          |  |                                                     |  |             |       |             |  |  |       |  |  |  |  |  |  |  |  | 
|Richard P. Woychik, Ph.D.   |  |                   |  |          |  |                                          |  |                                                     |  |             |       |             |  |  | 2,857  |  |  |  |  |  |  |  |  | 

Employment, Severance and Change of Control Agreements

In June 2002, we entered into an employment agreement with Kevin P.
Corcoran, Lynxs President and Chief Executive Officer, providing for an annual
compensation of $250,000. In the event Mr. Corcorans employment is terminated
without cause (as defined in the agreement) by us, or by any successor or
acquiring entity, upon or after certain change of control events, Mr. Corcoran
shall be eligible to receive severance compensation: (a) if the termination
occurs on or prior to the first year anniversary of the effective date of the
agreement, equal to six months of his base salary; and (b) if the termination
occurs after the first year anniversary of the effective date of the agreement,
equal to three months of his base salary. The severance shall be the only
severance, benefit or cash compensation, other than accrued wages, to which Mr.
Corcoran shall be entitled from Lynx in the event of a termination without
cause. In the event, however, that a successor or acquiring entity is
obligated to pay such severance to Mr. Corcoran, such severance shall be in
addition to any equity compensation or benefits for which Mr. Corcoran may be
eligible under the 1992 Plan.

In June 2002, we entered into an employment agreement with Thomas J.
Vasicek, Ph.D., Lynxs Vice President, Business Development,
providing for: (i)
an initial annual compensation of $200,000; (ii) subject to certain
performance-based criteria, a potential annualized base salary increase to
$240,000; and (iii) subject to the achievement of certain milestones, a
possible cash bonus equal to one percent (1%) of the cash proceeds received by
Lynx from certain third-party transactions. Also under the terms of the
agreement, Dr. Vasicek was granted an option to purchase 17,142 shares of
common stock at an exercise price of $8.05 per share, subject to a five-year
vesting schedule. In the event Dr. Vasiceks employment is terminated without
cause (as defined in the agreement) by Lynx, or by any successor or acquiring
entity, upon or after certain change of control events, Dr. Vasicek shall be
eligible to receive severance compensation: (a) if the termination occurs on or
prior to the first year anniversary of Dr. Vasiceks hire date, equal to six
months of his base salary; and (b) if the termination occurs after the first
year anniversary of Dr. Vasiceks hire date, equal to three months of his base
salary. The severance shall be the only severance, benefit or cash
compensation, other than accrued wages, to which Dr. Vasicek shall be entitled
from Lynx in the event of a termination without cause. In the event, however,
that a successor or acquiring entity is obligated to pay such severance to Dr.
Vasicek, such severance shall be in addition to any equity compensation or
benefits for which Dr. Vasicek may be eligible under the 1992 Plan.

In October 1999, we entered into an employment agreement with Norman J. W.
Russell, Ph.D., Lynxs former President and Chief Executive Officer, providing
for an annual compensation of $255,000 and an option to purchase 28,571 shares
of common stock at an exercise price of $79.17 per share, subject to a
five-year vesting schedule. 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
was secured by the property and was forgivable over a four-year period.

In connection with his resignation as President and Chief Executive
Officer of Lynx in May 2002, we entered into a separation agreement with Dr.
Russell. Pursuant to the terms and conditions of the separation agreement, Dr.
Russell received a gross severance payment of $246,665, or $127,440, net of
taxes, of which $60,000 was paid in cash and $67,440 was applied to his loan.
The loan was paid in full in September 2002.

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Compensation of Directors

We do not compensate directors for service 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 Lynx not to qualify as incentive stock options
under the Internal Revenue Code.

