10-K

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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, 2003

                                       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                           (281) 863-3000
   THE WOODLANDS, TEXAS 77381                    (Registrant's Telephone Number,
 (Address of Principal Executive                       Including Area Code)
      Offices and Zip 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. |X|

         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 $198.3 million, based on the closing price of
the common stock on the Nasdaq National Market on June 30, 2003 of $6.60 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 8, 2004, 63,312,972 shares of
common stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain sections of the registrant's definitive proxy statement
relating to the registrant's 2004 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, 2003, 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...........................................................................................   20
     3.     Legal Proceedings....................................................................................   21
     4.     Submissions of Matters to a Vote of Security Holders.................................................   21

                                                          PART II
     5.     Market for Registrant's Common Equity and Related Stockholder Matters................................   22
     6.     Selected Financial Data..............................................................................   23
     7.     Management's Discussion and Analysis of Financial Condition and Results of Operations................   24
    7A.     Quantitative and Qualitative Disclosure About Market Risk............................................   33
     8.     Financial Statements and Supplementary Data..........................................................   33
     9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................   33
    9A.     Controls and Procedures..............................................................................   33

                                                          PART III
    10.     Directors and Executive Officers of the Registrant...................................................   34
    11.     Executive Compensation...............................................................................   34
    12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......   34
    13.     Certain Relationships and Related Transactions.......................................................   34
    14.     Principal Accounting Fees and Services...............................................................   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 systematically
discovering the physiological and behavioral functions of genes to identify
those that encode potential targets for therapeutic intervention, or drug
targets. We make our discoveries using our proprietary technology to knock out,
or disrupt, the function of genes in mice to model the effects on physiology
that could be expected from prospective drugs directed against those targets.
For targets that we believe have high pharmaceutical value, we engage in
programs for the discovery and development of potential small molecule drugs,
therapeutic antibodies and therapeutic proteins. We focus our discovery efforts
in six therapeutic areas - diabetes and obesity, cardiovascular disease,
psychiatric and neurological disorders, cancer, immune system disorders and
ophthalmic disease - and we have advanced targets into drug discovery programs
in each of these areas with potential for addressing large medical markets.

         We make our discoveries using proprietary technology to knock out genes
in mice, analyze the resulting effects on physiology and behavior, and identify
those genes that exhibit a favorable therapeutic profile in mouse models. Using
this information, we select potential targets encoded by the corresponding human
genes for our drug discovery programs. . Our physiology-based approach to
understanding gene function and our use of mouse models in our drug discovery
efforts allow us to make highly-informed decisions throughout the drug discovery
and development process, which we believe will increase our likelihood of
success in discovering breakthrough therapeutics.

         The scope of our gene knockout technology, combined with the size and
sophistication of our facilities and our evaluative technologies, provides us
with what we believe to be a significant competitive advantage. We are using
these technologies in our Genome5000 program to discover the physiological and
behavioral functions of 5,000 genes from the human genome that belong to gene
families that we consider to be pharmaceutically important. We have completed
our analysis of more than 30% of these genes, and we expect to complete the
analysis of the remaining genes by the end of 2007. Through February 2004, we
have advanced into drug discovery programs more than 40 targets, each of which
we have validated in living mammals, or in vivo.

         We are working both independently and through strategic collaborations
and alliances to commercialize our technology and turn our discoveries into
drugs. We have established multiple collaborations with leading pharmaceutical
and biotechnology companies, as well as research institutes and academic
institutions. We are working with Bristol-Myers Squibb Company to discover and
develop novel small molecule drugs in the neuroscience field. We are working
with Genentech, Inc. to discover the functions of secreted proteins and
potential antibody targets identified through Genentech's internal drug
discovery research. We are also working with Abgenix, Inc. to discover and
develop therapeutic antibodies for drug targets identified in our own research.
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 such companies' own drug discovery efforts.

         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



OUR DRUG DISCOVERY PROCESS

         Our drug discovery process begins with our Genome5000 program, in which
we are using our gene knockout technology to discover the physiological and
behavioral functions of 5,000 human genes through analysis of the corresponding
knockout mouse models. Our Genome5000 efforts are focused on the discovery of
the functions in mammalian physiology of proteins encoded by gene families that
we consider to be pharmaceutically important, such as G-protein coupled, or
GPCRs, and other receptors, kinases, ion channels, other key enzymes and
secreted proteins. We have already completed our physiology- and behavior-based
analysis of more than 30% of these 5,000 genes, and we expect to complete the
analysis of the remaining genes by the end of 2007.

         We use knockout mice - mice whose DNA has been altered to disrupt, or
knock out, the function of the altered gene - to discover the physiological and
behavioral effects that result from loss of functioning protein encoded by the
disrupted gene. Historically, the study of such loss of function genetic
alterations in mice has been a very powerful tool for understanding human genes
because of the close similarity of gene function and physiology between mice and
humans. With the genomic sequence of both organisms now available, it is
noteworthy that approximately 99% of all human genes have a counterpart in the
mouse genome. 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 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, in vivo,
the physiological and behavioral functions and pharmaceutical utility of the
genes we have knocked out and the potential drug targets they encode.

         We believe that the power of our technology has been described in a
large body of scientific literature which was summarized in a retrospective
analysis that we performed of the 100 best selling drugs of 2001 and their
targets, as modeled by the physiological characteristics of knockout mice. This
analysis was published in the January 2003 issue of Nature Reviews Drug
Discovery, a peer-reviewed scientific journal. In this analysis we concluded
that in most cases there was a direct correlation between the physiological
characteristics, or phenotypes, of knockout mice and the therapeutic effect of
the 100 best-selling drugs of 2001.

         We are working to discover potential small molecule drugs, therapeutic
antibodies and therapeutic proteins for those in vivo-validated drug targets
that we consider to have high pharmaceutical value. We have established an
internal small molecule drug discovery program, in which we use our own
sophisticated libraries of drug-like chemical compounds in high-throughput
screening assays to identify "hits," or chemical compounds demonstrating
activity, against these targets. We then employ our industrialized medicinal
chemistry platform to optimize the potency and selectivity of these hits and to
identify lead compounds for potential development. Our compound libraries
include chemical scaffolds and building blocks that we designed based on
analyses of the characteristics of drugs that have proven safe and effective in
the past. When we identify a hit, we can rapidly reassemble these building
blocks to create hundreds or thousands of variations around the structure of the
initial compound, enabling us to accelerate our medicinal chemistry efforts.

         In all of our drug discovery programs, we use 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 drug candidates in mice. We
believe that by focusing on the physiological functions and pharmaceutical
utility of genes at the outset of the drug discovery process, we will increase
our likelihood of success in discovering breakthrough treatments for human
disease.

OUR TECHNOLOGY

         The scope of our gene knockout and evaluative technologies allows us to
create and analyze knockout mice at a rate and on a scale that we believe is
unmatched by our competitors. Combined with our state-of-the-art facilities,
which are among the largest and most sophisticated of their kind in the world,
these technologies provide us with what we believe to be a significant
competitive advantage. The core elements of our technology platform include our
patented technologies for the generation of knockout mice, 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.


                                        2


     GENE KNOCKOUT TECHNOLOGIES

         Gene Targeting. Our gene targeting technology, which is covered by
eight issued patents that we have licensed, enables us to generate highly
specific alterations in targeted genes. The technology uses a vector to replace
DNA of a gene in a mouse embryonic stem cell through a process known as
homologous recombination to disrupt the function of the targeted gene,
permitting the generation of knockout mice. By using this technology in
combination with one or more additional technologies, we are able 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. We can also use this technology to replace the targeted gene with
its corresponding human gene for use for preclinical research in our therapeutic
discovery programs.

         Gene Trapping. Our gene trapping technology, which is covered by six
issued patents that we own, is a high-throughput method of generating knockout
mouse clones that we invented. The technology uses genetically engineered
retroviruses that infect mouse embryonic stem cells in vitro, integrate into the
chromosome of the cell and disrupt the function of the gene into which it
integrates, permitting the generation of knockout mice. This process also
stimulates transcription of a non-protein producing 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 embryonic stem cell clone by DNA sequence from the trapped gene
and to select embryonic stem cell clones by DNA sequence for the generation of
knockout mice.

     PHYSIOLOGICAL ANALYSIS TECHNOLOGIES

         We employ an integrated platform of advanced medical examinations to
rapidly and systematically discover and catalogue the physiological and
behavioral effects resulting from loss of gene function in the mouse knockouts
we have generated using our gene trapping and gene targeting technologies. These
examinations include many of the most sophisticated diagnostic technologies and
tests currently available, many of which might be found in a major medical
center. The following are included among the many tests we use::

         -        CAT-scans;

         -        magnetic resonance imaging, or MRI;

         -        complete blood cell analysis, including red and white blood
                  cell counts;

         -        fluorescently activated cell sorting, or FACS, analysis;

         -        automated behavior analyses;

         -        nuclear magnetic resonance, or NMR, analysis; and.

         -        dual energy X-ray absorptiometry.

         Each of these technologies has been adapted specifically for the
analysis of mouse physiology. This state-of-the-art technology platform enables
us to assess the consequences of loss of gene function in a living mammal across
a wide variety of parameters relevant to human disease.

         We believe that our medical center approach and the technology platform
that makes it possible provide us with substantial advantages over other
approaches to discover gene function and identify novel drug targets. In
particular, we believe that the comprehensive nature of this approach allows us
to uncover functions within the context of mammalian physiology that might be
missed by more narrowly focused efforts. We also believe our approach is more
likely to reveal those side effects that may be a direct result of inhibiting or
otherwise modulating the drug target. Such target-related side effects might
limit the utility of potential therapeutics directed at the drug target or prove
to be unacceptable in light of the potential therapeutic benefit. We believe
these advantages will contribute to better target selection and, therefore, to
the success of our drug discovery and development efforts.

         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


                                       3


approach will allow us, at an early stage, to identify and optimize therapeutic
candidates for further preclinical and clinical development that demonstrate in
vivo efficacy and to distinguish side effects caused by a specific compound from
the target-related side effects that we defined using the same comprehensive
series of tests.

     PRODUCTION AND ANALYSIS INFRASTRUCTURE

         Our facilities, which are among the largest and most sophisticated of
their kind in the world, enable us to capitalize on our gene knockout and
physiological analysis technologies by generating knockout mice and analyzing
the physiological function of genes on an expansive scale. We are able to
generate knockout mice for the large number of genes that we believe may be
pharmaceutically important and analyze the physiology of each of those knockout
mice by utilizing our broad range of medical technologies. Our state-of-the-art
animal facilities, occupying a total of approximately 100,000 square feet, are
designed to allow us to generate and analyze approximately 1,000 knockout mice
per year. 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, or Association for Assessment and
Accreditation of Laboratory Animal Care.

         Our facilities also enable us to maintain in-house control over our
entire in vivo validation process, from the generation of embryonic stem cell
clones through the completion of in vivo analysis, in a specific pathogen-free
environment. As part of our Genome5000 program, we have already examined the
physiological functions of more than 1,500 genes and expect to complete our
analysis of an aggregate of 5,000 genes by the end of 2007. We are not aware of
any study approaching either the magnitude or breadth of our Genome5000 program,
and we believe that the investment of significant resources over a period of
several years would be required for any competitor to duplicate our gene
knockout and physiological analysis capabilities. The scope of our gene knockout
technology, combined with the size and sophistication of our facilities and our
evaluative technologies, provides us with what we believe to be a significant
competitive advantage.

     MEDICINAL CHEMISTRY TECHNOLOGY

         We use solution-phase chemistry to generate diverse libraries of
optically pure compounds that are targeted against the same pharmaceutically
relevant gene families that we address in our Genome5000 program. These
libraries are built using highly robust and scalable organic reactions that
allow us to generate compound collections of great diversity and to specially
tailor the compound collections to address various therapeutic target families.
We design these libraries by analyzing the chemical structures of drugs that
have been proven safe and effective against human disease and using that
knowledge in the design of scaffolds and chemical building blocks for the
generation of large numbers of new drug-like compounds. We can rapidly
reassemble these building blocks to generate optimization libraries when we
identify a hit against one of our in vivo-validated targets, enabling us to
rapidly optimize those hits and accelerate our medicinal chemistry efforts.

         Our medicinal chemistry technology is housed in a state-of-the-art
76,000 square foot facility in Hopewell, New Jersey. Our lead optimization
chemistry groups are organized around specific discovery targets and work
closely with their pharmaceutical biology counterparts in our facilities in The
Woodlands, Texas. The medicinal chemists optimize lead compounds in order to
select clinical candidates with the desired absorption, distribution,
metabolism, excretion and physicochemical characteristics. We have the
capability to profile our compounds using the same battery of in vivo assays
that we use to characterize our drug discovery targets. This provides us with
valuable detailed information relevant to the selection of the highest quality
compounds for clinical development.

     OMNIBANK LIBRARY AND LEXVISION DATABASE

         We have capitalized on these core elements of our technology platform
by developing our OmniBank library of gene knockout clones and our LexVision
database cataloging the functions of certain in vivo-validated drug targets.

         OmniBank Library. We have used our gene trapping technology in an
automated process to create our OmniBank library of more than 200,000 frozen
gene knockout embryonic stem cell clones, each identified by DNA sequence in a
relational database. Each OmniBank mouse clone contains a single genetic
mutation that can be used to produce knockout models of gene function. We
estimate that our OmniBank library currently contains embryonic stem cell clones
representing more than half of all genes in the mammalian genome and believe it
is the largest


                                       4


library of its kind. We believe our OmniBank library permits us to generate
knockout mice at a significantly higher rate than is possible using other
methods and, therefore, provides us with a significant strategic advantage in
the discovery of in vivo gene function and the identification of novel drug
targets.

         LexVision Database. Our LexVision database is a comprehensive,
relational database of in vivo-validated drug targets that catalogs the
physiological functions of genes that we have knocked out using our gene
targeting and gene trapping technologies. Our LexVision collaborators obtain
non-exclusive access to the LexVision database for the discovery of small
molecule drugs. We are committed to include 1,250 in vivo-validated drug targets
in our LexVision database over a period of five years. As of December 31, 2003,
we had deposited a total of 750 such targets in our LexVision database.

     RESEARCH AND DEVELOPMENT EXPENSES

         In 2003, 2002 and 2001, respectively, we incurred expenses of $82.2
million, $74.9 million and $53.4 million in company-sponsored research and
development activities, including $5.0 million, $5.2 million, and $5.5 million,
respectively, of stock-based compensation expense.

OUR COMMERCIALIZATION STRATEGY

         We are working both independently and through strategic collaborations
and alliances with leading pharmaceutical and biotechnology companies, research
institutes and academic institutions to commercialize our technology and turn
our discoveries into drugs. Consistent with this approach, we intend to develop
and commercialize certain of our drug discovery programs internally and retain
exclusive rights to the benefits of such programs and to collaborate with third
parties with respect to the development and commercialization of other drug
discovery programs.

         We apply our internal resources to our drug discovery programs in order
to commercialize our technology and turn our discoveries into drugs. As we
advance targets into our drug discovery programs, we allocate our internal
resources in a manner designed to maximize our ability to commercialize
opportunities presented by these programs. Our prioritization and allocation of
internal resources among these programs are based on our expectations regarding
their relative likelihood of success and the relevant medical market, as well as
progress realized in our drug discovery efforts for the program. We revise our
prioritization and resource allocation among programs as necessary in order to
capitalize on new discoveries and opportunities.

         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 we do not possess internally or is complementary
to our own. These strategic collaborations, as well as our licenses with
pharmaceutical and biotechnology companies, research institutes and academic
institutions, enable us to generate near-term revenues in exchange for access to
some of our technologies and discoveries for use by these third parties in their
own drug discovery efforts. These collaborations and licenses also offer us the
potential, in many cases, to receive milestone payments and royalties on
products that our collaborators and licensees develop using our technology.

ALLIANCES, COLLABORATIONS AND LICENSES

     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:

         Bristol-Myers Squibb Company. We established a drug discovery alliance
with Bristol-Myers Squibb in December 2003 to discover, develop and
commercialize small molecule drugs in the neuroscience field. In the alliance,
we are contributing a number of neuroscience drug discovery programs at various
stages of development. We will continue to use our gene knockout technology to
identify additional drug targets with promise in the neuroscience field. For
those targets that are selected for the alliance, we and Bristol-Myers Squibb
will work together, on an exclusive basis, to identify, characterize and carry
out the preclinical development of small molecule drugs, and will share equally
both in the costs and in the work attributable to those efforts. As drugs
resulting from

                                       5


the alliance enter clinical trials, Bristol-Myers Squibb will have the first
option to assume full responsibility for clinical development and
commercialization.

         We received an upfront payment under the agreement and are entitled to
receive research funding during the initial three years of the agreement. We may
receive additional cash payments if we exceed specified research productivity
levels. We will also receive clinical and regulatory milestone payments for each
drug target for which Bristol-Myers Squibb develops a drug under the alliance
and royalties on sales of drugs commercialized by Bristol-Myers Squibb. The
target discovery portion of the alliance has a term of three years, subject to
Bristol-Myers Squibb's option to extend the discovery portion of the alliance
for an additional two years in exchange for further research funding payments.

         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 are using our target validation 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 to the discoveries resulting from the collaboration for
the research, development and commercialization of therapeutic proteins and
antibodies. We will retain certain other rights to those discoveries, including
non-exclusive rights, along with Genentech, for the development and
commercialization of small molecule drugs. We received an up-front payment and
are entitled to receive performance payments for our work in the collaboration
as it is completed. We are also entitled to 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 target validation
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 bears 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 collaboration
period, as extended, expires in July 2004, subject to the right of the parties
to extend the term by mutual agreement for up to three additional one-year
periods.

         Incyte Corporation. We established a drug discovery alliance with
Incyte in June 2001 to discover novel therapeutic proteins using our target
validation technologies in the discovery of the functions of secreted proteins
identified in Incyte's LifeSeq(R) Gold database. The alliance agreement provides
that up to 250 secreted proteins will be jointly selected for functional
characterization, and we expect 150 to be selected in the first three years.
Under the alliance agreement, we receive research funding from Incyte during the
term of the collaboration. In addition, 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 collaboration period will terminate on June 27, 2004.

     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 annual access fees under this
agreement and are entitled to receive milestone payments and royalties on
products Bristol-Myers Squibb develops using our technology. The collaboration
period extends through December 31, 2005, although either party may terminate
the collaboration period on December 31, 2004.

                                       6


         Incyte Corporation. 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 annual access fees under this agreement, and are entitled to
receive milestone payments and royalties on products Incyte develops using our
technology. The collaboration period will terminate on June 27, 2004.

     TARGET VALIDATION COLLABORATIONS

         We have established target validation collaboration agreements with a
number of leading pharmaceutical and biotechnology companies. Under these
collaboration agreements, we generate and, in some cases, analyze knockout mice
for genes requested by the collaborator. In addition, we grant non-exclusive
licenses to the collaborator for use of the knockout mice in its internal drug
discovery programs 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 receive fees for knockout mice under these agreements. In
some cases, these agreements also provide for annual subscription fees, annual
minimum commitments and the potential for royalties on products that our
collaborators discover or develop using our technology.

         We are generally not pursuing renewals of these agreements as they
expire, and are entering into new agreements on a very limited basis.

     E-BIOLOGY COLLABORATION PROGRAM

         We provide access to our OmniBank database through the Internet to
subscribing researchers at academic and non-profit research institutions. Our
bioinformatics software allows subscribers to mine our OmniBank database for
genes of interest, and we permit subscribers to acquire OmniBank knockout mice
or embryonic stem cells on a non-exclusive basis in our e-Biology collaboration
program. We receive fees for knockout mice or embryonic stem cells provided to
collaborators in this program and, with participating institutions, rights to
license inventions or to receive royalties on products discovered using our
materials. In all cases we retain rights to use the same OmniBank knockout mice
in our own gene function research and with commercial collaborators. We have
entered into more than 200 agreements under our e-Biology collaboration program
with researchers at leading institutions throughout the world.

     TECHNOLOGY LICENSES AND COMPOUND SALES

         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 extend for
the life of the patents. Others have terms of one to three years, in some cases
with provisions for subsequent renewals. 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.

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 human genes and partial human and mouse gene
                  sequences, 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

                                       7


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

         We own or have exclusive rights to six issued United States patents
that are directed to our gene trapping technology, 31 issued United States
patents that are directed to full-length sequences of potential drug targets
identified in our gene discovery programs, and five issued United States patents
that are directed to specific knockout mice and discoveries of the functions of
genes made using knockout mice. We have licenses under 64 additional United
States patents, and corresponding foreign patents and patent applications,
directed to gene targeting, gene trapping and genetic manipulation of mouse
embryonic stem cells. These include patents to which we hold exclusive rights in
certain fields, including a total of eight United States patents directed to the
use of gene targeting technologies known as positive-negative selection and
isogenic DNA targeting, as well as patents directed to the use of site specific
genetic recombination technology known as Cre/lox technology.

         We have filed or have exclusive rights to more than 600 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, directed to our gene trapping technology, the DNA
sequences of genes, the uses of specific drug targets, drug discovery assays,
and other products and processes. Collectively, these patent applications are
directed to, 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.

         As noted above, we hold rights to a number of these patents and patent
applications under license agreements with third parties. In particular, we
license our gene targeting technologies from GenPharm International, Inc. and
our Cre/lox technology from DuPont Pharmaceuticals Company. Many of these
licenses are nonexclusive, although some are exclusive in specified fields. Most
of the licenses, including those from GenPharm and DuPont, have terms that
extend for the life of the licensed patents. In the case of our license from
GenPharm, the license generally is exclusive in specified fields, subject to
specific rights held by third parties, and we are permitted to grant
sublicenses.

         All of our employees, consultants and advisors are required to execute
a proprietary information 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 competition
from entities using traditional knockout mouse technology and other
technologies. Several companies, including Regeneron Pharmaceuticals, 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 do. 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.

                                       8


GOVERNMENT REGULATION

     REGULATION OF PHARMACEUTICAL PRODUCTS

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

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

         -        preclinical laboratory and animal tests performed under the
                  FDA's current Good Laboratory Practices regulations;

         -        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.

         Among other things, the FDA reviews an NDA to determine whether a
product is safe and effective for its intended use and a BLA to determine
whether a product is safe, pure and potent and the facility in which it is
manufactured, processed, packed, or held meets standards designed to assure the
product's continued safety, purity and potency.

         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. Non-compliance with these requirements can
result in, among other things, total or partial suspension of production,
failure of the government to grant approval for marketing and withdrawal,
suspension or revocation of marketing approvals.

         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 take
years to complete. In addition, the FDA may place a clinical trial on hold or
terminate it if, among other reasons, the agency concludes that clinical
subjects are being exposed to an unacceptable health risk. After completion of
clinical trials of a new drug or biologic product, FDA marketing approval of the
NDA or BLA must be obtained. An NDA or BLA, depending on the submission, must
contain, among other things, information on chemistry, manufacturing controls
and potency and purity, non-clinical pharmacology and toxicology, human
pharmacokinetics and bioavailability and clinical data. The process of obtaining
approval 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. The FDA's approval of an NDA or BLA can take years and can be
delayed if questions arise. Limited indications for use or other conditions
could also be placed on any approvals that could restrict the commercial
applications of products.

                                       9


         Once the FDA approves a product, a manufacturer must provide certain
updated safety and efficacy information. Product changes as well as certain
changes in a manufacturing process or facility would necessitate additional FDA
review and approval. Other post-approval changes may also necessitate further
FDA review and approval. Additionally, a manufacturer must meet other
requirements including those related to adverse event reporting and record
keeping.

