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

                                    FORM 10-K

(MARK ONE)

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

      FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                       OR

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

      FOR THE TRANSITION PERIOD FROM _____________ TO _____________

                        COMMISSION FILE NUMBER: 000-30111

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

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

       8800 TECHNOLOGY FOREST PLACE
        THE WOODLANDS, TEXAS 77381                       (281) 863-3000
      (Address of Principal Executive           (Registrant's Telephone Number,
           Offices and Zip Code)                      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, par value $0.001 per share

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

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

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

      The aggregate market value of voting stock held by non-affiliates of the
registrant as of the last day of the registrant's most recently completed second
quarter was approximately $124.9 million, based on the closing price of the
common stock on the Nasdaq National Market on June 28, 2002 of $4.12 per share.
For purposes of the preceding sentence only, all directors, executive officers
and beneficial owners of ten percent or more of the registrant's common stock
are assumed to be affiliates. As of March 10, 2003, 52,370,730 shares of common
stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Certain sections of the registrant's definitive proxy statement relating
to the registrant's 2003 annual meeting of stockholders, which proxy statement
will be filed under the Securities Exchange Act of 1934 within 120 days of the
end of the registrant's fiscal year ended December 31, 2002, are incorporated by
reference into Part III of this annual report on Form 10-K.

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                          LEXICON GENETICS INCORPORATED

                                TABLE OF CONTENTS

                                                                                                              
ITEM
                                                        PART I

   1.     Business.............................................................................................    1
   2.     Properties...........................................................................................   22
   3.     Legal Proceedings....................................................................................   23
   4.     Submissions of Matters to a Vote of Security Holders.................................................   23

                                                        PART II

   5.     Market for Registrant's Common Equity and Related Stockholder Matters................................   24
   6.     Selected Financial Data..............................................................................   25
   7.     Management's Discussion and Analysis of Financial Condition and Results of Operations................   26
  7A.     Quantitative and Qualitative Disclosure About Market Risk............................................   32
   8.     Financial Statements and Supplementary Data..........................................................   32
   9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................   32

                                                       PART III

  10.     Directors and Executive Officers of the Registrant...................................................   33
  11.     Executive Compensation...............................................................................   33
  12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......   33
  13.     Certain Relationships and Related Transactions.......................................................   34
  14.     Controls and Procedures..............................................................................   34

                                                        PART IV

  15.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................   35

Signatures.....................................................................................................   38

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

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

                  FACTORS AFFECTING FORWARD LOOKING STATEMENTS

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

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

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

      Lexicon Genetics is a biopharmaceutical company focused on the discovery
of breakthrough treatments for human disease. We are using gene knockout
technology to systematically discover in living mammals, or in vivo, the
physiological functions and pharmaceutical utility of genes. Our gene function
discoveries fuel therapeutic discovery programs in diabetes, obesity,
cardiovascular disease, immune disorders, neurological disease and cancer. We
have established drug discovery alliances and functional genomics collaborations
with leading pharmaceutical and biotechnology companies, research institutes and
academic institutions throughout the world to commercialize our technology and
turn our discoveries into drugs.

      We generate our gene function discoveries using knockout mice - mice whose
DNA has been altered to disrupt, or "knock out," the function of the altered
gene. Our patented gene trapping and gene targeting technologies enable us to
rapidly generate these knockout mice by altering the DNA of genes in a special
variety of mouse cells, called embryonic stem (ES) cells, which can be cloned
and used to generate mice with the altered gene. We employ an integrated
platform of advanced medical technologies to systematically discover and
validate, in vivo, the physiological functions and pharmaceutical utility of the
genes we have knocked out and the potential targets for therapeutic
intervention, or drug targets, they encode.

      We employ internal resources and drug discovery alliances to discover
potential small molecule drugs, therapeutic antibodies and therapeutic proteins
for in vivo-validated drug targets that we consider to have high pharmaceutical
value. We use our own sophisticated libraries of drug-like chemical compounds
and an industrialized medicinal chemistry platform to identify small molecule
drug candidates for our in vivo-validated drug targets. We have established
alliances with Genentech, Inc. for the discovery of therapeutic proteins and
antibody targets; with Abgenix, Inc. for the discovery and development of
therapeutic antibodies based on our drug target discoveries; and with Incyte
Genomics, Inc. for the discovery and development of therapeutic proteins. In
addition, we have established collaborations and license agreements with many
other leading pharmaceutical and biotechnology companies under which we receive
fees and, in many cases, are eligible to receive milestone and royalty payments,
in return for granting access to some of our technologies and discoveries for
use in their own drug discovery efforts.

      We believe that our industrialized approach of discovering and validating
drug targets in vivo, together with our capabilities in small molecule drug
discovery and the integration of our own capabilities with those of our alliance
partners in therapeutic antibody and therapeutic protein discovery, will
significantly increase our likelihood of success in discovering breakthrough
treatments for human disease, and will reduce the risk, time and expense of
discovering and developing therapeutics for new drug targets. Together, we
believe that these factors will provide us with substantial strategic advantages
in the competition to discover and develop genomics-based pharmaceutical
products.

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

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

                                       1

KEY MILESTONES AND ACHIEVEMENTS IN 2002

      We made substantial business and technical progress in 2002:

      -     We continued to advance additional in vivo-validated drug targets
            into therapeutic discovery programs, and identified compounds
            demonstrating activity in several of our more advanced programs;

      -     We established an alliance with Genentech for the discovery of
            therapeutic proteins and antibody targets;

      -     We made further progress in our alliances with Abgenix for the
            discovery of therapeutic antibodies and with Incyte for the
            discovery of therapeutic proteins;

      -     We granted non-exclusive, internal research-use sublicenses under
            our gene targeting patents to Genentech, Biogen, Inc. and Millennium
            Pharmaceuticals, Inc.;

      -     We obtained an additional key patent covering our gene trapping
            technology, as well as patents covering nine full-length sequences
            of potential drug targets identified in our gene discovery programs;

      -     We brought on-line our new office, laboratory and animal facilities;

      -     We substantially increased our rate of productivity in our
            Genome5000 program for the discovery of the in vivo functions of
            5,000 genes over five years, ending the year having completed the
            analysis of the functions of 750 genes; and

      -     We achieved more than $35 million in revenues, marking our seventh
            consecutive year of revenue growth.

      We believe we are poised to capitalize on these achievements in 2003 by
further accelerating the pace of our Genome5000 program, substantially expanding
our pipeline of in vivo-validated drug targets, advancing our therapeutic
discovery programs towards clinical development, and establishing additional
drug discovery alliances and functional genomics collaborations to commercialize
our technology and further develop our discoveries.

GENOMICS AND DRUG DISCOVERY

The Human Genome

      The human genome is comprised of complementary strands of deoxyribonucleic
acid, or DNA, molecules organized into 23 pairs of chromosomes. Genes, which
carry the specific information, or code, necessary to construct, or express, the
proteins that regulate human physiology and disease, make up approximately two
to four percent of the genome. The remaining 96% to 98% of DNA in chromosomes
does not code for protein. Although estimates vary as to the total number of
genes within the total of approximately three billion nucleotide base pairs of
"genomic" or "chromosomal" DNA that make up the human genome, it is estimated
that the human genome contains approximately 30,000 genes.

      The Human Genome Project and other publicly and privately-funded DNA
sequencing efforts invested considerable resources to sequence the genes in the
human genome, culminating in the completion of a "working draft" of sequence
from the human genome in the year 2000 and its publication in February 2001. The
sequence of a gene alone, however, does not permit reliable predictions of its
function in physiology and disease. As a result, the databases of gene sequences
generated by these efforts can be compared by analogy to a dictionary that
contains thousands of words, but only a handful of definitions.

Functional Genomics

      The efforts to discover these definitions - to define the functions of the
genes in the human genome and, in doing so, discover which genes encode
pharmaceutically valuable drug targets - are commonly referred to as

                                       2

functional genomics. Researchers use a variety of methods to obtain clues about
gene function, such as gathering information about where a gene's transcript is
found and where the corresponding protein is expressed in the cell, and
conducting experiments using cell culture, biochemical studies and non-mammalian
organisms. While these methods may provide useful information about gene
function at the biochemical and cellular levels, their ability to provide
information about how genes control mammalian physiology, and thus their
usefulness for drug discovery and development, is significantly limited.

      We believe that the method for defining gene function that has the
greatest relevance and highest value for drug discovery is to disrupt, or knock
out, the gene in a mouse and assess the resulting physiological, pathological
and behavioral consequences. As mammals, humans and mice have very similar
genomes and share very similar physiology - one of the reasons that mice are
among the most widely used animal model systems in the pharmaceutical industry.
As a result of these similarities, the in vivo analysis of the function of a
gene in knockout mice - mice whose DNA has been altered to disrupt, or "knock
out," the function of the altered gene - enables the predictions to be made
regarding the effects on human physiology of prospective therapeutics that
modulate the corresponding human drug target and, therefore, regarding the
pharmaceutical utility and value of the target for the discovery and development
of such therapeutics.

Genomics-Based Drug Discovery

      We believe that genomics represents a significant opportunity for the
discovery and development of breakthrough treatments for human disease. Drugs on
the market today interact with a total of about 120 specific protein targets,
each of which is encoded by a gene. Of those, only 43 represented human host
proteins targeted by one or more of the 100 best-selling drugs of 2001. While
estimates of the total number of potential drug targets encoded within the human
genome vary, some experts believe that genomics research could discover as many
as 5,000 new targets for pharmaceutical development. Our own experience suggests
that the number of new targets with true pharmaceutical value is much lower,
perhaps in the range of 100 to 150 new high-quality targets. This would still be
a substantial increase from the number of targets that fuel the pharmaceutical
industry at present, but demonstrates the importance of selecting the drug
targets with the greatest pharmaceutical utility from the much larger pool of
potential targets. The fact that very little is known about the physiological
functions of most genes, however, presents a major challenge in making these
selections, and for drug discovery research generally, which has traditionally
relied primarily on established drug targets with well-characterized functions.

      The magnitude of this challenge is evident in expectations regarding the
productivity of drug discovery research for genomics-based drug targets.
According to the Fruits of Genomics, a 2001 study conducted by McKinsey & Co.
and Lehman Brothers, the average cost of bringing a single drug to market,
estimated at $800 million in 2000, may increase to as much as $1.6 billion by
2005. The primary driver of the increase is the expected change, as a result of
the wealth of potential drug targets generated by the Human Genome Project and
other publicly and privately-funded DNA sequencing efforts, in the proportion of
drug targets in pharmaceutical companies' research pipelines that are
"unprecedented" - that is, drug targets for which therapeutics have not
previously been developed. The study estimates that this increase in
unprecedented drug targets will result in substantially higher rates of failure
in early preclinical biological validation and Phase 2 clinical development.

      The chief cause of these failures, we believe, is the advancement of
unprecedented drug targets into expensive screening and therapeutic discovery
programs without an understanding of the in vivo biology and physiological
function of the target. Because target selection decisions drive all subsequent
drug discovery and development spending, and failures account for 75% or more of
the average cost of bringing a drug to market, the quality of target selection
decisions has a disproportionate effect on the overall cost of bringing a drug
to market.

OUR STRATEGY

      We believe that the discovery and selection of drug targets that have high
pharmaceutical value - that exhibit favorable therapeutic profiles and address
large medical markets - will be the key determinant of success in genomics-based
drug discovery. The solution to this challenge, we believe, requires redefining
the way drug discovery is conducted by systematically determining the
physiological functions of large numbers of genes in mice, which, as mammals,
share significant genetic and physiological similarities with humans. We believe
that the resulting information will enable us to discover which potential
targets from the human genome exhibit favorable

                                       3

therapeutic profiles and address large medical markets. In addition, we believe
that identifying these drug targets at the very beginning of the drug discovery
process, before committing to expensive screening and therapeutic discovery
programs, will substantially increase the productivity and cost-effectiveness of
our drug discovery efforts relative to other approaches. Together, we believe
that these factors will significantly increase our likelihood of success in
discovering breakthrough treatments for human disease, and will reduce the risk,
time and expense of discovering and developing therapeutics for new drug
targets.

      Our principal objective is to establish a leadership position in the
discovery of breakthrough treatments for human disease. The key elements of our
strategy include the following:

      -     systematically discover, in vivo, the physiological functions and
            pharmaceutical utility of 5,000 genes over five years in our
            Genome5000 program;

      -     employ internal resources and drug discovery alliances to discover
            potential small molecule drugs, therapeutic antibodies and
            therapeutic proteins for in vivo-validated drug targets that we
            consider to have high pharmaceutical value;

      -     develop promising therapeutic candidates through drug development
            alliances or with our own resources; and

      -     generate near-term revenues through collaborations and license
            agreements with pharmaceutical and biotechnology companies in return
            for granting access to some of our technologies and discoveries for
            use in their own drug discovery efforts.

OUR TECHNOLOGY PLATFORM

      We have developed, refined and integrated a technology platform that spans
the drug discovery process from gene identification to the discovery and
development of therapeutics, with a focus on the systematic discovery and
validation, in vivo, of the physiological functions and pharmaceutical utility
of genes and the drug targets they encode, and the discovery and development of
therapeutics for our in vivo-validated drug targets. Our technology platform
includes both proprietary and non-proprietary technologies in gene sequencing
and discovery, bioinformatics analysis, expression analysis, gene knockouts,
biological and physiological analysis, chemical compound libraries, assay
development, high-throughput screening and medicinal chemistry.

      The core elements of our technology platform include our patented
technologies for the generation of gene knockouts, our integrated platform of
advanced medical technologies for the systematic and comprehensive biological
analysis of in vivo physiology, and our industrialized approach to medicinal
chemistry and the generation of high-quality, drug-like compound libraries.
These core elements of our technology platform are described below.

Gene Knockout Technologies

      We have developed and refined gene knockout technologies and expertise to
rapidly and efficiently generate knockout mice for the in vivo analysis of the
physiological functions of thousands of genes. Our patented gene trapping and
gene targeting technologies, our experience in using these technologies and the
scale of our gene knockout operations provide us with substantial advantages
over the methods generally used to generate knockout mice, allowing us to
overcome limitations inherent in such methods that restrict the rate at which
knockout mice may be produced and, therefore, the rate at which the genes in the
mammalian genome may be analyzed.

      Gene Targeting. Our gene targeting technology, which is covered by six
issued patents, enables us to generate highly-specific alterations in targeted
genes. The technology uses a vector to replace DNA of a gene in a mouse ES cell
with DNA from the targeting construct in the chromosome of the cell through a
process known as homologous recombination. When used to knock out a gene, the
DNA from the targeting construct disrupts the function of the targeted gene,
permitting the generation of knockout mice.

                                       4

      We use our gene targeting technology to knock out the function of the
targeted gene for the analysis of the gene's function. We also use this
technology in combination with one or more additional technologies such as
Cre/lox recombinase technology to generate alterations that selectively disrupt,
or conditionally regulate, the function of the targeted gene for the analysis of
the gene's function in selected tissues, at selected stages in the animal's
development or at selected times in the animal's life. In addition, we can use
this technology to replace the targeted gene with its corresponding human gene,
or ortholog, for use in our therapeutic discovery programs.

      We have developed an industrialized approach to gene targeting, and
believe that our experience using this technology and the scale of our gene
targeting operations provide us with substantial advantages in efficiency and
speed relative to others using similar approaches to generate knockout mice.

      Gene Trapping. Our gene trapping technology, which is covered by six
issued patents, is a high-throughput method of generating knockout mouse clones
that we invented. The technology uses genetically engineered retroviruses that
infect mouse ES cells in vitro, integrate into the chromosome of the cell and
deliver molecular traps for genes. The gene trap disrupts the function of the
gene into which it integrates, permitting the generation of knockout mice. The
gene trap also stimulates transcription of a portion of the trapped gene, using
the cell's own splicing machinery to extract this transcript from the chromosome
for automated DNA sequencing. This allows us to identify and catalogue each ES
cell clone by DNA sequence from the trapped gene, and to select ES cell clones
by DNA sequence for the generation of knockout mice.

      We have used our gene trapping technology in an automated process to
create our OmniBank library of more than 200,000 frozen gene knockout ES cell
clones, each identified by DNA sequence in a relational database. Because our
gene trapping vectors are designed to trap genes in a manner largely independent
of their levels of expression, our OmniBank library includes even those genes
that are very rarely expressed. We estimate that our OmniBank library currently
contains gene knockout clones for more than half of all genes in the mammalian
genome.

      We believe our OmniBank library, which is by far the largest library of
gene knockout clones in the world, provides us with unparalleled strategic
advantages in the discovery of in vivo gene function. The OmniBank library
permits us to generate knockout mice for in vivo analysis at a significantly
higher rate than is possible using other methods. We have generated many of our
in vivo-validated drug target discoveries that we consider to have high
pharmaceutical value using knockout mice generated from our OmniBank library.

Physiological Analysis Technologies

      We have assembled and integrated a technology platform for in vivo
physiological analysis using a medical center approach to genes, enabling us to
systematically define the functions and pharmaceutical utility of the genes we
have knocked out and the potential targets for therapeutic intervention, or drug
targets, they encode.

      Gene Function Discovery. We employ an integrated platform of advanced
medical technologies to rapidly and systematically discover and catalogue the
functions of the genes we have knocked out using our gene trapping and gene
targeting technologies. These technologies include many of the most
sophisticated diagnostic technologies that might be found in a major medical
center, from CAT-scans and magnetic resonance imaging (MRI) to complete blood
cell analysis, all adapted specifically for the analysis of mouse physiology.
This state-of-the-art technology platform enables us to assess the phenotypic
consequences, or function in a living mammal, of the knocked-out gene across a
variety of parameters relevant to human disease, including cancer,
cardiovascular disease, immune disorders, neurological disease, diabetes and
obesity. Most of the technologies we employ are non-invasive, permitting
longitudinal studies of gene function over time that are not feasible using
conventional techniques for the analysis of knockout mice. The information
resulting from this analysis is captured in relational databases for our use,
and use by our collaborators, in drug discovery.

      We believe that our medical center approach and the technology platform
that makes it possible provide us with substantial advantages over other
approaches to gene function and drug target discovery. We believe that our
comprehensive, unbiased approach allows us to uncover functions within the
context of mammalian physiology that might be missed by more narrowly-focused
efforts directed on the basis of hypotheses as to the gene's likely function,
particularly when these hypotheses are based on expression analyses and other
factors that our experience

                                       5

indicates are unreliable predictors of gene function. We also believe our
approach is more likely to uncover target-related side effects that might limit
the utility of potential therapeutics addressing the drug target or prove to be
unacceptable in light of the potential therapeutic benefit. In both these cases,
we believe these advantages will contribute to better target selection and,
therefore, to the success of our drug discovery and development efforts.

      Preclinical Analysis of Therapeutic Candidates. We employ the same
physiological analysis technology platform that we use in the discovery of gene
function to analyze the in vivo efficacy and safety profiles of therapeutic
candidates in mice. We believe that this approach will allow us, at an early
stage, to identify and optimize therapeutic candidates for further preclinical
and clinical development that demonstrate superior in vivo efficacy and to
distinguish compound-related effects from the target-related effects that we
defined using the same systematic, comprehensive series of tests. The result, we
believe, will substantially increase our likelihood of success in traditional
preclinical and clinical development, and will reduce the risk, time and expense
of developing our therapeutics for our in vivo-validated drug targets.

Medicinal Chemistry Technology

      We acquired state-of-the-art medicinal chemistry capabilities through our
July 2001 acquisition of Coelacanth Corporation, which forms the foundation of
our Lexicon Pharmaceuticals division focused on the discovery and development of
small molecule drugs for our in vivo-validated drug targets. We use
solution-phase chemistry to generate diverse libraries of optically pure
compounds that are targeted against the same categories of drug targets we
address in our Genome 5000 drug target discovery program. We design these
libraries by analyzing the chemical structures of drugs that have been proven
safe and effective against human disease and synthesizing that knowledge in the
design of scaffolds and chemical building blocks for the generation of large
numbers of new drug-like compounds. These building blocks, which we refer to as
"pharmacophoric modules," can rapidly be reassembled to generate optimization
libraries when we identify a hit, or compound demonstrating activity, against
one of our in vivo-validated targets, enabling us to rapidly optimize those hits
and accelerate our medicinal chemistry efforts.

RESEARCH AND DEVELOPMENT PROGRAMS

Genome5000 Drug Target Discovery Program

      We are using our industrialized approach to gene targeting and our
OmniBank library of more than 200,000 gene knockout ES cell clones, together
with our integrated platform of advanced physiological analysis technologies, to
systematically discover in living mammals, or in vivo, the functions and
pharmaceutical utility of a total of 5,000 genes over five years in our
Genome5000 program. The Genome5000 program includes the 1,250 drug targets that
we have committed to include in our LexVision database of in vivo-validated drug
targets, as well as the additional drug targets that we are pursuing in internal
programs and drug discovery alliances. We believe that our in vivo validation of
the drug targets discovered in our Genome5000 program provides us and our
collaborators with substantial advantages over competing validation approaches
in the discovery and development of genomics-based pharmaceutical products.

      Our Genome5000 efforts are focused on the discovery of the functions in
mammalian physiology of proteins encoded by pharmaceutically important gene
families, such as G-protein coupled (GPCRs) and other receptors, kinases, ion
channels, other key enzymes and secreted proteins. We use bioinformatics
analysis and other resources to prioritize genes for analysis in this program
from a variety of sources, including our own proprietary gene sequence
databases, which encompass hundreds of full-length human gene sequences and more
than 50,000 partial human gene sequences that we discovered using our gene
trapping technology, our OmniBank database and library, Incyte's LifeSeq(R) Gold
Database and the public human genome project.

      We have identified in vivo-validated drug targets in each of our internal
disease biology programs, which include programs for the identification of drug
targets with pharmaceutical utility in the discovery of therapeutics for the
treatment of diabetes, obesity, cardiovascular disease, immune disorders,
neurological disease and cancer. We are moving many of these targets forward
into therapeutic discovery and development programs, both on our own and with
collaborators.

                                       6

Therapeutic Discovery Programs

      We employ internal resources and drug discovery alliances to discover
potential small molecule drugs, therapeutic antibodies and therapeutic proteins
for in vivo-validated drug targets that we consider to have high pharmaceutical
value. We use our own sophisticated libraries of drug-like chemical compounds
and an industrialized medicinal chemistry platform to identify small molecule
drug candidates for our in vivo-validated drug targets. We have established
alliances with Genentech for the discovery of therapeutic proteins and antibody
targets; with Abgenix for the discovery and development of therapeutic
antibodies based on our drug target discoveries; and with Incyte for the
discovery and development of therapeutic proteins.

      Our criteria for advancing in vivo-validated drug targets into therapeutic
discovery and development programs include the following:

      -     Favorable Therapeutic Profile. The drug target must demonstrate a
            favorable therapeutic profile in vivo. Specifically, our in vivo
            analysis must suggest that the effect of inhibiting or otherwise
            modulating the activity of the drug target in humans would have a
            therapeutic effect in treating disease, with an acceptable
            target-related side effect profile.

      -     Novel Function. The function of the drug target must be novel - that
            is, we are interested in drug targets whose function was not
            generally known to others before we discovered it.

      -     Large Medical Market. The potential market for therapeutics
            addressing the drug target must be substantial. We are interested in
            drug targets that are key switches that control human physiology,
            addressing large markets such as heart disease, diabetes, depression
            and cancer.

      Our small molecule drug discovery programs involve the following stages:

      -     assay development and high throughput screening (HTS) to identify
            "hits," or compounds demonstrating activity, against the in
            vivo-validated targets;

      -     medicinal chemistry efforts to optimize the potency and selectivity
            of the hits, to identify lead compounds for further development;

      -     lead optimization and preliminary preclinical analysis;

      -     formal preclinical studies of optimized leads; and

      -     clinical development.

      Our most advanced projects to date have reached the lead optimization and
preliminary preclinical analysis stage.

      As of March 10, 2003, we had advanced more than 15 in vivo-validated drug
targets into therapeutic discovery programs.

Research and Development Expenses

      In 2002, 2001 and 2000, respectively, we incurred expenses of $74.9
million, $53.4 million and $31.6 million in company-sponsored research and
development activities, including $5.2 million, $5.5 million and $10.9 million,
respectively, of stock-based compensation expense.

                                       7

COLLABORATIONS AND ALLIANCES

      Our collaboration and alliance strategy involves:

      -     drug discovery alliances to discover and develop therapeutics based
            on our drug target discoveries, particularly when the alliance
            enables us to obtain access to technology and expertise that is
            complementary to our own; and

      -     functional genomics collaborations with pharmaceutical and
            biotechnology companies, research institutions and academic
            institutions to generate near-term revenues for granting access to
            some of our technologies and discoveries for use in their own drug
            discovery efforts, as well as the potential, in many cases, for
            milestone payments and royalties on products they develop using our
            technology.

      In implementing this strategy, we have entered into the drug discovery
alliances and functional genomics collaborations with leading pharmaceutical and
biotechnology companies, research institutions and academic institutions
throughout the world, as described below.

Drug Discovery Alliances

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

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

      Abgenix, Inc. We established a drug discovery alliance with Abgenix in
July 2000 to discover novel therapeutic antibodies using our functional genomics
technologies and Abgenix's technology for generating fully human monoclonal
antibodies. We and Abgenix expanded and extended the alliance in January 2002,
with the intent of accelerating the selection of in vivo-validated antigens for
antibody discovery and the development and commercialization of therapeutic
antibodies based on those targets. Under the alliance agreement, we and Abgenix
will each have the right to obtain exclusive commercialization rights, including
sublicensing rights, for an equal number of qualifying therapeutic antibodies,
and will each receive milestone payments and royalties on sales of therapeutic
antibodies from the alliance that are commercialized by the other party or a
third party sublicensee. Each party will bear its own expenses under the
alliance. The expanded alliance also provides us with access to Abgenix's
XenoMouse(R) technology for use in some of our own drug discovery programs. The
agreement, as extended, has a term of four years, subject to the right of the
parties to extend the term for up to three additional one-year periods.

      Incyte Genomics, Inc. We established a drug discovery alliance with Incyte
in June 2001 to discover novel therapeutic proteins using our functional
genomics technologies in the discovery of the functions of secreted proteins
from Incyte's LifeSeq(R) Gold database. Under the alliance agreement, we and
Incyte will each have the right to obtain exclusive commercialization rights,
including sublicensing rights, for an equal number of qualifying therapeutic
proteins, and will each receive milestone payments and royalties on sales of
therapeutic proteins from the alliance that are commercialized by the other
party or a third party sublicensee. The agreement has a term of five years,
although either party may terminate the agreement after three years.

                                       8

LexVision Collaborations

      We have entered into the following collaborations for access to our
LexVision database of in vivo-validated drug targets:

      Bristol-Myers Squibb Company. We established a LexVision collaboration
with Bristol-Myers Squibb in September 2000, under which Bristol-Myers Squibb
has non-exclusive access to our LexVision database and OmniBank library for the
discovery of small molecule drugs. We receive access fees under this agreement,
and are entitled to receive milestone payments and royalties on products
Bristol-Myers Squibb develops using our technology. The agreement has a term of
five years, although either party may terminate the agreement after three years.

      Incyte Genomics, Inc. We established a LexVision collaboration with Incyte
in June 2001, under which Incyte has non-exclusive access to our LexVision
database and OmniBank library for the discovery of small molecule drugs. We
receive access fees under this agreement, and are entitled to receive milestone
payments and royalties on products Incyte develops using our technology. The
agreement has a term of five years, although either party may terminate the
agreement after three years.

Functional Genomics Collaborations

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

      We have entered into functional genomics collaboration agreements with the
following companies:

      COMPANY                                                    DATE OF AGREEMENT     END OF ACCESS PERIOD
      -------                                                    -----------------     --------------------
                                                                                 
      Amgen, Inc.                                                July 2001             July 2003
      Abgenix, Inc.                                              January 2001          January 2004
      Tularik Inc.                                               October 2000          October 2003
      Wyeth                                                      March 2000            March 2003
      Boehringer Ingelheim Pharmaceuticals, Inc.                 February 2000         February 2004
      Pharmacia Corp.                                            January 2000          January 2003
      Johnson & Johnson Pharmaceutical
           Research and Development L.L.C.                       December 1999         December 2003
      N.V. Organon                                               December 1999         December 2002
      Millennium Pharmaceuticals, Inc.                           July 1999             June 2002

      Each of these agreements has a specified access period during which the
collaborator may request new projects, although we continue to conduct work and
the agreement remains in effect until the projects requested during the access
period are completed.

      We have also entered into functional genomics collaboration agreements
with a number of additional companies and academic institutions throughout the
world under which we receive research fees for the generation of knockout mice
and, with participating institutions, certain rights to license inventions or
royalties on products discovered using such mice.

e-Biology Global Collaboration Program

      We believe that our OmniBank database and library represent a unique
resource for catalyzing collaborations with researchers at pharmaceutical
companies, biotechnology companies and academic institutions

                                       9

for the discovery of gene function. We provide access to our OmniBank database
through the Internet to subscribing researchers at leading companies and
academic institutions throughout the world. Our bioinformatics software allows
subscribers to mine our OmniBank database for genes of interest, and we permit
subscribers to acquire OmniBank knockout mice or ES cells on a non-exclusive
basis for the determination of gene function under our e-Biology collaboration
program. In this program, we receive fees for OmniBank knockout mice and, with
participating institutions, rights to license inventions or to receive royalties
on pharmaceutical products discovered using our mice. In cases where we do not
obtain such rights, our e-Biology collaborations leverage the value of OmniBank
since we retain rights to use the same OmniBank knockout mice in our own gene
function research and with commercial collaborators. We have more than 100
agreements under our e-Biology collaboration program with researchers at leading
institutions throughout the world.

TECHNOLOGY LICENSES AND COMPOUND SALES

      In addition to collaborations, we have used technology licenses and
compound library sales to generate revenues for the support of our own research
and development efforts.

      Technology Licenses. We have granted non-exclusive, internal research-use
sublicenses under certain of our gene targeting patent rights to a total of 12
leading pharmaceutical and biotechnology companies. Many of these agreements
have terms of one to three years, in some cases with provisions for subsequent
renewals. Others extend for as long as the life of the patents. We typically
receive up-front license fees and, in some cases, receive additional license
fees or milestone payments on products that the sublicensee discovers or
develops using our technology.

      Compound Library Sales. Our Lexicon Pharmaceuticals subsidiary has entered
into agreements with a total of 29 leading pharmaceutical and biotechnology
companies for non-exclusive access to selected compound libraries. Most of these
agreements were completed by Coelacanth prior to our July 2001 acquisition of
the company. The remainder were completed in 2001 as we wound down Coelacanth's
compound sales efforts in support of our strategic decision to use our compound
libraries principally in our own drug discovery efforts. These agreements
typically provide for our sale of compounds from the selected library for use by
the customer in its own internal drug discovery efforts. Under some of these
agreements, we have agreed to provide additional quantities of selected
compounds or optimization services in exchange for further payments. Subject to
limited exceptions, we do not intend to continue to make our compound libraries
available for purchase in the future.

PATENTS AND PROPRIETARY RIGHTS

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

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

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

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

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

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

      We own or have exclusive rights to six issued U.S. patents that cover our
gene trapping technology, nine issued U.S. patents that cover full-length
sequences of potential drug targets identified in our gene discovery

                                       10

programs, and five issued U.S. patents that cover specific knockout mice and
discoveries of the functions of genes made using knockout mice. We have licenses
under 47 additional U.S. patents, and corresponding foreign patents and patent
applications, in the fields of gene targeting, gene trapping and genetic
manipulation of mouse ES cells. These include patents to which we hold exclusive
rights in certain fields, including a total of six U.S. patents covering the use
of positive-negative selection and isogenic DNA gene targeting technology, as
well as patents covering the use of Cre/lox technology. We have filed or have
exclusive rights to more than 500 pending patent applications in the United
States Patent and Trademark Office, the European Patent Office, the national
patent offices of other foreign countries or under the Patent Cooperation
Treaty, covering our gene trapping technology, the DNA sequences of genes, the
utility of drug targets, drug discovery assays, and other products and
processes. Collectively, these patent applications cover, among other things,
approximately 200 full-length human gene sequences, more than 50,000 partial
human gene sequences, and more than 45,000 knockout mouse clones and
corresponding mouse gene sequence tags. Patents typically have a term of no
longer than 20 years from the date of filing.

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

COMPETITION

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

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

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

GOVERNMENT REGULATION

Regulation of Pharmaceutical Products

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

                                       11

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

      -     preclinical tests;

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

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

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

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

      In addition to obtaining FDA approval for each product, each drug or
biologic manufacturing establishment must be inspected and approved by the FDA.
All manufacturing establishments are subject to inspections by the FDA and by
other federal, state and local agencies and must comply with current Good
Manufacturing Practices requirements.

      Preclinical studies can take several years to complete, and there is no
guarantee that an IND based on those studies will become effective to even
permit clinical testing to begin. Once clinical trials are initiated, they
generally take four to seven years, but may take longer, to complete. After
completion of clinical trials of a new drug or biologic product, FDA marketing
approval of the NDA or BLA must be obtained. This process requires substantial
time and effort and there is no assurance that the FDA will accept the NDA or
BLA for filing and, even if filed, that approval will be granted. In the past,
the FDA's approval of the NDA or BLA has taken, on average, one to three years;
if questions arise, approval can take longer.

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

Other Regulations

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

EMPLOYEES AND CONSULTANTS

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

                                       12

      As of March 3, 2003, we employed 579 persons, of whom 123 hold M.D., Ph.D.
or D.V.M. degrees and another 123 hold other advanced degrees. We believe that
our relationship with our employees is good.