The following table sets forth options granted to our directors during the
last fiscal year. The exercise price is equal to the fair market value of the
common stock on the last market trading day prior to the date of grant (based
on the closing sales price reported on the Nasdaq National Market). As of
February 10, 2003, no options had been exercised by non-employee directors
under our 1992 Stock Option Plan.

|                               |  |               |            |             |  |                      |       |                |  |   |       | 
|------------------------------ |  | ------------- | ---------- | ----------- |  | -------------------- | ----- | -------------- |  | - | ----- | 
|                               |  |               |            |             |  | Number of Securities |       | Exercise Price
|                               |  |               |            |             |  | Underlying Options   |       | Per Share     
|Name                           |  | Date of Grant |            | Granted (#) |  | ($/sh)              
|                               |  |               |            |             |  |                     
|Sydney Brenner, M.B., D.
Phil. |  |               | 05/08/2002 |             |  |                      | 714   |                |  | $ | 10.01 | 
|Leroy Hood, M.D., Ph.D.        |  |               | 05/08/2002 |             |  |                      | 714   |                |  | $ | 10.01 | 
|James C. Kitch                 |  |               | 05/08/2002 |             |  |                      | 714   |                |  | $ | 10.01 | 
|David C. UPrichard, Ph.D.     |  |               | 05/08/2002 |             |  |                      | 714   |                |  | $ | 10.01 | 
|Craig C. Taylor                |  |               | 05/08/2002 |             |  |                      | 1,428 |                |  | $ | 10.01 | 
|Marc D. Kozin                  |  |               | 07/18/2002 |             |  |                      | 2,857 |                |  | $ | 7.00  | 
|Richard P. Woychik, Ph.D.      |  |               | 09/25/2002 |             |  |                      | 2,857 |                |  | $ | 3.85  | 

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 16 hours per month in consideration of his standard consulting
fee. In 2002, Dr. Brenner received $25,000 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 two non-employee directors: Messrs. Taylor and Kitch. Mr. Taylor
served as Acting Chief Financial Officer of Lynx from July 1994 to April 1997.
No executive officer of Lynx has served as a member of the board of
directors or compensation committee of any entity that has one or
more executive officers serving as a member of Lynx's board of
directors or Compensation Committee. 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, 2002.

Limitations of Liability and Indemnification

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.

In addition, our Amended and Restated 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 Amended and
Restated 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.

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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 and Related Stockholder Matters

See Item 5. Market for Registrants Common Equity and Related Stockholder
Matters, for information regarding Lynxs equity compensation plans.

The following table sets forth certain information regarding beneficial
ownership of Lynxs common stock as of February 10, 2003 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.

|                                                                                                                  |  |                          |         |          |  |  |      |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | -------- |  |  | ---- | -
|                                                                                                                  |  | Beneficial Ownership (1)
|                                                                                                                  |  |                         
|                                                                                                                  |  | Number                   |         | Percent 
|Name of Beneficial Owner                                                                                          |  | of Shares                |         | of Total
|                                                                                                                  |  |                          |         |         
|Takara Bio Inc.
Seta 3-4-1, Otsu, Shiga, 520-2193, Japan                                                          |  |                          | 628,877 |          |  |  | 13.5 | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Entities affiliated with Citigroup Inc (2)
399 Park Avenue
New York, NY 10043                                     |  |                          | 577,535 |          |  |  | 12.0 | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Entities affiliated with
Hambrecht & Quist Capital Management LLC (3)
30 Rowes Wharf, Suite 430
Boston, MA 02110  |  |                          | 375,570 |          |  |  | 7.9  | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Entities affiliated with Seneca Capital (4)
527 Madison Avenue, 11th Floor
New York, NY 10022                     |  |                          | 370,220 |          |  |  | 7.8  | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Entities affiliated with Friedman
Billings Ramsey Group, Inc (5)
1001 Nineteenth Street North
Arlington, VA 22209 |  |                          | 331,953 |          |  |  | 6.9  | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Perceptive Life Sciences Master Fund Ltd (6)
5437 Connecticut Avenue, N.W., Suite 100
Washington DC, 20015        |  |                          | 290,931 |          |  |  | 6.1  | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Craig C. Taylor (7)                                                                                               |  |                          | 72,318  |          |  |  | 1.6  | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Sydney Brenner, M.B., D. Phil.(8)                                                                                 |  |                          | 50,712  |          |  |  | 1.1  | %
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Edward C. Albini (9)                                                                                              |  |                          | 21,646  |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Jen-i Mao, Ph.D. (10)                                                                                             |  |                          | 14,236  |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Kathy A. San Roman (11)                                                                                           |  |                          | 11,161  |          |  |  |      |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Kevin P. Corcoran (12)                                                                                            |  |                          | 10,911  |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|James C. Kitch (13)                                                                                               |  |                          | 6,332   |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Leroy Hood, M.D., Ph.D. (14)                                                                                      |  |                          | 3,683   |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|David C. UPrichard, Ph.D. (15)                                                                                   |  |                          | 1,998   |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Thomas J. Vasicek, Ph.D                                                                                           |  |                          | 726     |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Marc D. Kozin                                                                                                     |  |                          | 0       |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Norman J. W. Russell, Ph.D. (16)                                                                                  |  |                          | 0       |          |  |  | *    |  
|                                                                                                                  |  |                          |         |          |  |  |      |  
|Richard P. Woychik, Ph.D. (17)                                                                                    |  |                          | 0       |          |  |  | *    |  