         Violations of the FDC Act, the PHS Act or regulatory requirements may
result in agency enforcement action, including voluntary or mandatory recall,
license suspension or revocation, product seizure, fines, injunctions and civil
criminal penalties.

         In addition to regulatory approvals that must be obtained in the United
States, a drug or biological 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 or
biological product in a country until the regulatory authorities in that country
have approved an appropriate application. 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 or
biological product must also be approved. The pricing review period often begins
after marketing approval is granted. Even if a foreign regulatory authority
approves a drug or biological 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 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.

         As of March 1, 2004, we employed 637 persons, of whom 136 hold M.D.,
Ph.D. or D.V.M. degrees and another 86 hold other advanced degrees. We believe
that our relationship with our employees is good.

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 $35.2 million for the year ended December 31, 2001, $59.7 million for the
year ended December 31, 2002 and $64.2 million for the year ended December 31,
2003. As of December 31, 2003, we had an accumulated deficit of $213.9 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 drug discovery
alliances, subscriptions to our LexVision database and our OmniBank library and
collaborations for the development and, in some cases, analysis of the

                                       10


physiological effects of genes altered in knockout mice and technology licenses,
and will continue to do so for the foreseeable future. Our future revenues from
alliances, database subscriptions and collaborations 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 part, on securing new agreements. Our ability to secure future
revenue-generating agreements will depend upon our ability to address the needs
of our potential future 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. Given the early-stage nature of our operations, we do not currently
derive any revenues from sales of pharmaceuticals.

         A large portion of our expenses is 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.

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 alliance, database subscription,
                  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 products that we successfully develop and
                  commercially launch; and

         -        the resources we devote to developing and supporting such
                  products.

         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 products and technologies.

         We anticipate that our existing capital resources and the revenues we
expect to derive from drug discovery alliances, subscriptions to our databases,
collaborations for the development and, in some cases, analysis of the
physiological effects of genes altered in knockout mice and technology licenses
will enable us to fund our currently planned operations for at least the next
two years. 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 cannot be certain that additional financing,
whether debt or equity, will be available in amounts or on terms acceptable to
us, if at all. 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, and we may not successfully develop or
commercialize any therapeutics or drug targets that we have identified.

         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 developing and commercializing drugs based on
our discoveries, in significant part through collaborations and alliances, is
unproven. Our success will depend upon our ability to successfully develop
potential therapeutics for drug targets we consider to have pharmaceutical
value, whether on our own or through collaborations, and to select an
appropriate commercialization strategy for each potential therapeutic we choose
to pursue.

                                       11


         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 develop or commercialize
therapeutics or drug targets that we identify, nor have we advanced any drug
candidates to clinical trials. 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 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. Finally, the information that we learn from
knockout mice may prove not to be useful in identifying
pharmaceutically-important drug targets or safe and effective therapies.

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.

         We face significant competition in each of the aspects of our business
from companies such as Human Genome Sciences, Inc., Millennium Pharmaceuticals,
Inc., Exelixis, Inc. and other similar companies that engage in programs for the
discovery and development of drugs utilizing a genetics-based approach to target
discovery and validation.

         There are a finite number of genes in the human genome, and we believe
that the majority of such genes have been identified and that virtually all will
be identified within the next few years. We face substantial 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. These alternative approaches may
ultimately prove superior, in some or all respects, to the use of knockout mice.

         We also face competition from other companies in our efforts to
discover the functions of genes. The Human Genome Project and a large number of
universities and other not-for-profit institutions, many of which are funded by
the United States and foreign governments, are also conducting research to
discover the functions of genes. Competitors could discover and establish
patents on genes or gene products that we identify as promising drug targets,
which might hinder or prevent our ability to capitalize on such targets.

         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 our competitors have substantially greater
financial, scientific and human resources than we do. As a result, our
competitors may succeed in developing products earlier than we do, obtaining
regulatory approvals faster than we do and developing products that are more
effective or safer than any that we may develop.

We rely heavily on our collaborators to develop and commercialize pharmaceutical
products based on genes that we identify as promising candidates for development
as drug targets and our collaborators' efforts may fail to yield pharmaceutical
products on a timely basis, if at all.

         It is our strategy to develop drug candidates on our own as well as
developing drug candidates in collaboration with third parties, particularly
when such collaborations enable us to obtain access to technology and expertise
that we do not possess internally or is complementary to our own.

         Since we do not currently possess the resources necessary to develop,
obtain approvals for or commercialize potential pharmaceutical products based on
all of the genes that we identify as promising candidates for development as
drug targets, we must enter into collaborative arrangements to develop and
commercialize some of these products. We 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.

                                       12


         Some of our existing collaboration agreements contain, and
collaborations that we enter into in the future may contain, exclusivity
agreements or other limitations on our activities. These agreements may have the
effect of limiting our flexibility and may cause us to forego attractive
business opportunities.

Cancellations 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. Failures to renew or cancellations by collaborators could mean
a significant loss of revenues and could harm our reputation in the business and
scientific communities.

         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. Conflicts with our collaborators could reduce our ability
to obtain future collaboration agreements and could have a negative impact on
our relationship with existing collaborators, materially impairing 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 events could
harm our product development efforts.

We may be unsuccessful 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 these functions. It will be expensive and will require
significant time for us to develop these capabilities internally. 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,
clinical trials or commercial sales and will rely on third parties to
manufacture our potential products, which may harm or delay our product
development and commercialization efforts.

         We currently do not have the manufacturing capabilities or experience
necessary to produce materials for preclinical studies, clinical trials or
commercial sales 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 current Good Manufacturing Practices of the United
States Food and Drug Administration, or FDA, which relate to manufacturing and
quality control activities. 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. In addition, there are a limited number of
manufacturers that operate under the FDA's current Good Manufacturing Practices
and that are capable of producing such materials, and we may experience
difficulty finding manufacturers with adequate capacity for our needs. If we are
unable to contract for the production of sufficient quantity and quality of
materials on acceptable terms, our product development and commercialization
efforts may be delayed. Moreover, noncompliance with the FDA's current Good
Manufacturing Practices can result in, among other things, fines, injunctions,
civil and criminal penalties, product recalls or seizures, suspension of
production, failure to obtain marketing approval and withdrawal, suspension or
revocation of marketing approvals.

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


                                       13


expenditures and may not be achieved in a timely and non-disruptive manner, if
at all, and may absorb significant management attention that would otherwise be
available for ongoing development of our business. If we fail to integrate
acquired businesses, technologies or products effectively or if key employees of
an acquired business leave, the anticipated benefits of the acquisition would be
jeopardized. Moreover, we may never realize the anticipated benefits of any
acquisition, such as increased revenues and earnings or enhanced business
synergies. 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 materially
impair 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 could
negatively impact 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 at will. In addition, 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 intense. Failure to recruit and retain
scientific personnel on acceptable terms could prevent us from achieving our
business objectives.

Because all of our target validation operations are located at a single
facility, the occurrence of a disaster could significantly disrupt our business.

         Our OmniBank mouse clone library and its backup 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,
mechanical failure 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.

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 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.

RISKS RELATED TO OUR INDUSTRY

Our ability to patent our inventions 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 or use a particular technology or product. No clear
policy has emerged regarding the scope of protection provided in biotechnology
patents. The biotechnology patent situation outside the United States is
similarly uncertain. Changes in, or different interpretations of, patent laws in
the United States or other countries might allow others to use our inventions or
to develop and commercialize any technologies or products that we may develop
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 patent rights and, as a result, the
protection afforded to our scientific discoveries may be insufficient.

         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 use for the gene or gene sequences sufficient to meet the
statutory requirements that an invention have utility and that a patent
application enable one to make and use the invention. While the United States
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 covering any potential human therapeutic products that we may develop.
If required, obtaining such biologic data could delay, add substantial costs to,
or affect our ability to obtain patent protection for such products. 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.

         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 United States
Patent and Trademark Office. We believe that these court decisions and the
uncertain position of the United States Patent and Trademark Office present a
significant risk that the United States Patent and Trademark Office will not
issue patents based on patent disclosures limited to partial gene sequences. 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 relating to our drug target
or product candidate discoveries, we may be unable to obtain patents for our
inventions based upon those discoveries and may be blocked from using or
developing some of our technologies and products.

         Many other entities have filed or may file patent applications on genes
or gene sequences, uses of those genes or gene sequences, gene products and drug
targets, assays for identifying potential therapeutic products, potential
therapeutic products and methods of treatment which are identical or similar to
some of our filings. Some of these applications attempt to assign biologic
function to the genes and proteins based on predictions of function based upon
similarity to other genes and proteins or patterns of gene expression. There is
the significant possibility that patents claiming the functional uses of such
genes and gene products will be issued to our competitors based on such
information. If any such patents are issued to other entities, we will be unable
to obtain patent protection for the same or similar discoveries that we make.
Moreover, we may be blocked from using or developing some of our existing or
proposed technologies and products, or may be required to obtain a license that
may not be available on reasonable terms, if at all.


                                       15


         Alternatively, the United States 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 this event, the
prevailing party may require us or our collaborators to stop using a particular
technology or pursuing a potential product or may require us to negotiate a
license arrangement to do so. We may not be able to obtain a license from the
prevailing party on acceptable terms, or at all.

         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. The entire human genome and the entire mouse genome
are now publicly known. These public disclosures might limit the scope of our
claims or make unpatentable subsequent patent applications on partial or
full-length genes or their uses.

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

         Pending patent applications do not provide protection against
competitors because they are not enforceable until they issue as patents. Issued
patents may not provide commercially meaningful protection. If anyone infringes
upon our or our collaborators' patent rights, enforcing these rights may be
difficult, costly and time-consuming and, as a result, it may not be
cost-effective or otherwise expedient to pursue litigation to enforce those
patent rights. Others may be able to design around these patents or develop
unique products providing effects similar to any products that we may develop.
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 United States Patent and Trademark Office or a legal action.

         In addition, others may discover uses for genes, drug targets or
therapeutic products other than those covered in our issued or pending patents,
and these other uses may be separately patentable. Even if we have a patent
claim on a particular gene, drug target or therapeutic product, the holder of a
patent covering the use of that gene, drug target or therapeutic product could
exclude us from selling a product that is based on the same use of that product.

We may be involved in patent litigation and other disputes regarding
intellectual property rights and may require licenses from third parties for our
discovery and development and planned commercialization activities. We may not
prevail in any such litigation or other dispute or be able to obtain required
licenses.

         Our discovery and development efforts as well as 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 and institutions obtain more patents covering the
sequences, functions and uses of genes and the drug targets they encode. We are
aware that other companies and institutions have conducted research on many of
the same targets that we have identified and have filed patent applications
potentially covering many of the genes and encoded drug targets that are the
focus of our drug discovery programs. In some cases, patents have issued from
these applications. In addition, many companies and institutions 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 engaging in
certain discovery or development activities or from manufacturing and marketing
any resulting therapeutic products. If any of these actions are successful, in
addition to our potential liability for damages, these entities would likely
require us or our collaborators to obtain a license in order to continue
engaging in the infringing activities or to manufacture or market the resulting
therapeutic products or may force us to terminate such activities or
manufacturing and marketing efforts.

         We may need to pursue litigation against others to enforce our patents
and intellectual property rights and may be the subject of litigation brought by
third parties to enforce their patent and intellectual property rights. In
addition, we may become involved in litigation based on intellectual property
indemnification undertakings that we have given to certain of our collaborators.
Patent litigation is expensive and requires substantial amounts of management
attention. The eventual outcome of any such litigation is uncertain and involves
substantial risks.

         We believe that there will continue to be significant litigation in our
industry regarding patent and other intellectual property rights. We have
expended and many of our competitors have expended and are continuing to expend
significant amounts of time, money and management resources on intellectual
property litigation. If we

                                       16


become involved in future intellectual property litigation, it could consume a
substantial portion of our resources and could negatively affect our results of
operations.

         Furthermore, in light of recent United States Supreme Court precedent,
our ability to enforce our patents against state agencies, including state
sponsored universities and research laboratories, is limited by the Eleventh
Amendment to the United States Constitution. In addition, opposition by
academicians and the government may hamper our ability to enforce our patents
against academic or government research laboratories. Finally, enforcement of
our patents may cause our reputation in the academic community to be injured.

We use intellectual property that we license from third parties. If we do not
comply with these licenses, we could lose our rights under them.

         We rely, in part, on licenses to use certain technologies that are
important to our business, such as gene targeting and conditional knockout
technologies. 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 abiding by the terms of those licenses and the
licensors not terminating them. We are currently in compliance with all
requirements of these licenses. In many cases, we do not control the filing,
prosecution or maintenance of the patent rights to which we hold licenses and
rely upon our licensors to prosecute infringement of those rights. The scope of
our rights under our licenses may be subject to dispute by our licensors or
third parties.

We have not sought patent protection outside of the United States for some of
our inventions, and some of our licensed patents only provide coverage in the
United States. As a result, our international competitors could be granted
foreign patent protection with respect to our discoveries.

         We have decided not to pursue patent protection with respect to some of
our inventions 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, genes or gene sequences, uses of those genes or gene sequences, gene
products and drug targets, assays for identifying potential therapeutic
products, potential therapeutic products and methods of treatment for which we
are seeking United States patent protection. In addition, most of our gene
trapping patents and our licensed gene targeting patents cover only the United
States and do not apply to discovery activities conducted outside of the United
States or, in some circumstances, to importing into the United States products
developed using this technology.

We may be unable to protect our trade secrets.

         Significant aspects of our intellectual property are not protected by
patents. As a result, we seek to protect the proprietary nature of this
intellectual property as trade secrets through proprietary information
agreements and other measures. While we have entered into proprietary
information agreements with all of our employees, consultants, advisers 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.

Our efforts to discover, evaluate and validate potential targets for drug
intervention and our drug discovery programs are subject to evolving data and
other risks inherent in the drug discovery process.

         We are employing our knockout technology and integrated drug discovery
platform to systematically discover, evaluate and validate potential targets for
drug intervention and to develop drugs to address those targets. The drug
discovery and development process involves significant risks of delay or failure
due, in part, to evolving data and the uncertainties involved with the
applications of new technologies. As we refine and advance our efforts, it is
likely that the resulting data will cause us to change our targets from time to
time and, therefore, that the targets that we believe at any time to be
promising may prove not to be so. These developments can occur at any stage of
the drug discovery and development process.

                                       17


Our industry is subject to extensive and uncertain government regulatory
requirements, which could significantly hinder our ability, or the ability of
our collaborators, to obtain, in a timely manner or at all, government approval
of products based on genes that we identify, or to commercialize such products.

         We or our collaborators must obtain approval from the FDA in order to
conduct clinical trials and sell our future product candidates in the United
States and from foreign regulatory authorities in order to conduct clinical
trials and sell our future product candidates in other countries. In order to
obtain regulatory approvals for the commercial sale of any products that we may
develop, we will be required to complete extensive clinical trials in humans to
demonstrate the safety and efficacy of our drug candidates. We or our
collaborators may not be able to obtain authority from the FDA or other
equivalent foreign regulatory agencies to initiate or complete any clinical
trials. In addition, we have limited internal resources for making regulatory
filings and dealing with regulatory authorities.

         The results from preclinical testing of a drug candidate that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale, advanced stage
clinical trials. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after achieving
positive results in earlier trials. Negative or inconclusive results from a
preclinical study or a clinical trial could cause us, one of our collaborators
or the FDA to terminate a preclinical study or clinical trial or require that we
repeat it. Furthermore, we, one of our collaborators or a regulatory agency with
jurisdiction over the trials may suspend clinical trials at any time if the
subjects or patients participating in such trials are being exposed to
unacceptable health risks or for other reasons.

         Any preclinical or clinical test may fail to produce results
satisfactory to the FDA or foreign regulatory authorities. Preclinical and
clinical data can be interpreted in different ways, which could delay, limit or
prevent regulatory approval. The FDA or institutional review boards at the
medical institutions and healthcare facilities where we sponsor clinical trials
may suspend any trial indefinitely if they find deficiencies in the conduct of
these trials. Clinical trials must be conducted in accordance with the FDA's
current Good Clinical Practices. The FDA and these institutional review boards
have authority to oversee our clinical trials, and the FDA may require large
numbers of test subjects. In addition, we must manufacture, or contract for the
manufacture of, the product candidates that we use in our clinical trials under
the FDA's current Good Manufacturing Practices.

         The rate of completion of clinical trials is dependent, in part, upon
the rate of enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study, the nature of the
study, the existence of competitive clinical trials and the availability of
alternative treatments. Delays in planned patient enrollment may result in
increased costs and prolonged clinical development, which in turn could allow
our competitors to bring products to market before we do and impair our ability
to commercialize our products or potential products.

         We or our collaborators may not be able to successfully complete any
clinical trial of a potential product within any specified time period. In some
cases, we or our collaborators may not be able to complete the trial at all.
Moreover, clinical trials may not show our potential products to be both safe
and effective. Thus, the FDA and other regulatory authorities may not approve
any products that we develop for any indication or may limit the approved
indications or impose other conditions.

If our potential products receive regulatory approval, we or our collaborators
will remain subject to extensive and rigorous ongoing regulation.

         If we or our collaborators obtain initial regulatory approvals from the
FDA or foreign regulatory authorities for any products that we may develop, we
or our collaborators will be subject to extensive and rigorous ongoing domestic
and foreign government regulation of, among other things, the research,
development, testing, manufacture, labeling, promotion, advertising,
distribution and marketing of our products and product candidates. The failure
to comply with these requirements or the identification of safety problems
during commercial marketing could lead to the need for product marketing
restrictions, product withdrawal or recall or other voluntary or regulatory
action, which could delay further marketing until the product is brought into
compliance. The failure to comply with these requirements may also subject us or
our collaborators to stringent penalties.

                                       18


         Moreover, several of our product development areas 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 any products that we may develop could limit our ability to test,
manufacture and, ultimately, commercialize such products.

The uncertainty of pharmaceutical pricing and reimbursement may decrease the
commercial potential of any products that we or our collaborators may develop
and affect our ability to raise capital.

         Our ability and the ability of our collaborators to successfully
commercialize pharmaceutical products will 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 United States, 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 United States has increased 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, our ability to
establish corporate collaborations would be impaired. 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 profitable basis.

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
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 do not currently maintain insurance coverage that would
cover these types of environmental liabilities.

We may be sued for product liability.

         We or our collaborators may be held liable if any product that we or
our collaborators develop, or any product that 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. Our 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.

                                       19


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 reduce the likelihood of
maintaining 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 76,000 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 embryonic stem cell clones
through the completion of in vivo analysis, in a specific pathogen free
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. Because of the size and
sophistication of our facilities, it would require the investment of significant
resources over an extended period of time for any competitor to develop
facilities with the scale, efficiency and productivity with respect to the
analysis of the functionality of genes that our facilities provide.

         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 1.16%, the total lease
payments for our facilities would be approximately $0.8 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
$54.8 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.

         In May 2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc.
entered into a lease for a 76,000 square-foot facility in Hopewell, New Jersey.
The term of the lease extends until June 30, 2013. The lease provides for an
escalating yearly base rent payment of $1.3 million in the first year, $2.1
million in years two and three, $2.2 million in years four to six, $2.3 million
in years seven to nine and $2.4 million in years ten and eleven. We are the
guarantor of the obligations of our subsidiary under the lease.

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

                                       20


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, 2003.

                                       21

                                     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
                                                                                             
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
2003
First Quarter...................................................................  $    5.22        $   3.16
Second Quarter..................................................................  $    6.60        $   4.05
Third Quarter...................................................................  $    7.28        $   4.50
Fourth Quarter..................................................................  $    6.14        $   5.07


         As of March 8, 2004, there were approximately 257 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.

                                       22


ITEM 6.  SELECTED FINANCIAL DATA

         The statement of operations data for the years ended December 31, 2003,
2002 and 2001 and the balance sheet data as of December 31, 2003 and 2002 have
been derived from our audited financial statements included elsewhere in this
annual report on Form 10-K. The statements of operations data for the years
ended December 31, 2000 and 1999, and the balance sheet data as of December 31,
2001, 2000 and 1999 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 has 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,
                                                     ------------ ------------ ------------ ------------- ----------
                                                         2003         2002         2001         2000          1999
                                                     ------------ ------------ ------------ ------------- ----------
STATEMENTS OF OPERATIONS DATA:                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                           

Revenues...........................................  $   42,838   $   35,200   $   30,577   $   14,459    $    4,738
Operating expenses:
  Research and development, including stock-based
     compensation of $5,048 in 2003, $5,155 in
     2002, $5,539 in 2001 and $10,883 in 2000......      82,198       74,859       53,355       31,647        14,646
  General and administrative, including stock-based
     compensation of $5,067 in 2003, $5,113 in 2002,
     $5,231 in 2001 and $9,958 in 2000.............      23,233       23,234       20,861       18,289         2,913
                                                     ----------   ----------   ----------   ----------    ----------
Total operating expenses...........................     105,431       98,093       74,216       49,936        17,559
                                                     ----------   ----------   ----------   ----------    ----------
Loss from operations...............................     (62,593)     (62,893)     (43,639)     (35,477)      (12,821)
Interest and other income, net.....................       1,471        3,223        8,467        9,483           346
                                                     ----------   ----------   ----------   ----------    ----------
Net loss before cumulative effect of a change in
  accounting principle.............................     (61,122)     (59,670)     (35,172)     (25,994)      (12,475)
Cumulative effect of a change in accounting
principle..........................................      (3,076)           -            -            -             -
                                                     ----------   ----------   ----------   ----------    ----------
Net loss...........................................     (64,198)     (59,670)     (35,172)     (25,994)      (12,475)
Accretion on redeemable convertible preferred stock           -            -            -         (134)         (536)
                                                     ----------   ----------   ----------   ----------    ----------
Net loss attributable to common stockholders.......  $  (64,198)  $  (59,670)  $  (35,172)  $  (26,128)   $  (13,011)
                                                     ==========   ==========   ==========   ==========    ==========
Net loss per common share basic and diluted:
  Net loss before cumulative effect of a change
     in accounting principle.......................  $    (1.08)  $    (1.14)  $    (0.70)  $    (0.63)   $    (0.53)
  Cumulative effect of a change in
     accounting principle..........................       (0.05)           -            -            -             -
                                                     ----------   ----------   ----------   ----------    ----------
Net loss per common share, basic and diluted.......  $    (1.13)  $    (1.14)  $    (0.70   $    (0.63)   $    (0.53)
                                                     ==========   ==========   ==========   ===========   ==========
  Shares used in computing net loss per common
     share, basic and diluted......................      56,820       52,263       50,213       41,618        24,530




                                                          ------------------------------------------------------------
                                                                               AS OF DECEMBER 31,
                                                          ------------ ------------ ----------- ------------ ---------
                                                              2003         2002         2001        2000         1999
                                                          -----------  -----------  ----------  -----------  ---------
                                                                                              
BALANCE SHEET DATA:                                                              (IN THOUSANDS)
Cash, cash equivalents and investments, including
  restricted cash and investments of $57,514 in 2003,
   $57,710 in 2002, $43,338 in 2001 and $13,879 in 2000.  $   161,001  $   123,096  $  166,840  $   202,680  $   9,156

Working capital.........................................      139,739      111,833     147,663      194,801      2,021
Total assets............................................      284,199      201,772     239,990      220,693     22,295
Long-term debt, net of current portion..................       56,344        4,000          --        1,834      3,577
Redeemable convertible preferred stock..................           --           --          --           --     30,050
Accumulated deficit.....................................     (213,943)    (149,745)    (90,075)     (54,903)   (28,909)
Stockholders' equity (deficit)..........................      166,216      169,902     218,372      207,628    (21,937)



                                       23



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 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 Bristol-Myers Squibb Company to discover and develop novel small
molecule drugs in the neuroscience field; 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 Corporation 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 drug discovery
alliances, subscriptions to our databases, target validation 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 and technology licenses, 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
collaborations, alliances and database subscriptions 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 offer subscriptions to our databases or 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 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, 2003, we had an accumulated deficit of $213.9 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,

                                       24


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 target validation 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 target validation 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, 2003 we had net operating loss carryforwards of
approximately $131.8 million. We also had research and development tax credit
carryforwards of approximately $8.1 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 target validation resources
are recognized ratably over the subscription or access period. Payments received
under target validation collaborations are recognized as revenue as we perform
our obligations related to such research to the extent such fees are
non-refundable. Non-refundable upfront fees and annual research funding under
our drug discovery alliances are recognized as revenue on a straight-line basis
over the estimated period of service, generally the contractual research term.
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.

