Operating results for the three months ended March 31, 2005 are not necessarily indicative of results that may occur in future periods.

Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. When used herein, the words "believe," "anticipate," "expect," "estimate" and similar expressions are intended to identify such forward-looking statements. There can be no assurance that these statements will prove to be correct. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section. We undertake no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

Overview

We are in the business of developing and commercializing genetic analysis technologies. We are currently developing and preparing to commercialize a novel instrumentation system for genetic analysis based on our Sequencing-by-Synthesis, or SBS, chemistry and the DNA "cluster" technology we acquired in 2004. This one platform is expected to support many types of genetic analysis, including DNA sequencing, gene expression, genotyping and micro-RNA analysis. We believe that this technology, which can potentially generate over a billion bases of DNA sequence from a single experiment with a single sample preparation, will dramatically reduce the cost, and improve the practicality, of human re-sequencing relative to conventional technologies. We anticipate launching our first generation whole-genome sequencing system by the end of 2005. We believe our new DNA sequencing system will enable us to implement a new business model based primarily on the sales of genomic sequencing equipment, reagents and services to end user customers. Our longer-term goal is to further reduce the cost of human re-sequencing to a few thousand dollars for use in a wide range of applications from basic research through clinical diagnostics. On March 4, 2005, Solexa Limited, a privately-held United Kingdom company, and Lynx Therapeutics, Inc., a Delaware corporation, closed a business combination. Solexa Limited has become a wholly-owned subsidiary of Lynx as a result of the transaction. However, because the former Solexa Limited shareholders owned approximately 80% of the shares of the common stock immediately following the transaction, Solexa Limited's designees to the combined company's board of directors represent a majority of the combined company's directors and Solexa Limited's senior management represented a majority of the senior management of the combined company immediately following the business combination, Solexa Limited is deemed to be the acquiring company for accounting purposes. Accordingly, the assets and liabilities of Lynx were recorded, as of the date of the business combination, at their respective fair values and added to those of Solexa Limited. Reported results of operations of the combined company issued for the three months ended March 31, 2005, reflect those of Solexa Limited, to which the operations of Lynx were added from the date of the consummation of the business combination. The operating results of the combined company reflect purchase accounting adjustments, including increased amortization and depreciation expense for acquired assets. Additionally, historical financial condition and results of operations shown for comparative purposes in this Form 10-Q reflect those of Solexa Limited.

In connection with this business combination transaction, Lynx changed its name to Solexa, Inc. and its symbol on the Nasdaq SmallCap Market to SLXA. Unless specifically noted otherwise, as used throughout these Consolidated Financial Statements, "Lynx Therapeutics," and "Lynx" refers to the business, operations and financial results of Lynx Therapeutics, Inc. prior to the business combination on March 4, 2005, "Solexa Limited" refers to the business of Solexa Limited, a privately-held United Kingdom company, prior to the business combination and "Solexa" or "we" refers to the business of the combined company after the business combination, as the context requires.

On May 17, 2005, the Board of Directors of Solexa, Inc., or Solexa, approved a workforce restructuring plan designed to reflect Solexa's ongoing transition from its MPSSTM technology to the development and commercialization of its next-generation genetic analysis instrument system. The restructuring plan, which was initiated on May 18, 2005, involved a workforce reduction of approximately 17% and has left Solexa with a post-reduction workforce of approximately 116 U.S. and U.K. employees. We expect to incur restructuring charges of approximately $350,000 in the second quarter of 2005 primarily associated with employee severance costs. The workforce reduction included positions in most functional areas of Solexa.

Solexa Limited has incurred net losses each year since our inception in 1998, including a net loss for the three months ended March 31, 2005. As of March 31, 2005, we had an accumulated deficit of approximately $27.9 million. We expect to continue to incur net losses as we proceed with the commercialization and additional development of our technologies. The size of these losses will depend on the rate of growth, if any, in our revenues and on the level of our expenses. Our cash and cash equivalents have decreased from $10.5 million as of December 31, 2004 to $4.5 million as of March 31, 2005. On April 21, 2005, we entered into a definitive agreement for a private placement of common stock and warrants to purchase common stock which is expected to raise approximately $30.8 million, net of expenses. On April 25, 2005 we approximately received $8.5 million pursuant to this agreement. We believe this anticipated funding of $30.8 million, together with available cash resources will be sufficient to meet our operating requirements for at least the next twelve months, including the repayment of the $3.0 million loan from SVB. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern.