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|                                                       |  |  |         |  |  |  |     |  
|------------------------------------------------------ |  |  | ------- |  |  |  | --- | -
|James V. Mitchell                                      |  |  | 0       |  |  |  | *   |  
|                                                       |  |  |         |  |  |  |     |  
|All directors and officers as a group (13 persons)(18) |  |  | 193,723 |  |  |  | 4.1 | %



---

|* |  | Less than one percent.
|- |  | ----------------------



|(1) |  | This table is based on information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the SEC.
Except as otherwise noted, and subject to community property laws where
applicable, Lynx believes that 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 4,654,245 shares of common stock outstanding as of February
10, 2003, 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 10, 2003,
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) |  | Includes 357,142 shares of common stock and 142,857 shares of common
stock issuable upon exercise of a warrant held by Horizon Waves & Co.
(HW). Also includes 77,500 and 36 shares of common stock held by Cede &
Co. (Cede) and Salomon Smith Barney, Inc. (SSB), respectively. HW is
the nominee used by Smith Barney Fundamental Value Fund (SBFVF) and Cede
is the nominee used by Citi FCP CitiEquity US Value Fund (CEUVF) to
register the shares. SBFVF and CEUVF are mutual funds controlled by
Citigroup Inc., and SSB is a subsidiary of Citigroup Inc. Davis Skaggs
Investment Management (DSIM) has sole power to vote and control the
disposition of the shares held by HW and Cede while Smith Barney Asset
Management, Inc., has sole power to vote and control the dispositions of
the shares held by SSB. DSIM is a division of Smith Barney Asset
Management, Inc., which is also a subsidiary of Citigroup Inc. Therefore,
Citigroup Inc. may be deemed to be the beneficial owner of the securities
held by HW, Cede and SSB.                         
|   
|(3) |  | Includes 170,142 shares of common stock and 55,200 shares of common stock
issuable upon exercise of a warrant held by H&Q Healthcare Investors
(HQHI). Also includes 113,428 shares of common stock and 36,800 shares
of common stock issuable upon exercise of a warrant held by H&Q Science
Investors (HQSI). HQHI and HQSI are both wholly owned subsidiaries of
Hambrecht & Quist Capital Management LLC (HQCM). HQCM has sole power to
vote and control the disposition of the shares held by HQHI and HQSI, and
therefore, is deemed to be the beneficial owner of such shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(4) |  | Includes 178,135 shares of common stock and 80,000 shares of common stock
issuable upon exercise of a warrant held by Seneca Capital International,
Ltd. (SCI Ltd.). Also includes 77,800 shares of common stock and 34,285
shares of common stock issuable upon exercise of a warrant held by Seneca
Capital L.P. (SC L.P.), a limited partnership. Seneca Capital
Investments LLC (SCI LLC) serves as the investment advisor for SCI Ltd.
Seneca Capital Advisors LLC (SCA LLC) serves as the general partner of
SC L.P. Douglas Hirsch is the managing member of both SCI LLC and SCA LLC.
In this capacity, Mr. Hirsch has sole power to vote and control the
disposition of the shares held by SCI Ltd. and SC L.P., and therefore, may
be deemed to be the beneficial owner of such shares.                                                                                                                                                                                                                                                                              
|   
|(5) |  | Includes 142,857 shares of common stock and 35,714 shares of common stock
issuable upon the exercise of a warrant held by FBR Private Equity Fund,
L. P. (PEF), and 60,240 shares of common stock and 93,142 shares of
common stock issuable upon the exercise of warrants held by Friedman,
Billings, Ramsey & Co. (FBR & Co.). PEF is an equity fund limited
partnership. Friedman, Billings, Ramsey Investment Management, Inc., a
wholly owned subsidiary of Friedman, Billings, Ramsey Group, Inc.
(FBRG), serves as the general partner of PEF, and in that capacity
directs its investment activities. FBR & Co. is also a wholly owned
subsidiary of FBRG. FBRG disclaims beneficial ownership of the securities
held by PEF and FBR & Co.                                                                                                                                                                                                                                                                                                                               
|   
|(6) |  | Includes 108,571 shares of common stock issuable upon exercise of a
warrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(7) |  | Includes 16,606 shares of common stock, 1,428 shares of common stock
issuable upon exercise of stock options and 2,270 shares of common stock
issuable upon exercise of warrants held by Mr. Taylor. Also includes
52,014 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
Associates 1989 L.P. Mr. Taylor shares the power to vote and control the