         Prior to preclinical development work, we are unable to segregate the
costs related to research performed on drug candidates because the drug
candidate is often not specifically identified until the later stages of our
research. When we begin the formal preclinical process in preparation for filing
an IND, we intend to account on a program by program basis for the costs related
to the development of the identified candidate. To date, we have not advanced
any drug products into formal preclinical development.

     GOODWILL IMPAIRMENT

         Goodwill is not amortized, but is tested at least annually for
impairment at the reporting unit level. We have determined that the reporting
unit is the single operating segment disclosed in our current financial
statements. Impairment is the condition that exists when the carrying amount of
goodwill exceeds its implied fair value. The

                                       25


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. We
determined that the market capitalization approach is the most appropriate
method of measuring fair value of the reporting unit. Under this approach, fair
value is calculated as the average closing price of our common stock for the 30
days preceding the date that the annual impairment test is performed, multiplied
by the number of outstanding shares on that date. A control premium, which is
representative of premiums paid in the marketplace to acquire a controlling
interest in a company, is then added to the market capitalization to determine
the fair value of the reporting unit. 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 2003.

RECENT ACCOUNTING PRONOUNCEMENTS

         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 is applicable to agreements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
material impact on our financial statements.

         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 No. 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 No. 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. We have elected to continue to follow the intrinsic value
method of accounting as prescribed by Accounting Principles Board Opinion No. 25
(or APB 25), "Accounting for Stock Issued to Employees," to account for employee
stock options.

         In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51."
FIN 46 was revised in December 2003. It 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 applied immediately to variable interest entities
created after January 31, 2003, but was effective for the period ending December
31, 2003 for variable interest entities created before February 1, 2003. We
adopted FIN 46 on December 31, 2003 and determined that the lessor under the
synthetic lease is a variable interest entity as defined by FIN 46, and that we
absorb a majority of the variable interest entity's expected losses.
Accordingly, we consolidated the assets of the variable interest entity, which
were comprised of property and improvements funded under the synthetic lease.
These assets had a carrying value of $54.8 million, net of accumulated
depreciation of $3.1 million on December 31, 2003. We also consolidated the
variable interest entity's debt of $52.3 million and non-controlling interests
of $2.5 million. Additionally, we recorded a cumulative effect of a change in
accounting principle equal to the accumulated depreciation of $3.1 million for
the period from the date the buildings were placed in service under the
synthetic lease through December 31, 2003. These improvements will be
depreciated over their useful lives. Due to our residual value guarantee on the
property, the non-recourse feature of the underlying debt, and certain other
provisions of the lease arrangement, we do not allocate any of the variable
interest entity's depreciation or interest expenses to the non-controlling
interest. As permitted by applicable accounting standards, we had previously
accounted for our involvement with the variable interest entity as an operating
lease.

                                       26


RESULTS OF OPERATIONS

     YEARS ENDED DECEMBER 31, 2003 AND 2002

         Revenues. Total revenues and dollar and percentage changes as compared
to the prior year are as follows (dollar amounts are presented in millions):




                                                                      YEAR ENDED DECEMBER 31,
                                                                  --------------------------------
                                                                       2003             2002
                                                                  ----------------  --------------
                                                                              
                      Total revenues.............................     $   42.8          $   35.2
                      Dollar increase............................     $    7.6
                      Percentage increase........................          22%


                  -        Subscription and license fees - Revenue from
                           subscriptions and license fees increased 21% to $21.6
                           million due to additional technology licenses granted
                           to pharmaceutical and biotechnology companies in
                           2003.

                  -        Collaborative research - Revenue from collaborative
                           research increased 24% to $21.2 million primarily due
                           to increased revenue under our drug discovery
                           alliances with Genentech and Bristol-Myers Squibb,
                           offset in part by a decrease in revenues from target
                           validation collaborations due to the scheduled
                           conclusion of many of these arrangements.

                  -        Compound libraries and other - Revenue from compound
                           library sales and other decreased 81% to $46,000 due
                           to the fact that we are not making our compound
                           libraries available for purchase, subject to limited
                           exceptions. We may, however, provide additional
                           quantities of selected compounds or optimization
                           services under existing compound sales agreements.

         In 2003, Incyte Corporation, Amgen, Inc., Bristol-Myers Squibb Company
and Genentech, Inc. represented 23%, 15%, 14% and 14% of revenues, respectively.
In 2002, Incyte, Bristol-Myers Squibb Company and Millennium Pharmaceuticals,
Inc. represented 28%, 14% and 11% of revenues, respectively.

         Research and Development Expenses. Research and development expenses
and dollar and percentage changes as compared to the prior year are as follows
(dollar amounts are presented in millions):



                                                                      YEAR ENDED DECEMBER 31,
                                                                  --------------------------------
                                                                       2003             2002
                                                                  ----------------  --------------
                                                                              
                      Total research and development expense.....     $   82.2          $   74.9
                      Dollar increase............................     $    7.3
                      Percentage increase........................          10%


         Research and development expenses consist primarily of salaries and
other personnel-related expenses, stock-based compensation expenses, laboratory
supplies, facility and equipment costs, consulting and other services. The
change in 2003 as compared to 2002 resulted primarily from the following costs:

                  -        Personnel - Personnel costs increased 14% to $35.0
                           million primarily due to increased personnel to
                           support the expansion of our drug discovery programs,
                           merit pay increases for employees and increasing
                           employee benefit costs. Salaries, bonuses, employee
                           benefits, payroll taxes, recruiting and relocation
                           costs are included in personnel costs.

                  -        Stock-based compensation - Stock based compensation
                           expense, primarily relating to option grants made
                           prior to our April 2000 initial public offering,
                           decreased 2% to $5.0 million.

                  -        Laboratory supplies - Laboratory supplies expense
                           increased 5% to $11.1 million due primarily to an
                           increase in drug discovery activities such as high
                           throughput screening.

                                       27


                  -        Facilities and equipment - Facility and equipment
                           costs increased 13% to $19.8 million primarily due to
                           increased rent resulting from the May 2002 lease of
                           our facility in Hopewell, New Jersey and increased
                           property taxes on our facilities in The Woodlands,
                           Texas. Additionally, depreciation expense increased
                           as a result of purchases of capital equipment and
                           leasehold improvements.

                  -        Consulting and other services - Consulting and other
                           services decreased by 1% to $7.7 million. Consulting
                           and other services include subscriptions to
                           third-party databases, technology licenses and legal
                           and patent fees.

                  -        Other - Other costs increased by 17% to $3.6 million.

         General and Administrative Expenses. General and administrative
expenses and dollar and percentage changes as compared to the prior year are as
follows (dollar amounts are presented in millions):





                                                                      YEAR ENDED DECEMBER 31,
                                                                  --------------------------------
                                                                       2003             2002
                                                                  ----------------  --------------
                                                                              
                      Total general and administrative expense...     $   23.2          $   23.2
                      Dollar increase............................     $     --
                      Percentage increase........................           --



         General and administrative expenses consist primarily of personnel
costs to support our research activities, stock-based compensation expense,
facility and equipment costs and professional fees, such as legal fees. The
change in 2003 as compared to 2002 resulted primarily from the following costs:

                  -        Personnel - Personnel costs decreased 4% to $10.6
                           million primarily due to decreased staffing in
                           overhead departments. Salaries, bonuses, employee
                           benefits, payroll taxes, recruiting and relocation
                           costs are included in personnel costs.

                  -        Stock-based compensation - Stock based compensation
                           expense, primarily relating to option grants made
                           prior to our April 2000 initial public offering,
                           decreased 1% to $5.1 million.

                  -        Facilities and equipment - Facility and equipment
                           costs increased 12% to $3.6 million primarily due to
                           increased rent resulting from the May 2002 lease of
                           our facility in Hopewell, New Jersey and increased
                           property taxes on our facilities in The Woodlands,
                           Texas.

                  -        Professional fees - Professional fees increased 43%
                           to $1.6 million primarily due to increased legal
                           fees.

                  -        Other - Other costs increased 13% to $2.3 million.

         Interest and Other Income. Interest and other income decreased 44% to
$1.8 million in 2003 from $3.2 million in 2002. This decrease resulted primarily
from lower average cash and investment balances and lower average interest rates
on our investments.

         Net Loss and Net Loss Per Common Share Before Cumulative Effect of a
Change in Accounting Principle. Net loss before a change in accounting principle
increased to $61.1 million in 2003 from $59.7 million in 2002. Net loss per
common share before a change in accounting principle decreased to $1.08 in 2003
from $1.14 in 2002. Net loss before a change in accounting principle includes
stock-based compensation expense of $10.1 million and $10.3 million in 2003 and
2002, respectively.

         Change In Accounting Principle. As discussed in "Recent Accounting
Pronouncements" above, we adopted FIN 46 on December 31, 2003 and determined
that the lessor under the synthetic lease is a variable interest entity as
defined by FIN 46, and that we absorb a majority of the variable interest
entity's expected losses. Accordingly, we recorded a cumulative effect of a
change in accounting principle equal to the accumulated depreciation of

                                       28


$3.1 million for the period from the date the buildings were placed in service
under the synthetic lease through December 31, 2003.

         Net Loss and Net Loss Per Common Share. Net loss increased to $64.2
million in 2003 from $59.7 million in 2002. Net loss per common share decreased
to $1.13 in 2003 from $1.14 in 2002.

     YEARS ENDED DECEMBER 31, 2002 AND 2001

         Revenues. Total revenues and dollar and percentage changes as compared
to the prior year are as follows (dollar amounts are presented in millions):



                                                                       YEAR ENDED DECEMBER 31,
                                                                  --------------------------------
                                                                       2002             2001
                                                                  ----------------  --------------
                                                                              
                      Total revenues.............................     $   35.2          $   30.6
                      Dollar increase............................     $    4.6
                      Percentage increase........................          15%


                  -        Subscription and license fees - Revenue from
                           subscriptions and license fees increased 21% to $17.9
                           million due to subscriptions to our LexVision
                           database.

                  -        Collaborative research - Revenue from collaborative
                           research increased 52% to $17.1 million primarily due
                           to increased revenue from target validation
                           collaborations and our drug discovery alliance with
                           Incyte.

                  -        Compound libraries and other - Revenue from compound
                           library sales and other decreased 95% to $0.2 million
                           due to the fact that 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. We may, however, provide additional
                           quantities of selected compounds or optimization
                           services under existing compound sales agreements.

         In 2002, Incyte, Bristol-Myers Squibb and Millennium Pharmaceuticals
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
and dollar and percentage changes as compared to the prior year are as follows
(dollar amounts are presented in millions):



                                                                      YEAR ENDED DECEMBER 31,
                                                                  --------------------------------
                                                                       2002             2001
                                                                  ----------------  --------------
                                                                              
                      Total research and development expense.....     $   74.9          $   53.4
                      Dollar increase............................     $   21.5
                      Percentage increase........................          40%


         Research and development expenses consist primarily of salaries and
other personnel-related expenses, stock-based compensation expenses, laboratory
supplies, facility and equipment costs, consulting and other services. The
change in 2002 as compared to 2001 resulted primarily from the following costs:

                  -        Personnel - Personnel costs increased 35% to $30.8
                           million primarily due to increased personnel to
                           support the expansion of our drug discovery programs,
                           a full year of medicinal chemistry operations and
                           merit pay increases for employees. Salaries, bonuses,
                           employee benefits, payroll taxes, recruiting and
                           relocation costs are included in personnel costs.

                  -        Stock-based compensation - Stock based compensation
                           expense, primarily relating to option grants made
                           prior to our April 2000 initial public offering,
                           decreased 7% to $5.2 million.

                                       29


                  -        Laboratory supplies - Laboratory supplies expense
                           increased 28% to $10.6 million due primarily to an
                           increase in drug discovery activities and a full year
                           of medicinal chemistry operations.

                  -        Facilities and equipment - Facility and equipment
                           costs increased 98% to $17.5 million due to increased
                           rent, maintenance costs and property taxes resulting
                           from our expansion in 2002 into additional facilities
                           in The Woodlands, Texas and a full year of medicinal
                           chemistry operations. Additionally, depreciation
                           expense increased as a result of purchases of capital
                           equipment and leasehold improvements.

                  -        Consulting and other services - Consulting and other
                           services increased by 83% to $7.7 million, primarily
                           due to increased fees related to third party database
                           subscriptions. Consulting and other services include
                           subscriptions to third-party databases, technology
                           licenses and legal and patent fees.

                  -        Other - Other costs decreased 17% to $3.1 million.

         General and Administrative Expenses. General and administrative
expenses and dollar and percentage changes as compared to the prior year are as
follows (dollar amounts are presented in millions):




                                                                      YEAR ENDED DECEMBER 31,
                                                                  --------------------------------
                                                                       2002             2001
                                                                  ----------------  --------------
                                                                              
                      Total general and administrative expense...     $   23.2          $   20.9
                      Dollar increase............................     $    2.3
                      Percentage increase........................          11%


         General and administrative expenses consist primarily of personnel
costs to support our research activities, stock-based compensation expense,
facility and equipment costs and professional fees, such as legal fees. The
change in 2002 as compared to 2001 resulted primarily from the following costs:

                  -        Personnel - Personnel costs increased 59% to $11.1
                           million primarily due to increased personnel to
                           support our research activities and merit pay
                           increases for employees. Salaries, bonuses, employee
                           benefits, payroll taxes, recruiting and relocation
                           costs are included in personnel costs.

                  -        Stock-based compensation - Stock based compensation
                           expense, primarily relating to option grants made
                           prior to our April 2000 initial public offering,
                           decreased 2% to $5.1 million

                  -        Facilities and equipment - Facility and equipment
                           costs increased 81% to $3.2 million primarily due to
                           increased rent and property taxes resulting from the
                           expansion in 2002 into additional facilities in The
                           Woodlands, Texas.

                  -        Professional fees - Professional fees decreased 73%
                           to $1.1 million primarily due to a reduction in legal
                           costs as a result of the September 2001 settlement of
                           our patent infringement litigation against Deltagen,
                           Inc.

                  -        Other - Other costs increased 1% to $2.7 million.

         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 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. Net loss includes stock-based compensation
expense of $10.3 million and $10.8 million in 2002 and 2001, respectively.

                                       30


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,
2003, we had received net proceeds of $293.1 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 and $50.1 million from our
July 2003 common stock offering. In addition, from our inception through
December 31, 2003, we received $172.2 million in cash payments from database
subscription and technology license fees, drug discovery alliances, target
validation collaborations, sales of compound libraries and reagents and
government grants, of which $131.3 million had been recognized as revenues
through December 31, 2003.

         As of December 31, 2003, we had $161.0 million in cash, cash
equivalents and short-term investments (including $57.5 million of restricted
cash and investments), as compared to $123.1 million (including $57.7 million of
restricted cash and investments) as of December 31, 2002. We used cash of $7.7
million in operations in 2003. This consisted primarily of the net loss for the
year of $64.2 million offset by non-cash charges of $10.1 million related to
stock-based compensation expense, $10.2 million related to depreciation expense,
$3.1 million related to the cumulative effect of a change in accounting
principle and $1.2 million related to amortization of intangible assets other
than goodwill; a $29.0 million increase in deferred revenue; and changes in
other operating assets and liabilities of $2.8 million. Financing activities
provided cash of $50.4 million, consisting primarily of the $50.1 million in net
proceeds from our July 2003 common stock offering.

         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 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 1.16%, our total lease
payments would be approximately $0.8 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 $54.8 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 $54.8 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, 2003 and 2002, we maintained
restricted cash and investments of $57.0 million and $57.2 million,
respectively, to collateralize funding for property and improvements under the
synthetic lease of $54.8 million and $55.0 million.

         We are considering replacing our synthetic lease agreement covering all
of our facilities in The Woodlands, Texas, and we are currently engaged in
discussions to do so. We expect that any such new arrangement would require us
to maintain substantially lower amounts of restricted cash and investments while
increasing our lease payments with respect to these facilities, as compared to
our synthetic lease agreement.

         In May 2002, our subsidiary Lexicon Pharmaceuticals (New Jersey), Inc.
entered into a lease for a 76,000 square-foot facility in Hopewell, New Jersey.
The term of the lease extends until June 30, 2013. The lease provides for an
escalating yearly base rent payment of $1.3 million in the first year, $2.1
million in years two and three, $2.2


                                       31


million in years four to six, $2.3 million in years seven to nine and $2.4
million in years ten and eleven. 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, 2003:




                                               ---------------------------------------------------------
                                                         PAYMENTS DUE BY PERIOD (IN MILLIONS)
                                               ---------------------------------------------------------
                                                          LESS THAN                           MORE THAN
              CONTRACTUAL OBLIGATIONS            TOTAL      1 YEAR    1-3 YEARS   3-5 YEARS    5 YEARS
                                               ---------  ----------  ---------   ---------   ----------
                                                                               
Long-term debt................................   $ 56.3     $   --      $ 56.3      $   --      $   --
Other long-term liabilities...................      2.5         --         2.5          --          --
Interest payment obligations..................      2.6        0.8         1.8          --          --
Operating leases..............................     22.0        2.2         4.4         4.6        10.8
Obligations under purchase orders.............      1.9        1.9          --          --          --
                                                 ------     ------      ------      ------      ------
    Total.....................................   $ 85.3     $  4.9      $ 65.0      $  4.6      $ 10.8
                                                 ======     ======      ======      ======      ======


         Our future capital requirements will be substantial and will depend on
many factors, including our ability to obtain 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 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, target validation collaborations, technology
licenses and drug discovery alliances will be sufficient to fund our operations
at least through the next two years. 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 are exposed to interest rate risk because our synthetic lease
payments fluctuate based upon LIBOR rates. A hypothetical 1% increase in LIBOR
rates would result in $0.5 million of additional interest expense under the
lease.

         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.

                                       32


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 LLP 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.

ITEM 9A.  CONTROLS AND PROCEDURES

         Our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures (as defined in rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are sufficiently effective
to ensure that the information required to be disclosed by us in the reports we
file under the Securities Exchange Act is gathered, analyzed and disclosed with
adequate timeliness, accuracy and completeness, based on an evaluation of such
controls and procedures conducted within 90 days prior to the date hereof.

         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.

                                       33


                                    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," "Executive Officers" and "Code of
Ethics" 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, 2003.

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, 2003.
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, 2003.

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, 2003.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

         The information required by this Item as to the fees we pay our
principal accountant is hereby incorporated by reference from the information
appearing under the caption "Compensation of Independent Auditors" 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, 2003.

                                       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....................................................    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 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).

                    10.7  --    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).

                    10.8  --    2000 Equity Incentive Plan (filed as Exhibit 10.8 to the Company's Registration


                                       35


             

                                Statement on Form S-1 (Registration No. 333-96469) and incorporated by reference herein).

                    10.9  --    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).

                   10.10  --    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).

                  +10.11  --    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).

                  +10.12  --    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).

                  +10.13  --    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).

                 *+10.14  --    Amended and Restated Collaboration and License Agreement, dated November 19, 2003, with Genentech,
                                Inc.

                 *+10.15  --    Collaboration and License Agreement, dated December 17, 2003, with Bristol-Myers Squibb Company

                   10.16  --    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).

                   10.17  --    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).

                   10.18  --    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)

                   *31.1  --    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

                   *31.2  --    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

                    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).

             

                                       36




             EXHIBIT NO.                                            DESCRIPTION
             -----------                                            -----------

         ---------------------
               
         *        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:

                  On October 30, 2003, we filed a Current Report on Form 8-K dated October 30, 2003 relating to our issuance of a
                  press release reporting our financial results for the quarter ended September 30, 2003, which press release
                  included our consolidated balance sheet data and consolidated statements of operations data for the period.


                                       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 12, 2004      By:  /s/ ARTHUR T. SANDS
                              -------------------------------------------------
                                Arthur T. Sands, M.D., Ph.D.
                                President and Chief Executive Officer


Date:  March 12, 2004      By:  /s/ JULIA P. GREGORY
                              -------------------------------------------------
                                Julia P. Gregory
                                Executive Vice President, Corporate Development
                                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 12, 2004
- ------------------------------------     (Principal Executive Officer)
Arthur T. Sands, M.D., Ph.D.

/S/ JULIA P. GREGORY                     Executive Vice President, Corporate Development and      March 12, 2004
- ------------------------------------     Chief Financial Officer
Julia P. Gregory                         (Principal Financial and Accounting Officer)

/S/ C. THOMAS CASKEY                     Chairman of the Board of Directors                       March 12, 2004
- ------------------------------------
C. Thomas Caskey, M.D.

/S/ SAM L. BARKER                        Director                                                 March 12, 2004
- ------------------------------------
Sam L. Barker, Ph.D.

/S/ PATRICIA M. CLOHERTY                 Director                                                 March 12, 2004
- ------------------------------------
Patricia M. Cloherty

/S/ ROBERT J. LEFKOWITZ                  Director                                                 March 12, 2004
- ------------------------------------
Robert J. Lefkowitz, M.D.

/S/ ALAN S. NIES                         Director                                                 March 12, 2004
- ------------------------------------
Alan S. Nies. M.D.


                                       38

                         REPORT OF INDEPENDENT AUDITORS



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

We have audited the accompanying consolidated balance sheets of Lexicon Genetics
Incorporated and subsidiary (the Company) as of December 31, 2003 and 2002, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years 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 audits. The financial
statements of the Company for the year ended December 31, 2001 was 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 adjustment described in Note 4.

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 consolidated financial position of Lexicon Genetics
Incorporated as of December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 3 to the consolidated financial statements, during 2003 the
Company adopted relevant portions of Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51."

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



                                                          /s/ ERNST & YOUNG LLP

Houston, Texas
February 12, 2004


                                      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, 2003. SEE EXHIBIT 23.2 FOR FURTHER
INFORMATION.