Prior to the business combination with Lynx, Solexa Limited was a development stage company with minimal revenue. As a result of the business combination, we are no longer a development stage company. Until our new genetic analysis instrument system is completed, our primary revenue source will be from the genetic analysis service business of Lynx. Lynx has historically received and we expect to continue to receive in the future, a significant portion of our genetic analysis service revenues from a small number of customers and collaborators.

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

Our operating costs and expenses include service fees and other, research and development expenses and general and administrative expenses. Service fees and other includes primarily the costs of direct labor, materials and supplies, outside expenses, equipment and overhead incurred by us in performing our genetic analytical services for, and the costs of reagents and instruments sold to, our customers and collaborators. Research and development expenses include the costs of personnel, materials and supplies, outside expenses, equipment and overhead incurred by us in research and development related to our genetic analysis instrument systems and process improvements related to our services business. Research and development expenses are expected to increase due to spending for ongoing technology development and implementation, as well as increased headcount from the business combination. General and administrative expenses include the costs of personnel, materials and supplies, outside expenses, equipment and overhead incurred by us primarily in our administrative, business development, legal and investor relations activities. General and administrative expenses is expected to increase in support of our research and development, commercial and business development efforts, as well as increased headcount from the Lynx/Solexa business combination.

Critical Accounting Policies and Estimates

Revenues are related to service fees for services that we perform on the biological samples we receive from our customers. The Company recognizes revenue when persuasive evidence of an arrangement exists; services have been rendered and materials are delivered; the fee is fixed and determinable; and collectibility is reasonably assured. Determination of whether persuasive evidence of an arrangement exists and whether or services have been rendered are based on management's judgments regarding the fixed nature of the fee charged for the analysis performed and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain transactions then such amounts are recorded as deferred.

Inventory is stated at the lower of cost (which approximates first-in, first-out cost) or market. The balances at March 31, 2005 were classified as raw materials and work in process. There was no inventory at December 31, 2004 as the company was in the development stage prior to the business combination transaction with Lynx and the primary activity of the company was research and development. Raw material inventories consist primarily of reagents and other chemicals utilized while performing genomics services. Work in process inventories consists of accumulated cost of experiments not completed. Inventory used in providing genomics services and for reagent sales is charged to cost of service fees and other as consumed. Reagents and chemicals purchased for internal development purposes are charged to research and development expense upon receipt or as consumed.

Goodwill represents the difference between the purchase price and the fair value of net tangible and identifiable intangible assets acquired in the business combination. Other intangibles include patents, acquired technology rights and developed technology and are being amortized using the straight-line method over estimated useful lives of seven to ten years.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 141, all business combinations initiated after June 30, 2001 must be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if there are indicators such assets may be impaired) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their estimated useful lives (but with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. The Company has adopted these statements and is not amortizing goodwill but will test it for impairment annually or whenever events or circumstances suggest that the carrying value may not be recoverable.

We grant stock options to employees for a fixed number of shares with an exercise price equal to the fair value of the shares on the day prior to the date of grant. We account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related Interpretations. Under APB 25, when the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.

All stock option awards to non-employees are accounted for at the fair value of the equity instrument issued, as calculated using the Black-Scholes model, in accordance with SFAS No.123, Accounting for Stock-based Compensation, or SFAS 123, and Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The option arrangements are subject to periodic remeasurement over their vesting terms.