SCIENTIFIC ADVISORY PANEL MEMBERS

      We have consulting relationships with a number of scientific advisors. At
our request, these advisors review the feasibility of product development
programs under consideration, provide advice concerning advances in areas
related to our technology and aid in recruiting personnel. Most of these
advisors receive cash and stock-based compensation for their services, and in
some cases receive access to our OmniBank database and mice from our OmniBank
library. Most of these advisors are employed by academic institutions or other
entities and may have commitments to or advisory agreements with other entities
that may limit their availability to us. Our advisors are required to disclose
and assign to us any ideas, discoveries and inventions they develop in the
course of providing consulting services to us. We also use consultants for
various administrative needs. None of our consultants or advisors is otherwise
affiliated with us.

      Our scientific advisors and consultants include the following persons:

NAME                                     AFFILIATION                         TITLE
- ----                                     -----------                         -----
                                                                       
DISEASE BIOLOGY ADVISORS
Abul K. Abbas, M.D.                      University of California, San       Professor and Chair, Department of Pathology
                                         Francisco

John D. Brunzell, M.D.                   University of Washington            Professor of Medicine, Division of
                                                                             Metabolism, Endocrinology & Nutrition

Roger D. Cone, Ph.D.                     Vollum Institute for Advanced       Senior Scientist
                                         Biomedical Research

Neal G. Copeland, Ph.D.                  National Cancer Institute           Director, Mouse Cancer Genetics Program

Kenneth H. Gabbay, M.D.                  Baylor College of Medicine          Professor of Pediatrics and Molecular &
                                                                             Cell Biology, Head, Section of Molecular
                                                                             Diabetes and Metabolism, Department of
                                                                             Pediatrics

John M. Harlan, M.D.                     University of Washington            Professor and Head, Division of Hematology
                                                                             Medicine

Nancy A. Jenkins, Ph.D.                  National Cancer Institute           Senior Investigator, Mouse Cancer Genetics
                                                                             Program

Jeffrey L. Noebels, M.D., Ph.D.          Baylor College of Medicine          Professor of Neurology, Neuroscience and
                                                                             Molecular Genetics

Howard A. Rockman, M.D.                  Duke University Medical Center      Associate Professor of Medicine

Oliver Smithies, Ph.D.                   University of North Carolina        Excellence Professor, Department of
                                                                             Pathology and Laboratory Medicine

Laurence H. Tecott, M.D., Ph.D.          University of California, San       Associate Professor, Department of
                                         Francisco                           Psychiatry
MEDICINAL CHEMISTRY ADVISORS
Ronald T. Borchardt, Ph.D.               University of Kansas                Professor and Chairman, Department of
                                                                             Pharmaceutical Chemistry

Alan R. Katritsky, Ph.D.                 University of Florida               Professor of Chemistry

David W. C. MacMillan, Ph.D.             California Institute of Technology  Associate Professor of Chemistry

Nikola Pavletich, Ph.D.                  Memorial Sloan-Kettering Cancer     Head, Structural Biology of Oncogenes and
                                         Center                              Tumor Suppressors Laboratory, Howard Hughes
                                                                             Medical Institute Investigator
Chairman, Medical Advisory Board
Alan S. Nies, M.D.                                                           Former Senior Vice President, Clinical
                                                                             Sciences, Merck & Co., Inc.

                                       13

RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

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

      We have incurred net losses since our inception, including net losses of
$59.7 million for the year ended December 31, 2002. As of December 31, 2002, we
had an accumulated deficit of $149.7 million. We are unsure when we will become
profitable, if ever. The size of our net losses will depend, in part, on the
rate of growth, if any, in our revenues and on the level of our expenses.

      We derive substantially all of our revenues from subscriptions to our
LexVision and OmniBank databases, drug discovery alliances, functional genomics
collaborations for the development and, in some cases, analysis of the
physiological effects of genes altered in knockout mice, technology licenses and
compound library sales, and will continue to do so for the foreseeable future.
Our future revenues from database subscriptions, collaborations and alliances
are uncertain because our existing agreements have fixed terms or relate to
specific projects of limited duration. Our future revenues from technology
licenses are uncertain because they depend, in large part, on securing new
agreements. Subject to limited exceptions, we do not intend to continue to make
our compound libraries available for purchase in the future. Our ability to
secure future revenue-generating agreements will depend upon our ability to
address the needs of our potential future subscribers, collaborators and
licensees, and to negotiate agreements that we believe are in our long-term best
interests. We may determine that our interests are better served by retaining
rights to our discoveries and advancing our therapeutic programs to a later
stage, which could limit our near-term revenues.

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

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

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

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

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

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

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

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

      Because of these and other factors, including the risks and uncertainties
described in this section, our quarterly operating results have fluctuated in
the past and are likely to do so in the future. Due to the likelihood of

                                       14

fluctuations in our revenues and expenses, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. Our operating results in some quarters may not meet the
expectations of stock market analysts and investors, which could result in a
decline in our stock price.

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

      Our future capital requirements will be substantial and will depend on
many factors, including our ability to obtain database subscription, alliance,
collaboration and technology license agreements, the amount and timing of
payments under such agreements, the level and timing of our research and
development expenditures, market acceptance of our products, the resources we
devote to developing and supporting our products and other factors. Our capital
requirements will increase substantially to the extent we advance potential
therapeutics into preclinical and clinical development. Our capital requirements
will also be affected by any expenditures we make in connection with license
agreements and acquisitions of and investments in complementary technologies and
businesses.

      We anticipate that our existing capital resources and revenues we expect
to derive from subscriptions to our databases, drug discovery alliances,
functional genomics collaborations and technology licenses will enable us to
maintain our currently planned operations at least through the next 12 months.
However, we may generate less revenues than we expect, and changes may occur
that would consume available capital resources more rapidly than we expect. If
our capital resources are insufficient to meet future capital requirements, we
will have to raise additional funds to continue the development of our
technologies and complete the commercialization of products, if any, resulting
from our technologies. We may be unable to raise sufficient additional capital;
if so, we will have to curtail or cease operations.

We are an early-stage company with an unproven business strategy

      Our business strategy of using our technology platform and, specifically,
the discovery of the functions of genes using knockout mice to select promising
drug targets and of developing and commercializing our discoveries through
collaborations and alliances is unproven. Our success will depend upon our
ability to enter into additional collaboration and alliance agreements on
favorable terms, determine which genes have potential value as drug targets,
discover potential therapeutics for drug targets we consider to have
pharmaceutical value, successfully develop such potential therapeutics and
select an appropriate commercialization strategy for each potential therapeutic
we choose to pursue.

      Biotechnology and pharmaceutical companies have successfully developed and
commercialized only a limited number of genomics-derived pharmaceutical products
to date. We have not proven our ability to identify genomics-derived
therapeutics or drug targets with commercial potential, or to develop or
commercialize therapeutics or drug targets that we do identify. It is difficult
to successfully select those drug targets with the most potential for commercial
development and to identify potential therapeutics, and we do not know that any
pharmaceutical products based on our drug target discoveries can be successfully
commercialized. In addition, we may experience unforeseen technical
complications in the processes we use to generate gene knockout mice, conduct in
vivo analyses, generate compound libraries, develop screening assays for drug
targets or conduct screening of compounds against those drug targets. These
complications could materially delay or limit the use of those resources,
substantially increase the anticipated cost of generating them or prevent us
from implementing our processes at appropriate quality and throughput levels.

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

      There are a finite number of genes in the human genome, and we believe
that the majority of such genes have been identified by us or others conducting
genomic research and that virtually all will be identified within the next few
years. We face significant competition in our efforts to discover and patent the
sequence and other information derived from such genes from entities using
alternative, and in some cases higher volume and larger scale, approaches for
the same purpose.

                                       15

      We also face competition from other companies in our efforts to discover
the functions of genes. Many of these competitors have substantially greater
financial, scientific and human resources than we do. A large number of
universities and other not-for-profit institutions, many of which are funded by
the U.S. and foreign governments, are also conducting research to discover the
functions of genes. Competitors could discover and establish patents in genes or
gene products that we identify as promising drug targets.

      Our ability to use our patent rights to prevent competition in the
creation and use of knockout mice outside of the United States is limited.
Furthermore, other methods for conducting functional genomics research may
ultimately prove superior, in some or all respects, to the use of knockout mice.
In addition, technologies more advanced than or superior to our gene targeting
and gene trapping technologies may be developed, thereby rendering those
technologies obsolete.

      We face significant competition from other companies, as well as from
universities and other not-for-profit institutions, in our drug discovery and
product development efforts. Many of these competitors have substantially
greater financial, scientific and human resources than we do. These competitors
may develop products earlier than we do, obtain regulatory approvals faster than
we can and develop products that are more effective than ours.

We rely heavily on collaborators to develop and commercialize pharmaceutical
products based on genes that we identify as promising candidates for development
as drug targets

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

      Some of our agreements provide us with rights to participate in the
commercial development of pharmaceutical products derived from our
collaborations or access to our databases, technology or intellectual property.
We may not be able to obtain such rights in future collaborations or agreements.
Our ability to obtain such rights depends in part on the validity of our
intellectual property, the advantages and novelty of our technologies and
databases and our negotiating position relative to each potential collaborator
or customer. Previous attempts by others in the industry to obtain these rights
with respect to the development of knockout mice and related technologies have
generated considerable controversy, especially in the academic community.

Any cancellation by or conflicts with our collaborators could harm our business

      Our alliance and collaboration agreements may not be renewed and may be
terminated in the event either party fails to fulfill its obligations under
these agreements. Any failure to renew or cancellation by a collaborator could
mean a significant loss of revenues and volatility in our earnings.

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

                                       16

We have no experience in developing and commercializing pharmaceutical products
on our own

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

We lack the capability to manufacture compounds for preclinical studies and
clinical trials and will rely on third parties to manufacture our potential
products

      We currently do not have the manufacturing capabilities or experience
necessary to produce materials for preclinical studies or clinical trials and
intend to rely on collaborators and third-party contractors to produce such
materials. We will rely on selected manufacturers to deliver materials on a
timely basis and to comply with applicable regulatory requirements, including
the FDA's current Good Manufacturing Practices, or GMP. These manufacturers may
not be able to produce material on a timely basis or manufacture material at the
quality level or in the quantity required to meet our development timelines and
applicable regulatory requirements. If we are unable to contract for production
of sufficient quantity and quality of materials on acceptable terms, our product
development efforts may be delayed.

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

      We may acquire additional businesses, technologies and products, if we
determine that these businesses, technologies and products complement our
existing technology or otherwise serve our strategic goals. We currently have no
commitments or agreements with respect to any acquisitions. If we do undertake
any transactions of this sort, the process of integrating an acquired business,
technology or product may result in operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for ongoing development of our business. Moreover, we may never realize the
anticipated benefits of any acquisition. Future acquisitions could result in
potentially dilutive issuances of our equity securities, the incurrence of debt
and contingent liabilities and amortization expenses related to intangible
assets, which could adversely affect our results of operations and financial
condition.

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

      We are highly dependent on Arthur T. Sands, M.D., Ph.D., our president and
chief executive officer, as well as other principal members of our management
and scientific staff. The loss of any of these personnel would have a material
adverse effect on our business, financial condition or results of operations and
could inhibit our product development and commercialization efforts. Although we
have entered into employment agreements with some of our key personnel,
including Dr. Sands, these employment agreements are for a limited period of
time and not all key personnel have employment agreements.

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

We may encounter difficulties in managing our growth, which could increase our
losses

      We have experienced a period of rapid growth that has placed and, if this
growth continues, will continue to place a strain on our human and capital
resources. If we are unable to manage our growth effectively, our losses could
increase. The number of our employees increased from 93 at December 31, 1998 to
122 at December 31, 1999, 287 at December 31, 2000, 484 at December 31, 2001,
572 at December 31, 2002 and 579 at March 3, 2003. Our ability to manage our
operations and growth effectively requires us to continue to expend funds to
improve our

                                       17

operational, financial and management controls, reporting systems and
procedures. If we are unable to successfully implement improvements to our
management information and control systems in an efficient or timely manner, or
if we encounter deficiencies in existing systems and controls, our management
may not have adequate information to manage our day-to-day operations.

Because all of our functional genomics operations are located at a single
facility, the occurrence of a disaster could significantly disrupt our business

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

RISKS RELATED TO OUR INDUSTRY

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

      The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions that will determine who has the
right to develop a particular product. No clear policy has emerged regarding the
breadth of claims covered in biotechnology patents. The biotechnology patent
situation outside the United States is even more uncertain and is currently
undergoing review and revision in many countries. Changes in, or different
interpretations of, patent laws in the United States and other countries might
allow others to use our discoveries or to develop and commercialize our products
without any compensation to us. We anticipate that these uncertainties will
continue for a significant period of time.

Our patent applications may not result in enforceable patent rights

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

      Other companies or institutions have filed and will file patent
applications that attempt to patent genes or gene sequences that may be similar
to our patent applications. The U.S. Patent and Trademark Office could decide
competing patent claims in an interference proceeding. Any such proceeding would
be costly, and we may not prevail. In addition, patent applications filed by
third parties may have priority over patent applications we file. In this event,
the prevailing party may require us or our collaborators to stop pursuing a
potential product or to negotiate a license arrangement to pursue the potential
product. We may not be able to obtain a license from the prevailing party on
acceptable terms, or at all. In addition, the Human Genome Project, as well as
many companies and institutions, have identified genes and deposited partial
gene sequences in public databases and are continuing to do so. These public
disclosures might limit the scope of our claims or make unpatentable subsequent
patent applications on full-length genes.

                                       18

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

If other companies and institutions obtain patents claiming the functional uses
of genes and gene products based upon gene sequence information and predictions
of gene function, we may be unable to obtain patents for our discoveries of
biological functions in knockout mice

      We intend to pursue patent protection covering the functions and
pharmaceutical utility that we discover for both new and known genes and
proteins. While an actual description of the biological function of a gene or
protein should enhance a patent position, we cannot assure you that such
information will increase the probability of issuance of any patents. Further,
many other entities are currently filing patents on genes which are identical or
similar to our filings. Many such applications seek to protect partial human
gene sequences, full-length gene sequences and the deduced protein products
encoded by the sequences while others use biological or other laboratory data.
Some of these applications attempt to assign biologic function to the DNA
sequences based on computer predictions or patterns of gene expression. There is
the significant possibility that patents claiming the functional uses of genes
and gene products will be issued to our competitors based on such information.

We may be involved in patent litigation and other disputes regarding
intellectual property rights, and can give no assurances that we will prevail in
any such litigation or other dispute

      Our potential products and those of our collaborators may give rise to
claims that they infringe the patents of others. This risk will increase as the
biotechnology industry expands and as other companies obtain more patents
covering the sequences, functions and uses of genes and the drug targets they
encode. In addition, many companies have well-established patent portfolios
directed to common techniques, methods and means of developing, producing and
manufacturing pharmaceutical products. Other companies or institutions could
bring legal actions against us or our collaborators for damages or to stop us or
our collaborators from manufacturing and marketing the affected products. If any
of these actions are successful, in addition to our potential liability for
damages, these entities may require us or our collaborators to obtain a license
in order to continue to manufacture or market the affected products or may force
us to terminate manufacturing or marketing efforts.

      We may need to pursue litigation against others to enforce our patents and
intellectual property rights. Patent litigation is expensive and requires
substantial amounts of management attention. In addition, the eventual outcome
of any such litigation is uncertain.

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

      Patent litigation involves substantial risks. Each time we sue for patent
infringement we face the risk that the patent will be held invalid or
unenforceable. Such a determination is binding on us for all future litigation
involving that patent. Furthermore, in light of recent U.S. Supreme Court
precedent, our ability to enforce our patents against state agencies, including
state sponsored universities and research labs, is limited by the Eleventh
Amendment to the U.S. Constitution. Finally, opposition by academicians and the
government may hamper our ability to enforce our patent against academic or
government research laboratories. Enforcement of our patents may cause our
reputation in the academic community to be injured.

                                       19

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

      Issued patents may not provide commercially meaningful protection against
competitors. Other companies or institutions may challenge our or our
collaborators' patents or independently develop similar products that could
result in an interference proceeding in the Patent and Trademark Office or a
legal action. In the event any single researcher or institution infringes upon
our or our collaborators' patent rights, enforcing these rights may be difficult
and time consuming. Others may be able to design around these patents or develop
unique products providing effects similar to our products. We may be required to
choose between pursuing litigation against infringers and being unable to
recover damages or otherwise enforce our patent rights.

      In addition, others may discover uses for genes or proteins other than
those uses covered in our patents, and these other uses may be separately
patentable. Even if we have a patent claim on a particular gene, the holder of a
patent covering the use of that gene could exclude us from selling a product
that is based on the same use of that gene. In addition, with respect to certain
of our patentable inventions, we have decided not to pursue patent protection
outside the United States, both because we do not believe it is cost-effective
and because of confidentiality concerns. Accordingly, our international
competitors could develop, and receive foreign patent protection for gene
sequences and functions for which we are seeking U.S. patent protection.

Our rights to the use of technologies licensed by third parties are not within
our control

      We rely, in part, on licenses to use certain technologies that are
material to our business. We do not own the patents that underlie these
licenses. Our rights to use these technologies and practice the inventions
claimed in the licensed patents are subject to our licensors abiding by the
terms of those licenses and not terminating them. In many cases, we do not
control the prosecution or filing of the patents to which we hold licenses and
rely upon our licensors to prevent infringement of those patents. The scope of
our rights under our licenses may be subject to dispute by our licensors or
third parties.

We may be unable to protect our trade secrets

      While we have entered into confidentiality agreements with employees and
collaborators, we may not be able to prevent the disclosure of our trade
secrets. In addition, other companies or institutions may independently develop
substantially equivalent information and techniques.

We and our collaborators are subject to extensive and uncertain government
regulatory requirements, which could increase our operating costs or adversely
affect our ability to obtain government approval of products based on genes that
we identify in a timely manner or at all

      Drugs and diagnostic products are subject to an extensive and uncertain
regulatory approval process by the FDA and comparable agencies in other
countries. The regulation of new products is extensive, and the required process
of laboratory testing and human studies is lengthy and expensive. The burden of
these regulations will fall on us to the extent we develop proprietary products
on our own. If the products are the result of a collaboration effort, these
burdens may fall on our collaborating partner or may be shared with us. We may
not be able to obtain FDA approvals for those products in a timely manner, or at
all. We may encounter significant delays or excessive costs in our efforts to
secure necessary approvals or licenses. Even if we obtain FDA regulatory
approvals, the FDA extensively regulates manufacturing, labeling, distributing,
marketing, promotion and advertising after product approval. Moreover, several
of our product development areas may involve relatively new technology and have
not been the subject of extensive product testing in humans. The regulatory
requirements governing these products and related clinical procedures remain
uncertain and the products themselves may be subject to substantial review by
foreign governmental regulatory authorities that could prevent or delay approval
in those countries. Regulatory requirements ultimately imposed on our products
could limit our ability to test, manufacture and, ultimately, commercialize our
products.

      Since we develop animals containing changes in their genetic make-up, we
may become subject to a variety of laws, guidelines, regulations and treaties
specifically directed at genetically modified organisms, or GMOs. The area of
environmental releases of GMOs is rapidly evolving and is currently subject to
intense regulatory scrutiny,

                                       20

particularly internationally. If we become subject to these laws we could incur
substantial compliance costs. For example, the Biosafety Protocol, or the BSP, a
recently adopted treaty, is expected to cover certain shipments from the United
States to countries abroad that have signed the BSP. The BSP is also expected to
cover the importation of living modified organisms, a category that could
include our animals. If our animals are not contained as described in the BSP,
our animals could be subject to the potentially extensive import requirements of
countries that are signatories to the BSP.

The uncertainty of pharmaceutical pricing and reimbursement may decrease the
commercial potential of our products and affect our ability to raise capital

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

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

Security risks in electronic commerce or unfavorable Internet regulation may
deter future use of our products and services

      We provide access to our databases and the opportunity to acquire our
knockout mice on the Internet. A fundamental requirement to conduct
Internet-based electronic commerce is the secure transmission of confidential
information over public networks. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments may result in a
compromise or breach of the algorithms we use to protect proprietary information
in our OmniBank database. Anyone who is able to circumvent our security measures
could misappropriate our proprietary information, confidential customer
information or cause interruptions in our operations. We may be required to
incur significant costs to protect against security breaches or to alleviate
problems caused by breaches. Further, a well-publicized compromise of security
could deter people from using the Internet to conduct transactions that involve
transmitting confidential information.

      Because of the growth in electronic commerce, Congress has held hearings
on whether to regulate providers of services and transactions in the electronic
commerce market, and federal or state authorities could enact laws, rules or
regulations affecting our business or operations. If enacted and applied to our
business, these laws, rules or regulations could render our business or
operations more costly, burdensome, less efficient or impracticable.

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

      Our research and development processes involve the use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations also produce hazardous waste products. We cannot eliminate the risk
of accidental contamination or discharge or any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be

                                       21

subject to civil damages in the event of an improper or unauthorized release of,
or exposure of individuals to, these hazardous materials. In addition, claimants
may sue us for injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development or
production efforts.

We may be sued for product liability

      We or our collaborators may be held liable if any product we or our
collaborators develop, or any product which is made with the use or
incorporation of any of our technologies, causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing or sale. Although we
currently have and intend to maintain product liability insurance, this
insurance may become prohibitively expensive, or may not fully cover our
potential liabilities. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or our collaborators. If we are sued for any injury caused by our or our
collaborators' products, our liability could exceed our total assets.

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

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

ITEM 2. PROPERTIES

      We currently lease approximately 300,000 square feet of space for our
corporate offices and laboratories in buildings located in The Woodlands, Texas,
a suburb of Houston, Texas, and approximately 118,000 square feet of space for
offices and laboratories near Princeton, New Jersey.

      Our facilities in The Woodlands, Texas include two state-of-the art animal
facilities totaling approximately 100,000 square feet. These facilities,
completed in 1999 and 2002, respectively, were custom designed for the
generation and analysis of knockout mice and are accredited by AAALAC
International (Association for Assessment and Accreditation of Laboratory Animal
Care). These facilities enable us to maintain in-house control over our entire
in vivo validation process, from the generation of ES cell clones through the
completion of in vivo analysis, in a specific pathogen free (SPF) environment.
We believe these facilities, which are among the largest and most sophisticated
of their kind in the world, provide us with significant strategic and
operational advantages relative to our competitors.

      In October 2000, we entered into a synthetic lease agreement under which
the lessor purchased our existing laboratory and office buildings and animal
facility in The Woodlands, Texas and agreed to fund the construction of an
additional laboratory and office building and a second animal facility. The
synthetic lease agreement was subsequently expanded to include funding for the
construction of a central plant facility. Including the purchase price for our
existing facilities, the synthetic lease, as amended, provides for funding of up
to $55.0 million in property and improvements. The term of the agreement is six
years, which includes the construction period and a lease period. Lease payments
for the new facilities began upon completion of construction, which occurred at
the end of the first quarter of 2002. Lease payments are subject to fluctuation
based on LIBOR rates. Based on a year-end LIBOR rate of 1.4%, our total lease
payments for our existing facilities and the new facilities would be
approximately $0.9 million per year. At the end of the lease term, the lease may
be extended for one-year terms, up to seven additional terms, or we may purchase
the properties for a price equal to the $55.0 million funded under the synthetic
lease for property and improvements plus the amount of any accrued but unpaid
lease payments. If we elect not to renew the lease or purchase the properties,
we may arrange for the sale of the properties to a third party or surrender the
properties to the lessor. If we

                                       22

elect to arrange for the sale of the properties or surrender the properties to
the lessor, we have guaranteed approximately 86% of the total original cost as
the residual fair value of the properties.

      In May 2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc.
entered into a ten-year lease for a 76,000 square-foot facility in Hopewell, New
Jersey. The lease provides for an escalating yearly rent payment of $1.3 million
in the first year, $1.7 million in years two and three, $1.8 million in years
four to six, $2.0 million in years seven to nine and $2.1 million in year ten.
The lease also provides our subsidiary with the option in the second year of the
lease to borrow $2.0 million in tenant improvement funds from the landlord, at
which time rental payments due under the lease will increase as the tenant
improvement allowance is amortized over a ten-year period. We are the guarantor
of the obligations of our subsidiary under the lease. We also lease space in
East Windsor, New Jersey under an agreement that expires in January 2004. Our
aggregate rent expense under the New Jersey leases is approximately $2.5 million
per year.

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

ITEM 3. LEGAL PROCEEDINGS

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

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

      No matters were submitted during the fourth quarter of the year ended
December 31, 2002.

                                       23

                                     PART II

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

      Our common stock has been quoted on The Nasdaq National Market under the
symbol "LEXG" since April 7, 2000. Prior to that time, there was no public
market for our common stock. The following table sets forth, for the periods
indicated, the range of the high and low closing prices per share for our common
stock as reported on The Nasdaq National Market.

                                                                                          HIGH            LOW
                                                                                       ---------        --------
                                                                                                  
2001
First Quarter...................................................................       $   15.00        $   6.56
Second Quarter..................................................................       $   12.50        $   5.69
Third Quarter...................................................................       $   12.75        $   5.87
Fourth Quarter..................................................................       $   11.90        $   7.25
2002
First Quarter...................................................................       $   12.04        $   7.98
Second Quarter..................................................................       $    9.00        $   4.12
Third Quarter...................................................................       $    6.18        $   3.51
Fourth Quarter..................................................................       $    5.25        $   3.35

      As of March 10, 2003, there were approximately 253 holders of record of
our common stock.

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

                                       24

ITEM 6. SELECTED FINANCIAL DATA

      The statement of operations data for the year ended December 31, 2002 and
the balance sheet data as of December 31, 2002 have been derived from our
audited financial statements included elsewhere in this annual report on Form
10-K that have been audited by Ernst & Young LLP, independent auditors. The
statements of operations data for each of the years ended December 31, 2001 and
2000, and the balance sheet data as of December 31, 2001, have been derived from
our audited financial statements included elsewhere in this annual report on
Form 10-K that have been audited by Arthur Andersen LLP, independent public
accountants who have ceased operations. The statements of operations data for
the years ended December 31, 1999 and 1998, and the balance sheet data as of
December 31, 2000, 1999 and 1998 have been derived from our audited financial
statements not included in this annual report on Form 10-K. Our historical
results are not necessarily indicative of results to be expected for any future
period. The data presented below have been derived from financial statements
that have been prepared in accordance with accounting principles generally
accepted in the United States and should be read with our financial statements,
including the notes, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this annual report on
Form 10-K.

                                                                                         YEAR ENDED DECEMBER 31,
                                                                -------------------------------------------------------------------
                                                                   2002           2001          2000           1999          1998
                                                                ---------      ---------      ---------      --------      --------
STATEMENTS OF OPERATIONS DATA:                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                                            
Revenues ..................................................     $  35,200      $  30,577      $  14,459      $  4,738      $  2,242
Operating expenses:
   Research and development, including stock-based
     compensation of $5,155 in 2002, $5,539 in 2001
     and $10,883 in 2000 ..................................        74,859         53,355         31,647        14,646         8,410
   General and administrative, including stock-based
     compensation of $5,113 in 2002, $5,231 in 2001
     and $9,958 in 2000 ...................................        23,234         20,861         18,289         2,913         2,024
                                                                ---------      ---------      ---------      --------      --------
Total operating expenses ..................................        98,093         74,216         49,936        17,559        10,434
                                                                ---------      ---------      ---------      --------      --------
Loss from operations ......................................       (62,893)       (43,639)       (35,477)      (12,821)       (8,192)
Interest and other income, net ............................         3,223          8,467          9,483           346           711
                                                                ---------      ---------      ---------      --------      --------
Net loss ..................................................       (59,670)       (35,172)       (25,994)      (12,475)       (7,481)
Accretion on redeemable convertible preferred stock .......            --             --           (134)         (536)         (357)
                                                                ---------      ---------      ---------      --------      --------
Net loss attributable to common stockholders ..............     $ (59,670)     $ (35,172)     $ (26,128)     $(13,011)     $ (7,838)
                                                                =========      =========      =========      ========      ========
Net loss per common share, basic and diluted ..............     $   (1.14)     $   (0.70)     $   (0.63)     $  (0.53)     $  (0.32)
                                                                =========      =========      =========      ========      ========
Shares used in computing net loss per common share,
   basic and diluted ......................................        52,263         50,213         41,618        24,530        24,445

                                                                                          AS OF DECEMBER 31,
                                                                -------------------------------------------------------------------
                                                                   2002           2001          2000           1999          1998
                                                                ---------      ---------      ---------      --------      --------
BALANCE SHEET DATA:                                                                         (IN THOUSANDS)
                                                                                                            
Cash, cash equivalents and investments, including
  restricted cash and investments of $57,710 in 2002
  $43,338 in 2001 and $13,879 in 2000 .....................     $ 123,096      $ 166,840      $ 202,680      $  9,156      $ 19,422
Working capital ...........................................       111,833        147,663        194,801         2,021        18,102
Total assets ..............................................       201,772        239,990        220,693        22,295        28,516
Long-term debt, net of current portion ....................         4,000             --          1,834         3,577         5,024
Redeemable convertible preferred stock ....................            --             --             --        30,050        29,515
Accumulated deficit .......................................      (149,745)       (90,075)       (54,903)      (28,909)      (16,434)
Stockholders' equity (deficit) ............................       169,902        218,372        207,628       (21,937)       (9,035)

                                       25

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

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

OVERVIEW

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

      We employ internal resources and drug discovery alliances to discover
potential small molecule drugs, therapeutic antibodies and therapeutic proteins
for in vivo-validated drug targets that we consider to have high pharmaceutical
value. We use our own sophisticated libraries of drug-like chemical compounds
and an industrialized medicinal chemistry platform to identify small molecule
drug candidates for our in vivo-validated drug targets. We have established
alliances with Genentech, Inc. for the discovery of therapeutic proteins and
antibody targets; with Abgenix, Inc. for the discovery and development of
therapeutic antibodies based on our drug target discoveries; and with Incyte
Genomics, Inc. for the discovery and development of therapeutic proteins. In
addition, we have established collaborations and license agreements with many
other leading pharmaceutical and biotechnology companies under which we receive
fees and, in many cases, are eligible to receive milestone and royalty payments,
for access to some of our technologies and discoveries for use in their own drug
discovery efforts.

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

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

      Since our inception, we have incurred significant losses and, as of
December 31, 2002, we had an accumulated deficit of $149.7 million. Our losses
have resulted principally from costs incurred in research and development,
general and administrative costs associated with our operations, and non-cash
stock-based compensation expenses associated with stock options granted to
employees and consultants prior to our April 2000 initial public offering.
Research and development expenses consist primarily of salaries and related
personnel costs,

                                       26

material costs, facility costs, depreciation on property and equipment, legal
expenses resulting from intellectual property prosecution and other expenses
related to our drug discovery and LexVision programs, the development and
analysis of knockout mice and our other functional genomics research efforts,
and the development of compound libraries. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
other administrative personnel, professional fees and other corporate expenses
including business development and general legal activities, as well as expenses
related to our patent infringement litigation against Deltagen, Inc., which was
settled in September 2001. In connection with the expansion of our drug
discovery programs and our functional genomics research efforts, we expect to
incur increasing research and development and general and administrative costs.
As a result, we will need to generate significantly higher revenues to achieve
profitability.

      As of December 31, 2002, we had net operating loss carryforwards of
approximately $114.0 million. We also had research and development tax credit
carryforwards of approximately $7.1 million. The net operating loss and credit
carryforwards will expire at various dates beginning in 2011, if not utilized.
Utilization of the net operating losses and credits may be significantly limited
due to a change in ownership as defined by provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition

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

      Fees for access to our databases and other functional genomics resources
are recognized ratably over the subscription or access period. Collaborative
research payments are recognized as revenue as we perform our obligations
related to such research to the extent such fees are non-refundable.
Milestone-based fees are recognized upon completion of specified milestones
according to contract terms. Non-refundable technology license fees are
recognized as revenue upon the grant of the license when performance is complete
and there is no continuing involvement.

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

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

Research and Development Expenses

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

Stock-Based Compensation

      Deferred stock-based compensation and related amortization represents the
difference between the exercise price of stock options granted and the fair
value of our common stock at the applicable date of grant. Stock-based
compensation is amortized as research and development expense or general and
administrative expense, as appropriate, over the vesting period of the
individual stock options for which it was recorded, generally four years.

                                       27

If employees and consultants continue to vest in accordance with their
individual stock options, we expect to record amortization expense for deferred
stock-based compensation of $10.2 million during 2003 and $0.9 million during
2004. The amount of stock-based compensation expense to be recorded in future
periods may decrease if unvested stock options for which deferred stock-based
compensation has been recorded are subsequently canceled or forfeited or may
increase if additional stock options are granted to individuals other than
employees or directors.

Goodwill Impairment

      Goodwill is not amortized, but is tested at least annually for impairment
at the reporting unit level. Impairment is the condition that exists when the
carrying amount of goodwill exceeds its implied fair value. The first step in
the impairment process is to determine the fair value of the reporting unit and
then compare it to the carrying value, including goodwill. If the fair value
exceeds the carrying value, no further action is required and no impairment loss
is recognized. Additional impairment assessments may be performed on an interim
basis if we encounter events or changes in circumstances that would indicate
that, more likely than not, the carrying value of goodwill has been impaired.
There was no impairment of goodwill in 2002.

RECENT ACCOUNTING PRONOUNCEMENTS

      In November 2002, the Financial Accounting Standards Board, or FASB issued
Interpretation, or FIN, No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 elaborates on the existing disclosure requirements for most
guarantees, including residual value guarantees issued in conjunction with
operating lease agreements. It also clarifies that at the time a company issues
a guarantee, the company must recognize an initial liability for the fair value
of the obligation it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. Our adoption of FIN 45 will not have a material
impact on our results of operations and financial position.

      In November 2002, the Emerging Issues Task Force, or EITF, reached a
consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." This consensus requires that revenue arrangements with
multiple deliverables be divided into separate units of accounting if the
delivered items have value to the customer on a standalone basis, there is
objective and reliable evidence of fair value of the undelivered items and, if
the arrangement includes a general right of return, performance of the
undelivered item is considered probable and substantially in our control. The
final consensus will be applicable to agreements entered into in fiscal periods
beginning after June 15, 2003, with early adoption permitted.