disposition of shares held by Asset                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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|     |  | Management Associates 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.                                                                                                                                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(8)  |  | Includes 17,855 shares of common stock issuable upon exercise of stock
options held by Dr. Brenner that are exercisable within 60 days of
February 10, 2003.                                                                                                                                                                                                                                                                                                                                                                              
|    
|(9)  |  | Includes 14,402 shares of common stock issuable upon exercise of stock
options held by Mr. Albini that are exercisable within 60 days of February
10, 2003.                                                                                                                                                                                                                                                                                                                                                                               
|    
|(10) |  | Includes 13,962 shares of common stock issuable upon exercise of stock
options held by Dr. Mao that are exercisable within 60 days of February
10, 2003.                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(11) |  | Includes 10,394 shares of common stock issuable upon exercise of stock
options held by Ms. San Roman that are exercisable within 60 days of
February 10, 2003.                                                                                                                                                                                                                                                                                                                                                                            
|    
|(12) |  | Includes 6,268 shares of common stock issuable upon exercise of stock
options held by Mr. Corcoran that are exercisable within 60 days of
February 10, 2003.                                                                                                                                                                                                                                                                                                                                                                              
|    
|(13) |  | Includes 2,568 shares of common stock, 2,856 shares of common stock
issuable upon the exercise of stock options and 908 shares of common stock
issuable upon exercise of a warrant held by Mr. Kitch. Mr. Kitch holds
these options 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.
|    
|(14) |  | Includes 2,698 shares of common stock issuable upon exercise of stock
options held by Dr. Hood that are exercisable within 60 days of February
10, 2003.                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(15) |  | Includes 1,984 shares of common stock issuable upon exercise of stock
options held by Dr. UPrichard are exercisable within 60 days of February
10, 2003.                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(16) |  | Dr. Russell resigned as President, Chief Executive Officer and a director
of Lynx on May 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(17) |  | Dr. Woychik resigned as Chief Scientific Officer of Lynx on August 16,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(18) |  | Includes 118,698 shares of common stock (including shares of common stock
held by entities affiliated with certain directors), 71,847 shares of
common stock issuable upon exercise of stock options that are exercisable
within 60 days of February 10, 2003 and 3,178 shares of common stock
issuable upon exercise of warrants held by current directors and officers.
See Notes 7 through 15 above.                                                                                                                                   

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Item 13.Certain Relationships and Related Transactions

In June 2002, we entered into an employment agreement with Kevin P.
Corcoran, Lynxs President and Chief Executive Officer, providing for an annual
compensation of $250,000. In the event Mr. Corcorans employment is terminated
without cause (as defined in the agreement) by us, or by any successor or
acquiring entity, upon or after certain change of control events, Mr. Corcoran
shall be eligible to receive severance compensation: (a) if the termination
occurs on or prior to the first year anniversary of the effective date of the
agreement, equal to six months of his base salary; and (b) if the termination
occurs after the first year anniversary of the effective date of the agreement,
equal to three months of his base salary. The severance shall be the only
severance, benefit or cash compensation, other than accrued wages, to which Mr.
Corcoran shall be entitled from Lynx in the event of a termination without
cause. In the event, however, that a successor or acquiring entity is
obligated to pay such severance to Mr. Corcoran, such severance shall be in
addition to any equity compensation or benefits for which Mr. Corcoran may be
eligible under the 1992 Plan.