                                      F-2


                          LEXICON GENETICS INCORPORATED

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT PAR VALUE)



                                                                               ----------------------------------------
                                                                                          AS OF DECEMBER 31,
                                                                               ----------------------------------------
                                                                                      2003                   2002
                                                                               -----------------      -----------------
                                                                                                
ASSETS

Current assets:
    Cash and cash equivalents .............................................    $          81,915      $          39,362
    Restricted cash........................................................               56,963                 29,487
    Short-term investments, including restricted investments of $551 and
       $28,223, respectively...............................................               22,123                 54,247
    Accounts receivable, net of allowances of $109 for 2003 and 2002.......                6,571                  5,143
    Prepaid expenses and other current assets..............................                3,933                  4,893
                                                                               -----------------      -----------------
       Total current assets................................................              171,505                133,132
Property and equipment, net of accumulated depreciation of $31,941 and
    $19,768, respectively..................................................               83,676                 37,362
Goodwill...................................................................               25,798                 25,798
Intangible assets, net of amortization of $2,960 and $1,760, respectively..                3,040                  4,240
Other assets...............................................................                  180                  1,240
                                                                               -----------------      -----------------
       Total assets........................................................    $         284,199      $         201,772
                                                                               =================      =================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable.......................................................    $           5,884      $           4,378
    Accrued liabilities....................................................                4,757                  4,161
    Current portion of deferred revenue....................................               21,125                 12,760
                                                                               -----------------      -----------------
       Total current liabilities...........................................               31,766                 21,299
Deferred revenue, net of current portion...................................               26,567                  5,887
Long-term debt.............................................................               56,344                  4,000
Other long-term liabilities................................................                3,306                    684
                                                                               -----------------      -----------------
       Total liabilities...................................................              117,983                 31,870

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;
       62,827 and 52,367 shares issued and outstanding, respectively.......                   63                     52
    Additional paid-in capital.............................................              380,995                330,701
    Deferred stock compensation............................................                 (899)               (11,106)
    Accumulated deficit....................................................             (213,943)              (149,745)
                                                                               -----------------      -----------------
       Total stockholders' equity .........................................              166,216                169,902
                                                                               -----------------      -----------------
       Total liabilities and stockholders' equity..........................    $         284,199      $         201,772
                                                                               =================      =================


              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,
                                                                  -------------------------------------------------------
                                                                       2003                 2002                  2001
                                                                  --------------       -------------        -------------
                                                                                                   
Revenues:
   Subscription and license fees..............................    $       21,550       $      17,871        $      14,744
   Collaborative research.....................................            21,242              17,088               11,220
   Compound libraries and other...............................                46                 241                4,613
                                                                  --------------       -------------        -------------
     Total revenues...........................................            42,838              35,200               30,577
Operating expenses:
   Research and development, including stock-based
      compensation of $5,048, $5,155, and $5,539,
      respectively............................................            82,198              74,859               53,355
   General and administrative, including stock-based
      compensation of $5,067, $5,113, and $5,231, respectively            23,233              23,234               20,861
                                                                  --------------       -------------        -------------
     Total operating expenses.................................           105,431              98,093               74,216
                                                                  --------------       -------------        -------------
Loss from operations..........................................           (62,593)            (62,893)             (43,639)
Interest and other income.....................................             1,796               3,230                8,781
Interest expense..............................................              (325)                 (7)                (314)
                                                                  --------------       -------------        -------------
Net loss before cumulative effect of a change
   in accounting principle....................................           (61,122)            (59,670)             (35,172)
Cumulative effect of a change in accounting principle.........            (3,076)                 --                   --
                                                                  --------------       -------------        -------------
Net loss  ....................................................    $      (64,198)      $     (59,670)       $     (35,172)
                                                                  ==============       =============        =============

Net loss per common share basic and diluted:
   Net loss before cumulative effect of a
     change in accounting principle...........................    $        (1.08)      $       (1.14)       $       (0.70)
   Cumulative effect of a change in accounting principle......             (0.05)                 --                   --
                                                                  --------------       -------------        -------------
   Net loss per common share, basic and diluted...............    $        (1.13)      $       (1.14)       $       (0.70)
                                                                  ==============       =============        =============
Shares used in computing net loss per common share,
   basic and diluted..........................................            56,820              52,263               50,213



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

                                      F-4


                          LEXICON GENETICS INCORPORATED

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)



                                      -----------------------------------------  -------------------------------------------
                                                                                                  ACCUMULATED
                                                     ADDITIONAL    DEFERRED                          OTHER          TOTAL
                                                      PAID-IN       STOCK         ACCUMULATED    COMPREHENSIVE  STOCKHOLDERS'
                                      COMMON STOCK    CAPITAL    COMPENSATION       DEFICIT           LOSS         EQUITY
                                     --------------  ----------  -------------   ------------    -------------- ------------
                                     SHARES    PAR
                                              VALUE
                                                                                                
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
Deferred stock compensation, net of
  reversals.........................      --    --        (92)          92               --            --                --
Amortization of deferred stock
  compensation......................      --    --         --       10,115               --            --            10,115
Public offering of common stock,
  net of offering costs.............  10,240    10     50,147           --               --            --            50,157
Exercise of common stock options....     102     1        239           --               --            --               240
Exercise of common stock warrants...     118    --         --           --               --            --                --
Net and comprehensive loss..........      --    --         --           --          (64,198)           --           (64,198)
                                      ------   ---   --------     --------      -----------         -----         ---------
Balance at December 31, 2003........  62,827   $63   $380,995     $   (899)     $  (213,943)        $  --         $ 166,216
                                      ======   ===   ========     ========      ===========         =====         =========


              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,
                                                                           --------------------------------------------------------
                                                                                2003                  2002               2001
                                                                           -------------         -------------    -----------------
                                                                                                         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss............................................................    $     (64,198)        $     (59,670)   $       (35,172)
   Adjustments to reconcile net loss to net cash used in operating
    activities:
     Depreciation......................................................           10,215                 9,111              5,220
     Amortization of intangible assets, other than goodwill............            1,200                 1,200                560
     Amortization of deferred stock compensation.......................           10,115                10,268             10,770
     Loss on sale of long-term investments.............................               --                   197                 --
     Gain on disposal of property and equipment........................              (18)                   --                 --
     Cumulative effect of a change in accounting principle ............            3,076                    --                 --
     Changes in operating assets and liabilities:
       Increase in accounts receivable.................................           (1,428)                 (599)            (1,409)
       (Increase) decrease in prepaid expenses and other current assets              960                   484             (2,531)
       (Increase) decrease in other assets.............................            1,060                 3,965             (4,919)
       Increase in accounts payable and other liabilities..............            2,257                   700              1,089
       Increase in deferred revenue....................................           29,045                 5,552              8,402
                                                                           -------------         -------------      -------------
         Net cash used in operating activities.........................           (7,716)              (28,792)           (17,990)
CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchases of property and equipment...........................           (4,824)              (19,766)           (13,471)
         Proceeds from disposal of property and equipment..............               48                    --                 --
         (Increase) decrease in restricted cash........................          (27,476)              (22,794)             7,186
         Purchase of short-term investments............................          (33,313)              (91,962)          (355,869)
         Maturities of short-term investments..........................           65,437               171,109            387,345
         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.....             (128)               47,225             13,604
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock..............................           50,397                   574                718
   Proceeds from debt borrowings.......................................               --                 4,000                 --
   Repayment of debt borrowings........................................               --                    --             (3,909)
                                                                           -------------         -------------      -------------
         Net cash provided by (used in) financing activities...........           50,397                 4,574             (3,191)
                                                                           --------------        -------------      -------------
Net increase (decrease) in cash and cash equivalents...................           42,553                23,007             (7,577)
Cash and cash equivalents at beginning of year.........................           39,362                16,355             23,932
                                                                           -------------         -------------      -------------
Cash and cash equivalents at end of year...............................    $      81,915         $      39,362      $      16,355
                                                                           =============         =============      =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest..............................................    $           4         $           7      $         330

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
   Unrealized (loss) and reversal of unrealized loss on long-term
      investments......................................................    $          --         $         437      $        (437)
   Issuance (cancellation) of equity securities in connection with
   acquisition.........................................................    $          --         $         (79)     $      35,216
   Deferred stock compensation, net of reversals.......................    $          92         $         886      $         958
   Retirement of property and equipment................................    $       1,148         $          90      $         181
   Property and equipment recorded in connection with consolidation of
     variable interest entity..........................................    $      54,811         $          --      $          --
   Long-term debt recorded in connection with consolidation of variable
     interest entity...................................................    $     (52,344)        $          --      $          --
   Other long-term liabilities recorded in connection with consolidation
     of variable interest entity.......................................    $      (2,467)        $          --      $          --



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


                                      F-6





                          LEXICON GENETICS INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2003

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
database subscription and collaboration agreements, technology licenses,
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 and Short-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 and short-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.

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 (see Note 9) 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, 2003 and 2002, the
Company maintained restricted cash and investments of $57.5 million and $57.7
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 accounts receivable are unsecured and are
concentrated in 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, 2003, management believes that the Company has no
significant concentrations of credit risk.

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, target validation
collaborations for the development and, in some cases, analysis of the
physiological

                                      F-7


effects of genes altered in knockout mice, technology licenses and compound
library sales. In 2003, Incyte Corporation, Amgen Inc., Bristol-Myers Squibb
Company and Genentech, Inc. represented 23%, 15%, 14% and 14% of revenues,
respectively. In 2002, Incyte, Bristol-Myers Squibb 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.

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 40 years. Maintenance, repairs and minor
replacements are charged to expense as incurred. Significant renewals and
betterments are capitalized.

Impairment of Long-Lived Assets: Under Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal 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 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 2003.

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, target validation 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 target validation resources are
recognized ratably over the subscription or access period. Payments received
under target validation collaborations are recognized as revenue as Lexicon
performs its obligations related to such research to the extent such fees are
non-refundable. Non-refundable upfront fees and annual research funding under
our drug discovery alliances are recognized as revenue on a straight line basis
over the estimated period of service, generally the contractual research term.
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 (SAB) No. 104, "Revenue
Recognition," 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.

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


                                      F-8


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 $10.1 million, $10.3
million and $10.8 million of stock-based compensation during 2003, 2002 and
2001, 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 SFAS No. 123, "Accounting for Stock Based Compensation," had been
applied to all outstanding and unvested awards in each period:



                                                               ---------------------------------------------------
                                                                            YEAR ENDED DECEMBER 31,
                                                               ---------------------------------------------------
                                                                    2003              2002              2001
                                                               ---------------    --------------    --------------
                                                                                 (IN THOUSANDS)
                                                                                           
Net loss, as reported......................................... $      (64,198)    $     (59,670)    $     (35,172)
Add:  Stock-based employee compensation
   expense included in reported net loss......................         10,115            10,268            10,770
Deduct:  Total stock-based employee compensation
   expense determined under fair value based method
   for all awards.............................................        (26,344)          (25,913)          (20,616)
                                                               --------------     -------------     -------------
Pro forma net loss............................................ $      (80,427)    $     (75,315)    $     (45,018)
                                                               ==============     =============     =============

Net loss per common share, basic and diluted
   As reported................................................ $        (1.13)    $       (1.14)    $       (0.70)
                                                               ==============     =============     =============
   Pro forma.................................................. $        (1.42)    $       (1.44)    $       (0.90)
                                                               ==============     =============     =============


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 and warrants 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 security 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, 2003 or 2002.

3.       RECENT ACCOUNTING PRONOUNCEMENTS

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 is
applicable to agreements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF 00-21 did not have a material impact on the Company's
financial statements.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
This statement amends SFAS No. 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 No. 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 has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
employee stock options. The additional disclosures required under SFAS No. 148
are effective for fiscal years ending after December 15, 2002, and have been
provided in Note 2.

In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51."
FIN 46 was revised in December 2003. It 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 applied immediately to variable interest entities
created after January 31, 2003, but was effective for the period ending December
31, 2003 for variable interest

                                      F-9


entities created before February 1, 2003. The Company adopted FIN 46 on December
31, 2003 and determined that the lessor under the synthetic lease, as discussed
in Note 9, is a variable interest entity as defined by FIN 46, and that the
Company absorbs a majority of the variable interest entity's expected losses.
Accordingly, the Company consolidated the assets of the variable interest
entity, which were comprised of property and improvements funded under the
synthetic lease. These assets had a carrying value of $54.8 million, net of
accumulated depreciation of $3.1 million on December 31, 2003. Such amounts are
included in property and equipment in the accompanying consolidated balance
sheet as of December 31, 2003. The Company also consolidated the variable
interest entity's debt of $52.3 million and non-controlling interests of $2.5
million, which amounts are included in long-term debt and other long-term
liabilities, respectively, in the accompanying consolidated balance sheet as of
December 31, 2003. Additionally, the Company recorded a cumulative effect of a
change in accounting principle equal to the accumulated depreciation of $3.1
million for the period from the date the buildings were placed in service under
the synthetic lease through December 31, 2003. These improvements will be
depreciated over their useful lives. Due to the Company's residual value
guarantee on the property, the non-recourse feature of the underlying debt, and
certain other provisions of the lease arrangement, the Company did not allocate
any of the variable interest entity's depreciation or interest expenses to the
non-controlling interest. The Company had previously accounted for its
involvement with the variable interest entity as an operating lease.

4.       RECLASSIFICATION

In the accompanying statement of cash flows for the year ended December 31,
2001, Lexicon has reclassified the amount of restricted cash from cash and cash
equivalents into a separate line item.

5.       INVESTMENTS

Investments at December 31, 2003 and 2002 were as follows:



                                                 ---------------------------------------------------------------
                                                                     AS OF DECEMBER 31, 2003
                                                 ---------------------------------------------------------------
                                                                      GROSS            GROSS
                                                   AMORTIZED       UNREALIZED       UNREALIZED       ESTIMATED
                                                     COST            GAINS            LOSSES         FAIR VALUE
                                                 -----------      -----------     ------------     -------------
                                                                         (IN THOUSANDS)
                                                                                       
Held-to-maturity:
  Certificates of deposit....................... $       561      $        --     $         --     $         561
  U.S. government agencies......................       3,500                2               --             3,502
  Corporate debt securities.....................      16,572               --              (13)           16,559
  Commercial paper..............................       1,490               --               (2)            1,488
                                                 -----------      -----------     ------------     -------------
     Total held-to-maturity investments......... $    22,123      $         2     $        (15)    $      22,110
                                                 ===========      ===========     ============     =============




                                                 ----------------------------------------------------------------
                                                                     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
                                                 =============    ============     ============     =============



                                      F-10


6.       PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2003 and 2002 are as follows:



                                                                          -------------------------------------------------
                                                                            ESTIMATED             AS OF DECEMBER 31,
                                                                           USEFUL LIVES    --------------------------------
                                                                             IN YEARS           2003              2002
                                                                          ---------------  ---------------    -------------
                                                                                                     (IN THOUSANDS)
                                                                                                     
             Computers and software................................             3-5        $     11,519       $     10,996
             Furniture and fixtures................................             5-7               7,676              8,595
             Laboratory equipment..................................             3-7              29,847             27,282
             Leasehold improvements................................            3-10              11,765             10,257
             Buildings.............................................           15-40              51,246                 --
             Land..................................................              --               3,564                 --
                                                                                           ------------       ------------
                Total property and equipment.......................                             115,617             57,130
             Less: Accumulated depreciation........................                             (31,941)           (19,768)
                                                                                           ------------       ------------
                 Net property and equipment........................                        $     83,676       $     37,362
                                                                                           ============       ============


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 allowance
should be provided.

The components of Lexicon's deferred tax assets (liabilities) at December 31,
2003 and 2002 are as follows:



                                                                              ---------------------------------
                                                                                      AS OF DECEMBER 31,
                                                                              ---------------------------------
                                                                                   2003                2002
                                                                              -------------       -------------
                                                                                        (IN THOUSANDS)
                                                                                            
            Deferred tax assets:
              Net operating loss carryforwards............................    $      46,130       $      39,887
              Research and development tax credits........................            8,105               7,113
              Stock-based compensation....................................            7,468               5,828
              Deferred revenue............................................           16,685               4,686
              Other.......................................................            1,628               1,230
                                                                              -------------       -------------
                   Total deferred tax assets..............................           80,016              58,744
            Deferred tax liabilities:
              Property and equipment......................................           (1,643)               (990)
              Other.......................................................              (59)               (138)
                                                                              -------------       -------------
                   Total deferred tax liabilities.........................           (1,702)             (1,128)
            Less: Valuation allowance.....................................          (78,314)            (57,616)
                                                                              -------------       -------------
                   Net deferred tax assets................................    $          --       $          --
                                                                              =============       =============


At December 31, 2003, Lexicon had net operating loss carryforwards of
approximately $131.8 million and research and development tax credit
carryforwards of approximately $8.1 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 2003,
the valuation allowance increased $20.7 million primarily due to the Company's
current year net loss, 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 was no change in the carrying amount of goodwill for the year
ended December 31, 2003. In accordance with SFAS No. 142, the goodwill balance
is not subject to amortization, but is tested at least annually for impairment
at the reporting unit level, which is the Company's single operating segment.
The Company performed an impairment test of goodwill on its annual impairment
assessment date. This test did not result in an impairment of goodwill.

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, 2003 was $1.2 million.
The estimated amortization expense for the next five years is as follows:




                                                   ----------------------------------
                                                     FOR THE YEAR ENDING DECEMBER 31
                                                   ----------------------------------
                                                           (IN THOUSANDS)
                                                
                        2004....................   $                 1,200
                        2005....................                     1,200
                        2006....................                       640
                        2007....................                        --
                        2008....................                        --


9.       DEBT OBLIGATIONS

Genentech Loan: 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 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
below.

Synthetic Lease Obligation: 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 1.16%, the Company's total lease
payments would be approximately $0.8 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 $54.8
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 purchase the properties would not
materially exceed the $54.8 million funded under the synthetic

                                      F-12


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, 2003 and
2002, the Company maintained restricted cash and investments of $57.0 million
and $57.2 million, respectively, to collateralize funding for property and
improvements under the synthetic lease of $54.8 million and $55.0 million.
Lexicon consolidated the lessor under its synthetic lease upon adoption of FIN
46. See Note 3, "Recent Accounting Pronouncements," for information on the
financial statement impact.

10.      COMMITMENTS AND CONTINGENCIES

Operating Lease Obligation: Lexicon's subsidiary leases laboratory and office
space in East Windsor and Hopewell, New Jersey under agreements which expire in
January 2004 and June 2013, respectively. Lexicon is the guarantor of the
obligations of its subsidiary under the Hopewell lease. The Company is required
to maintain restricted investments to collateralize the East Windsor and
Hopewell leases. As of December 31, 2003 and 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 $3.7 million, $2.8
million, and $0.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively. These amounts included rent expense related to the synthetic
lease. Lexicon consolidated the lessor under its synthetic lease upon adoption
of FIN 46 on December 31, 2003. Future payments under the synthetic lease
agreement will be included in interest expense rather than rent expense. The
table below includes non-cancelable future lease payments for the facilities in
New Jersey:



                                                                                                ---------------------
                                                                                                 FOR THE YEAR ENDING
                                                                                                     DECEMBER 31
                                                                                                ---------------------
                                                                                                   (IN THOUSANDS)
                                                                                             
                    2004....................................................................... $           2,196
                    2005.......................................................................             2,191
                    2006.......................................................................             2,248
                    2007.......................................................................             2,248
                    2008.......................................................................             2,309
                    Thereafter.................................................................            10,921
                                                                                                -----------------
                               Total........................................................... $          22,113
                                                                                                =================


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

Common Stock: In July 2003, Lexicon completed the public offering and sale of
10.0 million shares of its common stock at a price of $5.25 per share. In August
2003, the underwriters partially exercised their over-allotment option,
purchasing an additional 240,000 shares. The total net proceeds from the
offering was $50.1 million, after deducting underwriting discounts of $3.2
million and offering expenses of $0.4 million.

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.

                                      F-13


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, 2003, an aggregate of 15,000,000 shares of common stock had
been reserved for issuance, options to purchase 12,669,159 shares were
outstanding and 1,795,078 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 day following 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
following 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.

As of December 31, 2003, an aggregate of 600,000 shares of common stock had been
reserved for issuance, options to purchase 131,000 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.

                                      F-14


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, 2003, an aggregate of 122,649 shares of common stock had been
reserved for issuance, options to purchase 89,012 shares of common stock were
outstanding, options to purchase 10,689 shares of common stock had been
cancelled and 22,948 shares of common stock had been issued upon the exercise of
stock options issued under the Coelacanth Plan.

Stock-Based Compensation: SFAS No. 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 prior to our initial public offering. During the years
ended December 31, 2003, 2002 and 2001, the Company recognized $10.1 million,
$10.3 million and $10.7 million, respectively, in compensation expense relating
to these options. Additionally, during the years ended December 31, 2003 and
2002, the Company reversed approximately $79,000 and $612,000, 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 No. 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 No. 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 2003, 2002 and 2001:

         -        volatility factors of 92%, 100% and 109%, respectively;

         -        risk-free interest rates of 3.40%, 4.64%, and 5.03%,
                  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. The fair values of the issuances were estimated using the Black-Scholes
pricing model with the assumptions noted in the preceding paragraph. 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. The Company reversed
expense of $6,000 for the year ended December 31, 2003 for the decline in fair
value of options issued to non-employee consultants and recognized expense of
$79,000 and $109,000 in the years ended December 31, 2002 and 2001,
respectively.

If vesting continues in accordance with the outstanding individual stock
options, Lexicon expects to record amortization expense for deferred stock
compensation of $0.9 million in 2004.

                                      F-15


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, 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
                                                                                   ---------
                   Granted.............................................                1,897               4.24
                   Exercised...........................................                 (102)              2.34
                   Canceled............................................                 (278)              8.92
                                                                                   ---------
               Balance at December 31, 2003............................               12,889               6.12
                                                                                   =========
               Exercisable at December 31, 2003........................                9,345     $         5.73
                                                                                   =========


The weighted average fair values of options granted during the years ended
December 31, 2003, 2002 and 2001 were $3.52, $7.32 and $10.31, respectively. As
of December 31, 2003, 1,004,763 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, 2003:



- ---------------------------------------------------------------------------------------------------------------------
                                OPTIONS OUTSTANDING                                       OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------    ----------------------------------
                                             WEIGHTED AVERAGE
                                                REMAINING            WEIGHTED                               WEIGHTED
     RANGE OF          OUTSTANDING AS OF       CONTRACTUAL           AVERAGE       EXERCISABLE AS OF        AVERAGE
  EXERCISE PRICE       DECEMBER 31, 2003     LIFE (IN YEARS)      EXERCISE PRICE   DECEMBER 31, 2003    EXERCISE PRICE
- -------------------    -----------------    ----------------     --------------    -----------------    --------------
                        (IN THOUSANDS)                                              (IN THOUSANDS)
                                                                                         
    $0.0003 - $0.22                  886                 1.9     $        0.05                   886    $         0.05
        1.67 - 2.50                5,509                 5.3              2.41                 5,419              2.41
        3.16 - 4.70                1,534                 9.1              3.92                    44              4.18
        4.76 - 7.00                  633                 9.1              5.62                   145              5.75
       7.20 - 10.55                1,994                 8.0              9.34                 1,035              9.33
      10.87 - 16.00                1,715                 7.3             12.60                 1,268             12.55
      16.63 - 22.06                  401                 6.3             19.51                   362             19.51
      25.25 - 31.63                   35                 6.8             27.00                    28             27.12
      38.00 - 38.50                  182                 6.7             38.49                   158             38.49
                               ---------                                                    --------
                                  12,889                         $        6.12                 9,345    $         5.73
                               =========                                                    ========


Warrants

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. 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 9). The warrant was exercised in 2003 by way of a
cashless exercise, resulting in the issuance of a total of 117,784 shares of
common stock.