      In December 2002, the FASB issued Statement of Financial Accounting
Standards, or SFAS, No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." This statement amends SFAS 123, "Accounting for
Stock-Based Compensation," 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, this statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
accounting for employee compensation and the effect of the method used on
reported results. The Company is currently evaluating whether to adopt the fair
value based method.

      In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires that unconsolidated variable interest
entities be consolidated by their primary beneficiaries. A primary beneficiary
is the party that absorbs a majority of the entity's expected losses or residual
benefits. FIN 46 applies immediately to variable interest entities created after
January 31, 2003 and to existing variable interest entities in the periods
beginning after June 15, 2003. We are evaluating whether the adoption of FIN 46
will require us to consolidate the lessor under our synthetic lease. If such
consolidation is required, our balance sheet will reflect as assets additional
property and equipment approximating the $55.0 million funded under the
synthetic lease for property and improvements, less accumulated depreciation,
and a similar amount as a liability. In addition, we will be required to
depreciate such improvements over their useful lives. We may, however, elect to
restructure or replace the synthetic lease prior to the adoption of FIN 46,
whether or not such consolidation would be required. We believe that the

                                       28

consolidation of the lessor, if required, will not have a material adverse
effect on our financial condition or results of operations.

RESULTS OF OPERATIONS

Years Ended December 31, 2002 and 2001

      Revenues. Total revenues increased 15% to $35.2 million in 2002 from $30.6
million in 2001. The increase of $4.6 million was primarily attributable to a
$5.9 million increase in revenues from functional genomics collaborations and
our drug discovery alliance with Incyte and a $3.1 million increase in revenues
from database subscription and technology license fees, offset in part by a $4.4
million decrease in compound libraries and other revenue. We did not make our
compound libraries available for purchase in 2002 and, subject to limited
exceptions, do not intend to make our compound libraries available for purchase
in the future.

      In 2002, Incyte, Bristol-Myers Squibb Company and Millennium
Pharmaceuticals, Inc. represented 28%, 14% and 11% of revenues, respectively. In
2001, Incyte, Bristol-Myers Squibb and Merck & Co., Inc. represented 16%, 13%
and 12% of revenues, respectively.

      Research and Development Expenses. Research and development expenses
increased 40% to $74.9 million in 2002 from $53.4 million in 2001. The increase
of $21.5 million was primarily attributable to increased personnel and facility
costs to support the expansion of our drug discovery programs, including a full
year of medicinal chemistry operations, the development and analysis of knockout
mice and our other functional genomics research efforts. Research and
development expenses for 2002 and 2001 included $5.2 million and $5.5 million,
respectively, of stock-based compensation primarily relating to option grants
made prior to our April 2000 initial public offering.

      General and Administrative Expenses. General and administrative expenses
increased 11% to $23.2 million in 2002 from $20.9 million in 2001. The increase
of $2.3 million was due primarily to additional personnel costs offset by a
reduction in legal costs as a result of the September 2001 settlement of our
patent infringement litigation against Deltagen, Inc. General and administrative
expenses for 2002 and 2001 included $5.1 million and $5.2 million, respectively,
of stock-based compensation primarily relating to option grants made prior to
our April 2000 initial public offering.

      Interest and Other Income. Interest and other income decreased 63% to $3.2
million in 2002 from $8.8 million in 2001. This decrease resulted from lower
cash and investment balances and lower average interest rates during 2002.

      Net Loss and Net Loss Per Common Share. Net loss attributable to common
shareholders increased to $59.7 million in 2002 from $35.2 million in 2001. Net
loss per common share increased to $1.14 in 2002 from $0.70 in 2001. Excluding
stock-based compensation expense of $10.3 million and $10.8 million in 2002 and
2001, respectively, we would have had a net loss of $49.4 million and net loss
per common share of $0.95 in 2002, as compared to a net loss of $24.4 million
and net loss per common share of $0.49 in 2001.

Years Ended December 31, 2001 and 2000

      Revenues. Total revenues increased 111% to $30.6 million in 2001 from
$14.5 million in 2000. The increase of $16.1 million was primarily attributable
to a $10.2 million increase in revenues from database subscription and
technology license fees, a $1.7 million increase in revenues from functional
genomics collaborations and our drug discovery alliance with Incyte and revenues
of $4.5 million from compound library sales, offset in part by a $0.3 million
decrease in other revenue.

      In 2001, Incyte, Bristol-Myers Squibb and Merck represented 16%, 13% and
12% of revenues, respectively. In 2000, the Merck Genome Research Institute and
Millennium represented 35% and 14% of revenues, respectively.

                                       29

      Research and Development Expenses. Research and development expenses
increased 69% to $53.4 million in 2001 from $31.6 million in 2000. The increase
of $21.8 million was attributable to continued growth of research and
development activities, primarily related to increased personnel costs to
support the expansion of our drug discovery programs, the development and
analysis of knockout mice and our other functional genomics research efforts,
offset in part by lower stock-based compensation in 2001. Research and
development expenses for 2001 and 2000 included $5.5 million and $10.9 million,
respectively, of stock-based compensation primarily relating to option grants
made prior to our April 2000 initial public offering.

      General and Administrative Expenses. General and administrative expenses
increased 14% to $20.9 million in 2001 from $18.3 million in 2000. The increase
of $2.6 million was due primarily to additional personnel costs for business
development and finance and administration, as well as expenses associated with
our patent infringement litigation against Deltagen, offset in part by lower
stock-based compensation in 2001. General and administrative expenses for 2001
and 2000 included $5.2 million and $10.0 million, respectively, of stock-based
compensation primarily relating to option grants made prior to our April 2000
initial public offering.

      Interest and Other Income. Interest income decreased 11% to $8.8 million
in 2001 from $9.9 million in 2000. This decrease resulted from lower cash and
investment balances and lower average interest rates on our investments.

      Net Loss and Net Loss Per Common Share. Net loss attributable to common
stockholders increased to $35.2 million in 2001 from $26.1 million in 2000. Net
loss per common share increased to $0.70 in 2001 from $0.63 in 2000. Excluding
stock-based compensation expense of $10.8 million and $20.8 million in 2001 and
2000, respectively, and assuming the conversion of the redeemable convertible
preferred stock into common stock occurred on the date of original issuance (May
1998), we would have had a net loss of $24.4 million and net loss per common
share of $0.49 in 2001, as compared to a net loss of $5.2 million and net loss
per common share of $0.11 in 2000.

LIQUIDITY AND CAPITAL RESOURCES

      We have financed our operations from inception primarily through sales of
common and preferred stock, contract and milestone payments to us under our
database subscription, collaboration and license agreements, equipment financing
arrangements and leasing arrangements. From our inception through December 31,
2002, we had received net proceeds of $242.7 million from issuances of common
and preferred stock, including $203.2 million of net proceeds from the initial
public offering of our common stock in April 2000. In addition, from our
inception through December 31, 2002, we received $101.7 million in cash payments
from database subscription and technology license fees, drug discovery
alliances, functional genomics collaborations, sales of compound libraries and
reagents and government grants, of which $88.5 million had been recognized as
revenues through December 31, 2002.

      As of December 31, 2002, we had $123.1 million in cash, cash equivalents
and short-term and long-term investments (including $57.7 million of restricted
cash and investments), as compared to $166.8 million (including $43.3 million of
restricted cash and investments) as of December 31, 2001. We used cash of $28.8
million in operations in 2002. This consisted primarily of the net loss for the
year of $59.7 million offset by non-cash charges of $10.3 million related to
stock-based compensation expense, $9.1 million related to depreciation expense
and $1.2 million related to amortization of intangible assets other than
goodwill; a $5.6 million increase in deferred revenue; and changes in other
operating assets and liabilities of $4.5 million. Investing activities provided
cash of $47.2 million in 2002, principally as a result of net maturities of
short-term investments and the sale of long-term investments, offset by an
increase in restricted cash and purchases of property and equipment. We received
cash of $4.6 million in financing activities in 2002, consisting principally of
proceeds from a $4.0 million loan and stock option exercises.

      In October 2000, we entered into a synthetic lease agreement under which
the lessor purchased our existing laboratory and office buildings and animal
facility in The Woodlands, Texas and agreed to fund the construction of an
additional laboratory and office building and a second animal facility. The
synthetic lease agreement was subsequently expanded to include funding for the
construction of a central plant facility for the distribution of utilities and
related services among our facilities. Including the purchase price for our
existing facilities, the

                                       30

synthetic lease, as amended, provided for funding of up to $55.0 million in
property and improvements. The term of the agreement is six years, which
includes the construction period and a lease period. Lease payments for the new
facilities began upon completion of construction, which occurred at the end of
the first quarter of 2002. Lease payments are subject to fluctuation based on
LIBOR rates. Based on a year-end LIBOR rate of 1.4%, our total lease payments
would be approximately $0.9 million per year. At the end of the lease term, the
lease may be extended for one-year terms, up to seven additional terms, or we
may purchase the properties for a price equal to the $55.0 million funded under
the synthetic lease for property and improvements plus the amount of any accrued
but unpaid lease payments. If we elect not to renew the lease or purchase the
properties, we may arrange for the sale of the properties to a third party or
surrender the properties to the lessor. If we elect to arrange for the sale of
the properties or surrender the properties to the lessor, we have guaranteed
approximately 86% of the total original cost as the residual fair value of the
properties. We are required to maintain restricted cash or investments to
collateralize borrowings made under the synthetic lease agreement. In addition,
we have agreed to maintain cash and investments of at least $12.0 million in
excess of our restricted cash and investments. If our cash and investments fall
below that level, we may be required to seek a waiver of that agreement or to
purchase the properties or arrange for their sale to a third party. Because our
cost to purchase the properties would not materially exceed the $55.0 million
funded under the synthetic lease for property and improvements and would likely
be less than the amount of restricted cash and investments we are required to
maintain under the synthetic lease, we believe that any requirement that we do
so would not have a material adverse effect on our financial condition. As of
December 31, 2002 and 2001, we maintained restricted cash and investments of
$57.2 million and $43.3 million, respectively, to collateralize funding for
property and improvements under the synthetic lease of $55.0 million and $41.7
million.

      In May 2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc.
entered into a ten-year lease for a 76,000 square-foot facility in Hopewell, New
Jersey. The lease provides for an escalating yearly rent payment of $1.3 million
in the first year, $1.7 million in years two and three, $1.8 million in years
four to six, $2.0 million in years seven to nine and $2.1 million in year ten.
The lease also provides our subsidiary with the option in the second year of the
lease to borrow $2.0 million in tenant improvement funds from the landlord, at
which time rental payments due under the lease will increase as the tenant
improvement allowance is amortized over a ten-year period. We are the guarantor
of the obligations of our subsidiary under the lease.

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

      Including the lease and debt obligations described above, we had incurred
the following contractual obligations as of December 31, 2002:

                                                                               PAYMENTS DUE BY PERIOD (IN MILLIONS)
                                                                       -------------------------------------------------
                                                                                   LESS                            MORE
                                                                                   THAN 1      1-3        3-5      THAN 5
                            CONTRACTUAL OBLIGATIONS                    TOTAL       YEAR      YEARS      YEARS      YEARS
                                                                       -----       ----      -----      -----      -----
                                                                                                    
      Long-term debt ..............................................    $ 4.0         --      $ 4.0         --         --
      Capital lease obligations ...................................       --         --         --         --         --
      Operating leases ............................................     22.7        3.5        5.6        4.7        8.9
      Other long-term liabilities reflected on our
          balance sheet under GAAP ................................      0.7         --         --        0.3        0.4
                                                                       -----      -----      -----      -----      -----
          Total ...................................................    $27.4      $ 3.5      $ 9.6      $ 5.0      $ 9.3
                                                                       =====      =====      =====      =====      =====

      Our future capital requirements will be substantial and will depend on
many factors, including our ability to obtain database subscription, alliance,
collaboration and technology license agreements, the amount and timing of
payments under such agreements, the level and timing of our research and
development expenditures, market acceptance of our products, the resources we
devote to developing and supporting our products and other factors. Our capital
requirements will also be affected by any expenditures we make in connection
with license agreements and acquisitions of and investments in complementary
technologies and businesses. We expect to devote substantial capital resources
to continue our research and development efforts, to expand our support and
product development

                                       31

activities, and for other general corporate activities. We believe that our
current unrestricted cash and investment balances and revenues we expect to
derive from subscriptions to our databases, functional genomics collaborations,
technology licenses and drug discovery alliances will be sufficient to fund our
operations at least through the next 12 months. During or after this period, if
cash generated by operations is insufficient to satisfy our liquidity
requirements, we will need to sell additional equity or debt securities,
restructure or replace our synthetic lease to reduce the required amount of
restricted cash and investments, or obtain additional credit arrangements.
Additional financing may not be available on terms acceptable to us or at all.
The sale of additional equity or convertible debt securities may result in
additional dilution to our stockholders.

DISCLOSURE ABOUT MARKET RISK

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

      On March 26, 2002, the Board of Directors and its audit committee
dismissed Arthur Andersen LLP as our independent public accountants and engaged
Ernst & Young LLP to serve as our independent auditors for the fiscal year
ending December 31, 2002, subject to stockholder ratification.

      Arthur Andersen's report on our consolidated financial statements for the
fiscal year ended December 31, 2001 did not contain an adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles.

      During the fiscal year ended December 31, 2001 and through the date of the
Board of Directors' decision, there were no disagreements with Arthur Andersen
on any matter of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Arthur
Andersen's satisfaction, would have caused them to make reference to the subject
matter in connection with their report on our consolidated financial statements
for such year; and there were no reportable events as defined in Item
304(a)(1)(v) of Regulation S-K.

      During the fiscal year ended December 31, 2001 and through the date of the
Board of Directors' decision, we did not consult Ernst & Young with respect to
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements, or any other matters or reportable events
as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

                                       32

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this Item as to our directors and executive
officers is hereby incorporated by reference from the information appearing
under the captions "Election of Directors" and "Executive Officers" in our
definitive proxy statement which involves the election of directors and is to be
filed with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 within 120 days of the end of our fiscal year on December
31, 2002.

ITEM 11. EXECUTIVE COMPENSATION

      The information required by this Item as to our management is hereby
incorporated by reference from the information appearing under the captions
"Executive Compensation" and "Election of Director - Director Compensation" in
our definitive proxy statement which involves the election of directors and is
to be filed with the Commission pursuant to the Securities Exchange Act of 1934
within 120 days of the end of our fiscal year on December 31, 2002.
Notwithstanding the foregoing, in accordance with the instructions to Item 402
of Regulation S-K, the information contained in our proxy statement under the
sub-heading "Report of the Compensation Committee of the Board of Directors" and
"Performance Graph" shall not be deemed to be filed as part of or incorporated
by reference into this annual report on Form 10-K.

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

      The information required by this Item as to the ownership by management
and others of our securities is hereby incorporated by reference from the
information appearing under the caption "Stock Ownership of Certain Beneficial
Owners and Management" in our definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on
December 31, 2002.

                      EQUITY COMPENSATION PLAN INFORMATION

      The following table presents aggregate summary information as of December
31, 2002 regarding the common stock that may be issued upon exercise of options,
warrants and rights under all of our existing equity compensation plans,
including our 2000 Equity Incentive Plan, 2000 Non-Employee Directors' Stock
Option Plan and Coelacanth Corporation 1999 Stock Option Plan.

                                                 (a)                         (b)                         (c)
                                                                          WEIGHTED
                                                                           AVERAGE
                                                                       EXERCISE PRICE            NUMBER OF SECURITIES
                                        NUMBER OF SECURITIES            PER SHARE OF           REMAINING AVAILABLE FOR
                                          TO BE ISSUED UPON              OUTSTANDING         FUTURE ISSUANCE UNDER EQUITY
                                             EXERCISE OF                  OPTIONS,          COMPENSATION PLANS (EXCLUDING
                                        OUTSTANDING OPTIONS,            WARRANTS AND           SECURITIES REFLECTED IN
        PLAN CATEGORY                    WARRANTS AND RIGHTS               RIGHTS                    COLUMN (a))
- -------------------------------        ------------------------        ---------------      -----------------------------
                                                                                   
Equity compensation plans
    approved by security
    holders (1) .................             11,282,188                    $6.5006                     2,124,606 (3)(4)(5)
Equity compensation plans
    not approved by security
    holders (2) .................                 89,979                     2.6807                           --
                                              ----------                    -------                    ---------
       Total.....................             11,372,167                    $6.4704                    2,124,606

- ----------
(1)   Consists of shares of our common stock issued or remaining available for
      issuance under our 2000 Equity Incentive Plan and 2000 Non-Employee
      Directors' Stock Option Plan.

(2)   Consists of shares of our common stock issuable upon the exercise of
      options granted under the Coelacanth Corporation 1999 Stock Option Plan,
      which we assumed in connection with our July 2001 acquisition of
      Coelacanth Corporation.

(3)   Includes 1,605,106 shares available for future issuance under our 2000
      Equity Incentive Plan, some or all of which may be awarded as stock
      bonuses.

                                       33

(4)   Our 2000 Equity Incentive Plan provides that on each January 1, the number
      of shares available for issuance under the plan will be automatically
      increased by the greater of (i) five percent of our outstanding shares on
      a fully-diluted basis or (ii) the number of shares that could be issued
      under awards granted under the plan during the prior year. Our Board of
      Directors may provide for a lesser increase in the number of shares
      available for issuance under the plan.

(5)   Our 2000 Non-Employee Directors' Stock Option Plan provides that on the
      day following each annual meeting of stockholders, the number of shares
      available for issuance under the plan will be automatically increased by
      the greater of (i) 0.3% of our outstanding shares on a fully-diluted basis
      or (ii) the number of shares that could be issued under options granted
      under the plan during the prior year. Our Board of Directors may provide
      for a lesser increase in the number of shares available for issuance under
      the plan.

Coelacanth Corporation 1999 Stock Option Plan

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item as to certain business relationships
and transactions with our management and other related parties is hereby
incorporated by reference to such information appearing under the captions
"Certain Transactions" and "Compensation Committee Interlocks and Insider
Participation" in our definitive proxy statement which involves the election of
directors and is to be filed with the Commission pursuant to the Securities
Exchange Act of 1934 within 120 days of the end of our fiscal year on December
31, 2002.

ITEM 14. CONTROLS AND PROCEDURES

      Our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures (as defined in Securities Exchange
Act of 1934 Rules 13a-14(c) and 15d-14(c)) are sufficiently effective to ensure
that the information required to be disclosed by us in the reports we file under
the Securities Exchange Act of 1934 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.

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

                                       34

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

            1.    Consolidated Financial Statements

                                                                                              PAGE
                                                                                              ----
                                                                                           
      Report of Independent Auditors......................................................     F-1
      Report of Independent Public Accountants............................................     F-2
      Consolidated Balance Sheets.........................................................     F-3
      Consolidated Statements of Operations...............................................     F-4
      Consolidated Statements of Stockholders' Equity (Deficit)...........................     F-5
      Consolidated Statements of Cash Flows...............................................     F-6
      Notes to Consolidated Financial Statements..........................................     F-7

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

            2.    Exhibits

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

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

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

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

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

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

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

            10.6    --    Employment Agreement with Randall B. Riggs (filed as
                          Exhibit 10.6 to the Company's Registration Statement
                          on Form S-1 (Registration No. 333-96469) and
                          incorporated by reference herein).

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

                                       35

     EXHIBIT NO.                             DESCRIPTION
     -----------                             -----------
                       
            10.8    --    Employment Agreement with David Boulton (filed as
                          Exhibit 10.3 to the Company's Quarterly Report on Form
                          10-Q for the period ended September 30, 2001 and
                          incorporated by reference herein).

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

            10.10   --    2000 Equity Incentive Plan (filed as Exhibit 10.8 to
                          the Company's Registration Statement on Form S-1
                          (Registration No. 333-96469) and incorporated by
                          reference herein).

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

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

           +10.13   --    LexVision Database and Collaboration Agreement, dated
                          September 26, 2000, with Bristol-Myers Squibb Company
                          (filed as Exhibit 10.1 to the Company's Current Report
                          on Form 8-K dated September 26, 2000 and incorporated
                          by reference herein).

           +10.14   --    LexVision Database and Collaboration Agreement, dated
                          June 27, 2001, with Incyte Genomics, Inc. (filed as
                          Exhibit 10.2 to the Company's Quarterly Report on Form
                          10-Q for the period ended June 30, 2001 and
                          incorporated by reference herein).

           +10.15   --    Therapeutic Protein Alliance Agreement, dated June 27,
                          2001, with Incyte Genomics, Inc. (filed as Exhibit
                          10.3 to the Company's Quarterly Report on Form 10-Q
                          for the period ended June 30, 2001 and incorporated by
                          reference herein).

          *+10.16   --    Collaboration and License Agreement, dated December
                          17, 2002, with Genentech, Inc.

            10.17   --    Synthetic Lease Financing Facility with First Security
                          Bank, National Association, the Lenders and Holders
                          named therein, and Bank of America, N.A. (filed as
                          Exhibit 10.12 to the Company's Annual Report on Form
                          10-K for the year ended December 31, 2000 and
                          incorporated by reference herein).

            10.18   --    Lease Agreement, dated October 21, 1998, between
                          Coelacanth Chemical Corporation and ARE-279 Princeton
                          Road, LLC. (filed as Exhibit 10.18 to the Company's
                          Annual Report on Form 10-K for the year ended December
                          31, 2001 and incorporated by reference herein).

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

            21.1    --    Subsidiaries (filed as Exhibit 21.1 to the Company's
                          Annual Report on Form 10-K for the year ended December
                          31, 2001 and incorporated by reference herein).

            *23.1   --    Consent of Ernst & Young LLP

            *23.2   --    Information regarding consent of Arthur Andersen LLP

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

                                       36

     EXHIBIT NO.                             DESCRIPTION
     -----------                             -----------
                       
             99.1   --    Letter to the Securities and Exchange Commission
                          regarding Audit Assurances (filed as Exhibit 99.1 to
                          the Company's Annual Report on Form 10-K for the year
                          ended December 31, 2001 and incorporated by reference
                          herein).

            *99.2   --    Certification of CEO and CFO Pursuant to Section 906
                          of the Sarbanes-Oxley Act of 2002

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

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

      (b)   Reports on Form 8-K:

      None.

                                       37

                                   SIGNATURES

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

                                      LEXICON GENETICS INCORPORATED

Date: March 17, 2003                  By:  /s/ ARTHUR T. SANDS
                                         ---------------------------------------
                                           Arthur T. Sands, M.D., Ph.D.
                                           President and Chief Executive Officer

Date: March 17, 2003                  By:  /s/ JULIA P. GREGORY
                                         ---------------------------------------
                                           Julia P. Gregory
                                           Executive Vice President and
                                           Chief Financial Officer

                                POWER OF ATTORNEY

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

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

            SIGNATURE                                 TITLE                                    DATE
            ---------                                 -----                                    ----
                                                                                     
/S/ ARTHUR T. SANDS               President and Chief Executive Officer                    March 17, 2003
- ------------------------------    (Principal Executive Officer)
Arthur T. Sands, M.D., Ph.D.

/S/ JULIA P. GREGORY              Executive Vice President and                             March 17, 2003
- ------------------------------    Chief Financial Officer
Julia P. Gregory                  (Principal Financial and Accounting Officer)

/S/ C. THOMAS CASKEY
- ------------------------------
C. Thomas Caskey, M.D.            Chairman of the Board of Directors                       March 17, 2003

/S/ SAM L. BARKER
- ------------------------------
Sam L. Barker, Ph.D.              Director                                                 March 17, 2003

/S/ PATRICIA M. CLOHERTY
- ------------------------------
Patricia M. Cloherty              Director                                                 March 17, 2003

/S/ ROBERT J. LEFKOWITZ
- ------------------------------
Robert J. Lefkowitz, M.D.         Director                                                 March 17, 2003

/S/ WILLIAM A. MCMINN
- ------------------------------
William A. McMinn                 Director                                                 March 17, 2003

                                       38

                                 CERTIFICATIONS

I, Arthur T. Sands, certify that:

      1.    I have reviewed this annual report on Form 10-K of Lexicon Genetics
            Incorporated;

      2.    Based on my knowledge, this 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 officers and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Securities Exchange Act of 1934 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.

      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 17, 2003

                                           /s/ ARTHUR T. SANDS
                                           -------------------------------------
                                           Arthur T. Sands, M.D., Ph.D.
                                           President and Chief Executive Officer

                                       39

I, Julia P. Gregory, certify that:

      1.    I have reviewed this annual report on Form 10-K of Lexicon Genetics
            Incorporated;

      2.    Based on my knowledge, this 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 officers and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in the Securities Exchange Act of 1934 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.

      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 17, 2003

                                                /s/ JULIA P. GREGORY
                                                --------------------------------
                                                Julia P. Gregory
                                                Executive Vice President and
                                                Chief Financial Officer

                                       40

                         REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Lexicon Genetics
Incorporated and subsidiary (the Company) as of December 31, 2002, and the
related consolidated statement of operations, stockholders' equity (deficit) and
cash flow for the year then ended. 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 audit. The financial
statements of the Company as of December 31, 2001 and 2000, and for the years
then ended were audited by other auditors who have ceased operations and whose
report dated February 22, 2002 expressed an unqualified opinion on those
statements before the reclassification adjustments and conforming disclosures
described in Note 4.

We conducted our audit 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 audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lexicon Genetics
Incorporated as of December 31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

As discussed above, the financial statements of the Company as of December 31,
2001 and 2000, and for the years then ended were audited by other auditors who
have ceased operations. As described in Note 4, these financial statements have
been revised. We audited the reclassification adjustments and conforming
disclosures described in Note 4 that were applied to revise the 2001 and 2000
financial statements. In our opinion, such reclassification adjustments and
conforming disclosures are appropriate and have been properly applied. However,
we were not engaged to audit, review or apply any procedures to the 2001 and
2000 financial statements of the Company other than with respect to such
reclassification adjustments and conforming disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 and 2000
financial statements taken as a whole.

                                             /s/ ERNST & YOUNG LLP

Houston, Texas
February 13, 2003

                                      F-1

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Lexicon Genetics
Incorporated (a Delaware corporation) and subsidiary as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of Lexicon
Genetics Incorporated'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 financial statements referred to above present fairly, in
all material respects, the financial position of Lexicon Genetics Incorporated
and subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
February 22, 2002

THIS IS A COPY OF THE REPORT ISSUED BY ARTHUR ANDERSEN LLP, LEXICON'S FORMER
INDEPENDENT PUBLIC ACCOUNTANTS, IN CONNECTION WITH THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH LEXICON'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. SEE EXHIBIT 23.2 FOR FURTHER
INFORMATION.

                                      F-2

                          LEXICON GENETICS INCORPORATED

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT PAR VALUE)

                                                                                                           AS OF DECEMBER 31,
                                                                                                     ------------------------------
                                                                                                        2002                 2001
                                                                                                     ---------            ---------
                                                                                                                    
ASSETS
Current assets:
    Cash and cash equivalents ............................................................           $  39,362            $  16,355
    Restricted cash ......................................................................              29,487                6,693
    Short-term investments, including restricted investments
       of $28,223 and $36,645, respectively ..............................................              54,247              133,394
    Accounts receivable, net of allowance for doubtful accounts
       of $109 and $211, respectively ....................................................               5,143                4,544
    Prepaid expenses and other current assets ............................................               4,893                5,456
                                                                                                     ---------            ---------
       Total current assets ..............................................................             133,132              166,442
Property and equipment, net of accumulated depreciation
    of $19,768 and $10,747, respectively .................................................              37,362               26,707
Long-term investments ....................................................................                  --               10,398
Goodwill .................................................................................              25,798               25,798
Intangible assets, net of amortization of $1,760 and $560, respectively ..................               4,240                5,440
Other assets .............................................................................               1,240                5,205
                                                                                                     ---------            ---------
       Total assets ......................................................................           $ 201,772            $ 239,990
                                                                                                     =========            =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable .....................................................................           $   4,378            $   3,168
    Accrued liabilities ..................................................................               4,161                5,016
    Current portion of deferred revenue ..................................................              12,760               10,595
                                                                                                     ---------            ---------
       Total current liabilities .........................................................              21,299               18,779
Deferred revenue, net of current portion .................................................               5,887                2,500
Long-term debt ...........................................................................               4,000                   --
Other long-term liabilities ..............................................................                 684                  339
                                                                                                     ---------            ---------
       Total liabilities .................................................................              31,870               21,618

Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.01 par value; 5,000 shares authorized;
       no shares issued and outstanding ..................................................                  --                   --
    Common stock, $.001 par value; 120,000 shares authorized;
       52,367 and 52,022 shares issued and outstanding, respectively .....................                  52                   52
    Additional paid-in capital ...........................................................             330,701              331,092
    Deferred stock compensation ..........................................................             (11,106)             (22,260)
    Accumulated deficit ..................................................................            (149,745)             (90,075)
    Accumulated other comprehensive loss .................................................                  --                 (437)
                                                                                                     ---------            ---------
       Total stockholders' equity ........................................................             169,902              218,372
                                                                                                     ---------            ---------
       Total liabilities and stockholders' equity ........................................           $ 201,772            $ 239,990
                                                                                                     =========            =========

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

                                      F-3

                          LEXICON GENETICS INCORPORATED

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

                                                                                             YEAR ENDED DECEMBER 31,
                                                                                     ----------------------------------------
                                                                                       2002            2001            2000
                                                                                     --------        --------        --------
                                                                                                            
Revenues:
   Subscription and license fees ..........................................          $ 17,871        $ 14,744        $  4,579
   Collaborative research .................................................            17,088          11,220           9,505
   Compound libraries and other ...........................................               241           4,613             375
                                                                                     --------        --------        --------
     Total revenues .......................................................            35,200          30,577          14,459
Operating expenses:
   Research and development, including stock-based
     compensation of $5,155, $5,539 and $10,883, respectively .............            74,859          53,355          31,647
   General and administrative, including stock-based
     compensation of $5,113, $5,231 and $9,958, respectively ..............            23,234          20,861          18,289
                                                                                     --------        --------        --------
     Total operating expenses .............................................            98,093          74,216          49,936
                                                                                     --------        --------        --------
Loss from operations ......................................................           (62,893)        (43,639)        (35,477)
Interest and other income .................................................             3,230           8,781           9,905
Interest expense ..........................................................                (7)           (314)           (422)
                                                                                     --------        --------        --------
Net loss ..................................................................           (59,670)        (35,172)        (25,994)
Accretion on redeemable convertible preferred stock .......................                --              --            (134)
                                                                                     --------        --------        --------
Net loss attributable to common stockholders ..............................          $(59,670)       $(35,172)       $(26,128)
                                                                                     ========        ========        ========

Net loss per common share, basic and diluted ..............................          $  (1.14)       $  (0.70)       $  (0.63)
                                                                                     ========        ========        ========
Shares used in computing net loss per common share,
   basic and diluted ......................................................            52,263          50,213          41,618

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

                                      F-4

                          LEXICON GENETICS INCORPORATED

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

                                                                                                        ACCUMULATED        TOTAL
                                            COMMON STOCK      ADDITIONAL    DEFERRED                       OTHER       STOCKHOLDERS'
                                        -------------------    PAID-IN       STOCK       ACCUMULATED   COMPREHENSIVE      EQUITY
                                        SHARES    PAR VALUE    CAPITAL    COMPENSATION     DEFICIT          LOSS         (DEFICIT)
                                        ------    ---------   ----------  ------------   -----------   -------------   -------------
                                                                                                  
Balance at December 31, 1999 .......     24,540      $24      $   7,863     $   (915)     $ (28,909)       $  --        $ (21,937)
Initial public offering of
  common stock .....................     10,000       10        203,175           --             --           --          203,185
Accretion on redeemable convertible
  preferred stock to redemption
  value ............................         --       --           (134)          --             --           --             (134)
Conversion of redeemable convertible
  preferred stock to common stock ..     12,734       13         30,171           --             --           --           30,184
Deferred stock compensation, net of
  reversals ........................         --       --         53,563      (53,563)            --           --               --
Amortization of deferred stock
  compensation .....................         --       --             --       20,841             --           --           20,841
Exercise of common stock options ...        849        1          1,111           --             --           --            1,112
Exercise of common stock warrants ..        149       --            371           --             --           --              371
Net loss ...........................         --       --             --           --        (25,994)          --          (25,994)
                                        -------      ---      ---------     --------      ---------        -----        ---------
Balance at December 31, 2000 .......     48,272       48        296,120      (33,637)       (54,903)          --          207,628
Deferred stock compensation, net of
  reversals.........................         --       --           (958)         958             --           --               --
Deferred stock compensation of
  options assumed in acquisition ...         --       --             --         (351)            --           --             (351)
Amortization of deferred stock
  compensation .....................         --       --             --       10,770             --           --           10,770
Common stock issued in connection
  with acquisition .................      2,919        3         35,213           --             --           --           35,216
Exercise of common stock options ...        419        1            717           --             --           --              718
Exercise of common stock warrants ..        412       --             --           --             --           --               --
Net loss ...........................         --       --             --           --        (35,172)          --          (35,172)
Unrealized loss on long-term
  investments ......................         --       --             --           --             --         (437)            (437)
                                                                                                                        ---------
Comprehensive loss .................         --       --             --           --             --           --          (35,609)
                                        -------      ---      ---------     --------      ---------        -----        ---------
Balance at December 31, 2001 .......     52,022       52        331,092      (22,260)       (90,075)        (437)         218,372
Deferred stock compensation, net of
  reversals.........................         --       --           (985)         985             --           --               --
Issuance of restricted stock .......         18       --             99          (99)            --           --               --
Amortization of deferred stock
  compensation .....................         --       --             --       10,268             --           --           10,268
Cancellation of equity securities
  in connection with acquisition ...         (7)      --            (79)          --             --           --              (79)
Exercise of common stock options ...        330       --            574           --             --           --              574
Exercise of common stock warrants ..          4       --             --           --             --           --               --
Net loss ...........................         --       --             --           --        (59,670)          --          (59,670)
Reversal of unrealized loss on
  sale of long-term investments ....         --       --             --           --             --          437              437
                                                                                                                        ---------
Comprehensive loss .................         --       --             --           --             --           --          (59,233)
                                        -------      ---      ---------     --------      ---------        -----        ---------
Balance at December 31, 2002 .......     52,367      $52      $ 330,701     $(11,106)     $(149,745)       $  --        $ 169,902
                                        =======      ===      =========     ========      =========        =====        =========