In June 2002, we entered into an employment agreement with Thomas J.
Vasicek, Ph.D., Lynxs Vice President, Business Development,
providing for: (i)
an initial annual compensation of $200,000; (ii) subject to certain
performance-based criteria, a potential annualized base salary increase to
$240,000; and (iii) subject to the achievement of certain milestones, a
possible cash bonus equal to one percent (1%) of the cash proceeds received by
Lynx from certain third-party transactions. Also under the terms of the
agreement, Dr. Vasicek was granted an option to purchase 17,142 shares of
common stock at an exercise price of $8.05 per share, subject to a five-year
vesting schedule. In the event Dr. Vasiceks employment is terminated without
cause (as defined in the agreement) by Lynx, or by any successor or acquiring
entity, upon or after certain change of control events, Dr. Vasicek shall be
eligible to receive severance compensation: (a) if the termination occurs on or
prior to the first year anniversary of Dr. Vasiceks hire date, equal to six
months of his base salary; and (b) if the termination occurs after the first
year anniversary of Dr. Vasiceks hire date, equal to three months of his base
salary. The severance shall be the only severance, benefit or cash
compensation, other than accrued wages, to which Dr. Vasicek shall be entitled
from Lynx in the event of a termination without cause. In the event, however,
that a successor or acquiring entity is obligated to pay such severance to Dr.
Vasicek, such severance shall be in addition to any equity compensation or
benefits for which Dr. Vasicek may be eligible under the 1992 Plan.

In October 1999, we entered into an employment agreement with Norman J. W.
Russell, Ph.D., Lynxs former President and Chief Executive Officer, providing
for an annual compensation of $255,000 and an option to purchase 28,571 shares
of common stock at an exercise price of $79.17 per share, subject to a
five-year vesting schedule. 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
was secured by the property and was forgivable over a four-year period.

In connection with his resignation as President and Chief Executive
Officer of Lynx in May 2002, we entered into a separation agreement with Dr.
Russell. Pursuant to the terms and conditions of the separation agreement, Dr.
Russell received a gross severance payment of $246,665, or $127,440, net of
taxes, of which $60,000 was paid in cash and $67,440 was applied to his loan.
The loan was paid in full in September 2002.

In 1999, we entered into a loan agreement with an officer of Lynx. The
loan totaled $110,000, was secured by a second mortgage on real property, had
interest accruable at a rate of 4.83% per annum and was subject to early
repayment under specified circumstances. The principal and interest on the loan
was to be forgiven, based on the officers continuous employment over a
four-year period, in the following amounts: 50% on the second anniversary date
of employment; and 25% on each of the third and fourth anniversary dates of
employment. The loan was forgiven in 2002 pursuant to the terms and conditions
of a separation agreement.

In August 1998, Lynx entered into two loan agreements with Jen-i Mao,
Ph.D., Lynxs Vice President, Genetic Analysis. Each loan was in the amount of
$100,000, was secured by a second mortgage on real property, had interest
accruable at the rate of 5.57% per annum and was subject to early repayment under
specified circumstances. The principal and interest on one loan were to be
forgiven, based on the officers continuous employment over a four-year period,
in the following amounts: 50% on the second anniversary date of employment; and
25% on each of the third and fourth anniversary dates of employment. The second
loan was 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 first loan was forgiven under the terms of the agreement, and
the second loan was paid in full in 2002.

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In April 1997, Lynx entered into a full-recourse loan agreement with
Edward C. Albini, Lynxs Chief Financial Officer. 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 were pledged
as collateral. The outstanding principal amount was due and payable in full in
April 2002, subject to an obligation to prepay under specified circumstances.
Interest was payable upon the expiration or termination of the note and accrued
at the rate of 6.49% per annum. The loan was paid in full in 2002.

For legal services rendered during the calendar year ended December 31,
2002, we paid approximately $471,000 to Cooley Godward LLP, Lynxs counsel, of
which Mr. Kitch, a director of Lynx, is a partner.

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 16 hours per month in consideration of his standard consulting
fee. In 2002, Dr. Brenner received $25,000 in consulting fees for services
performed for us.