                                      F-16



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, 2003,
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, 2003 an aggregate of 12,905,654 shares of common stock were
reserved for issuance upon exercise of outstanding stock options and warrants
and 1,004,763 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 $637,000,
$645,000, and $332,000 in 2003, 2002 and 2001, 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 drug discovery alliances,
target validation collaborations for the development and, in some cases,
analysis of the physiological effects of genes altered in knockout mice,
technology licenses, subscriptions to its databases 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 target
validation 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 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 ending
July 2004, subject to the right of the parties to extend the term for up to
three additional one-year periods.

Bristol-Myers Squibb Company: Lexicon established an alliance with Bristol-Myers
Squibb in December 2003 to discover, develop and commercialize small molecule
drugs in the neuroscience field. Lexicon is contributing a number of drug
discovery programs at various stages of development. Lexicon will continue to
use its gene knockout technology to identify additional drug targets with
promise in the neuroscience field. For those targets that are selected for the
alliance, Lexicon and Bristol-Myers Squibb will work together, on an exclusive
basis, to identify, characterize and carry out the preclinical development of
small molecule drugs, and will share equally both in the costs and in the work
attributable to those efforts. As drugs resulting from the collaboration enter
clinical trials, Bristol-Myers Squibb will have the first option to assume full
responsibility for clinical development and commercialization. Lexicon received
an upfront payment of $36.0 million and is entitled to receive research funding
of $30.0 million in the initial three years of the agreement. Bristol-Myers
Squibb has the option to extend the discovery portion of the alliance for an
additional two years in exchange for further committed research funding

                                      F-17


of up to $50.0 million. Lexicon may receive additional cash payments for
exceeding specified research productivity levels. Lexicon will also receive
clinical and regulatory milestone payments for each drug target for which
Bristol-Myers Squibb develops a drug under the alliance. Lexicon will earn
royalties on sales of drugs commercialized by Bristol-Myers Squibb. The party
with responsibility for the clinical development and commercialization of drugs
resulting from the alliance will bear the costs of those efforts. Revenue
recognized under this agreement was $0.8 million for the year ended December 31,
2003.

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 target validation 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 of $9.0 million and funding under a $4.0 million loan in
2002. The terms of the loan are discussed in Note 9. In addition, Lexicon can
receive up to $24.0 million in performance payments for its work in the
collaboration as it is completed, of which $3.0 million has been received as of
December 31, 2003. Total revenue recognized under this agreement was $6.0
million and $0.1 million for the years ended December 31, 2003 and 2002,
respectively. 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 Corporation. Lexicon established a drug discovery alliance with Incyte in
June 2001 to discover novel therapeutic proteins using the Company's target
validation technologies in the discovery of the functions of secreted proteins
from Incyte's LifeSeq(R) Gold database. Lexicon receives research funding under
the agreement, $15.0 million of which has been received as of December 31, 2003.
Revenue recognized under this agreement was $5.0 million, $5.0 million and $2.5
million for the years ended December 31, 2003, 2002 and 2001, respectively.
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 will terminate in June 2004.

Revenues from drug discovery alliances are included in collaborative research
revenue in the accompanying consolidated statements of operations.

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 annual 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. Revenue recognized under this agreement was $5.0 million, $5.0
million and $4.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The agreement, as amended, has a term of five years, although
either party may terminate the agreement after four years.

Incyte Corporation. 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 annual access fees under this agreement, and is
entitled to receive milestone payments and royalties on products Incyte develops
using the Company's technology. Revenue recognized under this agreement was $5.0
million, $5.0 million and $2.5 million for the years ended December 31, 2003,
2002 and 2001, respectively. The agreement will terminate in June 2004.

                                      F-18



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 2003 and 2002.

(IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                        ---------------------------------------------------------
                                                                             QUARTER ENDED
                                                        ---------------------------------------------------------
                                                           MARCH 31      JUNE 30      SEPTEMBER 30   DECEMBER 31
                                                        ------------  -----------    ------------- --------------
                                                                              (UNAUDITED)
                                                                                       
2003

Revenues............................................    $     8,106    $    8,921    $    12,111   $     13,700
Loss from operations................................    $   (17,532)   $  (17,852)   $   (14,868)  $    (12,341)
Net loss before cumulative effect of a change
   in accounting principle..........................    $   (17,145)   $  (17,619)   $   (14,558)  $    (11,800)
Cumulative effect of a change in accounting principle            --            --             --         (3,076)
                                                        -----------   -----------    -----------   ------------
Net loss............................................    $   (17,145)   $  (17,619)   $   (14,558)  $    (14,876)
                                                        ===========    ==========    ===========   ============
Net loss per common share before cumulative effect
   of a change in accounting principle..............    $     (0.33)   $    (0.34)   $     (0.24)  $      (0.19)
Cumulative effect of a change in accounting principle            --            --             --          (0.05)
                                                        -----------   -----------    -----------   ------------
Net loss per common share, basic and diluted........    $     (0.33)  $     (0.34)   $     (0.24)  $      (0.24)
                                                        ===========   ===========    ===========   ============
Shares used in computing net loss per common share..    $    52,371   $    52,496    $    59,475   $     62,794

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-19





                EXHIBIT NO.                   DESCRIPTION
                -----------                   -----------
                          
                 *+10.14   --   Amended and Restated Collaboration and
                                License Agreement, dated November 19, 2003, with
                                Genentech, Inc.

                 *+10.15   --   Collaboration and License Agreement, dated
                                December 17, 2003, with Bristol-Myers Squibb
                                Company

                   *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)

                   *31.1   --   Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

                   *31.2   --   Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

                   *32.1   --   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.

EX-10.14

                                                                   EXHIBIT 10.14

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



                              AMENDED AND RESTATED

                       COLLABORATION AND LICENSE AGREEMENT

         This Amended and Restated Collaboration and License Agreement (the
"Agreement") is executed as of the 19 day of November, 2003 and 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"). The
Agreement amends and restates that certain Collaboration and License Agreement
between Genentech and Lexicon dated as of December 17, 2002 (the "Original
Agreement"). 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


1.1      "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 [**].

1.3      "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.

                                       2


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.

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

                                       3


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 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:

                                       4


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

         (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 Patents 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) Restricted Rights Project Patents and
Know-How, (e) 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 (f) that portion of any such Patent or Know-How which is
beyond the scope of the work performed by Lexicon for Projects other than
Pre-Existing Projects.

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.

                                       5


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.

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).

                                       6


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

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") (i) created or acquired by either Party during the course of and in
connection with this Agreement and (ii) which are based upon data and other
information reviewed by the Steering Committee related to a Project Gene or
Protein Candidate; provided in each case that Project Patents and Know How shall
not include (A) Lexicon Knock-Out Technology, (B) Genentech Gene Patents and
Know-How, (C) Lexicon Pre-Existing Patents and Know-How, (D) Restricted Rights
Project Patents and Know-How, (E) 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 (F) any
Patent or Know-How 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

                                       7


claiming such full-length human gene sequence and the Protein believed to be
produced by such gene.

1.47     "PROTEIN" means [**].

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     "RESTRICTED RIGHTS PROJECT" means a Project involving a Project Gene
[**].

1.53     "RESTRICTED RIGHTS PROJECT PATENTS AND KNOW-HOW" means all Patents
(also referred to herein as "Restricted Rights Project Patents") and Know How
(also referred to herein as "Restricted Rights Project 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 and in connection with this Agreement
and (ii) which are based upon data and other information reviewed by the
Steering Committee related to a Project Gene or Protein Candidate in connection
with a Restricted Rights Project; provided in each case that Restricted Rights
Project Patents and Know How shall not include (A) Lexicon Knock-Out Technology,
(B) Genentech Gene Patents and Know-How, (C) 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 (D) any Patent claims or Know-How arising from work performed not
in relation to this Agreement.

1.54     "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

                                       8


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).

1.55     "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.

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

1.57     "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 [**];

                                       9


         (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 [**] of all 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 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.

                                       10



                                   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 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

                                       11


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. [**] 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 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

                                       12


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) [**], 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; and (iii) [**]. Lexicon agrees to
use Commercially Reasonable Efforts to perform and complete such 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

                                       13


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.

         (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 [**]

                                       14


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      [**]


                                   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; provided,
however, that with regard to Restricted Rights Projects, nothing in this Section
will be deemed to grant Genentech rights beyond the scope of the licenses
granted to Genentech (or limit the rights of Lexicon, its collaborators or
licensees) with regard to such Restricted Rights Project.

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, Project Know-How and Restricted Rights 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.

                                       15


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 AND
RESTRICTED RIGHTS PROJECT 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 (i) an exclusive (even as to Lexicon),
world-wide right and license under the Lexicon Pre-Existing Patents and Know-How
and (ii), to the extent specified in the Parties' designation(s) of Restricted
Rights Project(s), an exclusive (even as to Lexicon) or non-exclusive,
world-wide right and license under the Restricted Rights Project Patents and
Know-How, in each case 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 AND RESTRICTED
RIGHTS PROJECT 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 and, to the extent specified in the Parties' designation(s) of
Restricted Rights Project(s), the Restricted Rights Project 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 (i) shall be
exclusive (even as to Lexicon) under the Lexicon Pre-Existing Patents and
Know-How with respect to products in the Field other than Small Molecule Drugs,
(ii) shall be exclusive (even as to Lexicon) or non-exclusive under the
Restricted Rights Project Patents and Know-How, to the extent specified in the
Parties' designation(s) of Restricted Rights Project(s), with respect to
products in the Field other than Small Molecule Drugs and (iii) 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 or Restricted Rights Project
Patents or

                                       16


Know-How may be granted to any Third Person in the absence of (x) 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 (y) 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 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      [**]

                                     17


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
Patents and Know-How and Restricted Rights Project Patents 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 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

                                       18


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. On the Effective Date, 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 [**] the 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 [**].

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.

                                       19


Thereafter, until the expiration of six (6) months 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:

         [**]

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

                                       20


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 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.

                                       21


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
the [**]. 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 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

                                       22


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 [**], is on-going or (ii) Lexicon has, in good
faith and through written notice to Genentech, disputed such calculation before
the expiration of such [**] 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"),

                                       23

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, Lexicon
Pre-Existing Patents and Know-How and Restricted Rights Project 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, LEXICON
PRE-EXISTING PATENTS AND RESTRICTED RIGHTS PROJECT PATENTS.

         (a)      Patentable Inventions. Lexicon shall be responsible, at its
sole discretion and expense, for filing, prosecuting, and maintaining Lexicon
Knock-Out Technology, Lexicon Pre-Existing Patents and Restricted Rights Project
Patents; provided that Genentech shall be responsible, at its sole discretion,
for filing, prosecuting, and maintaining Lexicon Pre-Existing Patents and
Restricted Rights Project Patents (to the

                                       24


extent exclusively licensed to Genentech) 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.

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

                                       25


         (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 and Restricted Rights Project Patents (to the
extent exclusively licensed to Genentech) 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
(i) Project Patents and (ii) Lexicon Pre-Existing Patents or Restricted Rights
Project 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 (i) Project Patents related to a specific Project or (ii)
Lexicon Pre-Existing Patents or Restricted Rights Project 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 (i) Project Patents and (ii)
Lexicon Pre-Existing Patents and Restricted Rights Project 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 (A) Project Patents
and (B) Lexicon Pre-Existing Patents and Restricted Rights Project 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 (i) Project Patents
related to a specific Project or (ii) Lexicon Pre-Existing Patents or Restricted
Rights Project 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

                                       26


such documents and perform such 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, and Restricted
Rights Project Patents. 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, (ii) Project Patents and
Lexicon Pre-Existing Patents involving infringement or alleged infringement of a
Small Molecule Drug, and (iii) Restricted Rights Project Patents (except to the
extent exclusively licensed to Genentech), 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


                                       27


the suit shall execute such legal papers necessary for such suit as may be
reasonably requested by the Party bringing suit.

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 and
Restricted Rights Project Patents 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) (A) Project Patents and Know-How and (B) Lexicon Pre-Existing
Patents and Know-How (except to the extent such infringement or alleged
infringement relates to the development of Small Molecule Drugs, which shall be
controlled by subsection (c) above) and Restricted Rights Project Patents and
Know-How (to the extent exclusively licensed to Genentech) related to Protein
Candidates, 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 (i) Project Patents and Know-How or (ii) Lexicon Pre-Existing Patents
and Know-How or Restricted Rights Project Patents and Know-How (to the extent
exclusively licensed to Genentech) 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

                                       28


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.

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

                                       29


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

9.2      AUTHORIZED DISCLOSURES OF CONFIDENTIAL INFORMATION.

         (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.

                                       30


         (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.

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.


                                       31


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 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;

                                       32


         (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, 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.

                                       33


                                   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

         (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

                                       34


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;

         (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.

                                       35


                                   ARTICLE 12

                                 INDEMNIFICATION

12.1     INDEMNIFICATION OBLIGATIONS.

         (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

                                       36


         (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.

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;

                                       37


         (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.

         (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.

                                       38


         (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 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:

                                       39


         (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.

         (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.

                                       40


         (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 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, including without limitation, the
Origianl Agreement, 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.

                                       41


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.

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.

                                       42


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.

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]

                                       43



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


                                       44



                                    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,


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:
                                                ----------------------------
Name:    Thomas T. Thomas                  Title:
                                                  --------------------------
Title:   Treasurer

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:
                                      ----------------------------------

EX-10.15

                                                                   EXHIBIT 10.15


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


================================================================================



                       COLLABORATION AND LICENSE AGREEMENT

                                     between

                          LEXICON GENETICS INCORPORATED

                                       and

                          BRISTOL-MYERS SQUIBB COMPANY



================================================================================


                       COLLABORATION AND LICENSE AGREEMENT

         THIS COLLABORATION AND LICENSE AGREEMENT (this "Agreement") is dated as
of December 17, 2003 (the "Effective Date") and is made by and between LEXICON
GENETICS INCORPORATED, a Delaware corporation ("Lexicon"), and BRISTOL-MYERS
SQUIBB COMPANY, a Delaware corporation ("BMS"). Lexicon and BMS are sometimes
referred to herein individually as a "party" and collectively as the "parties."

                                 R E C I T A L S

         WHEREAS, Lexicon and BMS are each in the business of discovering,
developing and commercializing pharmaceutical products; and

         WHEREAS, Lexicon is engaged in the identification and validation of
targets for use in the discovery of compounds potentially useful to prevent or
treat diseases and conditions of the central nervous system;

         WHEREAS, Lexicon and BMS are interested in collaborating in the
discovery, development and commercialization of compounds for use in the
prevention or treatment of such diseases and conditions;

         NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, the parties hereto mutually agree as follows:

                             ARTICLE 1. DEFINITIONS

         The terms in this Agreement with initial letters capitalized, whether
used in the singular or the plural, shall have the meaning set forth below or,
if not listed below, the meaning designated in places throughout this Agreement.

         1.1      "Affiliate" means any corporation, company, partnership, joint
venture and/or firm that controls, is controlled by or is under common control
with a party to this Agreement. For purposes hereof, "control" means (a) in the
case of corporate entities, direct or indirect ownership of more than fifty
percent (50%) of the stock or shares entitled to vote for the election of
directors; and (b) in the case of non-corporate entities, direct or indirect
ownership of more than fifty percent (50%) of the equity interest with the power
to direct the management and policies of such non-corporate entities.

         1.2      "Agreement" means this Collaboration and License Agreement,
including all Exhibits hereto.

         1.3      "Alliance Manager" has the meaning set forth in Section 3.12.

         1.4      "Annual Research Plan" means the plan to be developed by the
Joint Scientific Committee and approved by the Joint Management Committee for
each Contract Year, to be updated as necessary during each Contract Year,
setting forth, among other things, a master plan for the Research Program during
the Research Program Term and the matters described in Section 2.7 hereof.

         1.5      "Background Materials" means BMS Background Materials and
Lexicon Background Materials.

         1.6      "Background Technology" means BMS Background Technology and
Lexicon Background Technology.

                                       1


         1.7      "Back-up Compound" means a Program Compound acting through the
same Selected Target as a Development Candidate and designated by the Joint
Management Committee as a back-up for such Development Candidate, including,
without limitation, any Program Compound for which the Joint Management
Committee authorizes the conduct of preclinical work sufficient to support the
filing of an IND.

         1.8      "Blended Rate" means (a) the total amount of royalties (stated
in U.S. dollars) that would be payable in a Contract Year with respect to a
Product under Section 5.5.1 or 5.5.2, as applicable, [**] divided by (b) the
total Net Sales (stated in U.S. dollars) of such Product in that Contract Year,
expressed as a percentage.

         1.9      "BMS" means Bristol-Myers Squibb Company and its Affiliates.

         1.10     "BMS Background Materials" means any compounds, assays or
other materials that are (a) necessary or useful for the conduct of the Research
Program, (b) Controlled by BMS, (c) utilized in the Research Program (but only
to the extent so utilized) and (d) either in BMS's or any of its Affiliates'
possession as of the Effective Date or are discovered or acquired by BMS or any
of its Affiliates during the Research Program Term but outside of the conduct of
the Research Program. BMS Background Materials excludes Selected Targets and
Program Compounds.

         1.11     "BMS Background Technology" means any inventions, information,
methods, know-how, trade secrets or data that (a) are necessary or useful for
the performance of the Research Program, (b) are Controlled by BMS, (c) are
utilized in the Research Program (but only to the extent so utilized) and (d)
either are in BMS's or any of its Affiliates' possession as of the Effective
Date or are discovered or acquired by BMS or any of its Affiliates during the
Research Program Term but outside of the conduct of the Research Program.

         1.12     "BMS Development Compound" means any and all of the following:

                  (a)      a Development Candidate for a BMS Target that is so
         designated under Section 2.5 hereof; and

                  (b)      any Back-up Compound(s) designated for such
         Development Candidate; and

                  (c)      any other Small Molecule Compound that acts through
         the same BMS Target:

                           (i)      that is made in the course of performing
                  medicinal chemistry on or optimizing such Development
                  Candidate and Back-up Compound(s), or performing structure
                  activity relationship activities using such Development
                  Candidate, Back-up Compound(s) or other Program Compounds
                  active against such BMS Target; provided that such Small
                  Molecule Compound [**]; or

                           (ii)     that is [**]; and

                  (d)      any salts of any of the foregoing.

         1.13     "BMS Inactive Selected Target" has the meaning set forth in
Section 2.3.4.4.

         1.14     "BMS Product" means a pharmaceutical product containing a BMS
Development Compound as an active ingredient.

                                       2


         1.15     "BMS Target" means a Selected Target that is so designated
under Section 2.5 hereof.

         1.16     "CNS Field" means the prevention, palliation, control or
treatment in humans of (a) depression, schizophrenia, [**], (b) Alzheimer's
disease and other cognitive disorders, (c) [**] neurodegenerative disorders,
[**].

         1.17     "Compound Library Screening" means screening of compound
libraries to identify Small Molecule Compounds that are active against a
Selected Target using an assay that meets requirements (for example, with
respect to throughput) established by, or the use of which is otherwise approved
by, the Joint Scientific Committee. For purposes of this Agreement,
"commencement of Compound Library Screening" for a Selected Target means the
initiation of Compound Library Screening for such Selected Target, following
Joint Management Committee authorization, by either BMS or Lexicon.

         1.18     "Confidential Information" means any information and data
received by a party (the "Receiving Party") from the other party or its
Affiliates (the "Disclosing Party") in connection with this Agreement
(including, without limitation, all information disclosed by the parties under
Article 2 hereof and any research, testing, clinical, regulatory, marketing or
other scientific or business information, plans, or data pertaining to any
Product of the Disclosing Party). Notwithstanding the foregoing, Confidential
Information shall not include any part of such information or data that:

                  (a)      is or becomes part of the public domain other than by
         unauthorized acts of the Receiving Party or its Affiliates;

                  (b)      can be shown by written documents to have been
         already in the possession of the Receiving Party or its Affiliates
         prior to disclosure under this Agreement, provided such information or
         data was not obtained directly or indirectly from the Disclosing Party
         under an obligation of confidentiality;

                  (c)      can be shown by written documents to have been
         disclosed to the Receiving Party or its Affiliates by a Third Party,
         provided such information or data was not obtained directly or
         indirectly from the Disclosing Party under an obligation of
         confidentiality; or

                  (d)      can be shown by written documents to have been
         independently developed by the Receiving Party or its Affiliates
         without use, aid or application of Confidential Information of the
         Disclosing Party.

Specific Confidential Information of a Disclosing Party shall not be deemed to
come under the foregoing exceptions merely because it is embraced by more
general information that is or becomes part of the public domain, or is known
by, disclosed to or independently developed by the Receiving Party.

         1.19     "Contract Year" means (a) with respect to the first Contract
Year, the period beginning on the Effective Date and ending on December 31, 2004
(the "First Contract Year"), and (b) with respect to each subsequent Contract
Year, the twelve (12) month period beginning on the day following the end of the
First Contract Year and each succeeding twelve (12) month period thereafter
during the term of the Agreement (except that the last Contract Year shall end
on the effective date of any termination or expiration of this Agreement). Each
Contract Year (other than the First and last Contract Year) shall be divided
into four (4) "Contract Quarters" comprised of successive three (3) month
periods. In the First Contract Year, the first Contract Quarter shall begin on
the Effective Date and end on March 31, 2004, and in the last Contract Year, the
last Contract Quarter shall end on the effective date of any termination or
expiration of this Agreement.


                                       3


         1.20     "Control" or "Controlled" means, with respect to any (a)
material, document, item of information, method, data or other know-how or (b)
Patent Right or other intellectual property right, the possession (whether by
ownership or license, other than by a license granted pursuant to this
Agreement) by a party or its Affiliates of the ability to grant to the other
party access, ownership, a license and/or a sublicense as provided herein under
such item or right without violating the terms of any agreement or other
arrangement with any Third Party as of the time such party would first be
required hereunder to grant the other party such access, ownership, license or
sublicense.

         1.21     "Cover," "Covered" or "Covering" means, with respect to a
Patent Right, that, but for rights granted to a person or entity under such
Patent Right, the practice by such person or entity of an invention claimed in
such Patent Right would infringe a Valid Claim included in such Patent Right, or
in the case of a Patent Right that is a patent application, would infringe a
Valid Claim in such patent application if it were to issue as a patent.

         1.22     "Development Candidate" means a Program Compound that has been
selected by the Joint Management Committee for full preclinical development in
preparation for the commencement of a Phase 1 Trial and that has been designated
by the Joint Management Committee as a "Development Candidate" in accordance
with Section 3.4, including, without limitation, any Program Compound for which
the Joint Management Committee authorizes the commencement of a Phase 1 Trial.

         1.23     "Development Compound" means a BMS Development Compound or a
Lexicon Development Compound.

         1.24     "Diligent Efforts" means the carrying out of obligations or
tasks by a party in a sustained manner using good faith commercially reasonable
and diligent efforts, which efforts shall be consistent with the exercise of
prudent scientific and business judgment in accordance with the efforts such
party devotes to products or research, development or marketing projects of
similar scientific and commercial potential. Diligent Efforts requires that
[**].

         1.25     "Disclosing Party" has the meaning specified in Section 1.18
hereof.

         1.26     "Effective Date" means the date specified in the initial
paragraph of this Agreement.

         1.27     "Escrow Agent" means an independent Third Party consultant to
the parties with whom BMS shall deposit a list of Excluded Targets and who shall
notify Lexicon which, if any, Targets submitted in accordance with Section 2.2.4
are Excluded Targets.

         1.28     "Excluded Target" means a Target that [**]. A list of such
Excluded Targets shall be provided to the Escrow Agent who shall notify Lexicon
which, if any, Targets submitted in accordance with Section 2.2.4 are Excluded
Targets. [**].