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

                                      F-5

                          LEXICON GENETICS INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                                                                   YEAR ENDED DECEMBER 31,
                                                                                          -----------------------------------------
                                                                                             2002            2001            2000
                                                                                          ---------       ---------       ---------
                                                                                                                 
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss ........................................................................      $ (59,670)      $ (35,172)      $ (25,994)
   Adjustments to reconcile net loss to net cash used in operating activities
     Depreciation ..................................................................          9,111           5,220           2,621
     Amortization of intangible assets, other than goodwill ........................          1,200             560              --
     Amortization of deferred stock compensation ...................................         10,268          10,770          20,841
     Loss on sale of long-term investments .........................................            197              --              --
     Changes in operating assets and liabilities:
       (Increase) decrease in accounts receivable ..................................           (599)         (1,409)            577
       (Increase) decrease in prepaid expenses and other current assets ............            484          (2,531)           (460)
       (Increase) decrease in other assets .........................................          3,965          (4,919)             97
       Increase in accounts payable and other liabilities ..........................            700           1,089           4,354
       Increase (decrease) in deferred revenue .....................................          5,552           8,402          (3,538)
                                                                                          ---------       ---------       ---------
         Net cash used in operating activities .....................................        (28,792)        (17,990)         (1,502)
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment .............................................        (19,766)        (13,471)         (7,709)
   (Increase) decrease in restricted cash ..........................................        (22,794)          7,186         (13,879)
   Purchase of short-term investments ..............................................        (91,962)       (355,869)       (269,847)
   Maturities of short-term investments ............................................        171,109         387,345         112,108
   Purchase of long-term investments ...............................................             --         (10,835)             --
   Sale of long-term investments ...................................................         10,638              --              --
   Payment of transaction costs, net of cash acquired ..............................             --            (752)             --
                                                                                          ---------       ---------       ---------
         Net cash provided by (used in) investing activities .......................         47,225          13,604        (179,327)
CASH FLOWS FROM FINANCING ACTIVITIES
   Principal payments on capital lease obligations .................................             --              --            (133)
   Proceeds from debt borrowings ...................................................          4,000              --              --
   Repayment of debt borrowings ....................................................             --          (3,909)         (1,462)
   Proceeds from issuance of common stock ..........................................            574             718         204,330
                                                                                          ---------       ---------       ---------
         Net cash provided by (used in) financing activities .......................          4,574          (3,191)        202,735
                                                                                          ---------       ---------       ---------
Net increase (decrease) in cash and cash equivalents ...............................         23,007          (7,577)         21,906
Cash and cash equivalents at beginning of year .....................................         16,355          23,932           2,026
                                                                                          ---------       ---------       ---------
Cash and cash equivalents at end of year ...........................................      $  39,362       $  16,355       $  23,932
                                                                                          =========       =========       =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid for interest ..........................................................      $       7       $     330       $     422

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
   Unrealized loss on long-term investments ........................................      $      --       $    (437)      $      --
   Reversal of unrealized loss on sale of long-term investments ....................      $     437       $      --       $      --
   Conversion of redeemable convertible preferred stock into common stock ..........      $      --       $      --       $  30,184
   Conversion of related party note payable into common stock ......................      $      --       $      --       $     338
   Issuance of equity securities in connection with acquisition ....................      $      --       $  35,216       $      --
   Cancellation of equity securities in connection with acquisition ................      $     (79)      $      --       $      --
   Deferred stock compensation, net of reversals ...................................      $     985       $     958       $ (53,563)
   Deferred stock compensation in connection with issuance of
     restricted stock ..............................................................      $     (99)      $      --       $      --
   Retirement of property and equipment ............................................      $      90       $     181       $      --

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

                                      F-6

                          LEXICON GENETICS INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2002

1. ORGANIZATION AND OPERATIONS

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Cash, Cash Equivalents, Short-term Investments and Long-term Investments:
Lexicon considers all highly-liquid investments with original maturities or
auction-based interest rate reset dates of three months or less to be cash
equivalents. Management determines the appropriate classification of its cash
equivalents, short-term investments and long-term investments at the time of
purchase. Short-term investments consist of U.S. government agency debt
obligations, investment grade commercial paper, corporate debt securities and
certificates of deposit that have maturities of three to twelve months from the
date of purchase. Short-term investments are classified as held-to-maturity
securities in the accompanying financial statements. Held-to-maturity securities
are carried at amortized cost. Long-term investments at December 31, 2001
consist of a U.S. government agency debt obligation with a maturity greater than
twelve months from the time of purchase. Long-term investments are classified as
available-for-sale securities and, accordingly, are stated at fair value based
upon quoted market prices of the securities. Unrealized gains and losses on such
securities are reported as other comprehensive income (loss), which is a
separate component of stockholders' equity. In 2002, the Company sold its
available-for-sale securities. As a result, there is no unrealized gain (loss)
as of December 31, 2002.

Restricted Cash and Investments: Lexicon is required to maintain restricted cash
or investments to collateralize borrowings made under the synthetic lease
agreement under which it leases its office and laboratory facilities in The
Woodlands, Texas as well as to collateralize standby letters of credit for the
leases on its office and laboratory facilities in East Windsor and Hopewell, New
Jersey (see Note 10). As of December 31, 2002 and 2001, the Company maintained
restricted cash and investments of $57.7 million and $43.3 million,
respectively, under these agreements.

Concentration of Credit Risk: Lexicon's cash equivalents, short-term investments
and trade receivables represent potential concentrations of credit risk. The
Company minimizes potential concentrations of risk in cash equivalents and
short-term investments by placing investments in high-quality financial
instruments. The Company's customers are primarily pharmaceutical and
biotechnology companies located in the United States and Europe. The Company has
not experienced any significant credit losses to date and, at December 31, 2002,
management believes that the Company has no significant concentrations of credit
risk.

                                      F-7

Segment Information and Significant Customers: Lexicon operates in one business
segment, which primarily focuses on the discovery of the functions and
pharmaceutical utility of genes and the use of those gene function discoveries
in the discovery and development of pharmaceutical products for the treatment of
human disease. Substantially all of the Company's revenues have been derived
from subscriptions to its databases, drug discovery alliances, functional
genomics collaborations for the development and, in some cases, analysis of the
physiological effects of genes altered in knockout mice, technology licenses and
compound library sales. In 2002, Incyte Genomics, Inc., Bristol-Myers Squibb
Company and Millennium Pharmaceuticals, Inc. represented 28%, 14% and 11% of
revenues, respectively. In 2001, Incyte, Bristol-Myers Squibb and Merck & Co.,
Inc. represented 16%, 13% and 12% of revenues, respectively. In 2000, the Merck
Genome Research Institute and Millennium represented 35% and 14% of revenues,
respectively.

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

Impairment of Long-Lived Assets: Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for impairment when events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, the assets are written
down to their estimated fair values.

Goodwill Impairment: Under Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets," goodwill is not amortized, but
is tested at least annually for impairment at the reporting unit level.
Impairment is the condition that exists when the carrying amount of goodwill
exceeds its implied fair value. The first step in the impairment process is to
determine the fair value of the reporting unit and then compare it to the
carrying value, including goodwill. If the fair value exceeds the carrying
value, no further action is required and no impairment loss is recognized.
Additional impairment assessments may be performed on an interim basis if the
Company encounters events or changes in circumstances that would indicate that,
more likely than not, the carrying value of goodwill has been impaired. There
was no impairment of goodwill in 2002.

Revenue Recognition: Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured.
Payments received in advance under these arrangements are recorded as deferred
revenue until earned. Revenues are earned from database subscriptions, drug
discovery alliances, functional genomics collaborations for the development and,
in some cases, analysis of the physiological effects of genes altered in
knockout mice, technology licenses and compound library sales.

Fees for access to databases and other functional genomics resources are
recognized ratably over the subscription or access period. Collaborative
research payments are recognized as revenue as Lexicon performs its obligations
related to such research to the extent such fees are non-refundable.
Milestone-based fees are recognized upon completion of specified milestones
according to contract terms. Non-refundable technology license fees are
recognized as revenue upon the grant of the license when performance is complete
and there is no continuing involvement. Compound library sales are recognized as
revenue upon shipment.

Revenues recognized from multiple element contracts are allocated to each
element of the arrangement based on the relative fair values of the elements.
The determination of fair value of each element is based on objective evidence.
In accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements," when revenues for an element are specifically tied to a
separate earnings process, revenue is recognized when the specific performance
obligation associated with the element is completed. When revenues for an
element are not specifically tied to a separate earnings process, they are
recognized ratably over the term of the agreement.

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

                                      F-8

Stock-based Compensation: As further discussed in Note 12, Lexicon has three
stock-based compensation plans, which are accounted for under the recognition
and measurement provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and Related Interpretations." Under
the intrinsic value method described in APB Opinion No. 25, no compensation
expense is recognized if the exercise price of the employee stock option equals
the market price of the underlying stock on the date of grant. Lexicon
recognized $10.3 million, $10.8 million and $20.8 million of stock-based
compensation during 2002, 2001 and 2000, respectively, which was primarily
related to option grants made prior to Lexicon's April 2000 initial public
offering. The following table illustrates the effect on net loss and net loss
per share if the fair value recognition provisions of Financial Accounting
Standards Board (FASB) No. 123 "Accounting for Stock Based Compensation," had
been applied to all outstanding and unvested awards in each period:

                                                                                            YEAR ENDED DECEMBER 31,
                                                                                   -----------------------------------------
                                                                                     2002             2001            2000
                                                                                   --------         --------        --------
                                                                                                  (IN THOUSANDS)
                                                                                                           
Net loss, as reported ..................................................           $(59,670)        $(35,172)       $(25,994)
Add: Stock-based employee compensation
   expense included in reported net loss ...............................             10,268           10,770          20,841
Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for all awards ......................................................            (25,913)         (20,616)        (27,346)
                                                                                   --------         --------        --------
Pro forma net loss .....................................................           $(75,315)        $(45,018)       $(32,499)
                                                                                   ========         ========        ========

Net loss per common share, basic and diluted
   As reported .........................................................           $  (1.14)        $  (0.70)       $  (0.63)
                                                                                   ========         ========        ========
   Pro forma ...........................................................           $  (1.44)        $  (0.90)       $  (0.78)
                                                                                   ========         ========        ========

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

Comprehensive Loss: Comprehensive loss is comprised of net loss and unrealized
gains and losses on long-term investments, which are considered
available-for-sale securities. Comprehensive loss is reflected in the
consolidated statements of stockholders' equity. During 2002, Lexicon sold its
available-for-sale securities for $10.6 million, resulting in a realized loss of
$197,000 reflected in its net loss for the year. As a result, there is no
accumulated other comprehensive loss as of December 31, 2002.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on the existing disclosure requirements for most guarantees,
including residual value guarantees issued in conjunction with operating lease
agreements. It also clarifies that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair value of the obligation
it assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN 45 will not have a material impact on Lexicon's results of
operations and financial position. See Note 10 regarding disclosures on residual
value guarantees and Lexicon's exposure related to its synthetic lease and
standby letters of credit related to other operating leases.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables." This issue requires that revenue arrangements with multiple
deliverables be divided into separate units of accounting if the deliverables
meet the following criteria: the delivered items have value to the customer on a
standalone basis; there is objective and reliable evidence of fair value of the
undelivered items; and, if the arrangement includes a general right of return,
performance of the undelivered item is considered probable and substantially in
control of Lexicon. The final consensus will be applicable to agreements entered
into in fiscal periods beginning after June 15, 2003 with early adoption
permitted.

In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement amends SFAS 123,
"Accounting for Stock-Based Compensation," to provide

                                      F-9

alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require 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. The Company is currently evaluating whether to adopt
the fair value based method. The additional disclosures required under SFAS 148
are effective for fiscal years ending after December 15, 2002, and have been
provided in Note 2.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 requires that unconsolidated variable interest entities be
consolidated by their primary beneficiaries. A primary beneficiary is the party
that absorbs a majority of the entity's expected losses or residual benefits.
FIN 46 applies immediately to variable interest entities created after January
31, 2003 and to existing variable interest entities in the periods beginning
after June 15, 2003. The Company is evaluating whether the adoption of FIN 46
will require the consolidation of the lessor under its synthetic lease,
discussed in Note 10. If such consolidation is required, the Company's balance
sheet will reflect as assets additional property and equipment approximating the
$55.0 million funded under the synthetic lease for property and improvements,
less accumulated depreciation, and a similar amount as a liability. In addition,
the Company will be required to depreciate such improvements over their useful
lives. The Company may, however, elect to restructure or replace the synthetic
lease prior to the adoption of FIN 46, whether or not such consolidation would
be required.

4. RECLASSIFICATIONS AND CONFORMING DISCLOSURES

In the accompanying balance sheet as of December 31, 2001, Lexicon has
reclassified the amount of restricted cash from cash and cash equivalents into a
separate line item. The accompanying statements of cash flows for the years
ended December 31, 2001 and 2000 have also been revised to reflect this
reclassification. Additionally, Lexicon included disclosures at December 31,
2001 in a table in Note 5 to conform the prior year information to the current
year presentation.

5. INVESTMENTS

Investments at December 31, 2002 and 2001 were as follows:

                                                                     AS OF DECEMBER 31, 2002
                                                   -------------------------------------------------------------
                                                                      GROSS           GROSS
                                                   AMORTIZED       UNREALIZED       UNREALIZED        ESTIMATED
                                                      COST            GAINS           LOSSES          FAIR VALUE
                                                   ---------       ----------       ----------        ----------
                                                                         (IN THOUSANDS)
                                                                                          
Held-to-maturity:
  Certificates of deposit                          $   6,091        $     --         $     --         $   6,091
  U.S. government agencies                             7,036               5               --             7,041
  Corporate debt securities                           13,719               8               (3)           13,724
  Commercial paper                                    26,127              --               --            26,127
  Other debt securities                                1,274               7               --             1,281
                                                   ---------        --------         --------         ---------
     Total held-to-maturity investments            $  54,247        $     20         $     (3)        $  54,264
                                                   =========        ========         ========         =========

                                                                     AS OF DECEMBER 31, 2001
                                                   -------------------------------------------------------------
                                                                      GROSS           GROSS
                                                   AMORTIZED       UNREALIZED       UNREALIZED        ESTIMATED
                                                      COST            GAINS           LOSSES          FAIR VALUE
                                                   ---------       ----------       ----------        ----------
                                                                         (IN THOUSANDS)
                                                                                          
Held-to-maturity:
  Certificates of deposit                          $  11,221        $     --         $     --         $  11,221
  U.S. government agencies                            24,125              23              (16)           24,132
  Corporate debt securities                           33,568             107              (26)           33,649
  Commercial paper                                    64,480               6               --            64,486
                                                   ---------        --------         --------         ---------
     Total held-to-maturity investments            $ 133,394        $    136         $    (42)        $ 133,488
                                                   =========        ========         ========         =========
Available-for-sale:
  U.S. government agencies                         $  10,835        $     --         $   (437)        $  10,398
                                                   ---------        --------         --------         ---------
     Total available-for-sale investments          $  10,835        $     --         $   (437)        $  10,398
                                                   =========        ========         ========         =========

                                      F-10

6. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2002 and 2001 are as follows:

                                                          ESTIMATED                AS OF DECEMBER 31,
                                                         USEFUL LIVES          -------------------------
                                                           IN YEARS              2002             2001
                                                         ------------          --------         --------
                                                                                   (IN THOUSANDS)
                                                                                       
      Computers and software ........................        3-5               $ 10,996         $  8,659
      Furniture and fixtures ........................        5-7                  8,595            5,044
      Laboratory equipment ..........................        3-7                 27,282           17,000
      Leasehold improvements ........................        3-10                10,257            6,751
                                                                               --------         --------
         Total property and equipment ...............                            57,130           37,454
      Less: Accumulated depreciation ................                           (19,768)         (10,747)
                                                                               --------         --------
          Net property and equipment ................                          $ 37,362         $ 26,707
                                                                               ========         ========

7. INCOME TAXES

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

      The components of Lexicon's deferred tax assets (liabilities) at December
      31, 2002 and 2001 are as follows:

                                                                                               AS OF DECEMBER 31,
                                                                                          --------------------------
                                                                                             2002             2001
                                                                                          --------          --------
                                                                                                   (IN THOUSANDS)
                                                                                                      
         Deferred tax assets:
           Net operating loss carryforwards ...............................               $ 39,887          $ 14,535
           Research and development tax credits ...........................                  7,113             4,607
           Stock-based compensation .......................................                  5,828             4,307
           Accrued expenses and other .....................................                  5,916             5,550
                                                                                          --------          --------
                Total deferred tax assets .................................                 58,744            28,999
         Deferred tax liabilities:

           Property and equipment .........................................                   (990)             (341)
           Other ..........................................................                   (138)              (18)
                                                                                          --------          --------
                Total deferred tax liabilities ............................                 (1,128)             (359)

         Less: Valuation allowance ........................................                (57,616)          (28,640)
                                                                                          --------          --------
                Net deferred tax assets ...................................               $     --          $     --
                                                                                          ========          ========

At December 31, 2002, Lexicon had net operating loss carryforwards of
approximately $114.0 million and research and development tax credit
carryforwards of approximately $7.1 million available to reduce future income
taxes. These carryforwards will begin to expire in 2011. A change in ownership,
as defined by federal income tax regulations, could significantly limit the
Company's ability to utilize its carryforwards. Based on the federal tax law
limits and the Company's cumulative loss position, Lexicon concluded it was
appropriate to establish a full valuation allowance for its net deferred tax
assets until an appropriate level of profitability is sustained. During 2002,
the valuation allowance increased $29.0 million primarily due to the Company's
current year net loss, the acquired net operating loss carryforwards from the
purchase of Coelacanth Corporation, and the current year research tax credits.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

On July 12, 2001, Lexicon completed the acquisition of Coelacanth Corporation in
a merger. Coelacanth, now Lexicon Pharmaceuticals (New Jersey), Inc., forms the
core of Lexicon Pharmaceuticals, the division of the

                                      F-11

Company responsible for small molecule compound discovery. The results of
Lexicon Pharmaceuticals (New Jersey), Inc. are included in the Company's results
of operations for the period subsequent to the acquisition.

Goodwill, associated with the acquisition, of $25.8 million, which represents
the excess of the $36.0 million purchase price over the fair value of the
underlying net identifiable assets, was assigned to the consolidated entity,
Lexicon. There were no changes in the carrying amount of goodwill for the year
ended December 31, 2002. In accordance with SFAS 142, the goodwill balance is
not subject to amortization, but is tested at least annually for impairment. The
Company performed an impairment test of goodwill upon adoption of SFAS 142 and
on its annual impairment assessment date. This comparison did not result in an
impairment of goodwill at either assessment date.

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

The amortization expense for the year ended December 31, 2002 was $1.2 million.
The estimated amortization expense for the next five years is as follows:

                                              FOR THE YEAR ENDING DECEMBER 31
                                              -------------------------------
                                                     (IN THOUSANDS)
                                           
                2003....................             $       1,200
                2004....................                     1,200
                2005....................                     1,200
                2006....................                       640
                2007....................             $          --

9. DEBT OBLIGATIONS

On December 31, 2002, Lexicon borrowed $4.0 million under a note agreement with
Genentech, Inc. The proceeds of the loan are to be used to fund research efforts
under the alliance agreement with Genentech discussed in Note 14. The note
matures on or before December 31, 2005, but the Company may prepay it at any
time. The Company may repay the note, at its option, in cash, in shares of
common stock valued at the then-current market price, or in a combination of
cash and shares, subject to certain limitations. The note accrues interest at an
annual rate of 8%, compounded quarterly. The note is subordinated in right of
payment to borrowings made under Lexicon's synthetic lease, which is discussed
in Note 10.

10. COMMITMENTS AND CONTINGENCIES

Lease Obligations: In October 2000, Lexicon entered into a synthetic lease
agreement under which the lessor purchased the Company's existing laboratory and
office buildings and animal facility in The Woodlands, Texas and agreed to fund
the construction of an additional laboratory and office building and a second
animal facility. The synthetic lease agreement was subsequently expanded to
include funding for the construction of a central plant facility. Including the
purchase price for the Company's existing facilities, the synthetic lease, as
amended, provides for funding of up to $55.0 million in property and
improvements. The term of the agreement is six years, which includes the
construction period and a lease period. Lease payments for the new facilities
began upon completion of construction, which occurred at the end of the first
quarter of 2002. Lease payments are subject to fluctuation based on LIBOR rates.
Based on a year-end LIBOR rate of 1.4% the Company's total lease payments would
be approximately $0.9 million per year. At the end of the lease term, the lease
may be extended for one-year terms, up to seven additional terms, or the Company
may purchase the properties for a price equal to the $55.0 million funded under
the synthetic lease for property and improvements plus the amount of any accrued
but unpaid lease payments. If the Company elects not to renew the lease or
purchase the properties, it may arrange for the sale of the properties to a
third party or surrender the properties to the lessor. If the Company elects to
arrange for the sale of the properties or surrender the properties to the
lessor, it has guaranteed approximately 86% of the total original cost as the
residual fair value of the properties. The Company is required to maintain
restricted cash or investments to collateralize borrowings made under the
synthetic lease agreement. In addition, Lexicon has agreed to maintain cash and
investments of at least $12.0 million in excess of the Company's restricted cash
and investments. If the Company's cash and investments fall below that level,
the Company may be required to seek a waiver of that agreement or to purchase
the properties or arrange for their sale to a third party. Because the Company's
cost to

                                      F-12

purchase the properties would not materially exceed the $55.0 million funded
under the synthetic lease for property and improvements and would likely be less
than the amount of restricted cash and investments it is required to maintain
under the synthetic lease, the Company believes that any requirement that it do
so would not have a material adverse effect on its financial condition. As of
December 31, 2002 and 2001, the Company maintained restricted cash and
investments of $57.2 million and $43.3 million, respectively, to collateralize
funding for property and improvements under the synthetic lease of $55.0 million
and $41.7 million.

Lexicon's subsidiary leases laboratory and office space in East Windsor, New
Brunswick and Hopewell, New Jersey under agreements which expire in January
2004, January 2003 and May 2012, respectively. The Hopewell lease is a ten-year
lease for a 76,000 square-foot facility in New Jersey. The lease provides for an
escalating yearly rent payment of $1.3 million in the first year, $1.7 million
in years two and three, $1.8 million in years four to six, $2.0 million in years
seven to nine and $2.1 million in year ten. The lease also provides an option in
the second year of the lease to borrow $2.0 million in tenant improvement funds
from the landlord, at which time rental payments due under the lease will
increase as the tenant improvement allowance is amortized over a ten-year
period. Lexicon is the guarantor of the obligations of its subsidiary under the
lease. The Company is required to maintain restricted investments to
collateralize the East Windsor and Hopewell leases. As of December 31, 2002, the
Company had $0.5 million in restricted investments to collateralize standby
letters of credit for these leases. Additionally, Lexicon leases certain
equipment under operating leases.

Rent expense for all operating leases was approximately $2.8 million, $0.9
million, and $1.5 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The table below includes non-cancelable future lease payments for
the facilities in The Woodlands, Texas based on a year-end LIBOR rate of 1.4%,
as well as future lease payments for the facilities in New Jersey:

                                                                FOR THE YEAR ENDING
                                                                    DECEMBER 31
                                                               ---------------------
                                                                  (IN THOUSANDS)
                                                            
           2003...................................               $         3,479
           2004...................................                         2,796
           2005...................................                         2,805
           2006...................................                         2,769
           2007...................................                         1,904
           Thereafter.............................                         8,953
                                                                 ---------------
                      Total.......................               $        22,706
                                                                 ===============

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

11. CAPITAL STOCK

Stock Dividend: Lexicon's Board of Directors declared a stock dividend to effect
a stock split of three shares for every one share of common stock then
outstanding, effective April 5, 2000. The accompanying financial statements and
footnotes give retroactive effect to the stock split for all periods presented.

Common Stock: In April 2000, Lexicon completed the initial public offering of
10,000,000 shares of its common stock at an initial public offering price of
$22.00 per share, for net proceeds of $203.2 million, after deducting
underwriting discounts of $15.4 million and offering expenses of $1.4 million.

Redeemable Convertible Series A Preferred Stock: Lexicon's redeemable
convertible Series A preferred stock, originally issued in a private placement
in May 1998, was converted according to its terms into 12,733,992 shares of
common stock upon the April 2000 closing of the Company's initial public
offering of common stock. Prior to the conversion, the Series A preferred stock
was being accreted to its May 7, 2003 redemption value of $31.8 million. The
Series A preferred stock was not included as a component of total stockholders'
equity (deficit) due to its redemption features.

                                      F-13

12. STOCK OPTIONS AND WARRANTS

Stock Options

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

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

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

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

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

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

As of December 31, 2002, an aggregate of 14,500,000 shares of common stock had
been reserved for issuance, options to purchase 11,201,000 shares were
outstanding and 1,693,000 shares had been issued upon the exercise of stock
options issued under the Equity Incentive Plan.

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

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

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

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

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

                                      F-14

As of December 31, 2002, an aggregate of 600,000 shares of common stock had been
reserved for issuance, options to purchase 81,000 shares were outstanding and no
options had been exercised under the Directors' Plan.

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

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

As of December 31, 2002, an aggregate of 123,000 shares of common stock had been
reserved for issuance, options to purchase 90,000 shares of common stock were
outstanding, options to purchase 10,000 shares of common stock had been
cancelled and 23,000 shares of common stock had been issued upon the exercise of
stock options issued under the Coelacanth Plan.

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

During the year ended December 31, 2000, Lexicon recorded $54.1 million in
aggregate deferred compensation relating to options issued to employees and
non-employee directors. During the years ended December 31, 2002, 2001 and 2000,
the Company recognized $10.3 million, $10.7 million and $20.0 million,
respectively, in compensation expense relating to these options. Additionally,
during the years ended December 31, 2002 and 2001, the Company reversed
approximately $612,000 and $1.4 million, respectively, of deferred compensation
and additional paid-in capital for unamortized deferred compensation related to
the forfeiture of nonvested options by terminated employees. Total amortization
expense was revised to the extent amortization had previously been recorded for
nonvested options.

The pro forma information regarding net loss required by SFAS 123 has been
included in Note 2. The information has been determined as if Lexicon had
accounted for its employee stock options under the fair-value method as defined
by SFAS 123. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period of the options using
the straight-line method. The fair value of these options was estimated at the
date of grant using the Black-Scholes method and the following weighted-average
assumptions for 2002, 2001 and 2000:

      -     volatility factors ranging from 109% to 67%;

      -     risk-free interest rates of 4.64%, 5.03% and 5.13%, respectively;

      -     expected option lives of seven years;

      -     three percent expected turnover; and

      -     no dividends.

Lexicon records the fair value of options issued to non-employee consultants,
including Scientific Advisory Panel members, at the fair value of the options
issued. Any expense is recognized over the service period or at the date of
issuance if the options are fully vested and no performance obligation exists.
No options were issued to non-

                                      F-15

employee consultants in 2002. Options to purchase 34,000 and 372,000 shares of
common stock were issued to non-employee consultants in 2001 and 2000,
respectively. The Company recognized expense relating to options issued to
non-employee consultants of $79,000, $109,000 and $836,000 in the years ended
December 31, 2002, 2001 and 2000, respectively. The fair values of the issuances
in 2001 and 2000 were estimated using the Black-Scholes pricing model with the
assumptions noted in the preceding paragraphs, resulting in an aggregate fair
value of approximately $471,000 and $6.4 million, respectively. Additionally,
the Company reversed $373,000 deferred compensation and additional paid-in
capital for unamortized deferred expense primarily related to the forfeiture of
nonvested options in the year ended December 31, 2002. Total amortization
expense was revised to the extent amortization had previously been recorded for
non-vested options.

If vesting continues in accordance with the outstanding individual stock
options, Lexicon expects to record amortization expense for deferred stock
compensation as follows: $10.2 million during 2003 and $884,000 during 2004.

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

                                                                                            WEIGHTED
                                                                        OPTIONS              AVERAGE
                                                                      OUTSTANDING        EXERCISE PRICE
                                                                      -----------        --------------
                                                                    (IN THOUSANDS)
                                                                                   
       Balance at December 31, 1999............................             5,197            $ 1.67
           Granted.............................................             4,464              6.61
           Exercised...........................................              (849)             1.31
           Canceled............................................              (559)             2.40
                                                                        ---------
       Balance at December 31, 2000............................             8,253              4.33
                                                                        ---------
           Granted.............................................             2,493             11.31
           Exercised...........................................              (419)             1.71
           Canceled............................................              (224)             9.17
                                                                        ---------
       Balance at December 31, 2001............................            10,103              6.04
                                                                        ---------
           Granted.............................................             2,200              8.68
           Exercised...........................................              (330)             1.74
           Canceled............................................              (601)             9.70
                                                                        ---------
       Balance at December 31, 2002............................            11,372              6.47
                                                                        ---------
       Exercisable at December 31, 2002........................             7,282            $ 4.77
                                                                        =========

The weighted average fair values of options granted during the years ended
December 31, 2002, 2001 and 2000 were $7.32, $10.31 and $4.40, respectively. As
of December 31, 2002, 2,125,000 shares of common stock were available for grant
under Lexicon's stock option plans.

Stock Options Outstanding: The following table summarizes information about
stock options outstanding at December 31, 2002:

                              OPTIONS OUTSTANDING                                          OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------    --------------------------------------
                                             WEIGHTED AVERAGE
                                                REMAINING            WEIGHTED                                  WEIGHTED
   RANGE OF          OUTSTANDING AS OF          CONTRACTUAL           AVERAGE        EXERCISABLE AS OF         AVERAGE
EXERCISE PRICE       DECEMBER 31, 2002        LIFE (IN YEARS)     EXERCISE PRICE     DECEMBER 31, 2002      EXERCISE PRICE
- --------------       -----------------       ----------------     --------------     -----------------      --------------
                      (IN THOUSANDS)                                                   (IN THOUSANDS)
                                                                                             
$0.0003 - $0.22                 893                 2.9               $ 0.05                   893              $ 0.05
  1.67  -  2.50               5,609                 6.3                 2.41                 4,882                2.40
  3.35  -  4.99                 151                 9.5                 4.24                    18                4.83
  5.10  -  7.63                 337                 9.2                 6.33                    57                7.07
  7.81  - 11.70               2,797                 8.8                 9.91                   592               10.46
 11.74  - 16.69                 997                 8.1                14.05                   465               14.15
 18.13  - 25.25                 384                 7.3                20.16                   251               20.09
 28.69  - 38.50                 204                 7.7                38.07                   124               37.99
                             ------                                                          -----
                             11,372                                   $ 6.47                 7,282              $ 4.77
                             ======                                                          =====

Warrants

In connection with certain note purchase agreements in August 1997, Lexicon
issued two warrants to purchase 13,500 shares and 135,000 shares of common stock
at an exercise price of $2.50 per share. Management estimated

                                      F-16

the value of these warrants at approximately $25,000 and recorded them as
deferred financing costs and additional paid-in capital. The warrant values were
estimated by management taking into consideration the term of the warrant, the
exercise price that was greater than the estimated fair value of the common
stock at issuance and a rate of return of eight percent. Amortization of these
costs is reflected as additional interest expense in the accompanying financial
statements for the year ended December 31, 2000. Both of these warrants were
exercised in 2000.

On May 7, 1998, Lexicon issued to the placement agent for the Series A Preferred
Stock private placement a warrant to purchase 605,001 shares of common stock at
an exercise price of $2.50 per share. The warrant provided that the exercise
price could be paid in cash or by way of a "cashless" exercise based upon the
difference between fair market value and exercise price. The value of the
warrant, along with the offering costs associated with the private placement,
were accreted back to the Series A Preferred Stock through the conversion date
of the Series A Preferred Stock. This warrant was exercised in 2001 by way of a
cashless exercise, resulting in the issuance of a total of 412,648 shares of
common stock.

In July 1998, Lexicon issued a warrant to purchase 249,999 shares of common
stock at an exercise price of $2.50 per share, in connection with the grant to
the Company of an option to lease additional real property. The warrant expires
on April 15, 2003. Amortization of the remaining balance of $155,000 on the
lease option was expensed in 2000 upon the Company's completion of a synthetic
lease agreement under which the lessor purchased the optioned real property
under an arrangement providing for its lease to the Company (see Note 10).

In connection with the acquisition of Coelacanth in July 2001, Lexicon assumed
Coelacanth's outstanding warrants to purchase 25,169 shares of common stock. The
warrants expire on March 31, 2009. The fair value of the warrants was included
in the total purchase price for the acquisition. As of December 31, 2002,
warrants to purchase 16,483 shares of common stock, with an exercise price of
$11.93 per share, remained outstanding.

Aggregate Shares Reserved for Issuance

As of December 31, 2002, an aggregate of 11,639,000 shares of common stock were
reserved for issuance upon exercise of outstanding stock options and warrants
and 2,124,000 additional shares were available for future grants under Lexicon's
stock option plans.

13. BENEFIT PLANS

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

Lexicon maintains a defined-contribution savings plan under Section 401(k) of
the Internal Revenue Code. The plan covers substantially all full-time
employees. Participating employees may defer a portion of their pretax earnings,
up to the Internal Revenue Service annual contribution limit. Beginning in 2000,
the Company was required to match employee contributions according to a
specified formula. The matching contributions totaled approximately $645,000,
$332,000 and $160,000 in 2002, 2001 and 2000, respectively. Company
contributions are vested based on the employee's years of service, with full
vesting after four years of service.