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, as well
as certain employees.




Item 14.Controls and Procedures

Our chief executive officer and chief financial officer have concluded
that Lynxs disclosure controls and procedures (as defined in Securities
Exchange Act Rules 13a-14(c) and 15d-14(c)) are sufficiently effective to
ensure that the information required to be disclosed by Lynx in the reports
that we file under the Exchange Act is gathered, analyzed and disclosed with
adequate timeliness, accuracy and completeness, based on an evaluation of such
controls and procedures conducted within 90 days prior to the date hereof.

There have been no significant changes in Lynxs internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referred to above, nor were there any significant
deficiencies or material weaknesses in Lynxs internal controls. Accordingly,
no corrective actions were required or undertaken.

Lynxs management, including the chief financial officer and chief
executive officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

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PART IV




Item 15.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 30 through 35
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, 2002 and
2001.                                        
|      |  |                                                                                                      
|(iii) |  | Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000.          
|      |  |                                                                                                      
|(iv)  |  | Consolidated Statements of Stockholders Equity for the
years ended December 31, 2002, 2001 and 2000.
|      |  |                                                                                                      
|(v)   |  | Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000.          
|      |  |                                                                                                      
|(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:                                                                                                     

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|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|----------- | ------- | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                            
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 3.1.1*  |                         | Certificate of Amendment to Amended and Restated Certificate
of Incorporation of the Company.                                                                                                                                                                                                                                                  
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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 (see the Statement Form 10).                                                                                                                                                                    
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                     
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                                                  
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                                                
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                                            
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                   
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.  
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 10.7.4+ |                         | Fourth Amendment to Technology Development and Services
Agreement, dated March 31, 2002, by and between the Company
and Aventis CropScience GmbH, incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period
ended March 31, 2002.                                                                           
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 10.7.5+ |                         | Fifth Amendment to Technology Development and Services
Agreement, dated as of September 30, 2002, by and between the
Company and Bayer CropScience GmbH, incorporated by reference
to the indicated exhibit of the Companys Form 10-Q for the
period ended September 30, 2002.                                                                

64



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|            |           |                         |                                                                                                                                                                                                                                                                                    
|----------- | --------- | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |           | Description of Document
|            |           |                        
|            | 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.            
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 10.12.1+  |                         | Letter Amendment, dated March 1, 2002, to Research Collaboration
Agreement 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-Q for the period ended March 31, 2002.                       
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 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                                                                                                                   
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 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.                               
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 10.17.1*+ |                         | Amendment No. 1 to Collaboration Agreement, dated December 19, 2002, by
and between the Company and Takara Bio Inc.                                                                                                                                                                
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 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
the indicated exhibit of the Companys Current                                                                                           

65



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|            |         |                         |                                                                                                                                                                                                                                                                                            
|----------- | ------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |         | Description of Document
|            |         |                        
|            |         |                         | Report on Form 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
reference to the indicated exhibit of the Companys Current Report on
From 8-K filed on March 18, 2002.                                          
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.27   |                         | Form of Securities Purchase Agreement by and among the Company and the
investors listed therein, incorporated by reference to the indicated
exhibit of the Companys Current Report on Form 8-K, as amended, filed
on April 30, 2002.                                                      
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.28   |                         | Form of Registration Rights Agreement by and among the Company and the
investors listed therein, incorporated by reference to the indicated
exhibit of the Companys Current Report on Form 8-K, as amended, filed
on April 30, 2002.                                                      
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.29   |                         | Form of Warrant issued by the Company in favor or each investor party
to the Securities Purchase Agreement and Friedman, Billings, Ramsey
& Co., Inc., incorporated by reference to the indicated exhibit of the
Companys Current Report on Form 8-K, as amended, filed on April 30,
2002.
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.30** |                         | Employment Agreement, dated as of June 3, 2002, by and between the
Company and Kevin P. Corcoran, incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended June
30, 2002.                                                                        
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.31** |                         | Employment Agreement, dated as of June 10, 2002, by and between the
Company and Thomas J. Vasicek, Ph.D., incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended June
30, 2002.                                                                
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.32** |                         | Letter Agreement, dated as of July 9, 2002, by and between the Company
and Norman John Wilkie Russell, Ph.D., incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended June
30, 2002.                                                            
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.33   |                         | Common Stock Purchase Agreement, dated as of September 25, 2002, by and
between the Company and Takara Shuzo Co., Ltd., incorporated by
reference to the indicated exhibit of the Companys Form 10-Q for the
period ended September 30, 2002.                                             
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.34   |                         | Loan and Security Agreement, dated October 23, 2002, by and between the
Company and Comerica Bank-California, incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended
September 30, 2002.                                                       
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.35*  |                         | Common Stock Purchase Agreement, dated as of December 26, 2002, by and
between the Company and Takara Shuzo Co., Ltd.                                                                                                                                                                      
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 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.                                                                                                                                                                                                                                
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 99.1*++ |                         | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                   