         1.29     "First Commercial Sale" means the first sale for use or
consumption by the general public of a Product in a country after Regulatory
Approval has been obtained in such country. For clarity, First Commercial Sale
shall not include the sale of any Product for use in clinical trials or for
compassionate use prior to the approval of an NDA.

         1.30     "FDA" means the United States Food and Drug Administration, or
the successor thereto.

         1.31     "Full Phase Program" means a full medicinal chemistry and
supporting biology program involving the commitment of resources of the scope
and nature described in Exhibit A. For purposes of this Agreement, "commencement
of a Full Phase Program" means the authorization by the Joint

                                       4


Management Committee of the commencement of activities for the first Full Phase
Program for a given Selected Target.

         1.32     "FTE" means the equivalent of one employee working on a
dedicated full time basis for one year (consisting of [**] hours per year of
dedicated effort) performing scientific, technical or managerial work on or
directly related to the Target Discovery Program or the Research Program, as
applicable. [**].

         1.33     "Inactive Selected Target" has the meaning specified in
Section 2.3.4 hereof. Any BMS Inactive Selected Target or Lexicon Inactive
Selected Target shall remain an Inactive Selected Target unless and until it
becomes a BMS Target or Lexicon Target.

         1.34     "Indemnitee" has the meaning specified in Section 10.4 hereof.

         1.35     "Indemnitor" has the meaning specified in Section 10.4 hereof.

         1.36     "IND" means an Investigational New Drug application filed with
the U.S. Food and Drug Administration or a similar application for the clinical
testing of a Product in human subjects filed with a foreign regulatory
authority.

         1.37     "Joint Management Committee" has the meaning specified in
Section 3.1.1 hereof.

         1.38     "Joint Program Inventions" has the meaning specified in
Section 7.1.3.3 hereof.

         1.39     "Joint Research Project Team" has the meaning specified in
Section 3.1.2 hereof.

         1.40     "Joint Scientific Committee" has the meaning specified in
Section 3.1.2 hereof.

         1.41     "Laws" means all laws, statutes, rules, regulations,
ordinances and other pronouncements having the effect of law of any federal,
national, multinational, state, provincial, county, city or other political
subdivision, domestic or foreign.

         1.42     "Level 1 Phenotypic Analysis" means the analyses of the
phenotypes of Mutant Mice described in Exhibit B.

         1.43     "Level 2 Phenotypic Analysis" means any one or more of the
analyses of the phenotypes of Mutant Mice described in Exhibit C. The Level 2
Phenotypic Analysis for a given Target shall be as determined by the Joint
Scientific Committee as set forth in Section 3.5.

         1.44     "Lexicon" means Lexicon Genetics Incorporated and its
Affiliates.

         1.45     "Lexicon Background Materials" means any compounds, assays or
other materials that are (a) necessary or useful for the conduct of the Research
Program, (b) Controlled by Lexicon, (c) utilized in the Research Program (but
only to the extent so utilized) and (d) either in Lexicon's or any of its
Affiliates' possession as of the Effective Date or are discovered or acquired by
Lexicon or any of its Affiliates during the Research Program Term but outside of
the conduct of the Research Program. Lexicon Background Materials excludes
Selected Targets and Program Compounds.

         1.46     "Lexicon Background Technology" means any inventions,
information, methods, know-how, trade secrets or data that (a) are necessary or
useful for the performance of the Research Program, (b) are Controlled by
Lexicon, (c) are utilized in the Research Program (but only to the extent so
utilized)

                                       5


and (d) either are in Lexicon's or any of its Affiliates' possession as of the
Effective Date or are discovered or acquired by Lexicon or any of its Affiliates
during the Research Program Term but outside of the conduct of the Research
Program.

         1.47     "Lexicon Development Compound" means any and all of the
following:

                  (a)      a Development Candidate for a Lexicon Target that is
         so designated under Section 2.5 hereof; and

                  (b)      any Back-up Compound(s) designated for such
         Development Candidate; and

                  (c)      any other Small Molecule Compound that acts through
         the same Lexicon Target:

                           (i)      that is made in the course of performing
                  medicinal chemistry on or optimizing such Development
                  Candidate and Back-up Compound(s), or performing structure
                  activity relationship activities using such Development
                  Candidate, Back-up Compound(s) or other Program Compounds
                  active against such Lexicon Target; provided that such Small
                  Molecule Compound [**]; or

                           (ii)     that is [**]; and

                  (d)      any salts of any of the foregoing.

         1.48     "Lexicon Inactive Selected Target" has the meaning set forth
in Section 2.3.4.4.

         1.49     "Lexicon Product" means a pharmaceutical product containing a
Lexicon Development Compound as an active ingredient.

         1.50     "Lexicon Target" means a Selected Target that is so designated
under Section 2.5 hereof.


         1.51     "LexVision Agreement" means the LexVision Database and
Collaboration Agreement dated September 26, 2000 between Lexicon and BMS, as
amended.

         1.52     "LG617 Compound" means a Small Molecule Compound acting
through the LG617 Target.

         1.53     "LG617 License" has the meaning specified in Section 4.4
hereof.

         1.54     "LG617 Negotiation Period" has the meaning specified in
Section 4.4 hereof.

         1.55     "LG617 Option Period" has the meaning specified in Section 4.4
hereof.


         1.56     "LG617 Target" means the Target designated by Lexicon as
LG617.


         1.57     "Listed Target" means [**].

         1.58     "MAA Approval" means the final marketing authorization
approval, including full marketing, pricing and reimbursement approval, for the
applicable Product, in [**].

                                       6


         1.59     "MAA Filing" means the filing of a marketing authorization
application or other application for marketing approval for the applicable
Product filed (a) in [**] or (b) in the European Medicines Evaluation Agency
under the centralized European procedure.

         1.60     "Mid-Phase Program" means a mid-phase medicinal chemistry and
supporting biology program involving the commitment of resources of the scope
and nature described in Exhibit D.

         1.61     "Mutant Mouse" means mouse cell or mouse containing a selected
mutation in the murine ortholog of a Target that is made or produced by Lexicon.
A "line of Mutant Mice" means Mutant Mice having the same selected mutation.

         1.62     "NDA" means a New Drug Application filed with the FDA required
for marketing approval for the applicable Product in the U.S.

         1.63     "NDA Approval" means the final approval of an NDA by the FDA
for the applicable Product in the U.S.

         1.64     "NDA Filing" means the acceptance by the FDA of the filing of
an NDA for the applicable Product.

         1.65     "Net Sales" means, with respect to a Product, the gross amount
invoiced by BMS, Lexicon, Sublicensees of BMS or Lexicon, and their respective
Affiliates for sales of such Product to customers which are not Affiliates (or
which are Affiliates but are end users of such Product), less:

         (a)      trade, quantity and cash discounts actually allowed;

         (b)      discounts, refunds, rebates, chargebacks, retroactive price
         adjustments, billing errors and any other allowances (including,
         without limitation, government-mandated and managed health
         care-negotiated rebates) actually granted which effectively reduce the
         net selling price;

         (c)      product returns credits and allowances actually granted;

         (d)      any tax imposed on the production, sale, delivery or use of
         the product (excluding federal, state or local taxes based on income);

         (e)      freight, postage, shipping, customs duties, excises, tariffs,
         surcharges, other governmental charges (excluding federal, state or
         local taxes based on income) and insurance charges actually allowed or
         paid for delivery of Products;

         (f)      payments or rebates paid with respect to such Product in
         connection with state or federal Medicare, Medicaid or similar programs
         in the United States or in connection with similar programs in other
         countries in which there are sales; and

         (g)      amounts repaid, credited or written off by reason of
         uncollectible debt, and amounts written off on account of factoring of
         receivables to the extent consistent with the selling party's normal
         business practices.

Such amounts shall be determined from the books and records of BMS, Lexicon,
Sublicensees of BMS or Lexicon, and their respective Affiliates, as the case may
be, maintained in accordance with U.S. generally accepted accounting principles,
consistently applied.

                                       7


         In the event the Product is sold as part of a Combination Product (as
defined below), the Net Sales from the Combination Product, for the purposes of
determining royalty payments, will be determined by multiplying the actual Net
Sales of the Combination Product by the fraction A/(A+B) where A is the average
sale price of the Product when sold separately in finished form and B is the
total average sale price of the other active ingredient or ingredients in the
Combination Product sold separately in finished form.

         In the event that the average sales price of both the Product and the
other active compounds or ingredients in the Combination Product cannot be
determined, the adjusted Net Sales of the Combination Product for the purpose of
determining royalties shall be negotiated by the parties in good faith and in an
equitable manner consistent with the intent of this Agreement.

         The Net Sales price for a Combination Product in a given country will
be calculated once each Contract Year and such price will be used during all
applicable royalty reporting periods for the entire Contract Year for such
country, absent extraordinary conditions or events. When determining the average
sale price of a Product or the other active compounds or ingredients in the
Combination Product, the average sale price will be calculated using data
arising from the twelve (12) months preceding the calculation of the Net Sales
price for the Combination Product. As used above, the term "Combination Product"
means any Product sold in conjunction with any other active component(s)
(whether packaged together or in the same therapeutic formulation).

         If BMS, Lexicon, Sublicensees of BMS or Lexicon, or any of their
respective Affiliates sells any Product to a customer which also purchases other
products or services from such seller or any of its Affiliates in a bundled,
combination or capitated transaction (a "Bundled Transaction"), and such seller
discounts the sales price of the Product to a greater degree than such seller or
its Affiliates generally discount the price of its other products to such
customer, then the aggregate amount received with respect to such Bundled
Transaction shall be allocated to Net Sales pursuant to the formula set forth in
Exhibit E hereto. For purposes of the foregoing, "discounting" includes
establishing the list price at lower than the seller's normal pricing level.

         Free samples of Product and/or the disposition of Product for, or the
use of Product in, pre-clinical or clinical (Phase 1 - 3) trials or other
market-focused (Phase 4) trials in which Product is provided to patients without
any payment shall not result in any Net Sales.

         1.66     "Patent Prosecution" has the meaning specified in Section
7.2.1 hereof.

         1.67     "Patent Rights" means all existing patents and patent
applications and all patent applications hereafter filed and patents hereafter
issued, including, without limitation, any continuations, continuations-in-part,
divisions, provisionals or any substitute applications, any patent issued with
respect to any such patent applications, any reissue, reexamination, renewal or
extension (including any supplemental protection certificate) of any such
patent, and any confirmation patent or registration patent or patent of addition
based on any such patent, and all foreign counterparts of any of the foregoing.

         1.68     "Phase 1 Trial" shall mean a human clinical trial [**] that is
intended to initially evaluate the safety, pharmacokinetic and/or
pharmacological effect of a Product in subjects in accordance with or otherwise
in satisfaction of the requirements of 21 CFR 312.21(a). For purposes of this
Agreement, "commencement of a Phase 1 Trial" for a Product shall mean the first
dosing of such Product into a human patient in a Phase 1 Trial.

         1.69     "Phase 2 Trial" means a human clinical trial [**] that is
intended to initially evaluate the dosing and effectiveness of a Product for a
particular indication or indications in patients with the disease

                                       8


or indication under study in accordance with or otherwise in satisfaction of the
requirements of 21 CFR 312.21(b). For purposes of this Agreement, "commencement
of a Phase 2 Trial" for a Product shall mean the first dosing of such Product
into a human patient in a Phase 2 Trial.

         1.70     "Phase 3 Trial" means a pivotal human clinical trial [**] the
results of which could be used to establish safety and efficacy of a Product as
a basis for an NDA in accordance with or otherwise in satisfaction of the
requirements of 21 CFR 312.21(c). For purposes of this Agreement, "commencement
of a Phase 3 Trial" for a Product shall mean the first dosing of such Product
into a human patient in a Phase 3 Trial.

         1.71     "Post Opt-out Product" has the meaning set forth in Section
2.5.3.3.


         1.72     "Pre-existing Obligations" means:

                  (a)      [**]; and

                  (b)      [**].

         1.73     "Product" means a BMS Product or a Lexicon Product.

         1.74     "Product Licensee" means (a) with respect to a BMS Product,
BMS, and (b) with respect to a Lexicon Product, Lexicon.

         1.75     "Product Licensor" means (a) with respect to a BMS Product,
Lexicon, and (b) with respect to a Lexicon Product, BMS.

         1.76     "Program Committee" means the Joint Management Committee or
the Joint Scientific Committee.

         1.77     "Program Compound" means a Small Molecule Compound that:

                  (a)      (i) is selected by the Joint Scientific Committee for
                  optimization, characterization and/or preclinical evaluation
                  in the conduct of the Research Program,

                           (ii)     is Controlled by a party,

                           (iii) either is in a party's or any of its
                  Affiliates' possession as of the Effective Date or is
                  discovered or acquired by either or both parties or any of
                  their respective Affiliates during the Research Program Term
                  but outside the conduct of the Research Program, and

                           (iv)     inhibits, agonizes or otherwise modulates
                  (i.e., acts through) a Selected Target; or

                  (b)      is first [**] in the conduct of the Research Program;
         or

                  (c)      is [**]; or

                  (d)      is otherwise designated a Program Compound by the
         Joint Management Committee;

                                       9



provided, however, that in no event shall [**] become a Program Compound unless
such designation is affirmatively agreed to by the Joint Management Committee.

         1.78     "Program Director" has the meaning specified in Section 3.2
hereof.

         1.79     "Program Intellectual Property" means Program Patent Rights
and any other proprietary rights in Program Material and Program Technology.

         1.80     "Program Invention" has the meaning specified in Section
7.1.3.3 hereof.

         1.81     "Program Material" means (a) any Program Compounds and (b) any
material first identified or discovered in the conduct of the Research Program.

         1.82     "Program Patent Rights" means any Patent Rights that are
Controlled by one or both parties and that Cover any Program Technology or
Program Materials. For clarification, such Program Patent Rights include the
entire scope of all of the claims contained in such Patent Rights.

         1.83     "Program Technology" means any invention, information,
methods, know-how, trade secrets or data that (a) is Controlled by a party or
jointly by the parties and (b) either (i) relates to the use in the CNS Field of
Small Molecule Compounds acting through a Selected Target, or the use in the CNS
Field of a Selected Target to identify Small Molecule Compounds acting through
such Selected Target, or (ii) is first identified or discovered in the conduct
of the Research Program. [**]. Program Technology excludes any invention,
information, methods, know-how, trade secrets or data with respect to [**], or
the [**] acting through such Selected Target, in each case that is first
identified or discovered by a party outside of the conduct of the Research
Program; provided, however, that, [**]. In addition, Program Technology excludes
Program Materials.

         1.84     "Proposed Target" means a Target proposed for designation as a
Selected Target in accordance with Section 2.3.1 hereof

         1.85     "Receiving Party" has the meaning specified in Section 1.18
hereof.

         1.86     "Regulatory Approval" means any and all approvals (including
any applicable governmental price and reimbursement approvals), licenses,
registrations, or authorizations of any federal, national, multinational, state,
provincial or local regulatory agency, department bureau or other governmental
entity that are necessary for the manufacture, use, storage, import, transport,
promotion, marketing and sale of a Product in a country or group of countries.

         1.87     "Released Target" means [**] or a Target designated as a
Released Target in accordance with Section 2.3.2 hereof.

         1.88     "Research Program" has the meaning specified in Section 2.1.1
hereof.

         1.89     "Research Program Activities" has the meaning specified in
Section 2.1.1 hereof.

         1.90     "Research Program Term" has the meaning specified in Section
2.1.2 hereof.

         1.91     "Research Program Costs" means the FTE costs and out-of-pocket
expenditures that are incurred after the Effective Date by a party in performing
activities approved by the Joint Management Committee in support of the Research
Program, for purposes of which the cost of an FTE shall be [**] per

                                       10


FTE per year. Research Program Costs shall not include [**]. In addition,
Research Program Costs shall not include [**].

         1.92     [**]

         1.93     "Reviewing Party" has the meaning specified in Section 8.4
hereof.


         1.94     "Selected Target" means any Target that is selected for
research by the Joint Management Committee in accordance with Section 2.3.2
hereof.

         1.95     "Selected Target Inventions" has the meaning specified in
Section 7.1.3.2 hereof.


         1.96     "Small Molecule Compound" means a chemical compound [**]. For
clarity, Small Molecule Compound specifically excludes any compound that
consists of or incorporates as an active ingredient [**] (a) a protein, (b) an
antibody or any fragment thereof, (c) an antisense product or (d) an
oligonucleotide.

         1.97     "Sole Program Inventions" has the meaning specified in Section
7.1.3.3 hereof.


         1.98     "Sublicensee" means (a) in the case of a BMS Product, any
Third Party which is licensed by BMS to market and sell such BMS Product, and
(b) in the case of a Lexicon Product, any Third Party which is licensed by
Lexicon to market and sell such Lexicon Product.

         1.99     "Submitting Party" has the meaning specified in Section 8.4
hereof.


         1.100    "Target" means [**]. Each Target shall be identified by [**].


         1.101    "Target Discovery Program" has the meaning specified in
Section 2.1.1 hereof.


         1.102    "Target Discovery Program Term" has the meaning specified in
Section 2.2.2 hereof.

         1.103    "Territory" means all countries and jurisdictions throughout
the world.


         1.104    "Third Party" means any person or entity other than Lexicon,
BMS and their respective Affiliates.

         1.105    "Third Party Opportunity" has the meaning specified in Section
2.11 hereof.

         1.106    "Valid Claim" means either (a) a claim of an issued and
unexpired patent which has not been held permanently revoked, unenforceable or
invalid by a decision of a court or other governmental agency of competent
jurisdiction, unappealable or unappealed within the time allowed for appeal and
that is not admitted to be invalid or unenforceable through reissue, disclaimer
or otherwise, or (b) a claim of a [**], provided, however, that (x) [**] and (y)
[**].

                          ARTICLE 2. RESEARCH PROGRAM

2.1      General.

         2.1.1    Objectives. The parties intend to carry out a research program
(the "Research Program") in which Lexicon and BMS will collaborate to identify,
characterize and carry out the preclinical development of Small Molecule
Compounds that act through Selected Targets for use in the CNS Field, consistent
with the objectives set forth in and the resources allocated to such

                                       11


activities in the then-current Annual Research Plan ("Research Program
Activities"). It is intended that the Research Program will be conducted as a
unified collaborative effort with activities by the parties carried out
primarily at each party's respective facilities, and this intent shall be
reflected in the Annual Research Plans. It is further intended that each party
shall contribute to fifty (50%) of the Research Program Costs, and the Annual
Research Plans will be consistent with and provide for such equal contribution.
In support of the Research Program, Lexicon will continue its efforts, using its
technology for the generation and analysis of the phenotypes of Mutant Mice, to
identify and validate Targets with potential utility in the CNS Field (the
"Target Discovery Program").

         2.1.2    Research Program Term. The Research Program shall commence on
the Effective Date and continue during the Target Discovery Program Term and
thereafter until all Selected Targets have become BMS Targets, Lexicon Targets
or Inactive Selected Targets and thereafter for so long as the parties continue
to conduct Research Program Activities with respect to any BMS Targets or
Lexicon Targets (the "Research Program Term").

2.2      Target Discovery Program.

         2.2.1    Generation and Analysis of Mutant Mice. In the Target
Discovery Program, Lexicon shall complete (a) the development and Level 1
Phenotypic Analysis of [**] lines of Mutant Mice and (b) Level 2 Phenotypic
Analysis of such lines of Mutant Mice, from the first [**] lines of Mutant Mice
for which Level 1 Phenotypic Analysis was completed, that displayed a phenotype
suggestive, as determined by [**], of the potential utility of the corresponding
Target in the CNS Field. [**]. Lexicon shall use Diligent Efforts to complete
such work by the end of the third Contract Year of the Research Term and, if
necessary, shall continue to use Diligent Efforts thereafter until such work is
complete, [**]. The Target Discovery Program Term shall continue until such work
is complete.

         2.2.2    Target Discovery Program Term. The Target Discovery Program
shall continue until the end of the third Contract Year of the Research Program
Term (and thereafter until the work set forth in Section 2.2.1 is completed)
(the "Target Discovery Program Term"); provided that BMS shall have the option
to extend the Target Discovery Program Term for an additional two Contract Years
(which two-year period may be further extended as set forth below) on the terms
set forth below:

                  (a)      BMS may extend the Target Discovery Program to
         include the completion by Lexicon in the Target Discovery Program of
         (i) the development and Level 1 Phenotypic Analysis of [**] lines of
         Mutant Mice (to the extent not already completed by the end of the
         third Contract Year of the Research Program Term) and (ii) Level 2
         Phenotypic Analysis of such lines of Mutant Mice, from such [**] lines
         of Mutant Mice, that displayed a phenotype suggestive, as determined by
         [**], of the potential utility of the corresponding Target in the CNS
         Field. Lexicon shall use Diligent Efforts to complete such work by the
         end of the fifth Contract Year of the Research Term and, if necessary,
         shall continue to use Diligent Efforts thereafter until such work is
         complete, [**]. The Target Discovery Program Term shall continue until
         such work is complete.

                  (b)      BMS may extend the Target Discovery Program to
         include the completion by Lexicon in the Target Discovery Program of
         (i) the development and Level 1 Phenotypic Analysis of [**] lines of
         Mutant Mice and (ii) Level 2 Phenotypic Analysis of such lines of
         Mutant Mice, from such [**] lines of Mutant Mice, that

                                       12


         displayed a phenotype suggestive, as determined by [**], of the
         potential utility of the corresponding Target in the CNS Field. Lexicon
         shall use Diligent Efforts to complete such work by the end of the
         fifth Contract Year of the Research Term and, if necessary, shall
         continue to use Diligent Efforts thereafter until such work is
         complete, [**]. The Target Discovery Program Term shall continue until
         such work is complete.

BMS may exercise the foregoing option by delivery to Lexicon of written notice
of such exercise (specifying the subsection above under which such option is
being exercised) no fewer than [**] days before the end of the third Contract
Year of the Research Program Term.

         2.2.3    Reporting and Oversight of Target Discovery Program Progress.
Lexicon shall keep the Joint Scientific Committee fully informed of the progress
of its activities under this Section 2.2. At a minimum, within [**] days
following [**] during the Target Discovery Program Term, Lexicon shall prepare,
and provide to the Joint Scientific Committee, a reasonably detailed written
summary report which shall describe (a) the work performed by Lexicon during the
preceding [**], including, without limitation, the status of Lexicon's
development of Mutant Mice and the conduct of Level 1 Phenotypic Analysis and
Level 2 Phenotypic Analysis (or only Level 1 Phenotypic Analysis if Level 2
Phenotypic Analysis has not been performed) of such Mutant Mice, and (b)
identify phenotypes identified through such Level 1 Phenotypic Analysis and
Level 2 Phenotypic Analysis that are suggestive, in Lexicon's good faith
scientific judgment, of the potential utility of the corresponding Targets in
the CNS Field. [**].