14. COLLABORATION AND LICENSE AGREEMENTS

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

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

Abgenix, Inc. Lexicon established a drug discovery alliance with Abgenix in July
2000 to discover novel therapeutic antibodies using the Company's functional
genomics technologies and Abgenix's technology for generating fully human
monoclonal antibodies. Lexicon and Abgenix expanded and extended the alliance in
January 2002, with the intent of accelerating the selection of in vivo-validated
antigens for antibody discovery and the development and commercialization of
therapeutic antibodies based on those targets. Under the alliance agreement, the
Company and

                                      F-17

Abgenix will each have the right to obtain exclusive commercialization rights,
including sublicensing rights, for an equal number of qualifying therapeutic
antibodies, and will each receive milestone payments and royalties on sales of
therapeutic antibodies from the alliance that are commercialized by the other
party or a third party sublicensee. Each party will bear its own expenses under
the alliance. The expanded alliance also provides us with access to Abgenix's
XenoMouse(R) technology for use in some of our own drug discovery programs. The
agreement, as extended, has a term of four years, subject to the right of the
parties to extend the term for up to three additional one-year periods.

Genentech, Inc. Lexicon established a drug discovery alliance with Genentech in
December 2002 to discover novel therapeutic proteins and antibody targets. Under
the alliance agreement, Lexicon will use its functional genomics technologies to
discover the functions of secreted proteins and potential antibody targets
identified through Genentech's internal drug discovery research. Genentech will
have exclusive rights in the discoveries resulting from the collaboration for
the research, development and commercialization of therapeutic proteins and
antibodies. Lexicon will retain certain other rights in those discoveries,
including rights for the development of small molecule drugs. Lexicon received
an upfront payment and funding under a loan in 2002, and will receive
performance payments for its work in the collaboration as it is completed. The
terms of the loan are discussed in Note 9. Lexicon will also receive milestone
payments and royalties on sales of therapeutic proteins and antibodies for which
Genentech obtains exclusive rights. The agreement has an expected collaboration
term of three years.

Incyte Genomics, Inc. Lexicon established a drug discovery alliance with Incyte
in June 2001 to discover novel therapeutic proteins using the Company's
functional genomics technologies in the discovery of the functions of secreted
proteins from Incyte's LifeSeq(R) Gold database. Under the alliance agreement,
the Company and Incyte will each have the right to obtain exclusive
commercialization rights, including sublicensing rights, for an equal number of
qualifying therapeutic proteins, and will each receive milestone payments and
royalties on sales of therapeutic proteins from the alliance that are
commercialized by the other party or a third party sublicensee. The agreement
has a term of five years, although either party may terminate the agreement
after three years.

LexVision Collaborations: Lexicon has entered into the following collaborations
for access to the Company's LexVision database of in vivo-validated drug
targets:

Bristol-Myers Squibb Company. Lexicon established a LexVision collaboration with
Bristol-Myers Squibb in September 2000, under which Bristol-Myers Squibb has
non-exclusive access to the Company's LexVision database and OmniBank library
for the discovery of small molecule drugs. The Company receives access fees
under this agreement, and is entitled to receive milestone payments and
royalties on products Bristol-Myers Squibb develops using the Company's
technology. The agreement has a term of five years, although either party may
terminate the agreement after three years.

Incyte Genomics, Inc. Lexicon established a LexVision collaboration with Incyte
in June 2001, under which Incyte has non-exclusive access to the Company's
LexVision database and OmniBank library for the discovery of small molecule
drugs. The Company receives access fees under this agreement, and is entitled to
receive milestone payments and royalties on products Incyte develops using the
Company's technology. The agreement has a term of five years, although either
party may terminate the agreement after three years.

15. SELECTED QUARTERLY FINANCIAL DATA

The table below sets forth certain unaudited statements of operations data, and
net loss per common share data, for each quarter of 2002 and 2001.

(IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                                  QUARTER ENDED
                                                               ---------------------------------------------------
                                                               MARCH 31      JUNE 30    SEPTEMBER 30   DECEMBER 31
                                                               --------      -------    ------------   -----------
                                                                                  (UNAUDITED)
                                                                                           
2002
Revenues .................................................     $  7,656      $  9,411      $  8,013      $ 10,120
Loss from operations .....................................      (15,177)      (15,640)      (17,491)      (14,585)
Net loss .................................................      (14,059)      (14,940)      (16,809)      (13,862)
Net loss per common share, basic and diluted .............        (0.27)        (0.29)        (0.32)        (0.26)
Shares used in computing net loss per common share .......       52,126        52,250        52,314        52,357

                                      F-18

                                                                                  QUARTER ENDED
                                                               ---------------------------------------------------
                                                               MARCH 31      JUNE 30    SEPTEMBER 30   DECEMBER 31
                                                               --------      -------    ------------   -----------
                                                                                  (UNAUDITED)
                                                                                           
2001
Revenues .................................................     $  3,311      $  3,502      $ 13,493      $ 10,271
Loss from operations .....................................      (10,823)      (12,236)       (7,955)      (12,625)
Net loss .................................................       (8,008)       (9,939)       (6,220)      (11,005)
Net loss per common share, basic and diluted .............        (0.17)        (0.20)        (0.12)        (0.21)
Shares used in computing net loss per common share .......       48,343        48,865        51,500        51,955

                                      F-19

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

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

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

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

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

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

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

            10.6    --    Employment Agreement with Randall B. Riggs (filed as
                          Exhibit 10.6 to the Company's Registration Statement
                          on Form S-1 (Registration No. 333-96469) and
                          incorporated by reference herein).

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

     EXHIBIT NO.                             DESCRIPTION
     -----------                             -----------
                       
            10.8    --    Employment Agreement with David Boulton (filed as
                          Exhibit 10.3 to the Company's Quarterly Report on Form
                          10-Q for the period ended September 30, 2001 and
                          incorporated by reference herein).

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

            10.10   --    2000 Equity Incentive Plan (filed as Exhibit 10.8 to
                          the Company's Registration Statement on Form S-1
                          (Registration No. 333-96469) and incorporated by
                          reference herein).

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

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

           +10.13   --    LexVision Database and Collaboration Agreement, dated
                          September 26, 2000, with Bristol-Myers Squibb Company
                          (filed as Exhibit 10.1 to the Company's Current Report
                          on Form 8-K dated September 26, 2000 and incorporated
                          by reference herein).

           +10.14   --    LexVision Database and Collaboration Agreement, dated
                          June 27, 2001, with Incyte Genomics, Inc. (filed as
                          Exhibit 10.2 to the Company's Quarterly Report on Form
                          10-Q for the period ended June 30, 2001 and
                          incorporated by reference herein).

           +10.15   --    Therapeutic Protein Alliance Agreement, dated June 27,
                          2001, with Incyte Genomics, Inc. (filed as Exhibit
                          10.3 to the Company's Quarterly Report on Form 10-Q
                          for the period ended June 30, 2001 and incorporated by
                          reference herein).

          *+10.16   --    Collaboration and License Agreement, dated December
                          17, 2002, with Genentech, Inc.

            10.17   --    Synthetic Lease Financing Facility with First Security
                          Bank, National Association, the Lenders and Holders
                          named therein, and Bank of America, N.A. (filed as
                          Exhibit 10.12 to the Company's Annual Report on Form
                          10-K for the year ended December 31, 2000 and
                          incorporated by reference herein).

            10.18   --    Lease Agreement, dated October 21, 1998, between
                          Coelacanth Chemical Corporation and ARE-279 Princeton
                          Road, LLC. (filed as Exhibit 10.18 to the Company's
                          Annual Report on Form 10-K for the year ended December
                          31, 2001 and incorporated by reference herein).

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

            21.1    --    Subsidiaries (filed as Exhibit 21.1 to the Company's
                          Annual Report on Form 10-K for the year ended December
                          31, 2001 and incorporated by reference herein).

            *23.1   --    Consent of Ernst & Young LLP

            *23.2   --    Information regarding consent of Arthur Andersen LLP

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

     EXHIBIT NO.                             DESCRIPTION
     -----------                             -----------
                       
             99.1   --    Letter to the Securities and Exchange Commission
                          regarding Audit Assurances (filed as Exhibit 99.1 to
                          the Company's Annual Report on Form 10-K for the year
                          ended December 31, 2001 and incorporated by reference
                          herein).

            *99.2   --    Certification of CEO and CFO Pursuant to Section 906
                          of the Sarbanes-Oxley Act of 2002

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

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

                                                                   EXHIBIT 10.16

Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

                       COLLABORATION AND LICENSE AGREEMENT

                                 BY AND BETWEEN

                          LEXICON GENETICS INCORPORATED

                                       AND

                                 GENENTECH, INC.

                                 EFFECTIVE AS OF

                                DECEMBER 17, 2002

                       COLLABORATION AND LICENSE AGREEMENT

            This Collaboration and License Agreement (the "Agreement") is made
effective as of the 17 day of December, 2002 (the "Effective Date") between
Genentech, Inc., a Delaware corporation having its principal place of business
at 1 DNA Way, South San Francisco, California 94080 ("Genentech"), and Lexicon
Genetics Incorporated, a Delaware corporation having its principal place of
business at 8800 Technology Forest Place, The Woodlands, TX 77381-1160
("Lexicon"). Throughout the Agreement, Genentech and Lexicon are sometimes
referred to individually as a "Party" and collectively as "Parties."

                                    RECITALS

            WHEREAS, Genentech is in the business of using human genetic
information to discover, develop, manufacture and market pharmaceutical
products; and

            WHEREAS, Lexicon possesses certain knowledge and experience in the
design, generation, and phenotypic analysis of Knock-Out Mice and ES Cell Lines;
and

            WHEREAS, Genentech desires, on the terms and conditions contained
herein, for Lexicon to generate Knock-Out Mice and ES Cell Lines for Genentech
based on human gene sequences provided by Genentech and then to analyze such
Knock-Out Mice and ES Cell Lines, and Lexicon desires, on the terms and
conditions, and for the consideration, contained herein, to undertake such
activities; and

            NOW THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained in this Agreement, the Parties agree as follows:

                                   ARTICLE 1

                                   DEFINITIONS

Terms defined in this Article 1 and parenthetically elsewhere, including in the
introductory paragraph and recitals, will have the same meaning throughout this
Agreement, unless otherwise specified. Defined terms are capitalized and may be
used in the singular or plural.

1.1 "ACADEMIC COLLABORATOR" means a principal investigator, employed at a
university or other not-for-profit academic research institution that has
entered into a material transfer agreement with Genentech pursuant to Section
5.10, who is performing collaborative research with Genentech involving use of a
Knock-Out Mouse or Progeny.

1.2 "ACTUAL KNOWLEDGE" of a Party means [**].

                                       1

1.3 "AFFILIATE" of a Party means any person or corporation, joint venture, or
other business entity which directly (or indirectly through one or more
intermediaries) controls, is controlled by, or is under common control with such
Party, as the case may be. For purposes of this definition only, the terms
"controls," "controlled," and "control" mean the direct or indirect ability or
power to direct or cause the direction of the management and policies of an
entity or otherwise direct the affairs of such entity, whether through ownership
of equity, voting securities, or beneficial interest, by contract, or otherwise.
Notwithstanding the foregoing, F. Hoffmann La Roche Ltd and its affiliates shall
not be considered Affiliates of Genentech for purposes of this Agreement.

1.4 "APPLICABLE LAWS" means all applicable statutes, ordinances, regulations,
rules, or orders of any kind whatsoever of any government authority or court of
competent jurisdiction.

1.5 "BLA" means a Biologics License Application filed with the FDA in the United
States or a corresponding application filed with a governmental authority in any
other country, together with all additions, deletions and supplements thereto.

1.6 "CALENDAR QUARTER" means a period of three (3) consecutive calendar months
ending on either March 31, June 30, September 30, or December 31.

1.7 "CALENDAR YEAR" means the respective period of a year commencing on January
1 and ending on December 31.

1.8 "COMMERCIALLY REASONABLE EFFORTS" or "commercially reasonable efforts" means
[**]. With regard to the creation and generation of Knock-Out Mice for a
Project, such efforts shall be deemed to have been exhausted if Lexicon has
[**].

1.9 "CONFIDENTIAL INFORMATION" means Lexicon Confidential Information, Project
Confidential Information and/or Genentech Confidential Information, as
applicable.

1.10 "CONTRACT SERVICE PROVIDER" means [**].

1.11 "DERIVATIVE PROTEIN" means [**].

1.12 "DOLLARS" means United States dollars.

1.13 "EFFECTIVE DATE" has the meaning set forth in the introductory paragraph of
the Agreement.

1.14 "ES CELL LINE" means the embryonic stem cell line used to produce a line of
Knock-Out Mice containing within their genome the corresponding mutated gene.
[**]

1.15 "FDA" means the U.S. Food and Drug Administration or corresponding
governmental authority in another country.

                                       2

1.16 "FIELD" means any human or animal healthcare applications including,
without limitation, the diagnosis, prevention and treatment of diseases or
conditions.

1.17 "FIRST PASS PHENOTYPIC ANALYSIS" means the tests, observations, and
analyses listed on Exhibit A that Lexicon will use Commercially Reasonable
Efforts to perform, under Section 3.3, on the Knock-Out Mice of each Project.

1.18 "FORCE MAJEURE" means acts of God, strikes, civil disturbances,
earthquakes, fires, floods, explosions, riots, war, rebellion, sabotage, acts or
failure to act of governmental authority, or any other cause beyond the
reasonable control and without negligence of the defaulting Party, provided that
the Party claiming force majeure has exerted all reasonable efforts to promptly
remedy such force majeure.

1.19 "GAAP" shall mean United States generally accepted accounting principles,
consistently applied.

1.20 "GENENTECH CONFIDENTIAL INFORMATION" means all proprietary discoveries,
trade secrets, inventions (whether or not patentable), data, materials and
information disclosed or provided by, or on behalf of, Genentech to Lexicon or
its designees in connection with this Agreement (including, but not limited to,
Genentech Gene Patents and Know-How) other than Project Confidential
Information, whether provided prior to, or after, the Effective Date and whether
provided orally, electronically, visually, or in writing, except such
discoveries, trade secrets, inventions, data, materials or information that
Lexicon can demonstrate, through its contemporaneous written records:

      (i)   was known to Lexicon or to the public prior to Genentech's
            disclosure hereunder;

      (ii)  became known to the public, after Genentech's disclosure hereunder,
            other than through an unauthorized act of Lexicon or of any person
            to whom Lexicon disclosed such information;

      (iii) was subsequently disclosed to Lexicon by a person having lawful
            possession of, and a legal right to disclose without any
            restrictions, such information; or

      (iv)  was developed by Lexicon without use, and independent, of Genentech
            Confidential Information.

1.21 "GENENTECH GENE PATENTS AND KNOW HOW" means (i) all Patents which are
owned, controlled or licensed by Genentech as of the Effective Date or which are
created or acquired by Genentech during the course of this Agreement and which
claim a Project Gene, polypeptides encoded by such genes and/or antibodies
directed toward such polypeptides and/or methods of treatment employing such
genes, polypeptides and/or antibodies (also referred to herein as a "Genentech
Gene Patent") and (ii) all Know-How which is owned, controlled or licensed by
Genentech as of the Effective Date or which is

                                       3

created or acquired by Genentech during the course of this Agreement which
relates to any of the Project Genes (also referred to herein as "Genentech Gene
Know-How"); provided that Genentech Gene Patents and Know-How shall not include
Project Patents and Know-How. [**]

1.22 "GROSS SALES" means, with respect to a Licensed Product, the gross amount
invoiced by Genentech, its Affiliates and Product Licensees, as applicable, for
sales of such Licensed Product to Third Persons.

1.23 "IND" means an Investigational New Drug Application filed with the FDA in
the United States, or a corresponding application filed with a regulatory agency
in any other country, together with all additions, deletions, and supplements
thereto.

1.24 "KNOCK-OUT MOUSE" means a mouse made by Lexicon pursuant to this Agreement
in which Lexicon has interrupted, disrupted, or deleted a specific gene or
portion thereof, homologous to a Project Gene, to inactivate the function of
such gene in such mouse.

1.25 "KNOW-HOW" means all proprietary information, trade secrets, techniques and
data (including Confidential Information) of a Party that are owned, controlled
or licensed by such a Party as of the Effective Date or thereafter during the
term of this Agreement, including but not limited to, discoveries, formulae,
materials, practices, methods, knowledge, processes, experience, test data
(including pharmacological, toxicological and clinical information and test
data), analytical and quality control data, marketing, pricing, distribution,
cost and sales data or descriptions. Know-How may be made prior to the Effective
Date or after the Effective Date whether or not during the course of, in
furtherance of, and as a direct result of the activities of one or more Parties
hereunder. Know-How may be made by employees of Lexicon, solely or jointly with
a Third Person, by employees of Genentech, solely or jointly with a Third
Person, or jointly by employees of Lexicon and Genentech, alone or together with
a Third Person. Know-How does not include Patents.

1.26 "LEXICON CONFIDENTIAL INFORMATION" means all proprietary discoveries, trade
secrets, inventions (whether or not patentable), data, materials, and
information disclosed or provided by, or on behalf of, Lexicon to Genentech or
its designees in connection with this Agreement (including, but not limited to,
Lexicon Knock-Out Technology), other than Project Confidential Information,
whether provided prior to, or after, the Effective Date and whether provided
orally, electronically, visually, or in writing, except such discoveries, trade
secrets, inventions, materials, data, or information that Genentech can
demonstrate, through its contemporaneous written records:

      (i)   was known to Genentech or to the public prior to Lexicon's
            disclosure hereunder;

                                       4

      (ii)  became known to the public, after Lexicon's disclosure hereunder,
            other than through an unauthorized act of Genentech or of any person
            to whom Genentech disclosed such information;

      (iii) was subsequently disclosed to Genentech by a person having lawful
            possession of, and a legal right to disclose without any
            restrictions, such information; or

      (iv)  was developed by Genentech without use, and independent, of Lexicon
            Confidential Information.

1.27 "LEXICON KNOCK-OUT TECHNOLOGY" means all Patents and Know How which are (i)
owned, controlled or licensed by Lexicon as of the Effective Date or created or
acquired by Lexicon during the course of this Agreement and (ii) related to a
process or method used in the creation or generation of Knock-Out or transgenic
mice, including the process for creating Knock-Out Mice [**] . "Lexicon
Knock-out Technology" shall also include (A) the Know-How consisting of the
Knock-Out Mice [**]; the Know-How consisting of ES Cell Lines; and the Know-How
consisting of biological materials (such as nucleic acid sequences, RNA, DNA,
organisms, proteins, polypeptides, plasmids and vectors) used for the creation
of such Knock-Out Mice [**], but not the Know-How related to the biological
materials and/or sequence information provided by Genentech to Lexicon or known
to Genentech (as evidenced by written records) prior to the Effective Date; and
(B) Patents claiming such Know How. [**]

1.28 "LEXICON PRE-EXISTING PATENTS AND KNOW-HOW" means all Patents ("Lexicon
Pre-Existing Patents") and Know-How ("Lexicon Pre-Existing Know-How") which are
(i) owned, controlled or licensed by Lexicon as of the Effective Date, or
involve a Project Gene for which Lexicon [**]and (ii) related to a Pre-Existing
Project, a Project Gene, a Protein Candidate or a Licensed Product, provided in
each case that Lexicon Pre-Existing Patent Rights and Know-How shall not include
(a) Lexicon Knock-Out Technology, (b) Genentech Gene Patents and Know How, (c)
Project Patents and Know How, (d) general Patents that cover inventions that
could be used for products other than products under which Genentech has a
license pursuant to Article 5, including, without limitation, Patents covering
manufacturing or process inventions, or (e) that portion of any such Patent
which is beyond the scope of the work performed by Lexicon for Projects other
than Pre-Existing Projects, including without limitation, First Pass Phenotypic
Analysis .

1.29 "LICENSED PRODUCT" means a pharmaceutical preparation other than a Small
Molecule Drug that is ready for administration to the ultimate consumer and that
(i) contains as the active pharmaceutical ingredient a Protein Candidate or (ii)
that directly modulates a Protein Candidate, or the gene that encodes a Protein
Candidate.

1.30 "NDA" means a New Drug Application filed with the FDA in the United States,
or a corresponding application filed with a regulatory agency in any other
country, together with all additions, deletions, and supplements thereto.

                                       5

1.31 "NET SALES" means, with respect to a Licensed Product, Gross Sales of such
Licensed Product less Sales Returns and Allowances for such Licensed Product.

1.32 "NOTE AGREEMENT" shall have the meaning set forth in Section 7.14.

1.33 [**]

1.34 [**]

1.35 "PATENT" means:

      (i)   a U.S. and corresponding foreign patent application (including
            provisional application, division, refiling, continuation,
            continuation-in-part, reissue and re-examination thereof); and

      (ii)  any patent (including without limitation, any substitution,
            extension, reissue, renewal, re-examination, patent of addition,
            supplementary protection certificate and inventors' certificate)
            that has issued or may issue in the future from any patent
            application described in Subsection (i).

1.36 "PHASE III CLINICAL TRIAL" means, as to a specific Licensed Product, a
controlled and lawful study in humans of the efficacy and safety of such
Licensed Product, which is prospectively designed to demonstrate statistically
whether such Licensed Product is effective and safe for use in a particular
indication in a manner sufficient to file a BLA or NDA to obtain regulatory
approval to market and sell that Licensed Product in the United States or
another country for the indication being investigated by the study, as further
defined in Federal Regulation 21 C.F.R. 312.21.

1.37 "PIPELINE PROJECT" means a Project involving a Project Gene for which
Lexicon [**].

1.38 "PRE-EXISTING PROJECT" means a Pipeline Project involving a Project Gene
for which Lexicon [**].

1.39 "PRODUCT LICENSEE" means any Third Person which enters into an agreement
with Genentech or its Affiliates involving the grant to such Third Person of a
license to sell a Licensed Product.

1.40 "PROGENY" means mice, including successive generations thereof, that are
produced or developed by Genentech, its Affiliates or Academic Collaborators by
breeding a Knock-Out Mouse with any other mouse (including, without limitation,
any other Knock-Out Mouse).

1.41 "PROJECT" has the meaning set forth in Section 3.1(e).

                                       6

1.42 "PROJECT CONFIDENTIAL INFORMATION" means all discoveries, trade secrets,
inventions (whether or not patentable), data, materials, and information created
by either Party, or created jointly by both Parties, in connection with this
Agreement (including, but not limited to, Project Patents and Project Know How)
and that are created during the course of performing the activities contemplated
by this Agreement, and whether provided orally, electronically, visually or in
writing, except such discoveries, trade secrets, inventions, materials, data, or
information that a Party can demonstrate, through its contemporaneous written
records:

      (i)   was known to such Party or to the public prior to its creation
            hereunder;

      (ii)  became known to the public, after its creation hereunder, other than
            through an unauthorized act of such Party or of any person to whom
            such Party disclosed such information;

      (iii) was subsequently disclosed to such Party by a person having lawful
            possession of, and a legal right to disclose without any
            restrictions, such information; or

      (iv)  was developed by such Party without use, and independent, of the
            Project Confidential Information.

1.43 "PROJECT GENE" has the meaning set forth in Section 3.1(e); provided that a
Rejected Proposed Gene shall not be a Project Gene.

1.44 "PROJECT MATERIALS" means, with respect to a Project, [**].

1.45 "PROJECT PATENTS AND KNOW-HOW" means all Patents (also referred to herein
as "Project Patents") and Know How (also referred to herein as "Project Know
How") created or acquired by either Party during the course of and in connection
with this Agreement and which are based upon data and other information reviewed
by the Steering Committee related to a Project Gene or Protein Candidate.
"Project Patents and Know How" shall not include (i) Lexicon Knock-Out
Technology, (ii) Genentech Gene Patents and Know-How, (iii) Lexicon Pre-Existing
Patents and Know-How, (iv) general Patents that cover inventions that could be
used for products other than a Licensed Product, including, without limitation,
Patents covering manufacturing or process inventions, or (v) any Patents arising
from work performed not in relation to this Agreement. [**]

1.46 "PROPOSED GENE" means a human gene sequence proposed by Genentech under
Section 3.1(a), (i) that Genentech believes is the full length gene sequence for
a Protein and (ii) for which a patent application owned or controlled by
Genentech has been filed claiming such full length human gene sequence and the
Protein believed to be produced by such gene.

1.47 "PROTEIN" means a [**].

                                       7

1.48 "PROTEIN CANDIDATE" has the meaning set forth in Section 3.5, and shall
include Derivative Proteins.

1.49 "REGULATORY APPROVAL" means any and all approvals (including pricing and
reimbursement approvals), licenses, registrations or authorizations of any kind
of the FDA (or foreign equivalent) necessary for the marketing and sale of a
Licensed Product in any country or other regulatory jurisdiction. "Regulatory
Approval" shall include, without limitation, approval granted with respect to
any BLA, NDA or other foreign equivalent.

1.50 "REJECTED PROJECT GENE" means a Project Gene whose Protein is not
designated as a Protein Candidate under Section 3.5(c).

1.51 "REJECTED PROPOSED GENE" means a Proposed Gene (i) that is rejected under
Section 3.1(b), (c) or (d), (ii) that is removed from the collaboration under
Section 3.1(f), (iii) that is deemed a Rejected Gene pursuant to Section 3.2(a),
(iv) for which the Steering Committee does not vote, under Section 3.2(b), to
proceed or (v) that is designated a Rejected Proposed Gene under Section 3.3(a).

1.52 "SALES RETURNS AND ALLOWANCES" means, with respect to a Licensed Product,
the sum of (a) and (b), where: (a) is a provision, [**] for sales of such
Licensed Product under GAAP as provided hereinabove for (i) cash and quantity
discounts or rebates on such Licensed Product (other than price discounts
granted at the time of invoicing and which are included in the determination of
Gross Sales), (ii) credits or allowances given or made for rejection or return
of previously sold Licensed Product or for retroactive price reductions
(including Medicare and similar types of rebates and chargebacks), (iii) sales
taxes, duties or other governmental charges levied on or measured by the billing
amount for such Licensed Product, as adjusted for rebates and refunds, (iv)
charges for freight and insurance directly related to the distribution of such
Licensed Product, to the extent included in the invoice to the customer, and (v)
credits for allowances given or made for wastage replacement, indigent patient
and any other sales programs agreed to by the Parties for such Licensed Product;
and (b) is a periodic adjustment of the provision determined in (a) to reflect
amounts actually incurred by Genentech, its Affiliates and Product Licensees, as
applicable, for items (i), (ii), (iii), (iv) and (v) in clause (a).

1.53 "SMALL MOLECULE DRUG" means any pharmaceutical compound for the treatment
of any human or animal disease or condition, the active ingredient of which is a
synthetically prepared, or a naturally derived chemical compound [**]; provided,
however, that "Small Molecule Drug" specifically excludes any compound which
consists of or incorporates as an active ingredient a Protein, a Derivative
Protein, a nucleic acid oligomer, or an antibody or any fragment thereof.

1.54 "STEERING COMMITTEE" means the committee established and described in
Article 2.

                                       8

1.55 "THIRD PERSON" means any person or entity other than Lexicon, Genentech or
any Affiliate of Lexicon or Genentech.

                                   ARTICLE 2

                             GOVERNANCE OF RESEARCH

2.1 CREATION OF A STEERING COMMITTEE. Within [**] of the Effective Date, the
Parties shall establish a Steering Committee to oversee the Parties' activities
under Article 3 of this Agreement. The Steering Committee shall be comprised of
[**], but each Party may change its Steering Committee members at any time by
giving prior written notice to the other Party.

2.2 STEERING COMMITTEE RESPONSIBILITIES. The Steering Committee shall have the
following responsibilities, as well as any additional responsibilities expressly
set forth in this Agreement:

      (i)   receiving and reviewing reports and data received from a Party from
            time to time as set forth herein, including without limitation the
            submission of Proposed Genes, data related to the murine homology of
            Proposed Genes, results of the First Pass Phenotypic Analysis and
            [**];

      (ii)  receiving notices from the Parties as set forth herein, including
            without limitation notices of delays or stalled research pursuant to
            Section 3.3(a);

      (iii) the designation of Project Genes and Protein Candidates under
            Sections 3.1 and 3.5, respectively;

      (iv)  coordinating the activities of the Parties hereunder;

      (v)   developing and implementing a publicity strategy and policy for the
            review and approval of press releases and publications in accordance
            with Section 9.4;

      (vi)  settling disputes or disagreements that arise between the parties as
            set forth in Article 13; and

      (vii) performing such other functions as appropriate to further the
            purposes of this Agreement, as determined by the Parties.

2.3 STEERING COMMITTEE DECISIONS. All Steering Committee decisions will be made
by [**] the Steering Committee's members, except as expressly stated otherwise
in this Agreement. Each Steering Committee member will have one vote, and a
Steering Committee member need not be present in order to vote; the Steering
Committee member(s) of a Party that are present for, or participating in, a
decision shall have the

                                       9

authority to vote on behalf of the Steering Committee member(s) of such Party
who are not present for, or participating in, such decision.

2.4 STEERING COMMITTEE MEETINGS. Within [**] after the Effective Date, the
Steering Committee will hold an in-person organizational meeting to establish
the Committee's operating procedures. After such initial meeting, the Steering
Committee will meet at such other times as are unanimously agreed to by the
Steering Committee members, but no less than once each Calendar Quarter. Such
meetings may be in-person, via videoconference, or via teleconference, provided
that at least one meeting per Calendar Year shall be held in person. The
location of in-person Steering Committee meetings will alternate between South
San Francisco, California and The Woodlands, Texas. Each Party will bear the
expense of its respective Committee members' participation in Steering Committee
meetings. Minutes will be kept of all Steering Committee meetings.
Responsibility for keeping minutes will alternate between the Parties, beginning
with Genentech. Meeting minutes will be sent to each member of the Steering
Committee for review as soon as practicable after a meeting.

2.5 DISSOLUTION OF THE STEERING COMMITTEE. Upon the expiration of [**] after all
of the activities of Lexicon that have been approved by the Steering Committee
have been completed, the Steering Committee will have no further
responsibilities or authority under this Agreement and will be considered
dissolved by the Parties.

                                   ARTICLE 3

                             KNOCK-OUT MICE PROJECTS

3.1 GENENTECH SUBMISSION OF PROPOSED GENES.

      (a) Initial Submission of Proposed Genes. Genentech, within [**], will
provide the Steering Committee with a written list of [**] Proposed Genes,
together with the date of Genentech's initial Patent filing with regard to each
such Proposed Gene.

      (b) Delivery of Notice by Lexicon. Within [**] of the delivery by
Genentech of the list of Proposed Genes (or, with respect to replacement
Proposed Genes proposed by Genentech under Section 3.1(b), (c) or (f) or Section
3.2(a), within [**] of the delivery by Genentech of notice to the Steering
Committee of such replacement), Lexicon will notify the Steering Committee in
writing as to whether or not: (i) to Lexicon's Actual Knowledge, Lexicon's
conducting the activities contemplated by this Agreement with regard to such
Proposed Gene would infringe patents or other intellectual property rights under
which Lexicon is not licensed through this Agreement or otherwise; or (ii) [**].
If so, Lexicon shall additionally notify Genentech which Proposed Gene(s) are
the subject of such patents or intellectual property rights [**].

      (c) Rejection of Proposed Genes by Lexicon; Proposal of Replacement
Proposed Genes by Genentech. Lexicon shall not be obligated to develop, produce
or

                                       10

 deliver a Knock-Out Mouse related to a Proposed Gene where Lexicon reasonably
believes, with the advice of its counsel and the Steering Committee, that such
action would infringe the intellectual property rights of a Third Person. Such
Proposed Gene shall become a Rejected Proposed Gene and the Steering Committee
shall adopt an acceptable solution including, but not limited to, the
identification by Genentech of an alternative Proposed Gene. Lexicon shall
further have the sole right, but not the obligation, to reject any Proposed Gene
for which Lexicon reasonably believes, with the advice of its counsel and the
Steering Committee, that Genentech was not the first to file a patent
application, but only in cases where the Steering Committee reasonably believes
[**], by notice to the Steering Committee within the period specified in Section
3.1(b), in which case Lexicon shall have the right to designate such Proposed
Gene as a Rejected Proposed Gene. In such event, Genentech shall have the sole
right, but not the obligation, to propose another Proposed Gene in the place of
such Rejected Proposed Gene for the Steering Committee's review and approval, by
notice to the Steering Committee within [**] of Lexicon's notice.

      (d) Removal of Proposed Genes by Genentech. Within [**] of Genentech's
receipt of Lexicon's notice under Section 3.1(b), Genentech shall inform Lexicon
which, if any, of the Proposed Genes referenced in Lexicon's notice (and not
automatically deemed a Rejected Proposed Gene under Section 3.1(b)) Genentech
elects to remove from the collaboration and, thereafter, all such removed
Proposed Genes shall constitute Rejected Proposed Genes. Genentech shall have no
right to propose a replacement Proposed Gene for any Proposed Gene that it
elects to remove from the collaboration under this Section 3.1(d).

      (e) Designation of Project Genes. Following Genentech's notice pursuant to
Section 3.1(d), the remaining Proposed Genes shall constitute "Project Genes"
(and the work performed hereunder with regard to such Project Gene shall be
deemed a corresponding "Project"), and be deemed to be submitted to the
collaboration for Lexicon to begin determining, as fully described in Section
3.2(a), the murine gene that is homologous to each such Project Gene. Except as
set forth in this Section 3.1, Lexicon, acting through the Steering Committee or
otherwise, shall not have the ability to prevent the submission of a Project
Gene to the collaboration for Lexicon to conduct its activities under Section
3.2(a) regarding such Project Gene. Within [**] following each designation of
Proposed Genes as Project Genes hereunder, Lexicon shall provide Genentech with
a list of the Projects, if any, that are Pipeline Projects and/or Pre-Existing
Projects, and the stage of each such Pipeline Project or Pre-Existing Project,
as the case may be.