---



|*    |  | 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.                                                                                     
|    
|(++) |  | This certification accompanies this annual report on Form 10-K and shall
not be deemed filed by Lynx for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.

(b)        Reports on Form 8-K

None.

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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 March,
28, 2003.

| |                         |                                                       
| | ----------------------- | ------------------------------------------------------
| | LYNX THERAPEUTICS, INC.
| |                         |                                                       
| | By:                     | /s/ Kevin P. Corcoran                                 
| |                         |                                                       
| |                         | Kevin P. CorcoranPresident 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/  Kevin P. CorcoranKevin P. Corcoran     |  | President, Chief Executive Officer and Director(Principal Executive Officer)      |  | March 28, 2003 
|                                           
|/s/  Craig C. TaylorCraig C. Taylor         |  | Chairman of the Board                                                             |  | March 28, 2003 
|                                           
|/s/  Edward C. AlbiniEdward C. Albini       |  | Chief Financial Officer and Secretary(Principal Financial and Accounting Officer) |  | March 28, 2003 
|                                           
|/s/  Sydney BrennerSydney Brenner           |  | Director                                                                          |  | March 28, 2003 
|                                           
|/s/  Leroy HoodLeroy Hood                   |  | Director                                                                          |  | March 28, 2003 
|                                           
|/s/  James C. KitchJames C. Kitch           |  | Director                                                                          |  | March 28, 2003 
|                                           
|/s/  Marc D. KozinMarc D. Kozin             |  | Director                                                                          |  | March 28, 2003 
|                                           
|/s/  David C. UPrichardDavid C. UPrichard |  | Director                                                                          |  | March 28, 2003 
|                                           
|/s/  Richard P. WoychikRichard P. Woychik   |  | Director                                                                          |  | March 28, 2003 
|                                           
|James V. Mitchell                           |  | Director                                                                          |  | March
   , 2003

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CERTIFICATION

I, Kevin P. Corcoran, President and Chief Executive Officer of Lynx
Therapeutics, Inc., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Lynx
Therapeutics, Inc.;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|
| | 4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                   

| |    |  |                                                                                                                                                                                                                                                                                             
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | designed such
disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| |    | 
| | b) |  | evaluated the
effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and                                                                                                  
| |    | 
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants Board of Directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |  |                                                                                                                                                                                                                                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| |    |  |                                                                                                                                                                                                                                                                                               
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 28, 2003

| |                                      
| | -------------------------------------
| | /s/ Kevin P. Corcoran                
| |                                      
| | President and Chief Executive Officer

68



---



##### Table of Contents



CERTIFICATION

I, Edward C. Albini, Chief Financial Officer of Lynx Therapeutics, Inc.,
certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Lynx
Therapeutics, Inc.;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;                   
|
| | 4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                   

| |    |  |                                                                                                                                                                                                                                                                                             
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| |    |  |                                                                                                                                                                                                                                                                                             
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
| |    |  |                                                                                                                                                                                                                                                                                             
| | c) |  | presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants Board of Directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |  |                                                                                                                                                                                                                                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| |    |  |                                                                                                                                                                                                                                                                                               
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 28, 2003

| |                        
| | -----------------------
| | /s/ Edward C. Albini   
| |                        
| | Chief Financial Officer