         2.2.4    Disclosure of Target Identity. Prior to first disclosing to
BMS the identity of any Target (by sequence or otherwise in a manner that would
reveal the identity of the Target), Lexicon shall submit the identity of the
Target to the Escrow Agent, who will notify Lexicon whether such Target matches
any Excluded Target. [**]. In the event a Target matches an Excluded Target, as
determined by the Escrow Agent, Lexicon shall promptly notify BMS of such fact
and, if requested by BMS within [**] days thereafter, shall provide BMS with the
phenotypic data relating to the corresponding line of Mutant Mice and such
additional information with respect to any Target (without disclosing the
identity of such Target) that is [**]. In such event, BMS shall have the right,
within [**] days after receiving such information, to submit to the Escrow Agent
a second list of Excluded Targets, in which case the Escrow Agent shall
determine whether the Target in question matches any Target on the second list
of Excluded Targets. If the Target in question does not match any Target on the
second list of Excluded Targets, the Escrow Agent shall so notify Lexicon and
BMS, and such Target shall not be considered an Excluded Target and may be
considered for proposal as a Proposed Target. BMS shall not be entitled to
designate a Target as an Excluded Target following Lexicon's disclosure to BMS
of the identity of such Target in accordance with this Section 2.2.4. The
parties may mutually agree in writing to redesignate any Excluded Target as a
non-Excluded Target that may be considered for proposal as a Proposed Target.

         2.2.5    [**].

2.3      Target Selection.

         2.3.1    Proposal of Targets. Following Lexicon's completion of Level 2
Phenotypic Analysis of a line of Mutant Mice corresponding to a Target [**], BMS
and Lexicon shall each have the right to propose such Target for inclusion in
the Research Program as a Selected Target. Within [**] following the proposal by
either party that such Proposed Target be considered for designation as a
Selected Target [**], BMS and Lexicon shall provide the Joint Scientific
Committee with the following information:

                                       13


                  (a)      all relevant scientific data in BMS's possession (and
         which BMS has the right to disclose to Lexicon) and all relevant
         scientific data in Lexicon's possession (and which Lexicon has the
         right to disclose to BMS) relating specifically to such Proposed
         Target, including, without limitation, any bioinformatics and
         expression analyses conducted by BMS or Lexicon with respect to such
         Proposed Target, and any phenotypic data with respect to mice
         (including, without limitation, Mutant Mice) with a mutation in the
         murine ortholog of such Proposed Target;

                  (b)      the results of genomic analysis and druggability
         assessment with respect to such Proposed Target by BMS and/or Lexicon;

                  (c)      [**]; and

                  (d)      [**].

         2.3.2    Designation of Proposed Targets as Selected Targets or
Released Targets. Within [**] following receipt by the Joint Scientific
Committee of a complete package of all of the information set forth in Section
2.3.1 for a Proposed Target, the Joint Scientific Committee shall make a
recommendation to the Joint Management Committee as to whether to designate such
Proposed Target as a Selected Target or a Released Target. [**] In the event the
members of the Joint Management Committee are unable to reach agreement by
consensus regarding such designation within [**] following its receipt of the
Joint Scientific Committee recommendation, [**].

         2.3.3    [**].

         2.3.4    Inactive Selected Targets.

                  2.3.4.1  A Selected Target shall become an "Inactive Selected
         Target" upon the occurrence of any of the following: (a) at such time
         that there has been no material activity by either party with respect
         to studies to further evaluate the utility of such Selected Target or
         the development of assays or the discovery or development of Program
         Compounds acting through such Selected Target for a period of [**], and
         [**]; (b) upon the election of a party that does not wish to proceed
         with the discovery or development of Program Compounds acting through a
         Selected Target, when the other party does wish to proceed, such that
         such other party could proceed with the discovery or development of
         Program Compounds acting through such Inactive Selected Target, without
         the participation of the party making such election [**]; or (c) upon
         the election of the Joint Management Committee, in order to equalize
         each party's participation in the Research Program (measured by
         Research Program Costs), such that one party could proceed with the
         discovery or development of Program Compounds acting through such
         Inactive Selected Target, without the participation of the other party.

                  2.3.4.2  The Joint Management Committee shall determine how
         the parties shall proceed with respect to the Inactive Selected Target;
         provided that, in the event that one party desires to proceed with the
         discovery or development of Program Compounds acting through such
         Inactive Selected Target, and the other party does not wish to proceed
         with such discovery and development efforts in the Research Program (or
         if one party has been given the opportunity to pursue the discovery or
         development of Program Compounds acting through such Inactive Selected
         Target under Section 2.3.4.1(b) or (c) above), such party may elect to
         proceed with such discovery or development for its own

                                       14


         account (using Diligent Efforts), without participation of the other
         party. In such case, (a) the other party shall reasonably cooperate
         with the party electing to proceed with the discovery and development
         of Program Compounds acting through such Inactive Selected Target, at
         the developing party's expense, in transitioning such activities to
         such developing party (including, without limitation, the transfer of
         relevant Program Material) and (b) upon the commencement of a Phase 1
         Trial for a Program Compound acting through such Inactive Selected
         Target (and notwithstanding anything to the contrary in Section 2.5),
         such Inactive Selected Target shall then be designated as and treated
         as a BMS Target or Lexicon Target (depending on the party that proceeds
         with such discovery and development) for all purposes, except that the
         milestone payments and royalties payable with respect to BMS Products
         (under Sections 5.4.1 and 5.5.1) or Lexicon Products (under Sections
         5.4.2 and 5.5.2), as the case may be, shall be [**] of those otherwise
         payable. Prior to the commencement of a Phase 1 Trial for a Product
         acting through an Inactive Selected Target, such Inactive Selected
         Target shall remain designated as an Inactive Selected Target.

                  2.3.4.3  If neither party elects to proceed with such
         discovery and development of Program Compounds acting through such
         Inactive Selected Target for its own account, [**].

                  2.3.4.4  An Inactive Selected Target for which BMS proceeds
         with the discovery and development of Program Compounds acting through
         such Inactive Selected Target, without the participation of Lexicon, as
         set forth above, shall be designated as a "BMS Inactive Selected
         Target." An Inactive Selected Target for which Lexicon proceeds with
         the discovery and development of Program Compounds acting through such
         Inactive Selected Target, without the participation of BMS, as set
         forth above, shall be designated as a "Lexicon Inactive Selected
         Target."

2.4      Conduct of Research Program.

         2.4.1    Scope. Following the designation of a Selected Target, the
parties will use Diligent Efforts, under the direction of the Joint Management
Committee and Joint Scientific Committee, to carry out the following principal
activities with respect to the Selected Target: (a) to carry out studies to
further evaluate the biology and the utility of the Selected Target ([**]), (b)
to develop assays for such Selected Target amenable to Compound Library
Screening, (c) to conduct Compound Library Screening against such Selected
Target, (d) to carry out a Mid-Phase Program to develop lead compounds suitable
to chemically recapitulate the phenotype seen in the Mutant Mice for the
Selected Target, (e) to carry out a follow-up Full Phase Program with the
objective of identifying Program Compounds meeting the criteria required for
designation as Development Candidates that are suitable for further development,
and (f) to carry out preclinical work on selected Development Candidates and
Back-up Compounds in preparation for Phase 1 Trials. The parties will carry out
other specific activities in support of these principal activities.

         2.4.2    Efforts. The Joint Management Committee shall adopt project
progression guidelines, including criteria for the selection of Program
Compounds, Development Candidates and Back-up Compounds for the Research
Program. [**]. The parties shall conduct the Research Program in good scientific
manner in accordance with such project progression guidelines and in compliance
with applicable Laws. Each party shall use Diligent Efforts to conduct the
activities of the Research Program that are assigned to it in the
then-applicable Annual Research Plan, and each shall devote sufficient resources
to timely perform such respective activities. While the parties acknowledge and
agree that neither party guarantees the success of the Research Program

                                       15


or any individual task undertaken thereunder, each party agrees that it will
perform the activities assigned to it under the Research Program in a
professional manner in accordance with the highest industry standards.

         2.4.3    Resources. Over the course of the Research Program, tasks
under the Research Program will be allocated between the parties with the goal
that each party's participation in the Research Program (based on FTE
utilization and out-of-pocket expenditures) and Research Program Costs will be
substantially equal. Particular tasks and responsibilities shall be assigned in
a manner consistent with each party's respective capabilities, capacity and
expertise. For purposes of this Agreement, "out-of-pocket expenditures"
includes, but is not limited to, the cost of subcontractors related to the
Research Program, but specifically excludes the cost of laboratory supplies,
laboratory space and capital equipment. Either party may at its sole discretion
reduce its required contribution to the Research Program Costs by designating
one or more Selected Targets as Inactive Selected Targets that may be pursued by
the other party as contemplated in Section 2.3.4.

         2.4.4    FTE Levels. The parties anticipate that the combined total
personnel the parties will commit to the Research Program will start at an
average of [**] FTEs for the First Contract Year and will escalate to an average
of [**] FTEs for the Second Contract Year, [**] FTEs in the Third Contract Year
and [**] FTEs for the Fourth Contract Year (i.e., these are the expected number
of FTEs to be included in the Research Program Costs). For clarification, the
number of FTEs referenced in the previous sentence shall not include Lexicon
FTEs working on the Target Discovery Program, except as set forth in Section
2.2.5. Each party agrees in good faith to expedite the hiring and utility of
such FTEs as early in the applicable Contract Year as possible. In the event
that the Research Program generates more projects that qualify for lead
optimization than are contemplated by the foregoing resource commitment, the
parties agree to discuss in good faith a possible increase in the number of FTEs
devoted to the Research Program, and may discuss changes in the allocation of
Research Program Costs; provided that any such increase in the number of FTEs or
change in the allocation of Research Program Costs shall be subject to the
mutual agreement of the parties. The Annual Research Plans shall set forth
specific FTE levels for each Contract Year to be assigned to specific
activities.

         2.4.5    Subcontractors. In accordance with Section 2.4.3, the parties
will endeavor to optimize the allocation of their resources for the conduct of
the Research Program. As necessary and in furtherance of the Research Program,
however, either party may enter into research-related agreements or subcontracts
in accordance with this Section 2.4.5; provided that (a) none of the rights of
the other party hereunder are diminished or otherwise adversely affected as a
result of such subcontracting, (b) such party obtains the written approval of
the other party prior to engaging any subcontractor, which approval shall not be
unreasonably withheld or delayed, (c) the subcontractor undertakes in writing
obligations of confidentiality and non-use regarding the other party's
Confidential Information that are substantially the same as those undertaken by
BMS and Lexicon pursuant to Article 8 hereof, and (d) where possible, the
subcontractor agrees in writing to assign to the party inventions made by such
subcontractor in performing services for the party. In the event a party
performs one or more of its obligations under the Research Program through a
subcontractor, then such Party shall at all times be responsible for the
performance of such subcontractor. The Joint Management Committee shall decide
whether the cost of such agreement shall be shared equally between the parties
or if the cost is to be borne by one party and whether it can be allocated to
offset obligations with respect to FTE levels as set forth in Section 2.4.4 of
this Agreement.

                                       16


         2.4.6    Reports. Each party shall submit [**] reports to the Joint
Management Committee, and additional reports as may be required by the
then-current Annual Research Plans, detailing its activities under the Research
Program. The Joint Management Committee shall use such [**] reports to monitor
the parties' respective contributions to the Research Program. The Joint
Management Committee may amend the Annual Research Plan as necessary to maintain
substantial equality in resources devoted and participation by the parties over
the course of the Research Program, as measured by Research Program Costs.

         2.4.7    Adjustments. If either party believes that the parties are not
devoting substantially equal resources and participation to the Research
Program, measured by the aggregated Research Program Costs incurred by each
party, such party may submit the matter to the Joint Management Committee in
writing, providing a reasonably detailed description of its reasons for such
belief. Taking into account historical and prospective participation and
resource devotion of the parties during the current Contract Quarter and the
immediately following Contract Quarter, the Joint Management Committee shall
take such steps as may be reasonably necessary to ensure substantial equality in
resources devoted to and participation by the parties in the Research Program
including, with respect to any out-of-pocket expenditures, a reimbursement by
one party to the other party. In addition or as an alternative to taking steps
to reallocate resources and participation in the Research Program, the Joint
Management Committee may, by agreement, take one or more of the following
actions in order to equalize each party's participation in the Research Program
(measured by the aggregated Research Program Costs): (a) designate a Selected
Target as an Inactive Selected Target, such that one party could proceed with
the discovery or development of Program Compounds acting through such Inactive
Selected Target, without the participation of the other party (and such that the
developing party's activities with respect to such Inactive Selected Target
would no longer be included in the Research Program Costs) or (b) provide for
the payment by one party to the other party of one-half of the Research Program
Costs attributable to unmatched FTEs provided by such other party in support of
Research Program Activities. In addition, a party may elect to designate a
Selected Target as an Inactive Selected Target to be pursued by the other party
as set forth in Section 2.3.4.1(b), and upon such election, the party making
such election shall notify the Joint Management Committee if it wishes to
maintain the level of its FTE contribution to the Research Program Costs by
allocating FTEs to another Selected Target or to reduce the total number of FTEs
the party contributes to the Research Program Costs. At the request of a party,
the other party shall permit an independent, certified accountant appointed by
the requesting party and reasonably acceptable to the other party, at reasonable
times and upon reasonable notice but no more than [**], to examine, at the sole
cost of the requesting party, the records of the other party to verify the
accuracy of any reports submitted by the other party to the Joint Management
Committee regarding the Research Program Costs devoted to the Research Program
by such party.

2.5      Development and Commercialization of Products.


         2.5.1    Designation of BMS Targets and Lexicon Targets. Upon the
commencement of a Phase 1 Trial for the first pharmaceutical product acting
through a given Selected Target that contains a Development Candidate as an
active ingredient, BMS will have the first option, exercisable by written notice
to Lexicon, to obtain exclusive rights under Section 4.1.1.3 and Section 4.2.1
with respect to such Selected Target, upon the exercise of which option (a) such
Selected Target shall be designated as a "BMS Target," (b) BMS shall then be the
Product Licensee with respect to such BMS Target and (c) the exclusive licenses
granted to BMS under Section 4.1.1.3 and Section 4.2.1 shall apply to such BMS
Target. BMS shall deliver written notice to Lexicon within [**] days of the
commencement of such Phase 1 Trial of its election whether or not to be the
Product Licensee for such Selected Target. If BMS fails, within such

                                       17



[**] period, to deliver written notice to Lexicon of its election whether or not
to be the Product Licensee for such Selected Target, Lexicon shall provide
notice to BMS advising BMS that such notice by BMS is required. If BMS does not
remedy such failure within [**] days following Lexicon's notice, then Lexicon
shall have the option to obtain exclusive rights under Section 4.1.2.3 and
Section 4.2.2 with respect to such Selected Target, upon the exercise of which
option (a) such Selected Target shall be designated as a "Lexicon Target," (b)
Lexicon shall then be the Product Licensee with respect to such Lexicon Target
and (c) the exclusive licenses granted to Lexicon under Section 4.1.2.3 and
Section 4.2.2 shall apply to such Lexicon Target.

         2.5.2    Responsibility for Development and Commercialization
Activities. From and after the time that a party is designated as the Product
Licensee with respect to a Selected Target, such party shall then have full
responsibility (including responsibility for funding, resourcing and
decision-making) for all research, development and commercialization activities
relating to Development Compounds and Products that act through such Selected
Target, subject to the provisions of Section 2.5.3 and Article 6 hereof.

         2.5.3    Continuation of Research Program Activities.

                  2.5.3.1  The party that is designated as the Product Licensee
         with respect to a Selected Target may, at its option, request that
         Research Program Activities (including but not limited to work on
         Back-up Compounds) continue following the designation of such Selected
         Target as a BMS Target or Lexicon Target, as applicable. In such event,
         the parties shall continue to carry out such Research Program
         Activities with respect to such Selected Target as may be reasonably
         requested by the Product Licensee (with the allocation of
         responsibilities determined by the Joint Management Committee and
         reflected in the Annual Research Plans) until the earlier of (a) the
         first NDA Approval or MAA Approval of a Product acting through such
         Selected Target or (b) the Product Licensor notifies the Product
         Licensee of its election to discontinue further Research Program
         Activities with respect to such Selected Target.

                  2.5.3.2  In the event the Product Licensor notifies the
         Product Licensee of its election to discontinue further Research
         Program Activities with respect to such Selected Target, (a) the
         Product Licensor shall have no further obligation with respect to
         further Research Program Activities related to such Selected Target
         other than to reasonably cooperate with the Product Licensee, at the
         Product Licensee's expense, in transitioning such activities to the
         Product Licensee (including, without limitation, the transfer of
         relevant Program Material), (b) no further activities of the Product
         Licensee related to such Selected Target shall be considered Research
         Program Activities for purposes of the parties' participation in the
         Research Program or Research Program Costs and (c) the milestone
         payments and royalties with respect to BMS Products (under Sections
         5.4.1 and 5.5.1) or Lexicon Products (under Sections 5.4.2 and 5.5.2),
         as the case may be, that are Post Opt-out Products (as defined below)
         shall be [**].

                  2.5.3.3  As used in this Agreement, a "Post Opt-out Product"
         shall mean a Product acting through a Selected Target for which the
         Product Licensor has elected to discontinue further Research Program
         Activities under this Section 2.5.3, which Product does not contain as
         an active ingredient a Development Candidate or Back-up Compound for
         which [**].

                  2.5.3.4  The milestone payments and royalties with respect to
         BMS Products (under Sections 5.4.1 and 5.5.1) or Lexicon Products
         (under Sections 5.4.2 and 5.5.2) (a)

                                       18


         that are Post Opt-out Products and that contain [**] as an active
         ingredient shall be [**] and (b) that are Post Opt-out Products and
         that do not contain [**] as an active ingredient shall be [**].

2.6      Exclusivity.

         2.6.1    During the Research Program Term, each party shall work
exclusively with the other party under the terms of the Agreement with respect
to discovery and development activities directed to identifying and developing
Small Molecule Compounds that act through Selected Targets, on a Selected
Target-by-Selected Target basis, until the later to occur of:

                  (a)      such time as the applicable Selected Target either:

                           (i)      becomes an Inactive Selected Target, or

                           (ii)     is designated as a BMS Target or a Lexicon
                  Target and either (A) the Product Licensee has obtained an NDA
                  Approval or MAA Approval of a Product acting through such
                  Selected Target or (B) the Product Licensor has notified the
                  Product Licensee of its election to discontinue further
                  Research Program Activities with respect to such Selected
                  Target; or

                  (b)      such time as the specific and substantial medical
                  utility of such Selected Target in the CNS Field is or becomes
                  [**].

The expiration or termination of the parties' exclusivity obligations with
respect to a Selected Target under this Section 2.6.1 shall not be construed as
granting any right or license under any Background Materials, Background
Technology or Program Intellectual Property related thereto.

         2.6.2    During the Target Discovery Program Term, Lexicon shall work
exclusively with BMS and shall not enter into discussions with any Third Party
with respect to activities directed to the identification of novel Targets for
the identification and development of Small Molecule Compounds for use in the
CNS Field, provided that Lexicon may pursue discussions with third parties with
respect to Released Targets and Inactive Selected Targets that the parties have
agreed to out-license. During the Target Discovery Program Term, Lexicon shall
work exclusively with BMS under the terms of the Agreement with respect to all
Targets identified by Lexicon as of the Effective Date and thereafter as having
potential utility in the CNS Field, with the exception of Lexicon's LG617 Target
(which is subject to Section 4.4) and Released Targets.

         2.6.3    Except as otherwise provided for in this Agreement, and
without granting any right or license under any Lexicon Background Materials or
Lexicon Background Technology with respect thereto, for a period of [**] years
following the proposal that a Proposed Target be considered for designation as a
Selected Target under Section 2.3.2, BMS shall not, unless such Proposed Target
was so designated, research, develop or commercialize any pharmaceutical product
for any indication within the CNS Field that specifically targets such Proposed
Target. For the avoidance of doubt, the parties agree that this covenant not to
compete is not meant to restrict BMS from researching, developing and/or
commercializing pharmaceutical products that do not specifically target a
Proposed Target but that nevertheless bind to such Proposed Target; provided
that such pharmaceutical products specifically target, and achieve their
intended physiological effects by binding to, a Target other than the Proposed
Target. Without granting any right or license, BMS's obligations under this
Section 2.6.3 with respect to a Proposed Target shall terminate on the earlier
of:

                                       19


                  (a)      the medical utility in the disclosed indication of
         the Proposed Target is or becomes [**]; or

                  (b)      [**].

2.7      Annual Research Plan.

         2.7.1    The Joint Scientific Committee shall prepare and the Joint
Management Committee shall approve the Annual Research Plan for every Contract
Year (other than the First Contract Year) at least [**] prior to the
commencement of such Contract Year. The Annual Research Plan for the First
Contract Year shall be prepared by the Joint Scientific Committee and approved
by the Joint Management Committee within [**] after the Effective Date.

         2.7.2    The Joint Management Committee shall update and amend, as
appropriate, the then-current Annual Research Plan from time to time.

         2.7.3    Each Annual Research Plan shall contain the specific research
objectives to be achieved during the relevant Contract Year, the specific
activities to be performed under the Research Program during such year and the
timeline for performing such activities, and shall designate which party shall
be responsible for performing each of such activities.

         2.7.4    Each Annual Research Plan shall be consistent with the other
terms and conditions of this Agreement, including without limitation the
objectives set forth in Section 2.1.1 and the terms and conditions set forth in
Section 2.4, and each Annual Research Plan for Contract Years after the First
Contract Year shall be substantially the same in form, including the items
itemized in, the Annual Research Plan for the First Contract Year.

2.8      Research Program Records.

         2.8.1    All work conducted by each party in the course of the Research
Program shall be completely and accurately recorded, in reasonable detail and in
good scientific manner, in separate laboratory notebooks. On reasonable notice,
and at reasonable intervals, each party shall have the right to inspect and copy
all such records of the other party reflecting Program Technology or work done
under the Research Program, to the extent reasonably required to carry out its
respective obligations and to exercise its respective rights hereunder. The
parties acknowledge and agree that neither party guarantees the success of the
Research Program tasks undertaken hereunder.

         2.8.2    In order to protect the parties' Patent Rights under U.S. law
in any inventions conceived or reduced to practice during or as a result of the
Research Program, each party agrees to maintain a policy that requires its
employees to record and maintain all data and information developed during the
Research Program in such a manner as to enable the parties to use such records
to establish the earliest date of invention and/or diligence to reduction to
practice. At a minimum, the policy shall require such individuals to record all
inventions generated by them in standard laboratory notebooks or other suitable
means that are dated and corroborated by non-inventors on a regular,
contemporaneous basis.

2.9      Disclosure of Research Program Results. Subject to restrictions imposed
by a party's confidentiality obligations to any Third Party with respect to
Background Materials or Background Technology, each party will disclose to the
Joint Scientific Committee all Program Technology that is discovered, invented
or made by such party during the course of the Research Program and that is
useful

                                       20


in or relates to the Research Program, including, without limitation,
information regarding Selected Targets, Small Molecule Compounds identified in
the Research Program through the use of Selected Targets, activities of such
Small Molecule Compounds, derivatives and results of in vitro and in vivo
studies, assay techniques and new assays. Such Program Technology will be
promptly disclosed to the Joint Scientific Committee, with meaningful
discoveries or advances being communicated as promptly as practicable after such
information is obtained or its significance is appreciated. Upon written request
by any member of the Joint Scientific Committee, each party will provide the
other with copies of the raw data generated in the course of the Research
Program, if reasonably necessary to the other party's work under the Research
Program. Any information disclosed pursuant to this Section 2.9 may be used by
the other party solely for the purposes of the Research Program or as otherwise
expressly permitted in this Agreement.