      (f) Removal and Replacement of Project Genes by Genentech. At any time
prior to [**], Genentech shall have the sole right, but not the obligation, to
remove such Project Gene and/or propose another Proposed Gene for the Steering
Committee's review and approval, by delivering notice thereof to the Steering
Committee; provided, however, that Genentech shall not be permitted to remove
more than [**] Project Genes pursuant to this Section 3.1(f); and provided,
further, that Genentech shall reimburse Lexicon for all reasonable costs and
expenses, including allocable overhead, incurred by Lexicon under this Agreement
prior to the date of Genentech's notice under this subsection 3.1(f) in

                                       11

respect of the Project Gene being removed (for purposes of which, "allocable
overhead" shall mean [**]). Any such removed Project Gene shall be considered a
Rejected Proposed Gene for purposes of this Agreement.

3.2 LEXICON IDENTIFICATION OF HOMOLOGOUS MURINE GENE; STEERING COMMITTEE REVIEW
AND APPROVAL OF PROJECTS.

      (a) Lexicon Efforts to Determine Homologous Murine Gene. For each Project
Gene submitted to the collaboration under Section 3.1(e), Lexicon will use
Commercially Reasonable Efforts to identify the homologous murine gene as soon
as practicable, and in any event within [**], after such Project Gene was
submitted to it, and will provide Genentech with [**] reports regarding its
efforts. To identify the homologous murine gene, Lexicon will use its standard
resources and, if applicable, [**]. Upon identifying what it believes to be the
homologous murine gene(s) for a Project Gene, Lexicon will provide the Steering
Committee with written evidence of such gene's (or, if applicable, genes')
homology. If Lexicon is unable to identify a homologous murine gene for a
Project Gene, Lexicon will report all of the results related to such Project
Gene obtained during the course of its search to the Steering Committee as well,
and such Project Gene shall thereafter be deemed a Rejected Proposed Gene under
this Agreement. Genentech shall have the sole right, but not the obligation, to
propose another Proposed Gene in the place of such Rejected Proposed Gene for
the Steering Committee's review and approval, by notice to the Steering
Committee within [**] of Lexicon's report of its failure to identify a
homologous murine gene.

      (b) Steering Committee Review and Approval of Projects. The Steering
Committee will review the information provided by Lexicon under Sections 3.2(a)
with respect to a Project Gene and will confirm that Lexicon has identified the
homologous murine gene, and therefore to proceed with such Project Gene under
Section 3.3 hereof. If the Steering Committee determines that Lexicon has not
identified a homologous murine gene for a Project Gene, such Project Gene shall
thereafter be deemed a Rejected Proposed Gene under this Agreement.

      (c) Project Development Plan. Concurrently with its delivery of the
information contemplated by Section 3.2(a), Lexicon will provide the Steering
Committee (i) for Pipeline Projects, information (as set forth in Exhibit A)
regarding [**], and (ii) for Projects other than Pipeline Projects, [**]. [**].

3.3 LEXICON'S CREATION AND TESTING OF KNOCK-OUT MICE AND ES CELL LINES.

      (a) Activities Performed by Lexicon. Once the Steering Committee approves
proceeding with a Project Gene under Section 3.2(b), Lexicon, in accordance with
the recommendation from Genentech as to desired priority, will, at Lexicon's
sole expense, use Commercially Reasonable Efforts to perform the following
activities on such Project: (i) create and generate, [**], Knock-Out Mice using
the Project Gene's homologous murine gene; (ii) conduct a First Pass Phenotypic
Analysis of such Knock-Out Mice [**]. Lexicon agrees to use Commercially
Reasonable Efforts to perform and complete such

                                       12

activities on a Project within [**] after the approval of a Project Gene by the
Steering Committee under Section 3.2(b). If a Project is delayed or stalled due
to technological or scientific difficulties, Lexicon will so notify Genentech
and the Steering Committee. The Parties will consult with each other to
determine whether such difficulties can be resolved or remedied. The Steering
Committee shall decide, based on input from Lexicon, whether such Project's
problems can be remedied within the scope of commercially reasonable efforts for
such Project or whether to terminate such Project and designate such Project
Gene a Rejected Proposed Gene. Genentech shall have the right to terminate this
Agreement under certain circumstances, as set forth in Section 10.2.

      (b) Reports; Consultation and Site Visits. Within [**] after the end of
[**], Lexicon will provide each Steering Committee member with a written report
describing the status of its work on each Project, and [**] Lexicon will provide
a Genentech Steering Committee member with the same [**] report generated for
Lexicon's internal purposes. Upon reasonable advance written notice from the
Steering Committee or Genentech, Lexicon will make persons working on its behalf
on a Project available during normal business hours for a reasonable number of
consultations with the Steering Committee or Genentech regarding such Project.
Such consultations will either be in-person at such person's place of employment
or via videoconference or teleconference. Upon reasonable notice, Genentech
representatives may visit during normal business hours the facilities where
Lexicon is performing services on Projects. All Genentech representatives will
be advised of, and be bound by, Genentech's confidentiality obligations in
Article 9 and will follow such security and facility access procedures as are
reasonably designated by Lexicon. Lexicon may require that at all times the
Genentech representatives be accompanied by a Lexicon representative.

3.4 SAFEGUARDS TO PROTECT CONFIDENTIALITY OF PROJECTS.

      (a) Lexicon hereby agrees that each person working on a Project on its
behalf (whether as an employee, subcontractor, or otherwise) has or will, prior
to commencing work on a Project, have executed an instrument:

      (i)   assigning to Lexicon all of his, her, or its rights, title, and
            interest in inventions or intellectual property arising during the
            course, and as a result, of his, her, or its association with
            Lexicon; and

      (ii)  agreeing to abide by confidentiality and non-use restrictions
            regarding Confidential Information and the existence and terms of
            this Agreement no less stringent than Lexicon's confidentiality and
            non-use obligations under Article 9.

Lexicon also agrees to maintain appropriate security measures no less stringent
than measures that are customary in the industry.

                                       13

      (b) Genentech hereby agrees that each person working on a Project on its
behalf (whether as an employee, subcontractor, or otherwise) has or will, prior
to commencing work on a Project, have executed an instrument:

      (i)   assigning to Genentech all of his, her, or its rights, title, and
            interest in inventions or intellectual property arising during the
            course, and as a result, of his, her, or its association with
            Genentech; and

      (ii)  agreeing to abide by confidentiality and non-use restrictions
            regarding Confidential Information and the existence and terms of
            this Agreement no less stringent than Genentech's confidentiality
            and non-use obligations under Article 9.

Genentech also agrees to maintain appropriate security measures no less
stringent than measures that are customary in the industry.

3.5 REVIEW OF FIRST PASS PHENOTYPIC ANALYSIS; DESIGNATION OF PROTEIN CANDIDATES.

      (a) Review of First Pass Phenotypic Analysis. Once Lexicon completes the
First Pass Phenotypic Analysis on each of the Project Genes, it will submit to
Genentech, through the Steering Committee, the data from such Projects. After
reviewing this information from a Project, the Steering Committee will determine
by [**], within [**] following the submission of the First Pass Phenotypic
Analysis on such Project, whether Lexicon has [**] for such Project Gene.

      (b) Designation of Protein Candidates. The Protein produced by each such
Project Gene for which the Steering Committee [**] votes that Lexicon has [**]
shall be designated as a "Protein Candidate." In the event that the Steering
Committee designates [**] Proteins produced by Project Genes as Protein
Candidates, then Lexicon shall have the right to designate an additional number
of Proteins produced by Project Genes as Protein Candidates, so that there are a
total of [**]; provided that Lexicon shall make such designations no later than
[**] following the submission to the Steering Committee of the last First Pass
Phenotypic Analysis to be submitted under this Agreement. Genentech shall have
the rights and obligations set forth in Article 4 and 6 with regard to such
Protein Candidates.

      (c) Rejected Project Genes. Any Project Gene the Protein product of which
has not been designated as a Protein Candidate pursuant to subsection (b) above,
shall be deemed a Rejected Project Gene for purposes of this Agreement.
Genentech shall have the rights and obligations set forth in Articles 5 and 6
with regard to such Rejected Project Genes.

3.6 [**]

                                       14

                                   ARTICLE 4

                                LICENSED PRODUCTS

4.1 GENENTECH'S EXCLUSIVE RIGHT TO DEVELOP AND COMMERCIALIZE LICENSED PRODUCTS.
Genentech shall have the sole right and responsibility for, and control over,
developing and commercializing Licensed Products.

4.2 TRANSFER TO GENENTECH OF LEXICON PRE-EXISTING KNOW-HOW AND PROJECT KNOW-HOW
RELATED TO PROTEIN CANDIDATES. Within [**] after designation of a Protein
Candidate pursuant to Section 3.5, Lexicon will provide Genentech, to the extent
not previously provided, with a copy of all Lexicon Pre-Existing Know-How and
Project Know-How related to such Protein Candidate in Lexicon's possession or
control.

4.3 GENENTECH RESPONSIBLE FOR DEVELOPMENT COSTS. Genentech shall bear all costs
and expenses associated with, and shall have sole control over, developing and
commercializing Licensed Products.

4.4 PRODUCT LICENSEES. Genentech agrees to notify Lexicon promptly of any
(sub)license that it enters into with a Product Licensee, and Genentech further
covenants that any such (sub)licence shall contain terms and conditions
consistent with Genentech's obligations under this Agreement.

                                   ARTICLE 5

                             GRANT OF LICENSE RIGHTS

5.1 EXCLUSIVE LICENSE UNDER LEXICON PRE-EXISTING PATENTS AND KNOW-HOW FOR THE
RESEARCH, DEVELOPMENT AND COMMERCIALIZATION OF LICENSED PRODUCTS. Subject to the
terms of this Agreement, Lexicon hereby grants to Genentech an exclusive (even
as to Lexicon), world-wide right and license under the Lexicon Pre-Existing
Patents and Know-How to research, develop, make (or have made), use, sell, offer
for sale, and import Licensed Products in the Field. Such license includes the
right to grant sublicenses of all or part of such rights without Lexicon's
consent; provided that the grant of any such sublicense shall be consistent with
the terms and conditions of this Agreement and that no such sublicense to a
Product Licensee shall relieve Genentech of primary responsibility for all
payments and royalties due to Lexicon under Article 7 with respect to Licensed
Product(s) licensed to such Product Licensee.

5.2 LICENSE UNDER LEXICON PRE-EXISTING PATENTS AND KNOW-HOW FOR THE RESEARCH,
DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS OTHER THAN LICENSED PRODUCTS IN
THE FIELD. Subject to the terms of this Agreement, Lexicon hereby grants to
Genentech a royalty-free, worldwide right and license under the Lexicon
Pre-Existing Patents and Know-How to research, develop, make (or have made),
use, offer for sale, sell, and import products (including, but not limited to
Small Molecule Drugs) other than Licensed Products for use in the Field. Such
right and license shall be exclusive (even as

                                       15

to Lexicon) with respect to products in the Field other than Small Molecule
Drugs and shall be non-exclusive with regard to Small Molecule Drugs. Lexicon
hereby grants Genentech the right to grant sublicenses under the right and
license granted by Lexicon pursuant to this Section 5.2, on a Project
Gene-by-Project Gene basis; provided, however, that with respect to a Small
Molecule Drug related to a Project Gene, without the prior written consent of
Lexicon, no such sublicense under the Lexicon Pre-Existing Patents or Know-How
may be granted to any Third Person in the absence of (i) a corresponding license
or sublicense of right to a given Small Molecule Drug that directly modulates
the Protein produced by such Project Gene or Derivative Protein thereof and
discovered, researched and under bona fide commercial development (at least
through the stage of the demonstration of preclinical efficacy in animal
studies) by Genentech and (ii) the license or sublicense of Patent rights
pertaining thereto owned by, licensed to or controlled by Genentech.

5.3 LICENSE UNDER PROJECT PATENTS AND KNOW-HOW FOR THE RESEARCH, DEVELOPMENT AND
COMMERCIALIZATION OF SMALL MOLECULE DRUGS IN THE FIELD. Subject to the terms of
this Agreement, Genentech hereby grants to Lexicon a royalty-free,
non-exclusive, worldwide right and license under the Project Patents and
Know-How to research, develop, make (or have made), use, offer for sale, sell,
and import Small Molecule Drugs for use in the Field. Such right and license
shall be exclusive; provided that Genentech retains rights under the Genentech
Project Patents and Know How (i) to research, develop, make (or have made), use,
offer for sale, sell, and import Small Molecule Drugs for use in the Field and
(ii) to grant licenses to Third Persons under the Genentech Project Patents and
Know How to research, develop, make (or have made), use, offer for sale, sell,
and import Small Molecule Drugs for use in the Field in connection with (A) a
corresponding license or sublicense of right to a given Small Molecule Drug that
directly modulates the Protein produced by a Project Gene or Derivative Protein
thereof and discovered, researched and under bona fide commercial development
(at least through the stage of the demonstration of preclinical efficacy in
animal studies) by Genentech and (B) the license or sublicense of Patent rights
pertaining thereto owned by, licensed to or controlled by Genentech. Genentech
hereby grants Lexicon the right to grant sublicenses under the right and license
granted by Genentech pursuant to this Section 5.3, subject to the restrictions,
if any, on Project Materials set forth in Section 5.5.

5.4 NON-EXCLUSIVE RESEARCH LICENSE GRANT UNDER LEXICON KNOCK-OUT TECHNOLOGY TO
KNOCK-OUT MICE AND PROGENY. Subject to the terms of this Agreement and the
restrictions, if any, on Project Materials set forth in Section 5.5, Lexicon
hereby grants to Genentech a worldwide, non-exclusive right and license under
the Lexicon Knock-Out Technology to use, breed, cross-breed and have bred and
cross-bred Knock-Out Mice and Progeny, at the internal research facilities of
Genentech and its Academic Collaborators or Contract Service Providers, for
research directed toward the discovery, identification, selection,
characterization, development or commercialization of products for use in the
Field. Except as provided in Section 5.10, Genentech agrees to use Knock-Out
Mice and Progeny solely for its own internal research purposes in accordance
with

                                       16

the terms and conditions of this Agreement, and not to use any Knock-Out Mice or
Progeny for any purposes for any Third Person, or to transfer, license the use
of or make available to any Third Person any Knock-Out Mice or Progeny.

5.5 [**]

5.6 [**]

5.7 RESERVATION OF RIGHTS. Notwithstanding the non-exclusive rights and licenses
granted to Genentech under Sections 5.2 and 5.4, but subject to the exclusive
rights and licenses granted to Genentech under Sections 5.1 and 5.2 [**]:

      (a) Lexicon reserves the right under the Lexicon Knock-Out Technology to
make and use, and to permit others to use, (i) Project Materials and (ii) other
transgenic and Knock-Out mice (including, without limitation, transgenic and
Knock-Out mice with a mutation in the same gene as a Knock-Out Mouse or
Overexpression Mouse) and phenotypic data with respect thereto, including the
right to grant licenses with respect to any applicable intellectual property
rights for such purpose.

      (b) Lexicon reserves the right under the Lexicon Pre-Existing Patent
Rights and Know-How (i) to discover, research, develop, make, have made, import,
use, have used, offer for sale, sell and have sold Small Molecule Drugs and (ii)
to grant licenses to Third Persons to discover, research, develop, make, have
made, import, use, have used, offer for sale, sell and have sold Small Molecule
Drugs.

5.8 LIMITED LICENSE TO GENENTECH GENE KNOW-HOW. For each Project Gene, Genentech
hereby grants Lexicon a non-exclusive, royalty-free license under the Genentech
Gene Patents and Know-How related to such Project Gene solely for Lexicon to
perform the following activities under this Agreement:

      (i)   identify, under Section 3.2(a), the homologous murine gene;

      (ii)  create, under Section 3.3, Knock-Out Mice with such homologous
            murine gene;

      (iii) test, under Section 3.3 and, if applicable, Section 3.6, such
            Knock-Out Mice;

      (iv)  conduct a First Pass Phenotypic Analysis on such Project Gene under
            Section 3.3(a); and

      (v)   [**].

Lexicon has no right to sublicense under this license grant, which shall be
considered personal to Lexicon. Such license will terminate with regard to a
Project Gene upon the earliest to occur of such Project Gene becoming a Rejected
Proposed Gene, a Rejected

                                       17

Project Gene, a Protein Candidate, or the completion of Lexicon's activities
under this article 5.8.

5.9 NO GRANT OF OTHER TECHNOLOGY OR PATENT RIGHTS. Except as otherwise expressly
provided in this Agreement, under no circumstances shall a party hereto, as a
result of this Agreement, obtain any ownership interest in or other right to any
technology, know-how, patents, patent applications, gene or genomic sequence
data or information, products, or biological materials of the other party,
including items owned, controlled or developed by, or licensed to, the other
party, or transferred by the other party to said party, at any time pursuant to
this Agreement.

5.10 TRANSFERS TO ACADEMIC COLLABORATOR OR CONTRACT SERVICE PROVIDERS. Genentech
shall have the right to transfer a Knock-Out Mouse or Progeny made pursuant to
this Agreement to an Academic Collaborator or Contract Service Providers,
provided that such Academic Collaborator or Contract Service Providers shall
have entered into a material transfer agreement with Genentech containing terms
relating to the transfer of such material that expressly (i) prohibit the use of
such Knock-Out Mice or Progeny thereof for any purpose other than such Academic
Collaborator's collaborative research with, or Contract Service Provider's
service for, Genentech in the Field and (ii) prohibit the transfer of such
Knock-Out Mice thereof by such Academic Collaborator or Contract Service
Provider to any Third Party. Within [**] of entering into any such material
transfer agreement, Genentech shall provide Lexicon with a copy thereof.

5.11 LICENSE TO LEXICON ISOGENIC TECHNOLOGY. Concurrently with the execution of
this Agreement, Lexicon and Genentech shall enter into the Sublicense Agreement
attached hereto as Exhibit B.

                                   ARTICLE 6

                   REQUEST FOR AND DELIVERY OF KNOCK-OUT MICE

6.1 REQUESTS FOR PROJECT MATERIALS BY GENENTECH. During the period of [**]
following the submission to the Steering Committee of the data from the First
Pass Phenotypic Analysis for a Project Gene in accordance with Section 3.5(a),
Genentech shall have the option, subject to the terms and conditions of this
Agreement, to have Lexicon deliver to Genentech [**] Knock-Out Mice for such
Project Gene, by delivering written notice of such request to Lexicon. During
the period beginning on the date of the submission to the Steering Committee of
the data from the First Pass Phenotypic Analysis for a Project Gene in
accordance with Section 3.5(a) and ending on [**], Genentech shall have the
option, subject to the terms and conditions of this Agreement, to have Lexicon
deliver to Genentech Project Materials and Project Know-How (to the extent not
already provided), including without limitation [**] for such Project Gene.
Genentech may also have, during such period, [**]. Lexicon shall have no further
obligation to deliver Project Materials to Genentech following such period;
provided that, following such period, Genentech may [**].

                                       18

6.2 MAINTENANCE OF BACK-UP COLONIES. For a period of at least [**] after the
delivery of a particular Knock-Out Mouse requested by Genentech under Section
6.1, Lexicon shall retain a small back-up colony of [**] such Knock-Out Mice
[**], for the purpose of replacing mice shipped to Genentech under this Article
6 which die or are otherwise unable to breed during or within [**] after
shipment to Genentech hereunder. Thereafter, until the expiration of [**]
following the submission to the Steering Committee of the data from the last
First Pass Phenotypic Analysis to be submitted under this Agreement, Lexicon
shall [**], if requested by Genentech. In the event Genentech requests that
Lexicon maintain any such colony for a period of more than [**], Genentech shall
pay Lexicon a storage and maintenance charge of [**] for such requested line of
Knock-Out Mice for each [**] that Lexicon maintains such colony at Genentech's
request.

6.3 DELIVERY TERMS AND CONDITIONS. Lexicon shall be responsible for making
shipping arrangements for all Knock-Out Mice to be shipped to Genentech from
Lexicon; provided that Genentech shall be responsible for (i) paying all
shipment and delivery charges in connection therewith and (ii) obtaining, if
desired, and paying for any insurance for Knock-Out Mice shipped to Genentech
from Lexicon. Genentech shall also be responsible for complying with all
customs, regulations, veterinary handling procedures and protocols, and
obtaining any and all permits, forms or permissions that may be required for
Genentech to accept shipment of Knock-Out Mice from Lexicon. Lexicon shall ship
to Genentech [**] Knock-Out Mice, [**], promptly following its receipt of
written notice that Genentech is prepared to accept shipment. Risk of loss with
respect to any Knock-Out Mice to be transferred under this Section 6.3 shall
pass to Genentech upon delivery thereof to the shipping company designated as
specified herein. If Genentech fails to complete the necessary arrangements to
accept shipment and provide such notice within [**] after delivery of its
request for such Knock-Out Mice pursuant to Section 6.1, Genentech shall pay
Lexicon a storage and maintenance charge of [**] for such requested line of
Knock-Out Mice for each week thereafter until Lexicon receives such notice.

                                   ARTICLE 7

                                    PAYMENTS

7.1 UP-FRONT FEE. As partial consideration for the work to be performed by
Lexicon under this Agreement, Genentech shall pay Lexicon a fee of [**], which
fee shall be payable within ten (10) days of the Effective Date.

7.2 PERFORMANCE PAYMENTS. Within [**] of achieving each of the research
milestones listed below, Genentech shall pay to Lexicon the following amounts:

    [**]

                                       19

7.3 OPTION FEE. In the event Genentech exercises its option under [**] with
respect to [**], Genentech shall pay Lexicon [**] concurrently with its delivery
of its notice exercising such option.

7.4 [**] FUNDING. To the extent the Steering Committee elects to have Lexicon
produce [**], Genentech shall pay Lexicon funding of [**] for each additional
[**], which funding shall be payable within [**] of such election.

7.5 FEE FOR [**] KNOCK-OUT MICE. In the event Genentech requests, more than [**]
following the submission to the Steering Committee of the data from the First
Pass Phenotypic Analysis for a Project Gene in accordance with Section 3.5(a),
that Lexicon [**], Genentech shall pay Lexicon a fee of [**] concurrently with
its delivery of such request.

7.6 FEE FOR DELIVERY OF MATERIALS [**]. In the event Genentech requests, after
the later of (i) the date of submission to the Steering Committee of the data
from the last First Pass Phenotypic Analysis to be submitted under this
Agreement and (ii) [**] following the date of submission to the Steering
Committee of the data from the First Pass Phenotypic Analysis for a Project
Gene, that [**], Genentech shall pay Lexicon a fee of [**] within [**] of
Lexicon's notice that [**].

7.7 MILESTONE PAYMENTS. With respect to the first Licensed Product relating to a
specified Protein Candidate to achieve the following development milestones
listed below, within [**] of achieving each such development milestones,
Genentech shall pay Lexicon the following amounts:

    [**]

For purposes of clarification, with respect to each Project Gene whose Protein
is designated as a Protein Candidate, Genentech shall only be required to pay
Lexicon for each of the above development milestones once upon the first
occurrence of the respective event. All milestone payments hereunder are to be
made by wire transfer of immediately available funds. Such milestone payments
are non-refundable and non-creditable against any other payments hereunder.
Genentech shall give Lexicon written notice of the achievement of any milestone
event no later than [**] after such achievement.

7.8 ROYALTIES ON LICENSED PRODUCTS. As consideration for its exclusive rights
with respect to Licensed Products and the other rights provided and activities
performed by Lexicon hereunder, Genentech agrees to pay Lexicon a royalty of
[**] of Net Sales of each Licensed Product by Genentech, its Affiliates and
Product Licensees, on a country-by-country basis, during the period commencing
with the first sale for use or consumption by the general public of a Product in
a country after Regulatory Approval in such country and ending on the date that
is [**] from the date of such first commercial sale of such Licensed Product in
such country; provided that, in the event the worldwide Net Sales of such
Licensed Product for which a royalty is payable to Lexicon hereunder

                                       20

exceeds [**] in any Calendar Year, Genentech shall pay Lexicon a royalty of [**]
on that portion of such Net Sales of such Licensed Product that exceeds [**] in
such Calendar Year. The royalty payable hereunder shall be payable only once
with respect to the same unit of Licensed Product.

7.9 PAYMENT OF ROYALTY; REPORTING; EXCHANGE RATES. Within [**] after the end of
each [**], Genentech will pay (and/or cause its Affiliates and/or Product
Licensees to pay) the royalty owed under this Agreement, if any, on applicable
Net Sales invoiced during such just-ended [**]. Such payment will be accompanied
by the report showing: (i) the Gross Sales and Net Sales of Products sold during
the reporting period and the calculation of Net Sales from such Gross Sales;
(ii) the royalties payable in Dollars which shall have accrued hereunder in
respect of such Net Sales; (iii) withholding taxes, if any, required by law to
be deducted in respect of such royalties; (iv) the dates of the first commercial
sales of Licensed Products in any country during the reporting period, if
applicable; and (v) the exchange rates used in determining the amount of Dollars
payable hereunder. Royalties payable on sales in countries other than the United
States shall be calculated in accordance with the standard exchange rate
conversion practices used by Genentech, its Affiliates or the Product Licensee,
as applicable, for financial accounting purposes. If no royalty or payment is
due for any royalty period hereunder, Genentech shall so report. Genentech shall
keep, and shall require its Affiliates and Product Licensees to keep (all in
accordance with GAAP), complete and accurate records in sufficient detail to
properly reflect all gross sales and Net Sales and to enable the royalties
payable hereunder to be determined.

7.10 U.S. CURRENCY; WIRE TRANSFERS. All payments, including any interest
pursuant to Section 7.12, payable by Genentech, its Affiliates and Product
Licensees to Lexicon under this Agreement will be paid in Dollars and will be
made by wire transfer, in immediately available funds, to an account designated
in writing by Lexicon.

7.11 TAXES. Any and all taxes levied on any payments from Genentech to Lexicon
under this Agreement will be the liability of, and paid by, Lexicon. However, if
Applicable Laws require the withholding of such taxes, Genentech will deduct
such taxes from its payment to Lexicon and remit such withheld amount to the
proper tax authority. Genentech will provide proof of payment to Lexicon within
[**] of such payment. This Agreement shall not be considered a partnership for
tax reporting purposes.

7.12 INTEREST ON OVERDUE PAYMENTS. In the event a royalty or other payment under
this Agreement is not made within [**] of when due, such outstanding payment
will accrue interest (from the date such payment is due through and including
the date upon which full payment is made) at the annual rate equal to [**].
Payment of accrued interest will accompany payment of the outstanding payment.

7.13 ROYALTY RECORDS; AUDIT RIGHTS. Genentech will keep, and maintain for a
period of [**] following the end of a Calendar Year, accurate records in
sufficient detail to enable royalties under this Agreement for such Calendar
Year to be determined. Lexicon has the right, upon prior written notice to
Genentech, not more than [**], through an

                                       21

independent certified public accountant selected by Lexicon and acceptable to
Genentech (which acceptance shall not be unreasonably refused) to have access
during normal business hours to those records of Genentech as may be reasonably
necessary to verify the accuracy of the royalty reports furnished by Genentech
under this Agreement for the previous Calendar Year. Prior to implementing an
audit, Lexicon agrees to submit an audit plan, including audit scope, to
Genentech for Genentech's approval (which shall not be unreasonably withheld).
Lexicon's independent certified public accountant will keep confidential all
information obtained during such audit and will report to Lexicon only the
amount of Genentech's Gross Sales and Net Sales made during, and royalties due
for, the Calendar Year in question. Genentech shall have the right, at its own
expense, to have its own independent certified public accountant review and
confirm the results of the audit performed by Lexicon's accountants. In the
event that the Parties' accountants do not agree as to the results of the audit,
the Parties agree that such accountants shall attempt in good faith to resolve
any discrepancies between their results according to GAAP and the terms of this
Agreement.

Lexicon is solely responsible for all the expenses of an audit, unless the
independent certified public accountant's report correctly shows any
underpayment of royalties by Genentech exceeding [**] of the total royalties it
owed for the Calendar Year then being reviewed. If the independent certified
public accountant's report correctly shows that Genentech underpaid its
royalties by more than [**], Genentech is responsible for the reasonable
expenses incurred by Lexicon for the independent certified public accountant's
services.

If the independent certified public accountant's report correctly shows any
underpayment of royalties by Genentech, Genentech shall remit to Lexicon within
[**] after the Genentech receipt of such report:

      (i)   the amount of such royalty underpayment;

      (ii)  interest on the amount being paid in (i), which interest shall be
            calculated pursuant to Section 7.12; and

      (iii) if such royalty underpayment exceeds [**] of Genentech's total
            royalties owed for the Calendar Year then being reviewed, the
            reasonable expenses incurred by Lexicon for the independent
            certified public accountant's services.

If the independent certified public accountant's report correctly shows any
overpayment of royalties by Genentech, such overpayment shall be fully
creditable against future royalties payable by Genentech in subsequent royalty
periods.

The calculation of royalties payable with respect to a Calendar Year will be
binding and conclusive on the Parties upon the expiration of [**] following the
end of such Calendar Year, unless (i) an audit of such Calendar Year, initiated
before the expiration of such [**] period, is on-going or (ii) Lexicon has, in
good faith and through written notice to

                                       22

Genentech, disputed such calculation before the expiration of such [**] period
or, if applicable, within [**] after receipt of the audit report.

7.14 CONVERTIBLE NOTE. Simultaneously with the execution and delivery of this
Agreement, the parties hereto shall enter into a Note Agreement (the "Note
Agreement"), dated as of the date hereof, substantially in the form attached as
Exhibit C hereto. Under the Note Agreement, Genentech shall loan Lexicon Four
Million Dollars (U.S.$4,000,000), on or before December 31, 2002, pursuant to
the terms and conditions set forth in such Note Agreement.

                                   ARTICLE 8

                     INTELLECTUAL PROPERTY RESPONSIBILITIES

8.1 OWNERSHIP.

      (a) Lexicon shall own all Lexicon Knock-Out Technology and Lexicon
Pre-Existing Patents and Know-How. Genentech shall own all Genentech Gene
Patents and Know-How and Project Patents and Know-How.

      (b) Lexicon shall assign all right, title and interest in inventions
encompassed within Project Patents and Know-How to Genentech by taking, and
causing its employees and agents to take, all necessary actions and executing,
and causing its employees and agents to execute, all necessary documents to
assign such rights, title and interest to Genentech. Moreover, Lexicon covenants
and agrees to cooperate, and cause its employees and agents to cooperate, with
Genentech to enable Genentech to enjoy to the fullest extent the right, title
and interest herein conveyed in the United States and foreign countries. Such
cooperation shall include prompt production of pertinent facts and documents,
giving of testimony, execution of petitions, oaths, specifications, declarations
or other papers, and other assistance all to the extent deemed necessary or
desirable by Genentech (a) for perfecting the right, title and interest herein
conveyed; (b) for prosecuting any of said applications; (c) for filing and
prosecuting applications for reissuance of any of said patents; (d) for
interference or other priority proceedings involving said invention; and (e) for
legal proceedings involving said invention and any applications therefor and any
patents granted thereon, including without limitation opposition proceedings,
cancellation proceedings, priority contests, public use proceedings,
infringement actions and court actions; provided, however, that the expense
incurred by Lexicon, its employees and agents in providing such cooperation
shall be paid for by Genentech.

8.2 PATENT PROSECUTION OF LEXICON KNOCK-OUT TECHNOLOGY AND LEXICON PRE-EXISTING
PATENTS.

                                       23

      (a) Patentable Inventions. Lexicon shall be responsible, at its sole
discretion and expense, for filing, prosecuting, and maintaining Lexicon
Knock-Out Technology and Lexicon Pre-Existing Patents; provided that Genentech
shall be responsible, at its sole discretion, for filing, prosecuting, and
maintaining Lexicon Pre-Existing Patents claiming Protein Candidates and uses
thereof following their designation as Protein Candidates.

      (b) Review and Comment. Lexicon shall provide Genentech with a copy of any
patent application (including any provisional applications) within Lexicon
Knock-Out Technology specifically related to a Protein Candidate prior to filing
in any jurisdiction, for review and comment by Genentech. Lexicon shall
reasonably consider comments and suggestions provided in a timely manner by
Genentech. Genentech shall maintain any such applications in confidence.

      (c) Notice of Decision. If Lexicon decides not to file an application
within Lexicon Knock-Out Technology specifically related to a Protein Candidate
in any country, it shall give Genentech prompt notice to this effect. After such
notice, Genentech may file, prosecute (including any interference), and
maintain, at its own expense, such application in such country, and Lexicon
shall execute such documents and perform such acts as may be reasonably
necessary for Genentech to continue such filing, prosecution, or maintenance.

      (d) Prosecution and Maintenance. Lexicon agrees to use reasonable
diligence to prosecute and maintain the Lexicon Knock-Out Technology
specifically related to a Protein Candidate it filed and to prosecute any
interference proceedings with respect thereto, unless it provides Genentech
notice under Subsection (c) or (e). Upon Genentech's request, Lexicon shall
provide Genentech with (i) a copy of communications with any patent office with
respect to any Lexicon Knock-Out Technology specifically related to a Protein
Candidate and (ii) the opportunity to review and comment on any or all such
communications. Genentech shall provide its comments on any such communication
within [**] after receipt of such communication, and should no comments be
received by Lexicon on or before the [**], then it shall be deemed that
Genentech has no comment to make on such communication. Lexicon shall reasonably
consider comments and suggestions provided in a timely manner by Genentech.
Genentech shall maintain any such communications in confidence. All such
communications provided to Genentech pursuant to this Section shall be sent to a
person to be designated by Genentech by written notice to Lexicon.

      (e) Cessation of Prosecution or Maintenance. Lexicon shall give prior
written notice to Genentech of any decision by Lexicon to cease the prosecution
(including any interference) and maintenance of Lexicon Knock-Out Technology
specifically related to a Protein Candidate and, in such case, Genentech shall
have the right at its sole discretion and expense to continue such prosecution
(including any interference) or maintenance. If Genentech continues such
prosecution or maintenance, Lexicon shall execute such documents and perform
such acts as may be reasonably necessary for Genentech to continue such
prosecution or maintenance.