69



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##### Table of Contents






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.                                                                                                                                                            
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 3.1.1*  |                         | Certificate of Amendment to Amended and Restated Certificate
of Incorporation of the Company.                                                                                                                                                                                                                                                  
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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 (see the Statement Form 10).                                                                                                                                                                    
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                     
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                                                  
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                                                
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                                                                            
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.                                                                                                                                   
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 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.  
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 10.7.4+ |                         | Fourth Amendment to Technology Development and Services
Agreement, dated March 31, 2002, by and between the Company
and Aventis CropScience GmbH, incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period
ended March 31, 2002.                                                                           
|            |         |                         |                                                                                                                                                                                                                                                                                                                                                
|            | 10.7.5+ |                         | Fifth Amendment to Technology Development and Services
Agreement, dated as of September 30, 2002, by and between the
Company and Bayer CropScience GmbH, incorporated by reference
to the indicated exhibit of the Companys Form 10-Q for the
period ended September 30, 2002.                                                                





---



##### Table of Contents



|            |           |                         |                                                                                                                                                                                                                                                                                    
|----------- | --------- | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |           | Description of Document
|            |           |                        
|            | 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.            
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 10.12.1+  |                         | Letter Amendment, dated March 1, 2002, to Research Collaboration
Agreement 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-Q for the period ended March 31, 2002.                       
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 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                                                                                                                   
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 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.                               
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 10.17.1*+ |                         | Amendment No. 1 to Collaboration Agreement, dated December 19, 2002, by
and between the Company and Takara Bio Inc.                                                                                                                                                                
|            |           |                         |                                                                                                                                                                                                                                                                                    
|            | 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
the indicated exhibit of the Companys Current                                                                                           





---



##### Table of Contents



|            |         |                         |                                                                                                                                                                                                                                                                                            
|----------- | ------- | ----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |         | Description of Document
|            |         |                        
|            |         |                         | Report on Form 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
reference to the indicated exhibit of the Companys Current Report on
From 8-K filed on March 18, 2002.                                          
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.27   |                         | Form of Securities Purchase Agreement by and among the Company and the
investors listed therein, incorporated by reference to the indicated
exhibit of the Companys Current Report on Form 8-K, as amended, filed
on April 30, 2002.                                                      
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.28   |                         | Form of Registration Rights Agreement by and among the Company and the
investors listed therein, incorporated by reference to the indicated
exhibit of the Companys Current Report on Form 8-K, as amended, filed
on April 30, 2002.                                                      
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.29   |                         | Form of Warrant issued by the Company in favor or each investor party
to the Securities Purchase Agreement and Friedman, Billings, Ramsey
&
Co., Inc., incorporated by reference to the indicated exhibit of the
Companys Current Report on Form 8-K, as amended, filed on April 30,
2002.
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.30** |                         | Employment Agreement, dated as of June 3, 2002, by and between the
Company and Kevin P. Corcoran, incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended June
30, 2002.                                                                        
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.31** |                         | Employment Agreement, dated as of June 10, 2002, by and between the
Company and Thomas J. Vasicek, Ph.D., incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended June
30, 2002.                                                                
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.32** |                         | Letter Agreement, dated as of July 9, 2002, by and between the Company
and Norman John Wilkie Russell, Ph.D., incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended June
30, 2002.                                                            
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.33   |                         | Common Stock Purchase Agreement, dated as of September 25, 2002, by and
between the Company and Takara Shuzo Co., Ltd., incorporated by
reference to the indicated exhibit of the Companys Form 10-Q for the
period ended September 30, 2002.                                             
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.34   |                         | Loan and Security Agreement, dated October 23, 2002, by and between the
Company and Comerica Bank-California, incorporated by reference to the
indicated exhibit of the Companys Form 10-Q for the period ended
September 30, 2002.                                                       
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 10.35*  |                         | Common Stock Purchase Agreement, dated as of December 26, 2002, by and
between the Company and Takara Shuzo Co., Ltd.                                                                                                                                                                      
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 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.                                                                                                                                                                                                                                
|            |         |                         |                                                                                                                                                                                                                                                                                            
|            | 99.1*++ |                         | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                   



---



|*    |  | 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.                                                                                     
|    
|(++) |  | This certification accompanies this annual report on Form 10-K and shall
not be deemed filed by Lynx for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.