Pro forma information regarding net loss and net loss per share required by SFAS 123, as amended by SFAS 148, is presented below and has been determined as if the Company had accounted for awards under its stock option and employee stock purchase plans using the fair value method:

                                                                      Three Months Ended
                                                                          March 31,
                                                                      2005           2004
Net loss, as reported                                              $   (5,782 )    $ (2,026 )

Add: Stock-based employee compensation as reported                         13             -
Deduct: Stock-based employee compensation as if fair value
method applied to all awards                                              (14 )         (15 )

Net loss, pro forma as if fair value method applied to all
awards                                                             $   (5,783 )    $ (2,041 )

Basic and diluted net loss per share, as reported                  $    (0.96 )    $  (1.96 )

Basic and diluted net loss per share, pro forma as if fair
value method applied to all awards                                 $    (0.96 )    $  (1.97 )

Recent Accounting Pronouncements

In December 2004, the FASB issued a revision of FAS No. 123, "Accounting for Stock-Based Compensation." The revision is referred to as "FAS 123R - Share-Based Payment", effective for reporting periods beginning after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a rule amendment that delayed the compliance dates for FAS 123R such that we are now allowed to adopt the new standard no later than January 1, 2006. FAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock purchase plans. We expect to adopt FAS 123R using the modified prospective method on January 1, 2006. We are currently evaluating option valuation methodologies and assumptions in light of FAS 123R; the methodologies and assumptions we ultimately use to adopt FAS 123R may be different than those currently used. We currently expect that our adoption of FAS 123R will have a material impact on our consolidated results of operations.

Results of Operations

Revenues

Revenues for the three-month period ended March 31, 2005 were approximately $605,000, compared to revenues of $17,000 for the corresponding three-month period of 2004. The increase was primarily due to revenue generated by the service business we acquired in the business combination because we were a development stage company prior to that time. Through the rest of 2005, we expect revenues attributable to our genomics services business to vary from period to period based in part on the timing of receipt of biological samples, variability in outstanding contracts, and the presence of non-service fee revenues, including sales of reagents and other. Near the end of 2005, as we introduce our SBS-cluster based technology in our genomics services business, our revenues could vary due to interruptions in service production as the new instrumentation is brought on line as well as due to variable customer demand until the new technology has demonstrated equivalence or superiority to the MPSS™ technology.

Operating Costs and Expenses

Total operating costs and expenses were approximately $5.9 million for the three-month period ended March 31, 2005, compared to approximately $2.1 million for the three-month period ended March 31, 2004.

Cost of service fees reflect primarily the costs of providing our genomics services. For the three-month period in 2005, cost of service fees and other was $540,000 compared to zero for the corresponding period in 2004.

Research and development expenses were approximately $2.7 million for the three-month period ended March 31, 2005, compared to approximately $1.4 million for the corresponding period in 2004. The increase in research and development expenses was primarily due to increases in headcount at Solexa Limited during 2004 and as a result of the business combination on March 4, 2005, as well as increases in material expenses. Research and development expenses are expected to increase during the rest of 2005 due to the full effect of the increase in headcount resulting from the business combination, as well as spending for ongoing technology development and implementation.

General and administrative expenses were $2.6 million for the three-month period ended March 31, 2005, compared to $760,000 for the corresponding period in 2004. The increase in general and administrative expenses in 2005 as compared to 2004 is primarily due to the increase in headcount attributable to the business combination and costs associated with an employee severance agreement.

Interest Income

Interest income was approximately $4,000 for the quarter ended March 31, 2005, compared to $77,000 for the quarter ended March 31, 2004. The decrease was due to lower average cash balances during the first quarter of 2005 as compared to 2004.

Liquidity and Capital Resources

Cash and cash equivalents have decreased from the $10.5 million, as of December 31, 2004, to $4.4 million, as of March 31, 2005. Net cash used in operating activities was $5.1 million for the three months ended March 31, 2005, as compared to $1.9 million for the same period in 2004. The change was due primarily to the net loss of $5.3 million in 2005 as compared to $2.0 million in 2004.

Net cash used in investing activities of $818,000 for the three-month period of 2005, was primarily due to purchases of property and equipment and the payment of costs associated with the business combination. Net cash used in investing activities of $62,000 for the three-month period of 2004 was due to purchases of property and equipment.