                                       24

8.3 PATENT PROSECUTION OF GENENTECH GENE PATENTS, PROJECT PATENTS AND LEXICON
PRE-EXISTING PATENTS CLAIMING PROTEIN CANDIDATES.

      (a) Patentable Inventions. Genentech shall be responsible, at its sole
discretion and expense, for filing, prosecuting, and maintaining Genentech Gene
Patents, Project Patents and, following designation of a Protein Candidate, any
Lexicon Pre-Existing Patents related to such Protein Candidate.

      (b) Review and Comment. Genentech shall provide Lexicon with a copy of any
patent application (including any provisional applications) within Project
Patents and within Lexicon Pre-Existing Patents relating to Protein Candidates
prior to filing in any jurisdiction for review and comment by Lexicon. Genentech
shall reasonably consider comments and suggestions provided in a timely manner
by Lexicon. Lexicon shall maintain any such applications in confidence.

      (c) Notice of Decision. If Genentech decides not to file an application
within Project Patents related to a specific Project or within Lexicon
Pre-Existing Patents related to a Protein Candidate in any country, it shall
give Lexicon prompt notice to this effect. After such notice, Lexicon may file,
prosecute (including any interference), and maintain, at its own expense, such
application in such country, and Genentech shall execute such documents and
perform such acts as may be reasonably necessary for Lexicon to continue such
filing, prosecution, or maintenance.

      (d) Prosecution and Maintenance. Genentech agrees to use reasonable
diligence to prosecute and maintain the Project Patents and Lexicon Pre-Existing
Patents related to Protein Candidates it filed and to prosecute any interference
proceedings with respect thereto, unless it provides Lexicon notice under
Subsection (c) or (e). Upon Lexicon's request, Genentech shall provide Lexicon
with (i) a copy of communications with any patent office with respect to any
Project Patents and Lexicon Pre-Existing Patents related to Protein Candidates
and (ii) the opportunity to review and comment on any or all such
communications. Lexicon shall provide its comments on any such communication
within [**] after receipt of such communication, and should no comments be
received by Genentech on or before the [**], then it shall be deemed that
Lexicon has no comment to make on such communication. Genentech shall reasonably
consider comments and suggestions provided in a timely manner by Lexicon.
Lexicon shall maintain any such communications in confidence. All such
communications provided to Lexicon pursuant to this Section shall be sent to a
person to be designated by Lexicon by written notice to Genentech.

      (e) Cessation of Prosecution or Maintenance. Genentech shall give prior
written notice to Lexicon of any decision by Genentech to cease the prosecution
(including any interference) and maintenance of Project Patents related to a
specific Project or within Lexicon Pre-Existing Patents related to a Protein
Candidate and, in such case, Lexicon shall have the right at its sole discretion
and expense to continue such prosecution (including any interference) or
maintenance. If Lexicon continues such prosecution or maintenance, Genentech
shall execute such documents and perform such

                                       25

acts as may be reasonably necessary for Lexicon to continue such prosecution or
maintenance.

8.4 INFRINGEMENT AND MISAPPROPRIATION.

      (a) Notice. Each Party shall promptly notify the other Party in writing of
any alleged infringement or misappropriation, of which it becomes aware, by any
person of any intellectual property licensed or sublicensed to a Party under
this Agreement.(b) Infringement of Lexicon Knock-Out Technology, Project
Patents and Lexicon Pre-Existing Patents involving Small Molecule Drugs. Lexicon
shall have the sole right, but not the obligation, to take appropriate steps to
remove the infringement or alleged infringement of (i) Lexicon Knock-Out
Technology and (ii) Project Patents and Lexicon Pre-Existing Patents involving
infringement or alleged infringement of a Small Molecule Drug, including,
without limitation, by initiation, prosecution and control, at its own expense,
of any suit, proceeding or other legal action by counsel of its own choice. Any
damages or other monetary awards recovered by Lexicon shall be owned by Lexicon.

      (c) Notwithstanding the above, if the infringement or alleged infringement
relates to Lexicon Knock-Out Technology specifically related to a Protein
Candidate or to Project Patents and Lexicon Pre-Existing Patents involving
infringement or alleged infringement of a Small Molecule Drug, Lexicon shall
have the first right, but not the obligation, to take appropriate steps to
remove the infringement or alleged infringement, including, without limitation,
by initiation, prosecution and control, at its own expense, of any suit,
proceeding or other legal action by counsel of its own choice, provided that
Lexicon keeps Genentech reasonably informed of the progress of such suit,
proceeding or legal action and provides Genentech with copies of any substantive
documents related to such suit, proceeding or legal action and reasonable notice
thereof. Lexicon shall notify Genentech of its decision to exercise its right to
enforce Lexicon Knock-Out Technology specifically related to a Protein Candidate
or to Project Patents and Lexicon Pre-Existing Patents involving infringement or
alleged infringement of a Small Molecule Drug not later than [**] following its
discovery or notice of alleged infringement of Lexicon Knock-Out Technology
specifically related to a Protein Candidate or to Project Patents and Lexicon
Pre-Existing Patents involving infringement or alleged infringement of a Small
Molecule Drug. Genentech shall have the right, at its own expense, to be
represented in any such action by counsel of its own choice. If Lexicon decides
not to institute an infringement suit, proceeding or other legal action that
Genentech feels is reasonably required to protect such Lexicon Knock-Out
Technology specifically related to a Protein Candidate or to Project Patents and
Lexicon Pre-Existing Patents involving infringement or alleged infringement of a
Small Molecule Drug, Genentech shall have the right, at its sole discretion, to
institute such suit, proceeding or other legal action and Lexicon shall have the
right to be represented in such suit, proceeding or legal action, at its own
expense, by counsel of its own choice. For this purpose, the Party not bringing
the suit shall execute such legal papers necessary for such suit as may be
reasonably requested by the Party bringing suit.

                                       26

In the case of infringement or alleged infringement of a Project Patent,
Genentech in its sole discretion, may elect to assign such a Project Patent to
Lexicon so that Lexicon may maintain such suit, proceding or legal action in its
own name. In such event, the licenses to Genentech under such a Project Patent
shall remain unaffected.

If Lexicon brings an action under this Subsection, any damages or other monetary
awards recovered by Lexicon shall be applied proportionately first to defray the
unreimbursed costs and expenses (including actual and reasonable attorneys'
fees) incurred by the Parties in the action. If any balance remains, such
balance shall be the property of Lexicon. If Lexicon fails to bring an action
under this Subsection, but Genentech brings an action, any damages or other
monetary awards recovered by Genentech shall be applied first to defray the
costs and expenses (including actual and reasonable attorneys' fees) incurred in
the action by the Parties. The balance that remains shall be the property of
Genentech

      (d) Infringement of Genentech Gene Patents and Know-How, Project Patents
and Know-How, and Lexicon Pre-Existing Patents and Know-How related to Protein
Candidates. Genentech shall have the sole right, but not the obligation, to take
appropriate steps to remove the infringement or alleged infringement of (i)
Genentech Gene Patents and Know-How, and (ii) Project Patents and Know-How and
Lexicon Pre-Existing Patents and Know-How related to Protein Candidates (except
in the case of this clause (ii), to the extent such infringement or alleged
infringement relates to the development of Small Molecule Drugs, which shall be
controlled by subsection (c) above), including, without limitation, by
initiation, prosecution and control, at its own expense, of any suit, proceeding
or other legal action by counsel of its own choice. Any damages or other
monetary awards recovered by Genentech shall be owned by Genentech.

      (e) If Genentech brings action under Subsection (d) above with respect to
Project Patents and Know-How or Lexicon Pre-Existing Patents and Know-How
related to Protein Candidates, any damages or other monetary awards recovered by
Genentech shall be applied proportionately first to defray the unreimbursed
costs and expenses (including actual and reasonable attorneys' fees) incurred by
the Parties in the action. If any balance remains, Lexicon shall retain as its
own property an amount of compensatory damages equal to the royalty that Lexicon
would otherwise be entitled to under this Agreement if such remaining balance
was treated as Genentech Net Sales. If any balance remains after Lexicon's
retained amount, such balance shall be the property of Genentech.

8.5 NOTICE OF INFRINGEMENT BY A PARTY. If the making, using, importing, offer
for sale, or selling a Licensed Product results in a claim against a Party of
patent infringement by any Third Person, the Party first having notice of that
claim shall promptly notify the other Party in writing. The notice shall set
forth the facts of the claim in reasonable detail.

                                       27

If any notice of infringement is received by, or a suit is initiated against,
either Party with respect to any Licensed Product, the Parties shall consult in
good faith regarding the best response.

Notwithstanding the foregoing, if the claim involves an allegation of a
violation of the trade secret rights of a Third Person, the Party accused of
such violation shall have the obligation to defend against such claim and shall
indemnify the other Party against all costs associated with such claim.

8.6 LITIGATION EXPENSES. Each Party shall assume and pay all of its own
out-of-pocket expenses incurred in connection with all litigation described in
this Article 8, including without limitation, the fees and expenses of that
Party's counsel.

8.7 SETTLEMENT APPROVAL. No settlement, consent judgment or other voluntary
final disposition of a suit being prosecuted by a Party under this Article may
be entered into without the consent of the other Party if such settlement,
consent judgment or other voluntary final disposition would alter, derogate, or
diminish such other Party's rights under the Agreement, which consent will not
be unreasonably withheld or delayed.

8.8 PATENT TERM EXTENSIONS. When appropriate, the Parties shall cooperate with
each other in gaining patent term extension. All filings for such extension
shall be made by the Party that is the owner of the patent

8.9 AUDIT RIGHTS REGARDING INVOICES. In the event there is a good faith dispute
over an amount owed by a Party under this Article, the disputed payment may be
delayed, and such payment will not be considered delinquent pending a resolution
of the Parties' dispute. Section 7.13 (i.e., "Royalty and Reasonable Expenses
Records; Audit Rights") is applicable with regard to all invoices submitted by a
Party to the other Party under this Article.

                                   ARTICLE 9

                                 CONFIDENTIALITY

9.1 OBLIGATIONS. Except upon obtaining the other Party's prior written consent
to the contrary, each Party agrees that it will, for a period of [**] after the
expiration or early termination of the entire Agreement:

      (i)   maintain in confidence, and not disclose to any person (except as
            provided in Section 9.2), the other Party's Confidential Information
            or any Project Confidential Information; and

      (ii)  not use such Confidential Information for any purpose except as
            contemplated in this Agreement.

9.2 AUTHORIZED DISCLOSURES OF CONFIDENTIAL INFORMATION.

                                       28

      (a) Permitted Persons. Each Party may disclose Confidential Information of
the other Party or Project Confidential Information, without such other Party's
prior written consent, to its and its Affiliates' (or the other Party's and its
Affiliates') directors, employees, agents, consultants, permitted
(sub)licensees, suppliers, and other Third Persons who:

      (i)   need to know such Confidential Information to assist the Party in
            fulfilling its obligations or exploiting its rights hereunder (or to
            determine their interest in providing such assistance); and

      (ii)  are bound by written confidentiality and non-use obligations no less
            stringent than those contained herein.

      (b) Legally Required or Necessary. Each Party may also disclose the
Confidential Information of the other Party or Project Confidential Information,
without such other Party's prior written consent, to any person or to a
government or regulatory authority to the extent that such disclosure is:

      (i)   required by Applicable Law; or

      (ii)  otherwise necessary for filing a patent application, prosecuting,
            maintaining, or enforcing a patent, obtaining or maintaining
            authorizations to conduct pre-clinical or clinical studies regarding
            a product, or obtaining or maintaining a registration regarding a
            product (provided such Party is entitled at the time to engage in
            such activities under this Agreement).

Prior to disclosing the other Party's Confidential Information or Project
Confidential Information under this Subsection (b), the disclosing Party, to the
extent practicable, will give the other Party a copy of the Confidential
Information to be disclosed and provide such Party a reasonable opportunity to
comment on the necessity and the text of the proposed disclosure. The disclosing
Party agrees to consider such comments in good faith and to reasonably avail
itself of available means under the applicable law to minimize the disclosure of
such Confidential Information.

      (c) Court Orders. Each Party may also disclose the Confidential
Information of the other Party or Project Confidential Information, without such
other Party's prior written consent, pursuant to an order of a regulatory
authority or court of competent jurisdiction, provided that it promptly notifies
the other Party of the required disclosure in order to provide such Party an
opportunity to take legal action to prevent or limit such disclosure and, if
asked, reasonably assists the other Party in pursuing such action.

      (d) Legal Actions. Each Party may also disclose the Confidential
Information of the other Party or Project Confidential Information, without such
other Party's prior written consent, as is necessary to pursue or defend against
a legal or regulatory action related to this Agreement.

                                       29

9.3 DISCLOSURE OF THE TERMS OF THE AGREEMENT. Each Party agrees that it will
maintain in confidence, and not to disclose, the terms of this Agreement without
the prior written consent of the other Party, except as authorized under
Subsections (a), (b), (c), or (d) of Section 9.2. In addition, if a Party
receives a request from an authorized representative of a U.S. or foreign tax
authority for a copy of the Agreement, that Party may provide a copy of the
Agreement to such tax authority representative without advance notice to or the
consent or cooperation of the other Party, but the disclosing Party must notify
the other Party of the disclosure as soon as practical.

9.4 PUBLICITY ABOUT THE AGREEMENT. If a Party desires to issue a press release
or other public statement or announcement concerning this Agreement, the subject
matter hereof, or the research, development or commercial results of the
products hereunder, it must first obtain the other Party's written approval of
the proposed release or announcement; provided that such approval shall not be
unreasonably withheld if required pursuant to the disclosure requirements of the
Securities and Exchange Commission ("SEC") or the national securities exchange
or other stock market on which such Party's securities are traded ("Exchange").
All press releases and other publicity will conform to the publicity strategy
and policy developed by the Steering Committee in accordance with Section
2.2(v). Without limiting the generality of the foregoing, each Party agrees that
the other Party will have no less than [**] to review and provide comment
regarding any such proposed press release or publicity, unless a shorter review
time is agreed to by both Parties. Neither Party may use any trademarks, logos,
or symbols associated with the other Party without the prior written permission
of such other Party. In the event that one Party reasonably concludes that a
given disclosure is required by law and the other Party disagrees with the
substance or extent of the disclosure, then the Party seeking such disclosure
shall either (i) limit said disclosure to address the concerns of the other
Party, or (ii) provide a written opinion from counsel stating that such
disclosure is indeed required by law. With respect to complying with the
disclosure requirements of the SEC, in connection with any required SEC filing
of this Agreement, the filing Party shall seek confidential treatment of
portions of this Agreement from the SEC and the other Party shall have the right
to review and comment on such an application for confidential treatment prior to
its being filed with the SEC. The non-filing Party shall provide its comments,
if any, on such application as soon as practicable and in no event later than
[**] after such application is provided to the non-filing Party. Notwithstanding
the foregoing, Genentech shall not be prohibited from making a statement
regarding the development or commercialization of a Protein Candidate, Licensed
Product or Small Molecule Drug and Lexicon shall not be prohibited from making a
statement regarding the development or commercialization of a Small Molecule
Drug.

9.5 PUBLICATIONS. Genentech and Lexicon (as applicable, the "Publishing Party")
may each publish or present data and/or results generated by or on behalf of
such Publishing Party utilizing Knock-Out Mice or Progeny, subject to the prior
review of the proposed disclosure by the other Party (the "Reviewing Party")
solely to determine (i) whether the proposed disclosure contains Confidential
Information of the Reviewing

                                       30

Party or Project Confidential Information or (ii) whether information contained
in the proposed disclosure should be the subject of a patent application to be
filed by Lexicon or Genentech prior to such disclosure. The Publishing Party
shall provide the Reviewing Party with the opportunity to review any proposed
abstract, manuscript or presentation which discloses the results of research
conducted utilizing the Knock-Out Mice or Progeny by delivering a copy thereof
to the Reviewing Party no less than [**] before its intended submission for
publication or presentation. The Reviewing Party shall have [**] from its
receipt of any such abstract, manuscript or presentation in which to notify the
Publishing Party in writing of any specific objections to the disclosure, based
on either the need to seek patent protection or concern regarding the specific
disclosure of the Confidential Information of the Reviewing Party or Project
Confidential Information. In the event the Reviewing Party objects to the
disclosure, the Publishing Party agrees not to submit the publication or
abstract or make the presentation containing the objected-to information until
the Reviewing Party is given a reasonable additional period of time (not to
exceed an additional [**]) to seek patent protection for any material in the
disclosure which the Reviewing Party believes is patentable (subject, in all
events, to Article 8) or, in the case of Confidential Information of the
Reviewing Party, to allow the Publishing Party to delete any Confidential
Information of Reviewing Party from the proposed disclosure. Each Party agrees
to delete from the proposed disclosure any Confidential Information of the
Reviewing Party upon request. Notwithstanding the foregoing, publication of
Patent applications shall not be subject to this Section 9.5

                                   ARTICLE 10

                        TERM AND TERMINATION OF AGREEMENT

10.1 TERM. This Agreement commences on the Effective Date and will remain in
full force and effect, unless earlier terminated as provided in this Article 10,
until the later of: (i) [**] after the last Project Gene becomes a Rejected
Project hereunder; or (ii) the expiration of all royalty obligations under this
Agreement between the Parties.

10.2 [**]

10.3 TERMINATION FOR INSOLVENCY OR BANKRUPTCY. Either Party may, by written
notice, terminate this Agreement with immediate effect if the other Party:

      (i)   makes a general assignment for the benefit of creditors;

      (ii)  files an insolvency petition in bankruptcy;

      (iii) petitions for or acquiesces in the appointment of any receiver,
            trustee or similar officer to liquidate or conserve its business or
            any substantial part of its assets;

      (iv)  commences under the laws of any jurisdiction any proceeding
            involving its insolvency, bankruptcy, reorganization, adjustment of
            debt, dissolution,

                                       31

            liquidation or any other similar proceeding for the release of
            financially distressed debtors; or

      (v)   becomes a party to any proceeding or action of the type described
            above in (iii) or (iv), and such proceeding or action remains
            undismissed or unstayed for a period of more than sixty (60) days.

All rights and licenses granted under or pursuant to this Agreement by each
Party as a licensor or sublicensor are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of Title XI, U.S. Code (the "Bankruptcy Code"),
licenses (or, if applicable, sublicenses) of rights to "intellectual property"
as defined under Section 101(35A) of the Bankruptcy Code. The Parties agree that
each licensee (or, if applicable, sublicensee) of such rights under this
Agreement shall retain and may fully exercise all rights and elections it would
have in the case of a licensor (or sublicensor) bankruptcy under the Bankruptcy
Code. Each Party agrees during the term of this Agreement to create or maintain
current copies, or if not amenable to copying, detailed descriptions or other
appropriate embodiments, of all such intellectual property licensed or
sublicensed to the other Party.

10.4 SURVIVING OBLIGATIONS. The rights and obligations of the Parties under
Article 1 (Definitions), Article 9 (Confidentiality), Article 11 (Disclaimers,
Representations and Warranties), Article 12 (Indemnification), and Article 13
(General Provisions) survive the termination or expiration of this Agreement.
Also, termination or expiration of the Agreement shall not affect the rights and
obligations of the Parties that by their nature survive, including, but not
limited to, those in Article 8 (Intellectual Property Responsibilities) and, to
the extent applicable, the effects of termination contained in Sections 10.2
through 10.4. [**] The provisions of Sections 7.7 through 7.13 shall survive
termination of this Agreement [**]. Finally, except as specifically provided to
the contrary in this Agreement, termination or expiration of the Agreement shall
be without prejudice to any rights that shall have accrued to the benefit of
either Party prior to such termination or expiration and shall not relieve the
Parties of any obligations accrued hereunder prior to such termination or
expiration. This Section survives the termination or expiration of this
Agreement for any reason.

                                   ARTICLE 11

                  DISCLAIMERS, REPRESENTATIONS, AND WARRANTIES

11.1 CORPORATE EXISTENCE AND AUTHORITY. Each Party represents and warrants to
the other Party that:

      (i)   it is a corporation or entity duly organized and validly existing
            under the law of the state or country of its incorporation; and

                                       32

      (ii)  it has the full authority to enter into and perform all of the
            duties and obligations contemplated under this Agreement.

11.2 AUTHORIZED EXECUTION; BINDING OBLIGATION. Each Party represents and
warrants to the other Party that its execution, delivery, and performance of
this Agreement have been duly authorized and approved by all necessary corporate
action and that this Agreement is binding, upon and enforceable against it in
accordance with the Agreement's terms (subject to bankruptcy and similar laws
affecting the rights of creditors generally).

11.3 NO CONFLICTS. Each Party represents and warrants that its execution,
delivery, and performance of this Agreement:

      (i)   does not, except as otherwise described in this Agreement, require
            the approval or consent of any Third Person, which has not already
            been obtained;

      (ii)  does not, to the best of its knowledge, contravene any Applicable
            Law; and

      (iii) does not contravene the provisions of, nor constitutes a default
            under, its Certificate of Incorporation or bylaws or any indenture,
            mortgage, contract or other agreement or instrument to which it is a
            signatory.

11.4 NO DEBARMENT. Each Party represents and warrants to the other that it is
not debarred under the Generic Drug Enforcement Act of 1992 (the "Act") and is
in compliance with the provisions of such Act. Each Party also covenants that,
while this Agreement is in effect, it will comply with such Act, will not become
debarred under the Act, and will not use in connection with this Agreement the
services of any person debarred under such Act. Finally, upon request by the
other Party, a Party will certify its compliance with the Act and this Section
in writing to such other Party. If, at any time, a Party breaches a covenant
under this Section, the breaching Party shall immediately notify the other Party
of such fact.

11.5 REPRESENTATIONS AND WARRANTIES REGARDING LICENSES. With regard to each
license granted under this Agreement, the Party granting such license (the
"Granting Party") will be deemed to represent and warrant to the other Party, at
the time any such license is granted, that, to the Granting Party's Actual
Knowledge:

      (a) the Granting Party's grant of such license does not require the
approval or consent of any person or entity, which has not already been
obtained;

      (b) the Granting Party's grant of such license does not contravene any
Applicable Law;

                                       33

      (c) the Granting Party's grant of such license does not contravene the
provisions of, nor constitutes a default under, the Granting Party's Certificate
of Incorporation or bylaws or any indenture, mortgage, contract or other
agreement or instrument to which the Granting Party is a signatory;

      (d) the Granting Party has the ability and right to grant the other Party
such license;

      (e) except as previously identified in a written notice, the Granting
Party has not received, nor been made aware of, any communications alleging that
its practice of the licensed intellectual property rights has infringed or
misappropriated (or that it, or the other Party, will infringe or misappropriate
in carrying out such license) the intellectual property rights of any person or
entity;

      (f) except as previously identified in a written notice, there have been
no claims made against the Granting Party asserting the invalidity, abuse,
misuse, or unenforceability of the licensed intellectual property rights; and

      (g) there are no outstanding encumbrances on, licenses under, or
covenants-not-to-sue with respect to the licensed intellectual property rights,
which, in the case of licenses or covenants not-to-sue, would conflict with the
rights granted herein.

11.6 DISCLAIMER OF IMPLIED WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTE, OR OTHERWISE, AND EACH
PARTY SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES
INCLUDING WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE.

11.7 LIMITATION OF LIABILITY. NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY
FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES INCLUDING, BUT NOT
LIMITED TO, LOST PROFITS ARISING FROM OR RELATING TO ANY BREACH OF THIS
AGREEMENT, REGARDLESS OF ANY NOTICE OF THE POSSIBILITY OF SUCH DAMAGES. HOWEVER,
NOTHING IN THIS SECTION IS INTENDED TO LIMIT OR RESTRICT THE INDEMNIFICATION
RIGHTS OR OBLIGATIONS OF ANY PARTY.

                                   ARTICLE 12

                                 INDEMNIFICATION

12.1 INDEMNIFICATION OBLIGATIONS.

                                       34

      (a) Genentech's Obligation. Genentech will defend, indemnify, and hold
harmless Lexicon, its Affiliates and their respective directors, officers,
shareholders, employees, and agents ("Lexicon Indemnitees"), from and against
any and all liabilities, damages, losses, penalties, fines, costs, interest, and
expenses, including, without limitation, reasonable attorneys' fees ("Damages"),
arising from or occurring as a result of a Third Person's claim, action, suit,
judgment, or settlement against a Lexicon Indemnitee that is due to or based
upon:

      (i)   any breach of a representation, warranty, covenant, obligation, or
            agreement of Genentech under this Agreement;

      (ii)  any grossly negligent or more culpable act of Genentech or a
            Genentech Affiliate or sublicensee, or their respective directors,
            officers, shareholders, employees, and agents related to this
            Agreement; or

      (iii) the development, manufacture, marketing, sale or other disposition,
            offer to sell, use, importation, or exportation of a Licensed
            Product, Protein Candidate or other product in the Field by
            Genentech or Genentech's Affiliates, sublicensees, subcontractors,
            or customers, or the customers of Genentech's Affiliates and
            sublicensees (any of clauses of (i) through (iii), a "Lexicon Third
            Person Claim").

[**] Genentech's obligations under this Subsection shall survive the expiration
or termination of this Agreement for any reason.

      (b) Lexicon's Obligation. Lexicon will defend, indemnify, and hold
harmless Genentech, its Affiliates and their respective directors, officers,
shareholders, employees and agents ("Genentech Indemnitees"), from and against
any and all Damages arising from or occurring as a result of a Third Person's
claim, action, suit, judgment, or settlement against a Genentech Indemnitee that
is due to or based upon:

      (i)   any breach of a representation, warranty, covenant, obligation, or
            agreement of Lexicon under this Agreement;

      (ii)  any grossly negligent or more culpable act of Lexicon or a Lexicon
            Affiliate or sublicensee, or their respective directors, officers,
            shareholders, employees, and agents related to this Agreement (any
            of clauses (i) through (ii), a "Genentech Third Person Claim"); or

      (iii) the development, manufacture, marketing, sale or other disposition,
            offer to sell, use, importation, or exportation of a Small Molecule
            Drug by Lexicon or Lexicon's Affiliates, sublicensees,
            subcontractors, or customers, or the customers of Lexicon's
            Affiliates and sublicensees.

[**] Lexicon's obligations under this Subsection shall survive expiration or
termination of this Agreement for any reason.

                                       35

12.2 INDEMNIFICATION PROCEDURES.

      (a) Notice. Promptly after a Genentech Indemnitee or a Lexicon Indemnitee
(each, an "Indemnitee") receives notice of a pending or threatened Lexicon Third
Person Claim or Genentech Third Person Claim, as the case may be (an "Action"),
such Indemnitee shall give written notice of the Action to the Party to whom the
Indemnitee is entitled to look for indemnification pursuant to this Article 12
(the "Indemnifying Party"). However, an Indemnitee's delay in providing or
failure to provide such notice shall not relieve the Indemnifying Party of its
indemnification obligations, except to the extent it can demonstrate prejudice
due to the delay or lack of notice.

      (b) Defense. Upon receipt of notice under Subsection (a) from the
Indemnitee, the Indemnifying Party will have the duty to either to compromise or
defend, at its own expense and by counsel (reasonably satisfactory to
Indemnitee), such Action. The Indemnifying Party will promptly (and in any event
not more than [**] after receipt of the Indemnitee's original notice) notify the
Indemnitee in writing of its intention to either compromise or defend such
Action. Once the Indemnifying Party notifies the Indemnitee of its election to
assume the defense of an Action, the Indemnifying Party is not liable to the
Indemnitee for the fees of other counsel or any other expenses subsequently
incurred by the Indemnitee in connection with such defense, other than the
Indemnitee's reasonable costs of investigation and cooperation. However, the
Indemnitee shall have the right to employ separate counsel and to participate in
the defense of an Action (and the Indemnifying Party shall bear the reasonable
fees, costs, and expenses of such counsel) if:

      (i)   the use of the counsel chosen by the Indemnifying Party would
            present such counsel with a conflict of interest;

      (ii)  the actual or potential defendants in, or targets of, such Action
            include both the Indemnifying Party and the Indemnitee, and the
            Indemnitee reasonably concludes that there may be legal defenses
            available to it that are different from or additional to those
            available to the Indemnifying Party (in which case the Indemnifying
            Party shall not have the right to assume the defense of such Action
            on the Indemnitee's behalf);

      (iii) the Indemnifying Party does not employ counsel satisfactory to the
            Indemnitee to represent the Indemnitee within a reasonable time
            after the Indemnitee's notice of such Action;

      (iv)  the Indemnifying Party denies or fails to timely admit its
            obligation to defend and indemnify the Action; or

      (v)   in the reasonable opinion of counsel to the Indemnitee, the claim
            could result in the Indemnitee becoming subject to injunctive relief
            or relief other than the payment of Damages that could have a
            materially adverse effect on the ongoing business of the Indemnitee.

                                       36

      (c) Cooperation. The Indemnitee shall cooperate fully with the
Indemnifying Party and its legal representatives in the investigation and
defense of an Action. The Indemnifying Party will keep the Indemnitee informed
on a reasonable and timely basis as to the status of such Action (to the extent
the Indemnitee is not participating jointly in the defense of such Action) and
conduct the defense of such Action in a prudent manner.

      (d) Settlement. If an Indemnifying Party assumes the defense of an Action,
no compromise or settlement of such Action may be effected by the Indemnifying
Party without the Indemnitee's written consent (which consent shall not be
unreasonably withheld or delayed), unless (i) there is no finding or admission
of any violation of law or any violation of the rights of any person and no
effect on any other claims that may be made against the Indemnitee, (ii) the
sole relief provided is monetary damages that are paid in full by the
Indemnifying Party, and (iii) the Indemnitee's rights under this Agreement are
not adversely affected. In any event, the Indemnitee shall have no right to
settle any such Action without the prior written consent of the Indemnifying
Party, unless (i) there is no finding or admission of any violation of law or
any violation of the rights of any person and no effect on any other claims that
may be made against the Indemnifying Party, (ii) the sole relief provided is
monetary damages that are paid in full by the Indemnitee, and (iii) the
Indemnifying Party's rights under this Agreement are not adversely affected; any
settlement under this Subsection (d) without the prior written consent of the
Indemnifying Party shall relieve the Indemnifying Party of its obligations under
this Article 12.

12.3 INSURANCE.

      (a) During the term of this Agreement, each Party shall maintain an
ongoing basis, Commercial General Liability ("CGL") insurance, including
contractual liability, in the minimum amount of [**] per occurrence and [**]
annual aggregate combined single limit for bodily injury and property damage
liability; provided that Lexicon may satisfy such requirement by maintaining a
combination of CGL insurance and umbrella insurance in such combined per
occurrence and aggregate amounts. Within [**] of the Effective Date, the Parties
shall provide one another with their respective certificates of such insurance.
The aggregate deductible under CGL shall be reasonably satisfactory to the other
Party. The insurance policy shall be an occurrence or claims-made form, but if
only on a claims made form, the insurance coverage shall be maintained for at
least [**] following completion of the work performed under this Agreement.

      (b) Commencing not later than [**] prior to the first use in humans of the
first potential Licensed Product and thereafter for the period of time required
below, Genentech shall obtain and maintain on an ongoing basis Products
Liability insurance (including contractual liability), with a reputable carrier,
in the amount of at least [**] per occurrence and annual aggregate combined
single limit for bodily injury and property damage liability. No later than [**]
prior to the first use in humans of the first potential Licensed Product with
respect to the Product Liability insurance coverage, Genentech shall provide to
Lexicon a certificate evidencing all such coverage required hereunder.
Thereafter Genentech shall maintain such Products Liability insurance coverage
without

                                       37

interruption during the term of this Agreement and for a period of at least [**]
after the expiration or termination of the term, except as provided under the
next paragraph below.

      (c) In addition, the Parties agree with respect to (a) and (b) above that:

      (i)   The Parties shall use Commercially Reasonable Efforts to name each
            other as additional insureds under their respective CGL and Products
            Liability insurance;

      (ii)  Each of the above insurance policies shall be primary insurance as
            respects each Party's participation under this Agreement; and

      (iii) Each of the above insurance coverage shall be maintained with an
            insurance company or companies having an A.M. Best rating of "A" or
            better.

                                   ARTICLE 13

                               DISPUTE RESOLUTION

13.1 INTERNAL RESOLUTION. The Parties shall attempt to settle any dispute,
controversy or claim arising out of or relating to the validity, enforceability
or performance of this Agreement, including disputes relating to alleged breach
or termination of this Agreement but excluding any determination as to the
validity of the Parties' patents (hereinafter, the "Dispute"), in accordance
with the provisions of this Section 13.1. The Parties have entered into the
Agreement in good faith and in the belief that it is mutually advantageous to
them. It is with that same spirit of cooperation that they pledge to attempt to
resolve any Dispute amicably. Accordingly, the Parties agree that if any Dispute
should arise, it shall be referred to a member of senior management from each of
the Parties and from any sublicensee (if any).

13.2 ARBITRATION. Should the senior management be unable to resolve the dispute,
any controversy, dispute or claim which may arise out of or in connection with
this Agreement, or the breach, termination or validity thereof, shall be settled
by final and binding arbitration pursuant to the Arbitration Rules of the
American Arbitration Association as hereinafter provided:

      (a) The arbitration tribunal shall consist of three arbitrators. Each
party shall nominate in the request for arbitration and the answer thereto one
arbitrator and the two arbitrators so named will then jointly appoint the third
arbitrator as chairman of the arbitration tribunal. If one party fails to
nominate its arbitrator or, if the parties' arbitrators cannot agree on the
person to be named as chairman within [**], the President of the American
Arbitration Association shall make the necessary appointments for arbitrator or
chairman.

                                       38

      (b) The place of arbitration shall be in a neutral location (i.e., not
California or Texas) to be decided by the Party not initiating such arbitration,
and the arbitration proceedings shall be held in English. The procedural law of
the State of Delaware shall apply where the said Arbitration Rules are silent.
      (c) The decision of the arbitration tribunal must be in writing and must
specify the basis on which the decision was made, and the award of the
arbitration tribunal shall be final and judgement upon such an award may be
entered in any competent court or application may be made to any competent court
for juridical acceptance of such an award and order of enforcement.

                                   ARTICLE 14

                               GENERAL PROVISIONS

14.1 COMMON INFORMATION TECHNOLOGY. In order to facilitate efficient
communication between Genentech and Lexicon regarding the Projects, the Parties
agree to establish and maintain a secure communication link between Genentech
and Lexicon and work together to identify and support hardware, software, and
services, in accordance with Genentech's platforms and technology architecture,
appropriate for the sharing of Project information. Each Party shall bear its
own costs identifying, acquiring, operating, and maintaining such hardware,
software, and services.

14.2 LEGAL COMPLIANCE. Each Party will comply with all Applicable Laws in the
performance of its obligations or the exercise of its rights hereunder.

14.3 ASSIGNMENT. (a) Neither Party may assign this Agreement (nor any part
thereof) without the prior written consent of the other Party. Notwithstanding
the foregoing, if either Party is a party to a merger and it will not be the
surviving entity of such transaction, such Party may assign, without the other
Party's prior written consent (but with [**] prior written notice to the other
Party) all of its rights and obligations hereunder to the surviving or new
entity resulting from such merger so long as the surviving or new entity
expressly agrees in writing to assume all obligations of such Party under this
Agreement.

      (b) Any attempted assignment of this Agreement, other than as allowed in
this Section, will be of no force or effect. Subject to the provisions set forth
in this Section, this Agreement will be binding upon and will inure to the
benefit of the successors and permitted assigns of the Parties.

14.4 INDEPENDENT CONTRACTORS. It is understood and agreed that the Parties are
independent contractors and are engaged in the operation of their own respective
businesses, and neither Party is to be considered the agent of the other Party
or to have a fiduciary responsibility to such other Party for any purpose
whatsoever. The rights and

                                       39

obligations of each Party under this Agreement do not constitute the formation
of a partnership for federal, state, or any other tax purpose. Each Party shall
file all income tax returns consistent with that position. Neither Party will
have any authority to enter into any contracts or assume any obligations for the
other Party nor make any warranties or representations on behalf of that other
Party.

14.5 GOVERNING LAW. This Agreement and all amendments, modifications,
alterations, or supplements hereto, and the rights of the Parties hereunder,
will be construed under and governed by the laws of the State of Delaware
exclusive of its conflicts of laws principles.

14.6 ENTIRE AGREEMENT. This Agreement, including all Exhibits, Schedules and
attachments hereto, constitutes the entire agreement between Lexicon and
Genentech with respect to the subject matter hereof, and all previous or other
negotiations, representations and understandings with respect to the subject
matter hereof between Lexicon and Genentech are superceded as of the Effective
Date. This Agreement has been prepared jointly and will not be strictly
construed against either Party.

14.7 SEVERABILITY. All rights and restrictions contained herein may be exercised
and will be applicable and binding only to the extent that they do not violate
any applicable laws and are intended to be limited to the extent necessary so
that they will not render this Agreement illegal, invalid or unenforceable. If
any provision or portion of any provision of this Agreement, not essential to
the commercial purpose of this Agreement, will be held to be illegal, invalid or
unenforceable by a court of competent jurisdiction, it is the intention of the
Parties that the remaining provisions or portions thereof shall constitute their
agreement with respect to the subject matter hereof, and all such remaining
provisions, or portions thereof, will remain in full force and effect. To the
extent legally permissible, any illegal, invalid or unenforceable provision of
this Agreement will be replaced by a valid provision which will implement the
commercial purpose of the illegal, invalid, or unenforceable provision. In the
event that any provision essential to the commercial purpose of this Agreement
is held to be illegal, invalid or unenforceable and cannot be replaced by a
valid provision which will implement the commercial purpose of this Agreement,
the Parties will promptly negotiate a suitable resolution (potentially even
termination of the Agreement) in good faith.

14.8 FORCE MAJEURE. Any delays in, or failure of, performance of any obligations
of a Party will not constitute a default hereunder or give rise to any claim for
damages, if, and to the extent, caused by Force Majeure. The Party asserting
this Section will promptly notify the other Party of the event constituting
Force Majeure, of all relevant details of the occurrence, and an estimate of how
long such Force Majeure event shall continue. The affected Party will also take
reasonable and diligent actions to cure such cause, and the Parties will consult
with each other in order to find a fair solution and shall use all reasonable
endeavors to minimize the consequences of such Force Majeure.

                                       40

14.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which will be deemed an original, but all of which together will
constitute one and the same instrument.

14.10 NOTICES. All notices, statements, and reports required to be given under
this Agreement will be in writing, delivered in person, via registered or
certified mail postage prepaid, or through a professional courier service (e.g.,
FedEx or DHL), and addressed as follows:

            To Lexicon:         Lexicon Genetics Incorporated
                                8800 Technology Forest Place
                                Woodlands, TX 77381-1160
                                Fax: (281) 863-8088
                                Phone: (281) 863-3000
                                Attn: President, CEO

            With a copy to:     General Counsel

            To Genentech:       Genentech, Inc.
                                1 DNA Way
                                South San Francisco, California  94080
                                Fax: (650) 952-9881
                                Phone: (650) 225-1000
                                Attn: Corporate Secretary

            With a copy to:     Vice President, Research

Notice will be deemed to have been given when delivered if personally delivered
on a business day, on the [**] after dispatch if sent by a professional courier,
and on the [**] following the date of mailing if sent by registered or certified
mail. A Party may change the address to which notices to such Party are to be
sent by giving written notice to the other Party at the address and in the
manner provided above. Any notice may be given, in addition to the manner set
forth above, by facsimile or e-mail, provided that the Party giving such notice
obtains acknowledgment by facsimile or e-mail that such notice has been received
by the Party to be notified. Notices made in this manner will be deemed to have
been given when such acknowledgment has been transmitted.

14.11 WAIVER. The failure of either Party to enforce any provision of this
Agreement at any time will not be construed as a present or future waiver of
such provision or any other provision of this Agreement. The written waiver by
either Party, pursuant to this Section 14.11, of any provision or requirement
hereunder will neither be deemed nor operate as a future waiver of such or any
other provision or requirement.

14.12 MODIFICATIONS. No amendment, waiver or modification of this Agreement will
be valid or binding on either Party unless made in writing and signed by duly
authorized representatives of both Parties.

                                       41

14.13 HEADINGS. All headings and captions used in this Agreement are for
convenience only, and are not intended to have any substantive effect.

14.14 NO IMPLIED LICENSES. Except as specifically provided for in this
Agreement, neither Party grants, expressed or implied, any license to the other
Party under this Agreement.

14.15 NO THIRD PARTY BENEFICIARIES: Except as expressly provided herein, this
Agreement shall not confer any rights or remedies upon any Third Person other
than the Parties and their respective successors and permitted assigns.

14.16 R&D TAX CREDITS. To the extent permitted by Applicable Law, Genentech will
be entitled to any tax credits due on account of research and development
expenses it pays to Lexicon under this Agreement.

14.17 RESPONSIBLE FOR SUBLICENSEES. If a Party sublicenses to another person any
of the rights it received under this Agreement from the other Party, such Party
agrees to remain responsible to other Party for the performance and compliance
of such sublicensee with all obligations under this Agreement that apply to such
sublicensee.

                        [The rest of this page is blank]

                                       42

14.18 FURTHER ACTIONS. Each Party agrees to execute, acknowledge, and deliver
such further instruments, and to do all other acts, as may be necessary or
appropriate to carry out the purposes and intent of this Agreement.

            IN WITNESS WHEREOF, each Party has executed this Agreement by its
respective, duly authorized officer as of the day and year herein written.

GENENTECH, INC.                                LEXICON GENETICS INCORPORATED

/s/ ARTHUR D. LEVINSON                         /s/ ARTHUR T. SANDS
________________________________               _________________________________
By:  Arthur D. Levinson                        By: Arthur T. Sands
Title:  CEO                                    Title:  President and CEO

                                       43

                                    EXHIBIT A

        COMPREHENSIVE THERAPEUTIC PROTEIN DISCOVERY & VALIDATION PROGRAM

                 First Pass Phenotypic Analysis of Project Genes

                                      [**]

                                    EXHIBIT C

                                 NOTE AGREEMENT

          THIS NOTE AGREEMENT is entered into as of December 17, 2002 (this
"Note Agreement"), between LEXICON GENETICS INCORPORATED, A Delaware corporation
(herein called "Borrower"), and GENENTECH, INC., a Delaware corporation (herein
called "Lender").

          1. COMMITMENT. Subject to all the terms and conditions of this Note
Agreement and prior to the termination of its commitment as hereinafter
provided, Lender hereby agrees to make a loan (the "Loan"), up to an aggregate
principal amount not to exceed $4,000,000, pursuant to Article 7.14 of the
Collaboration and License Agreement dated as of the date hereof, between
Borrower and Lender (the "Collaboration Agreement"). The Loan shall become
available to Borrower on or before December 31, 2002. The Loan shall be
evidenced by a convertible promissory note, in the form of the Convertible
Promissory Note attached as Exhibit A hereto and incorporated herein by this
reference (the "Note"), which Note shall reflect the date of payment of the Loan
(the "Effective Date"). The Loan will be advanced to Borrower in immediately
available funds by wire transfer to a deposit account of Borrower in accordance
with the wire transfer instructions set forth beneath Borrower's signature to
this Agreement (as the same may be amended by written notice from Borrower to
Lender).

          2. LOAN.

                   A. MATURITY DATE. Borrower promises to pay to Lender the
entire outstanding principal balance (and all accrued interest thereon) of the
Loan on or before the date (the "Maturity Date") that is the earlier of (i)
December 31, 2005, (ii) six (6) months after the termination of the
Collaboration Agreement or (iii) the date of an Event of Default as set forth in
Section 8 below.

                            (1) PAYMENT IN NOTE SHARES. At Borrower's option,
subject to the limitations set forth in Section 2.A.(3), on the Maturity Date,
Borrower may elect to pay the outstanding principal balance (and all accrued
interest thereon) of the Loan in (a) shares of Borrower's common stock, par
value $0.001 per share (the "Common Stock"), pursuant to the Note (the "Note
Shares"), (b) immediately available funds, or (c) a combination of Note Shares
and immediately available funds.

                            (2) OPTIONAL PREPAYMENT. At Borrower's option,
subject to the limitations set forth in Section 2.A.(3), Borrower may at any
time, upon fifteen (15) days written notice to Lender, prepay all or any portion
of the outstanding principal balance (and all accrued interest on the principal
amount so prepaid) of the Loan in (a) Note Shares pursuant to the Note, (b)
immediately available funds, or (c) a combination of Note Shares and immediately
available funds.

                            (3) LIMITATIONS ON PAYMENT IN NOTE SHARES.

                                      (a) Borrower shall have no right to pay in
Note Shares any amounts in respect of principal outstanding under the Loan and
accrued interest in respect thereof to the extent that the number of such Note
Shares, calculated pursuant to Section 3 of the Note, would, when added to all
other shares of Common Stock of Borrower then owned by Lender or issuable to
Lender pursuant to the terms of any convertible securities of Borrower then
owned by Lender, cause Lender to own, in the aggregate, shares of Common Stock
equal to more than 15% of Borrower's issued and outstanding Common Stock plus
the Note Shares so contemplated to be issued, calculated at the time such
payment in Note Shares is contemplated. In such event, then Borrower shall pay
in Note Shares only up to such amount as, in Lender's good faith opinion, based
on the advice of legal counsel, would not exceed 15% of Borrower's issued and
outstanding Common Stock plus the Note Shares so issued unless Lender elects, in
its sole discretion, to receive payment of the entire amount due under the Loan
in Note Shares, notwithstanding the foregoing limitation on repayment in Note
Shares. Any remaining balance payable to Lender in respect of the Loan shall be
paid in immediately available funds.

                                      (b) Borrower may make payments in Note
Shares only to the extent that Borrower then has in reserve and available
sufficient of its authorized but unissued shares of Common Stock to effect such
payment in Note Shares.

                   B. INTEREST ON LOAN. Interest shall accrue on the sum of the
daily unpaid principal balance of the Loan outstanding on each day in lawful
money of the United States of America from the Effective Date until all such
principal amounts shall have been paid in full, which interest shall accrue at a
rate equal to eight percent (8%) per annum. Interest shall be compounded
quarterly and computed at the above rate on the basis of the actual number of
days elapsed year of 365 days; provided, however, that in no event shall
Borrower be bound to pay for the use or forbearance of the money loaned pursuant
hereto, interest of more than the maximum rate permitted by law to be charged by
Lender; the right to demand any such excess being hereby expressly waived by
Lender. All accrued and unpaid interest attributable to the principal amount of
the Loan then being paid shall be payable concurrently with such payment of
principal, whether in connection with any prepayment, on the Maturity Date or
otherwise.

                   C. USE OF PROCEEDS. The Loan may only be used for the
generation and phenotypic analysis of knock-out mice and Over-Expression Mice
for Project Genes (as such terms are defined in the Collaboration Agreement).

          3. DELIVERY AND APPLICATION OF PAYMENTS. Payment to Lender of all
amounts due hereunder shall be made in immediately available funds on the date
when due by wire transfer to a deposit account of Lender in accordance with the
wire transfer instructions set forth beneath Lender's signature to this
Agreement (as the same may be amended by written notice from Lender to
Borrower). Payment to Lender of all amounts due hereunder payable in Note Shares
shall be made by delivery of an appropriate stock certificate within two
business days after the Maturity Date (in the case of a payment pursuant to
Section 2.A.(l)) or two business days after the effective date of an election by
Borrower to prepay (in the case of a prepayment pursuant to Section 2.A.(2)), to
the office of Lender at I DNA Way, South San Francisco, California 94080,

                                        2

Attention: Treasurer, or at such other place as may be designated in writing by
Lender from time to time. If any payment date falls on a day that is not a
business day, the payment due date shall be extended to the next business day.
Any payment or prepayment received or deemed received in respect of the Loan
shall be applied first, to accrued and unpaid interest, and then, to the
outstanding principal balance of the Note.

          4. BORROWER REPRESENTATIONS AND COVENANTS. Borrower hereby represents,
warrants and covenants to Lender as follows:

                   A. AUTHORITY. Borrower has full right, power, authority and
capacity to enter into this Note Agreement and the Note (collectively, the "Loan
Documents") and to consummate the transactions contemplated hereby and thereby.
Upon due execution and delivery by Borrower, the Loan Documents will constitute
a legal, valid and binding obligation of Borrower enforceable in accordance with
its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies.

                   B. GOOD STANDING. Borrower is qualified to do business and is
in good standing in the State of Delaware and each jurisdiction in which the
failure to so qualify would have a material adverse effect on the business,
operations, financial condition or results of operations of Borrower and its
subsidiaries, taken as a whole.

                   C. CONSENTS. The execution and delivery of the Loan
Documents, and performance by Borrower of its obligations hereunder and
thereunder, have been duly authorized by all necessary corporate action on the
part of Borrower. No consent, approval, order or authorization of any federal,
state or local governmental authority on the part of Borrower is required in
connection with the consummation of the transactions contemplated by this Note
Agreement.

                   D. COMPLIANCE WITH SECURITIES LAWS. Assuming the accuracy of
the representations made by Lender in Section 5 hereof, the Note Shares issuable
upon conversion of any portion of the Note will be issued to Lender in
compliance with (i) the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the registration
and qualification requirements of all applicable securities laws of the states
of the United States or (ii) applicable exemptions therefrom.

                   E. NO CONFLICTS. The execution and delivery by Borrower of
the Loan Documents and consummation of the transactions contemplated thereby do
not and will not (i) violate the Certificate of Incorporation or Bylaws of
Borrower or any material judgment, order, writ, decree, statute, rule or
regulation applicable to Borrower; (ii) violate any provision of, or result in
the breach of, any material mortgage, indenture, agreement, instrument,
contract, judgment or decrees to which Borrower is a party or by which it is
bound; or (iii) result in the creation or imposition of any lien upon any
property, asset or revenue of Borrower or the suspension, revocation or
nonrenewal of any material permit, license, authorization or approval applicable
to Borrower, its business or operations, or any of its assets or properties.

                                        3

                   F. DISCLOSURE. No representation or warranty of Borrower
contained in the Loan Documents, the Collaboration Agreement or any other
documents, certificate or statement furnished to Lender by or on behalf of
Borrower in connection with the transactions contemplated hereby or thereby
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statement contained herein or therein nor misleading.
To the best of Borrower's knowledge, there is no fact known to Borrower that
materially adversely affects the business, operations, property, assets,
condition or prospects of Borrower that has not been disclosed in any filing
with the Securities and Exchange Commission.

          5. LENDER REPRESENTATIONS AND COVENANTS. Lender hereby represents,
warrants and covenants to Borrower as follows:

                   A. AUTHORITY. Lender has full right, power, authority and
capacity to enter into this Note Agreement and to consummate the transactions
contemplated hereby. Upon due execution and delivery by Lender, this Note
Agreement will constitute a legal, valid and binding obligation of Lender
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.

                   B. INVESTMENT EXPERIENCE; INVESTMENT INTENT; ETC. (i) Lender
is knowledgeable, sophisticated and experienced in making, and is qualified to
make, decisions with respect to investments in shares presenting an investment
decision like that involved in the purchase of the Note and the Note Shares that
may be issued in payment thereof (collectively, the "Securities"); (ii) Lender
has received all the information it considers necessary or appropriate for
deciding whether to purchase the Securities; (iii) Lender is acquiring the
Securities in the ordinary course of its business and for its own account solely
for investment and with no present intention of distributing any of such
Securities, except in accordance with an effective Registration Statement or
otherwise pursuant to an available exemption from registration under the
Securities Act, and no arrangement or understanding exists with any other person
regarding the distribution of such Securities; (iv) Lender will not, directly or
indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit
any offers to buy, purchase or otherwise acquire or take a pledge of) the
Securities except in compliance with the Securities Act, and the rules and
regulations promulgated thereunder; and (v) Lender is an "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act.

                   C. LENDER UNDERSTANDING AND AGREEMENTS. Lender acknowledges
and agrees that it will acquire the Securities being purchased by it in
transactions not involving a public offering and that such Securities are
subject to certain restrictions as to resale under the federal and state
Securities laws. Lender agrees and understands that each certificate
representing Note Shares issued in payment of the Note delivered on transfer of
or in substitution for any such certificate, shall bear a legend in
substantially the following form:

                   THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
                   RESTRICTIONS IMPOSED BY THE SECURITIES ACT OF 1933, AS
                   AMENDED, AND

                                        4

                   APPLICABLE STATE SECURITIES LAW. THE SHARES MAY NOT BE SOLD
                   OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION
                   THEREFROM UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE
                   STATE SECURITIES LAWS.

          Lender agrees that it will not sell, pledge, assign, transfer or
otherwise dispose (collectively, "Transfer") of any Securities unless the
Transfer will be made pursuant to an exemption from the registration
requirements of the Securities Act or pursuant to an effective registration
statement under the Securities Act and pursuant to an exemption from any
applicable state securities laws or an effective registration or other
qualification under any applicable state securities laws.

                   D. CONSENTS. The execution and delivery of this Note
Agreement, and performance by Lender of its obligations hereunder, have been
duly authorized by all necessary corporate action on the part of Lender.

          6. CONDITIONS TO MAKING OF LOAN. Lender's obligation to make the Loan
to Borrower under the Loan Documents is subject to satisfaction of each of the
following conditions as of the date the Loan is to be made, any of which may be
waived in whole or in part by Lender:

                   A. REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Borrower in Section 4 hereof shall be true and correct as of
the date the Loan is to be made, except that to the extent any representation or
warranty is made as of a specified date, it shall have been true and correct as
of such date.

                   B. NO DEFAULTS. No Event of Default or event which, with
notice or lapse of time or both would become an Event of Default, shall have
occurred and be continuing under the Loan Documents, and no breach shall have
occurred and be continuing under the Collaboration Agreement.

          7. SUBORDINATION. The indebtedness evidenced by the Note is hereby
subordinated, only in right of payment to the prior payment of (a) the
indebtedness of Borrower outstanding as of the date of this Note Agreement to
banks or commercial finance or other lending institutions regularly engaged in
the business of lending money, whether or not secured ("Senior Indebtedness")
and (b) any indebtedness or debentures, notes or other evidences of indebtedness
issued in exchange for Senior Indebtedness.

          8. DEFAULT AND REMEDIES. The occurrence of any one or more of the
following shall constitute an "Event of Default": (a) default in the payment of
any obligation by Borrower under the Note within five (5) business days after
the date the same became due and payable; (b) any representation or warranty
made by Borrower in Section 4 of this Note Agreement shall prove to have been
untrue in any material respect when made or deemed made; (c) except for any
failure to pay as described in clause (a) above, breach of any covenant
contained in the Loan Documents

                                        5

if such breach shall not have been cured to the reasonable satisfaction of
Lender within sixty (60) days after Borrower shall have received written notice
thereof from Lender; (d) Borrower files any petition or action for relief under
any bankruptcy, reorganization, insolvency or moratorium law or any other law
for the relief of, or relating to, debtors, now or hereafter in effect, or makes
any assignment for the benefit of creditors or takes any corporate action in
furtherance of any of the foregoing; (e) an involuntary petition is filed
against Borrower (unless such petition is dismissed or discharged within sixty
(60) days) under any bankruptcy statute now or hereafter in effect, or a
custodian, receiver, trustee, assignee for the benefit of creditors (or other
similar official) is appointed to take possession, custody or control of any
property, of Borrower (provided that no Loan will be made prior to the dismissal
of such proceeding); (f) Lender terminates the Collaboration Agreement pursuant
to Article 10.2 of the Collaboration Agreement; or (g) failure to pay when due
any amount in respect of Senior Indebtedness, or occurrence of any other default
in respect of Senior Indebtedness that pursuant to which the holder thereof
accelerates the due date thereof. Upon the occurrence and during the continuance
of an Event of Default, Lender may, at its option, upon notice to Borrower, do
any one or more of the following: (i) terminate its obligation to make the Loan
to Borrower as provided in Section 2 hereof if such Loan has not yet been made;
provided that in the case of an Event of Default pursuant to clause (d) or (e)
above, Lender's obligation to make the Loan to Borrower as provided in Section 3
hereof shall automatically terminate, without notice to Borrower, if such Loan
has not yet been made; (ii) declare all sums evidenced hereby immediately due
and payable; provided that in the case of an Event of Default pursuant to clause
(d) or (e) above, all sums evidenced hereby shall be automatically and
immediately due and payable, without notice to or demand on Borrower; or (iii)
exercise any remedies of an unsecured creditor under applicable law.

          9. GOVERNING LAW. This Agreement shall be deemed to have been made in
the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.

          10. MISCELLANEOUS PROVISIONS.

                   A. Nothing herein shall in any way limit the effect of the
conditions set forth in any other security or other agreement executed by
Borrower, but each and every condition hereof shall be in addition thereto.

                   B. No failure or delay on the part of Lender, in the exercise
of any power, right or privilege hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise thereof.

                   C. All rights and remedies existing under this Note Agreement
or any other Loan Document are cumulative to, and not exclusive of, any rights
or remedies otherwise available.

                   D. All headings and captions in this Note Agreement and any
related documents are for convenience only and shall not have any substantive
effect.

                                        6

                   E. This Note Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such agreement shall become effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and telephonic notification that such
executed counterparts has been received by Borrower and Lender.

                   F. Neither party shall assign any of its rights or
obligations hereunder except: (a) as incident to the merger, consolidation,
reorganization or acquisition of stock or assets affecting substantially all of
the assets or voting control of the assigning party; (b) to any wholly-owned
Affiliate of such party; provided, however, that such assignment shall not
relieve the assigning party of its responsibilities for performance of its
obligations under this Note Agreement; or (c) with the prior written consent of
the other party (in its sole discretion). This Note Agreement shall be binding
upon the successors and permitted assigns of the parties, and the name of a
party appearing herein shall be deemed to include the names of such party's
successor's and permitted assigns to the extent necessary to carry out the
intent of this Agreement. Any assignment not in accordance with this section
shall be null and void.

                            (Signature page follows)

                                        7

          IN WITNESS WHEREOF, the parties hereto have caused this Note Agreement
to be executed as of the date first written above.

LENDER:                                           BORROWER:

GENENTECH, INC.,                                  LEXICON GENETICS INCORPORATED,
a Delaware corporation                            a Delaware corporation

By:                                               By:
   -----------------------------------               ---------------------------
Name:  Thomas T. Thomas                           Name:
Title: Treasurer                                       -------------------------
                                                  Title:
                                                        ------------------------

Wire Transfer Instructions:                       Wire Transfer Instructions:
- ---------------------------                       ---------------------------

Account Name:     Genentech, Inc.
Account Number:   040-1699
Bank Name:        Mellon Bank, Pittsburgh, PA
ABA Number:       043-000-261

                                        8

                                    EXHIBIT A

                       FORM OF CONVERTIBLE PROMISSORY NOTE

THIS CONVERTIBLE PROMISSORY NOTE IS SUBJECT TO RESTRICTIONS IMPOSED BY THE
SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAW. THIS
NOTE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN
EXEMPTION THEREFROM UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE
SECURITIES LAWS.

                           CONVERTIBLE PROMISSORY NOTE

$4,000,000.00                                                             [DATE]

          FOR VALUE RECEIVED, LEXICON GENETICS INCORPORATED, a Delaware
corporation ("Borrower"), hereby promises to pay to the order of GENENTECH,
INC., a Delaware corporation ("Lender"), in lawful money of the United States of
America and in immediately available funds, the principal sum of $4,000,000.00
or such lesser amount as shall have been advanced by Lender and shall remain
outstanding (the "Loan"), together with accrued and unpaid interest thereon, due
and payable on the date and in the manner set forth below.

          This Convertible Promissory Note ("Note") is the note referred to in
and is executed and delivered in connection with the Note Agreement dated as of
December 17, 2002, between Borrower and Lender (the "Note Agreement").
Additional rights and obligations of Lender and Borrower are set forth in the
Note Agreement. All capitalized terms used herein and not otherwise defined
shall have the respective meanings given to them in the Note Agreement.

          1. MATURITY DATE. Subject to Section 3 below, all amounts payable
hereunder shall be due and payable on the Maturity Date. This Note may be,
prepaid in whole or in part at any time without penalty, in accordance with the
terms of the Note Agreement.

          2. INTEREST RATE AND PAYMENT. Borrower further promises to pay
interest on the outstanding Loan amount, which interest shall accrue from the
date hereof and shall be added to the principal balance of the Loan. Interest
shall accrue on the sum of the daily unpaid principal balance of the Loan
outstanding on each day in lawful money of the United States of America, from
the Effective Date until all such principal amounts shall have been paid in
full, which interest shall accrue at a rate equal to eight percent (8%) per
annum. Interest shall be compounded quarterly and computed at the above rate on
the basis of the actual number of days elapsed year of 365 days; provided,
however, that in no event shall Borrower be bound to pay for the use or
forbearance of the money loaned pursuant hereto, interest of more than the
maximum rate permitted by law to be charged by Lender; the right to demand any
such excess being hereby expressly waived by Lender. All accrued and unpaid
interest attributable to the principal amount of the Loan then being paid shall
be payable concurrently with such payment of principal, whether in connection
with any prepayment, on the Maturity Date or otherwise.

          3. PAYMENT. At Borrower's sole option and subject to the limitations
contained in Section 2.A.(3) of the Note Agreement, (a) on the Maturity Date,
the outstanding principal balance of, and accrued interest on, this Note shall
be payable in (i) shares of Borrower's Common Stock, (ii) immediately available
funds, or (iii) a combination of Common Stock and

immediately available funds; and (b) on any date upon which Borrower desires to
prepay all or any portion of the outstanding principal balance of, and accrued
interest on the amount so prepaid, such prepayment shall be payable in (i)
Common Stock, (ii) immediately available funds, or (iii) a combination of Common
Stock and immediately available funds. The number of shares of Common Stock
which shall be issuable to make any payment under this Note, including, without
limitation, any optional prepayment amount, which may be made by Borrower shall
be determined by dividing the amount of such payment by the Fair Market Value.
"Fair Market Value" shall mean the average of the closing prices for Borrower's
Common Stock as reported in The Wall Street Journal (Western Edition) for the
twenty (20) trading days immediately preceding the Maturity Date or the date
upon which an optional prepayment amount is paid, as the case may be.

                   A. MECHANICS AND EFFECT OF PAYMENT IN COMMON STOCK. No
fractional shares of Common Stock shall be issued in payment of this Note. In
lieu of Borrower issuing any fractional shares to Lender upon payment of this
Note (or any amount thereof) in Common Stock, Borrower shall pay to Lender in
cash the amount of any such payment that is not so paid in Common Stock, such
payment to be in the form provided below. Upon payment of this Note in full
pursuant to this Section 3, Lender shall surrender this Note, duly endorsed, at
the principal office of Borrower. The payment in Common Stock shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of this Note or the date any optional prepayment amount is paid, as
the case may be, and the person or persons entitled to receive the shares of
Common Stock issuable upon such payment shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date.
Borrower shall, in accordance with Section 2 of the Note Agreement, issue and
deliver to Lender at such principal office a certificate or certificates for the
number of shares of Common Stock to which Lender shall be entitled upon such
payment bearing such legends as are required by applicable state and federal
securities laws and pursuant to Section S.C. of the Note Agreement, together
with any other securities and property to which Lender is entitled upon such
payment under the terms of this Note, including a check payable to Lender for
any cash amounts payable as described above.

          4. SUBORDINATION. The indebtedness evidenced by this Note is hereby
subordinated, only to the extent set forth in Section 7 of the Note Agreement,
in right of payment to the prior payment of the Senior Indebtedness.

          5. PLACE OF PAYMENT. All amounts payable hereunder shall be payable in
accordance with terms of the Note Agreement, unless otherwise specified in
writing by Lender.

          6. APPLICATION OF PAYMENTS. Payment on this Note shall be applied
first to accrued interest, and thereafter to the outstanding principal balance
hereof.

          7. DEFAULT. The occurrence of an "Event of Default" under and as
defined in the Note Agreement shall constitute an "Event of Default" hereunder.
Upon the occurrence of an Event of Default, Lender shall have such rights and
remedies as are provided under the Note Agreement or by law.

                                        2

          8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.

          9. SUCCESSORS AND ASSIGNS. Subject to the limitations of Section 10.F.
of the Note Agreement, the provisions of this Note shall inure to the benefit of
and be binding on any successor to Borrower and shall extend to any holder
hereof.

                                      BORROWER:

                                      LEXICON GENETICS INCORPORATED

                                      By:
                                         ---------------------------------------

                                      Printed Name:
                                                   -----------------------------

                                      Title:
                                            ------------------------------------

                                        3

                                                                    EXHIBIT 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

      We consent to the incorporation by reference in the previously filed
Registration Statements on Form S-8 (Registration Nos. 333-41532 and 333-66380)
pertaining to the 2000 Equity Incentive Plan, the 2000 Non-Employee Directors'
Stock Option Plan and the Coelacanth Corporation 1999 Stock Option Plan and on
Form S-3 (Registration Nos. 333-67294 and 333-101549) and in the related
prospectus of Lexicon Genetics Incorporated, of our report dated February 13,
2003, with respect to the consolidated financial statements of Lexicon Genetics
Incorporated included in this Annual Report (Form 10-K) for the year ended
December 31, 2002.

                                                    /s/ ERNST & YOUNG LLP

Houston, Texas
March 14, 2003

                                                                    EXHIBIT 23.2

                 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP

      The financial statements of Lexicon Genetics Incorporated as of December
31, 2001 and 2000, and for years then ended, included in this annual report on
Form 10-K have been audited by Arthur Andersen LLP, independent public
accountants. Arthur Andersen LLP has since ceased operations.

      This annual report on Form 10-K is incorporated by reference into
Lexicon's registration statements on Form S-8 (Registration Nos. 333-41532 and
333-66380) and on Form S-3 (Registration Nos. 333-67294 and 333-101549) and the
prospectuses relating thereto. Arthur Andersen LLP has not reissued its report
on Lexicon's financial statements as of December 31, 2001 and 2000, and for the
years then ended, in connection with this annual report on Form 10-K. In
addition, after reasonable efforts, and in reliance upon Rule 437a under the
Securities Act of 1933, we have not been able to obtain the consent of Arthur
Andersen LLP with respect to the incorporation by reference of such report in
the registration statements and prospectuses referenced above. Because Arthur
Andersen LLP has not consented to the inclusion of such report in the
registration statements and prospectuses referenced above, purchasers under such
prospectuses will not be able to recover against Arthur Andersen LLP under
Section 11(a) of the Securities Act for any untrue statements of a material fact
contained in the financial statements audited by Arthur Andersen LLP or any
omissions to state a material fact required to be stated therein.

                                                                    EXHIBIT 99.2

                                  CERTIFICATION

      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350,
as adopted), Arthur T. Sands, M.D., Ph.D., Chief Executive Officer of Lexicon
Genetics Incorporated ("Lexicon"), and Julia P. Gregory, Chief Financial Officer
of Lexicon, each hereby certify that:

      1.    Lexicon's Annual Report on Form 10-K for the year ended December 31,
            2002, and to which this Certification is attached as Exhibit 99.2
            (the "Periodic Report"), fully complies with the requirements of
            section 13(a) or section 15(d) of the Securities Exchange Act of
            1934, and

      2.    The information contained in the Periodic Report fairly presents, in
            all material respects, the financial condition and results of
            operations of Lexicon.

      IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the
17th day of March, 2003.

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

                                   By:  /s/ JULIA P. GREGORY
                                      ------------------------------------------
                                        Julia P. Gregory
                                        Executive Vice President and
                                        Chief Financial Officer