We plan to use available funds for ongoing commercial and research and development activities, working capital and other general corporate purposes and capital expenditures. We expect capital investments during the remainder of 2005 will be approximately $500,000 and will be comprised of expenditures for capital equipment required in the normal course of business and acquisition of intellectual property. We intend to invest our excess cash in investment-grade, interest-bearing securities.

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

Solexa Limited has incurred net losses each year since its inception in 1998. As of March 31, 2005, we had an accumulated deficit of $27.9 million. Net losses may continue for the next several years as we proceed with the development and commercialization of our technologies. The presence and size of these potential net losses will depend, in part, on the rate of growth, if any, in our revenues and on the level of our expenses.

On April 21, 2005, we entered into a definitive agreement for a private placement of common stock and warrants to purchase common stock which is expected to raise approximately $30.8 million, net of issuance costs. On April 25, 2005 we received gross proceeds of approximately $8.5 million pursuant to this agreement. We believe this anticipated funding of $30.8 million, together with cash resources will be sufficient to meet our operating requirements for at least the next twelve months including the repayment of the $3.0 million loan from SVB. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern.

Additional Business Risks

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

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

We have incurred net losses each year since inception of Solexa Limited in 1998, including a net loss for the three months ended March 31, 2005. As of December 31, 2004 we had an accumulated deficit of approximately $28.0 million. In addition, Lynx had incurred net losses each year since its inception in 1992. Net losses for the combined company may continue for the next several years as the combined company proceeds with the development and commercialization of its technologies. The presence and size of these potential net losses will depend, in part, on the rate of growth, if any, in revenues and on the level of expenses. Research and development expenditures and general and administrative costs have exceeded revenues to date, and these expenses may increase in the future. We will need to generate significant revenues to achieve profitability, and even if we are successful in achieving profitability, there is no assurance we will be able to sustain profitability.

We may need to raise additional funding, which may not be available on favorable terms, if at all.

We may need to raise additional capital through public or private equity or debt financings in order to satisfy our projected capital needs. We estimate that we will require approximately $35,000,000 in capital to meet our needs through 2006, including the approximately $8,640,000 received at the first closing of our private placement transaction on April 25, 2005. On April 21, 2005, we entered into a definitive agreement for a private placement of approximately 8,125,000 shares of common stock at $4.00 per share and warrants to purchase approximately 4,063,000 shares of common stock at an exercise price of $5.00 per share in two closings. Approximately 2,160,000 shares of common stock and warrants to purchase up to approximately 1,060,000 shares of common stock were sold and issued at the first closing on April 25, 2005 with aggregate gross proceeds to us of approximately $8,640,000. The balance of approximately 6,005,000 shares of common stock and warrants to purchase approximately 3,002,000 shares of common stock are expected to be sold and issued on substantially the same terms in a second closing subject to stockholder approval at our 2005 annual meeting of stockholders.

The amount of additional capital we would need to raise would depend on many factors, including:

• the second closing of the private placement transaction;

• the progress and scope of research and development programs;

• the progress of efforts to develop and commercialize new products and services, and

• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

We cannot be certain that additional capital will be available when and if needed or that our actual cash requirements will not be greater than anticipated. If we require additional capital at a time when investment in

biotechnology companies or in the marketplace in general is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter. If we are unable to obtain financing on terms favorable to us, we may be unable to execute our business plan and may be required to cease or reduce development or commercialization of our products, to sell some of all of our technology or assets or to merge with another entity.

The issuance of shares of our common stock and warrants to purchase shares of our common stock in the private placement transaction will substantially reduce the percentage interests of our stockholders who are not participating in the private placement transaction.

As of May 12, 2005, 19,972,809 shares of our common stock are issued and outstanding. On April 21, 2005, we entered into a definitive agreement for a private placement of approximately 8,125,000 shares of common stock and warrants to purchase approximately 4,063,000 shares of common stock in two closings. . . .