         2.10     Material Transfer. In order to facilitate the Research
Program, either party may provide to the other party certain Program Materials
and Background Materials Controlled by the supplying Party for use by the other
party in furtherance of the Research Program. All such Program Materials shall
be considered the Confidential Information of both parties and shall be subject
to the restrictions in Article 8. All Background Materials shall be considered
the Confidential Information of the supplying Party and shall be subject to the
restrictions in Article 8. Except as otherwise provided under this Agreement,
all such Program Materials and Background Materials delivered to the other party
shall remain the sole property of the supplying party, shall be used only in
furtherance of the Research Program and solely under the control of the other
party and its Affiliates, shall not be used or delivered to or for the benefit
of any Third Party without the prior written consent of the supplying party and
shall not be used in research or testing involving human subjects. The Program
Materials and Background Materials supplied under this Section 2.10 must be used
with prudence and appropriate caution in any experimental work, since not all of
their characteristics may be known. THE PROGRAM MATERIALS AND BACKGROUND
MATERIALS ARE PROVIDED "AS IS" AND WITHOUT ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE OR ANY WARRANTY THAT
THE USE OF THE MATERIALS WILL NOT INFRINGE OR VIOLATE ANY PATENT OR OTHER
PROPRIETARY RIGHTS OF ANY THIRD PARTY.

         2.11     Third Party Opportunities. In the event that a party is
presented with an opportunity to obtain a license from a Third Party for the
development and commercialization of a Small Molecule Compound acting through a
Selected Target (a "Third Party Opportunity"), then the party may pursue such
Third Party Opportunity, but only in the manner provided in this Section 2.11.
For purposes of Third Party Opportunities, Section 2.6.1.(a) shall not apply
[**]

                  2.11.1   Third Party Opportunities for Selected Targets. In
         the event that a party is presented with a Third Party Opportunity for
         the development and commercialization of a Small Molecule Compound
         acting through a Selected Target that has not been previously
         designated as an Inactive Selected Target, a BMS Target or a Lexicon
         Target, then the party may pursue such Third Party Opportunity, but
         only in the manner provided in this Section 2.11.1. The party shall
         present the Third Party Opportunity, including all relevant terms and
         conditions relating thereto (subject to any confidentiality obligations
         to the Third Party), to the Joint Management Committee. In the event
         that the Joint Management Committee elects to pursue such Third Party
         Opportunity, then the parties shall negotiate (with one another and
         with the Third Party, as appropriate) in a good faith effort to reach
         an agreement whereby the Third Party Opportunity can be included as a
         Product under the Agreement. In the event that the parties and the
         Third Party reach an agreement to include such Third Party Opportunity
         as a Product under the Agreement, then (a) [**], and (b) [**]. In the
         event that the Joint Management Committee does not elect to pursue such
         Third Party Opportunity, then, subject to the parties' obligations
         under Section

                                       21


         2.6.1(b) and Article 8, either party shall have the right to pursue
         such Third Party Opportunity and, upon completion of an agreement with
         such Third Party for such Third Party Opportunity, shall, by notice to
         the other party, either (i) include such Third Party Opportunity as a
         Product under this Agreement, [**], or (ii) designate such Selected
         Target as an Inactive Selected Target to be pursued by the other party.

                  2.11.2   Third Party Opportunities for Inactive Selected
         Targets, BMS Targets or Lexicon Targets. In the event that a party is
         presented with a Third Party Opportunity for the development and
         commercialization of a Small Molecule Compound acting through a
         Selected Target that has been previously designated as an Inactive
         Selected Target, a BMS Target or a Lexicon Target, then the party may
         pursue such Third Party Opportunity, but only in the manner provided in
         this Section 2.11.2 and subject to the parties' obligations under
         Section 2.6.1(b) and Article 8.

                           2.11.2.1 If the party pursuing such Third Party
                  Opportunity [**], the party shall present the Third Party
                  Opportunity, including all relevant terms and conditions
                  relating thereto (subject to any confidentiality obligations
                  to the Third Party), to the Joint Management Committee. In the
                  event that the Joint Management Committee elects to pursue
                  such Third Party Opportunity, then the parties shall negotiate
                  (with one another and with the Third Party, as appropriate) in
                  a good faith effort to reach an agreement whereby the Third
                  Party Opportunity can be included as a Product under the
                  Agreement. In the event that the parties and the Third Party
                  reach an agreement to include such Third Party Opportunity as
                  a Product under the Agreement, then (a) [**], and (b) [**]. In
                  the event that the Joint Management Committee does not elect
                  to pursue such Third Party Opportunity, then, subject to the
                  parties' obligations under Section 2.6.1(b) and Article 8,
                  [**] shall have the right to pursue such Third Party
                  Opportunity. [**].

                           2.11.2.2 [**].

                           2.11.2.3 [**].

                      ARTICLE 3. COLLABORATION MANAGEMENT

3.1      Program Committees.

                  3.1.1    Joint Management Committee. As soon as practicable
         after the Effective Date, BMS and Lexicon shall establish a Joint
         Management Committee (the "Joint Management Committee") comprised of
         [**] representatives designated by BMS and [**] representatives
         designated by Lexicon, each of whom shall have experience and seniority
         sufficient to enable him or her to make decisions on behalf of the
         party he or she represents; provided that BMS and Lexicon may, by
         mutual agreement, designate an appropriate number of additional
         representatives from time to time.

                  3.1.2    Joint Scientific Committee. As soon as practicable
         after the Effective Date, BMS and Lexicon shall establish a Joint
         Scientific Committee (the "Joint Scientific Committee") comprised of
         [**] representatives designated by BMS and [**] representatives
         designated by Lexicon, each of whom shall have experience and seniority
         sufficient to enable him or her to make decisions on behalf of the
         party he or she represents; provided that BMS and Lexicon may, by
         mutual agreement, designate an appropriate number of additional
         representatives from time to time. From time to time during the
         Research Program Term, the Joint Scientific Committee may establish one
         or more Joint Research Project Teams (each, a "Joint Research Project
         Team") to implement various aspects of the Annual Research Plan. Such
         teams shall be governed in the

                                       22


same manner and subject to the relevant requirements as set forth herein for the
Joint Scientific Committee.

         3.2      Program Directors. Each party shall appoint one of its
designees on the Joint Management Committee or the Joint Scientific Committee to
serve as a program director (each, a "Program Director") with responsibility for
overseeing the day-to-day activities of the parties with respect to the Research
Program and for being the primary point of contact between the parties with
respect to the Research Program.

         3.3      Replacement of Program Committee Representatives and Program
Directors. Each party shall be free to replace its representative members of any
Program Committee and its Program Director with new appointees who have
authority to act on behalf of such party, on notice to the other party.

         3.4      Responsibilities of Joint Management Committee. The Joint
Management Committee shall be responsible for overseeing and directing the
parties' interaction and performance of their respective obligations under this
Agreement. Without limiting the generality of the foregoing, its duties shall
include, and it shall be responsible for decisions with respect to, the
following:

                  (a)      designation of Selected Targets and Released Targets
         in accordance with Section 2.3.2 hereof;

                  (b)      review and approval of Annual Research Plans;

                  (c)      oversight of the implementation of Annual Research
         Plans and allocation of resources and other activities in support of
         the Research Program, including the matters contemplated by Section 2.4
         hereof;

                  (d)      [**];

                  (e)      classification of Selected Targets as Inactive
         Selected Targets in accordance with Section 2.3.4 hereof;

                  (f)      authorization of the commencement of Compound Library
         Screening for a Selected Target;

                  (g)      determination as to which Selected Targets should be
         pursued with a Mid-Phase Program and which party should perform such
         Mid-Phase Program;

                  (h)      determination as to which Selected Targets should be
         pursued with a Full Phase Program and which party should perform such
         Full Phase Program;

                  (i)      establishment of criteria for designation of
         Development Candidates [**] and Back-up Compounds;

                  (j)      designation of Development Candidates [**] and
         Back-up Compounds;

                  (k)      decisions with respect to the preclinical development
         of Development Candidates and Back-up Compounds leading to the
         commencement of a Phase 1 Trial;

                  (l)      prioritization of programs and activities where
         resources are constrained;

                                       23


                  (m)      resolving matters within the responsibilities of the
         Joint Scientific Committee as to which the members of the Joint
         Scientific Committee are unable to reach a consensus; and

                  (n)      addressing scientific issues and resolving
         differences that may arise between the parties related to the
         performance of the Target Discovery Program or the Research Program.

The Joint Management Committee shall not have the power to amend or waive
compliance with this Agreement.

         3.5      Responsibilities of Joint Scientific Committee. The Joint
Scientific Committee shall be responsible for preparing for approval by the
Joint Management Committee and implementing the Annual Research Plans,
allocation of resources and other activities in support of the Research Program,
with the objective of expeditiously identifying Selected Targets and identifying
compounds meeting the criteria for designation as Development Candidates.
Without limiting the generality of the foregoing, its duties shall include (a)
establishing requirements (including, for example, with respect to throughput)
for, or otherwise approving the use of, assays for Compound Library Screening,
(b) selecting Small Molecule Compounds for optimization, characterization and/or
preclinical evaluation in the conduct of the Research Program, (c) monitoring,
reviewing and reporting on the progress of the Research Program, and (d) setting
the agenda for the Joint Management Committee for scientific and technical
matters relating to the Research Program and recommending actions by the Joint
Management Committee. The Joint Scientific Committee shall further have
responsibility during the Target Discovery Program Term for [**] monitoring and
reviewing the progress of the Target Discovery Program. The Joint Scientific
Committee shall not have the power to amend or waive compliance with this
Agreement. As appropriate, the Joint Scientific Committee shall establish
subcommittees and working groups, having an equal number of representatives of
Lexicon and BMS, which will work closely and meet frequently to further the
objectives of this Agreement.

         3.6      Meetings of Program Committees. Each Program Committee shall
meet at least [**], and more frequently as the parties deem appropriate, on such
dates and at such times as the parties shall agree, on [**] days' written notice
to the other party unless such notice is waived by the parties. The first
meeting of the Joint Management Committee shall take place within [**] days
after the Effective Date, at Lexicon's facility in The Woodlands, Texas. Each
Program Committee may convene or be polled or consulted from time to time by
means of telecommunications, videoconferences or correspondence, as deemed
necessary or appropriate by the parties. To the extent that meetings are held in
person, they shall alternate between the offices of the parties unless the
parties otherwise agree.

         3.7      Decisions.

                  3.7.1    Quorum; Voting. A quorum for a meeting of a Program
         Committee shall require the presence of at least one Lexicon member (or
         designee) and at least one BMS member (or designee) in person or by
         telephone. All decisions made or actions taken by a Program Committee
         shall be made unanimously by its members, with the Lexicon members
         cumulatively having one vote and the BMS members cumulatively having
         one vote; provided that, in the event the members of the Joint
         Management Committee are unable to reach unanimity as to a decision
         under Section [**], [**]; and provided further, that at such time that
         a party is designated as a Product Licensee with respect to a Selected
         Target under Section 2.5, such Product Licensee shall then have final
         decision-making authority with respect to decisions concerning all
         further research and development activities with respect to such
         Selected Target.

                                       24


         3.7.2    Dispute Resolution.

                  3.7.2.1  In the event that unanimity cannot be reached by the
         Joint Scientific Committee with respect to a matter that is a subject
         of its decision-making authority, then the matter shall be referred for
         further review and resolution to the Alliance Managers and the Joint
         Management Committee. Except as provided in Section 3.7.1, in the event
         that unanimity cannot be reached by the Joint Management Committee with
         respect to a matter that is a subject of its decision-making authority,
         then the matter shall be referred for further review and resolution to
         [**]. The designated officers of each party shall use reasonable
         efforts to resolve the matter within [**] days after the matter is
         referred to them.

                  3.7.2.2  If the designated officers cannot resolve any matter
         described in Section 3.4 within such [**] period, the matter shall be
         referred to a Third Party arbitrator or arbitrators, in accordance with
         the following procedures, whose decision shall be [**]. In such event,
         the parties shall attempt to mutually agree upon a single independent
         Third Party arbitrator, who shall be a scientific professional with
         appropriate experience in the subject matter at issue in such
         disagreement, within [**] days after the initial referral of such
         matter to the designated officers. If the parties are unable to
         mutually agree upon one such person, then each party shall appoint one
         independent Third Party scientific professional with appropriate
         experience in the subject matter at issue in such disagreement prior to
         the expiration of such [**] period, and within [**] days after the
         initial referral of such matter to the designated officers, such
         person(s) shall select a single independent Third Party arbitrator, who
         shall be a scientific professional with appropriate experience in the
         subject matter at issue in such disagreement. Each party shall present
         all information presented to the Joint Management Committee and all
         other information as such party reasonably desires regarding such
         disagreement. Within [**] days after the initial referral of such
         matter to the designated officers, the arbitrator shall provide written
         notice to the parties regarding his or her determination regarding such
         disagreement.

         3.8      Administration. The chairperson of each Program Committee
shall be designated annually on an alternating basis between the parties. The
initial chairperson shall be selected by BMS. The party not designating the
chairperson shall designate one of its representative members as secretary to
such Program Committee for such year. The chairperson shall be responsible for
calling meetings of such Program Committee, sending notices of meetings to all
members and for leading such meetings.

         3.9      Minutes. Within [**] days after each Program Committee
meeting, the secretary of such Program Committee shall prepare and distribute
minutes of the meeting, which shall provide a description in reasonable detail
of the discussions had at the meeting and a list of any actions, decisions or
determinations approved by such Program Committee. The secretary shall be
responsible for circulation of all draft and final minutes. Draft minutes shall
be first circulated to the chairperson, edited by the chairperson and then
circulated in final draft form to all members of such Program Committee
sufficiently in advance of the next meeting to allow adequate review and comment
prior to the meeting. Minutes shall be approved or disapproved, and revised as
necessary, at the next meeting. Final minutes shall be distributed to the
members of such Program Committee.

         3.10     Term. The Joint Scientific Committee and the Joint Management
Committee shall exist until the termination or expiration of the Research
Program Term and for such longer period as necessary to perform the
responsibilities assigned to it under this Agreement.

                                       25


         3.11     Expenses. Each party shall be responsible for all travel and
related costs for its representatives to attend meetings of, and otherwise
participate on, the Joint Scientific Committee and the Joint Management
Committee.

         3.12     Alliance Managers. Each party shall appoint one senior
representative who possesses a general understanding of the scientific and
business issues relevant to this Agreement to act as its respective alliance
manager (each, an "Alliance Manager") for the relationship of the parties under
this Agreement. Each party may change its designated Alliance Manager from time
to time upon notice to the other party. Any Alliance Manager may designate a
substitute to temporarily perform the functions of that Alliance Manager. Each
Alliance Manager shall be charged with creating and maintaining a collaborative
work environment within and among the Joint Management Committee and Joint
Scientific Committee and any other committees or working groups that may be
formed pursuant to this Agreement. Each Alliance Manager will also:

                  (a)      be the point of first referral in all matters of
         conflict resolution;

                  (b)      provide a single point of communication for seeking
         consensus both internally within the respective parties organizations
         and together regarding key strategy and plan issues;

                  (c)      plan and coordinate cooperative efforts and internal
         and external communications; and

                  (d)      take responsibility for ensuring that governance
         activities occur as set forth in this Agreement, in particular ensuring
         that Joint Scientific Committee and Joint Management Committee meetings
         occur, and that minutes are developed from such meetings, in accordance
         with this Agreement, and that action items determined at such meetings
         are appropriately carried out or otherwise addressed.

         The Alliance Managers shall be entitled to attend meetings of any of
the Joint Scientific Committee and Joint Management Committee and other
committees that may be formed, but shall not have, or be deemed to have, any
rights or responsibilities of a member of any committee. Each Alliance Manager
may bring any matter to the attention of any committee where such Alliance
Manager reasonably believes that such matter requires such attention.

         Any dispute between the parties arising under this Agreement shall be
brought to the attention of the Alliance Managers for resolution. The Alliance
Managers will endeavor to propose and define mutually acceptable solutions and
facilitate communications in an attempt to bring the dispute to a mutually
agreeable resolution. If the Alliance Managers cannot find an acceptable
solution to a dispute and if the Joint Management Committee cannot resolve any
matter properly referred to it, such dispute shall be resolved as set forth in
Section 3.7.2 or Section 12.6, as applicable.

                          ARTICLE 4. GRANTS OF RIGHTS

         4.1      Grants of Research Licenses.

                  4.1.1    By Lexicon.

                           4.1.1.1  Selected Targets. Subject to the terms of
                  this Agreement and any applicable [**], during the Research
                  Program Term, Lexicon hereby grants to BMS and its Affiliates,
                  within the Territory, (a) a non-exclusive right and license
                  (without any right to sublicense, except as set forth below)
                  under Lexicon's rights in the Lexicon

                                       26


                  Background Materials and the Lexicon Background Technology and
                  (b) a co-exclusive right and license (without any right to
                  sublicense, except as set forth below) under Lexicon's rights
                  in the Program Intellectual Property to (i) identify and
                  validate Selected Targets (other than Selected Targets that
                  have become BMS Inactive Selected Targets, Lexicon Inactive
                  Selected Targets, BMS Targets or Lexicon Targets) for the
                  identification, evaluation and optimization of Small Molecule
                  Compounds that are active against such Selected Targets for
                  use in the CNS Field, (ii) identify Small Molecule Compounds
                  that are active against such Selected Targets through the use
                  of such Selected Targets and (iii) undertake preclinical
                  research and evaluation of Program Compounds, in each case in
                  the conduct of the Research Program. Such right and license
                  shall include the right to grant sublicenses to Third Parties
                  that are approved by the Joint Management Committee.

                           4.1.1.2  BMS Inactive Selected Targets. Subject to
                  the terms of this Agreement and any applicable [**], Lexicon
                  hereby grants to BMS and its Affiliates, within the Territory,
                  (a) a non-exclusive right and license (without any right to
                  sublicense, except as set forth below) under Lexicon's rights
                  in the Lexicon Background Materials and the Lexicon Background
                  Technology and (b) an exclusive right and license (without any
                  right to sublicense, except as set forth below) under
                  Lexicon's rights in the Program Intellectual Property to (i)
                  validate BMS Inactive Selected Targets for the identification,
                  evaluation and optimization of Small Molecule Compounds that
                  are active against such Selected Targets for use in the CNS
                  Field, (ii) identify Small Molecule Compounds that are active
                  against such BMS Inactive Selected Targets through the use of
                  such BMS Inactive Selected Targets and (iii) undertake
                  preclinical research and evaluation of Small Molecule
                  Compounds that are active against such BMS Inactive Selected
                  Targets. Such right and license shall include the right to
                  grant sublicenses to Third Parties in connection with, and
                  incident to, a sublicense granted to such Third Party under
                  the rights and licenses granted under Section 4.2.1. The
                  rights and licenses granted under this Section 4.1.1.2 shall
                  be in effect during the Research Program Term and thereafter
                  so long as BMS is using Diligent Efforts in exercising its
                  rights under this license.

                           4.1.1.3  BMS Targets. Subject to the terms of this
                  Agreement and any applicable [**], Lexicon hereby grants to
                  BMS and its Affiliates, within the Territory, (a) a
                  non-exclusive right and license (without any right to
                  sublicense, except as set forth below) under Lexicon's rights
                  in the Lexicon Background Materials and the Lexicon Background
                  Technology and (b) an exclusive right and license (without any
                  right to sublicense, except as set forth below) under
                  Lexicon's rights in the Program Intellectual Property to (i)
                  identify Small Molecule Compounds that are active against BMS
                  Targets through the use of such BMS Targets and (ii) undertake
                  preclinical research and evaluation of Small Molecule
                  Compounds that are active against such BMS Targets. Such right
                  and license shall include the right to grant sublicenses to
                  Third Parties in connection with, and incident to, a
                  sublicense granted to such Third Party under the rights and
                  licenses granted under Section 4.2.1.

                  4.1.2    By BMS.


                           4.1.2.1  Selected Targets. Subject to the terms of
                  this Agreement and any applicable [**], during the Research
                  Program Term, BMS hereby grants to Lexicon and its Affiliates,
                  within the Territory, (a) a non-exclusive right and license
                  (without any right to sublicense, except as set forth below)
                  under BMS's rights in the BMS Background Materials and the BMS
                  Background Technology and (b) a co-exclusive right and license

                                       27


                  (without any right to sublicense, except as set forth below)
                  under BMS's rights in the Program Intellectual Property to (i)
                  identify and validate Selected Targets (other than Selected
                  Targets that have become BMS Inactive Selected Targets,
                  Lexicon Inactive Selected Targets, BMS Targets or Lexicon
                  Targets) for the identification, evaluation and optimization
                  of Small Molecule Compounds that are active against such
                  Selected Targets for use in the CNS Field, (ii) identify Small
                  Molecule Compounds that are active against such Selected
                  Targets through the use of such Selected Targets and (iii)
                  undertake preclinical research and evaluation of Program
                  Compounds, in each case in the conduct of the Research
                  Program. Such right and license shall include the right to
                  grant sublicenses to Third Parties that are approved by the
                  Joint Management Committee.

                           4.1.2.2  Lexicon Inactive Selected Targets. Subject
                  to the terms of this Agreement and any applicable [**], BMS
                  hereby grants to Lexicon and its Affiliates, within the
                  Territory, (a) a non-exclusive right and license (without any
                  right to sublicense, except as set forth below) under BMS's
                  rights in the BMS Background Materials and the BMS Background
                  Technology and (b) an exclusive right and license (without any
                  right to sublicense, except as set forth below) under BMS's
                  rights in the Program Intellectual Property to (i) validate
                  Lexicon Inactive Selected Targets for the identification,
                  evaluation and optimization of Small Molecule Compounds that
                  are active against such Selected Targets for use in the CNS
                  Field, (ii) identify Small Molecule Compounds that are active
                  against such Lexicon Inactive Selected Targets through the use
                  of such Lexicon Inactive Selected Targets and (iii) undertake
                  preclinical research and evaluation of Small Molecule
                  Compounds that are active against such Lexicon Inactive
                  Selected Targets. Such right and license shall include the
                  right to grant sublicenses to Third Parties in connection
                  with, and incident to, a sublicense granted to such Third
                  Party under the rights and licenses granted under Section
                  4.2.2. The rights and licenses granted under this Section
                  4.1.2.2 shall be in effect during the Research Program Term
                  and thereafter so long as Lexicon is using Diligent Efforts in
                  exercising its rights under this license.

                           4.1.2.3  Lexicon Targets. Subject to the terms of
                  this Agreement and any applicable [**], BMS hereby grants to
                  Lexicon and its Affiliates, within the Territory, (a) a
                  non-exclusive right and license (without any right to
                  sublicense, except as set forth below) under BMS's rights in
                  the BMS Background Materials and the BMS Background Technology
                  and (b) an exclusive right and license (without any right to
                  sublicense, except as set forth below) under BMS's rights in
                  the Program Intellectual Property to (i) identify Small
                  Molecule Compounds that are active against Lexicon Targets
                  through the use of such Lexicon Targets and (ii) undertake
                  preclinical research and evaluation of Small Molecule
                  Compounds that are active against such Lexicon Targets. Such
                  right and license shall include the right to grant sublicenses
                  to Third Parties in connection with, and incident to, a
                  sublicense granted to such Third Party under the rights and
                  licenses granted under Section 4.2.2.

                  4.1.3    Restrictions on Clinical Development of Products.
         Neither party nor their respective Affiliates shall administer to
         humans any Product that incorporates or is derived from any Program
         Compound, unless and until (and then only to the extent that) such
         party has received Joint Management Committee approval or has received
         a license under Section 4.2 for the clinical development and
         commercialization of such Product.

4.2      Grants of Development and Commercialization Licenses.

                                       28


                  4.2.1    By Lexicon. Subject to the terms of this Agreement
         and any applicable [**], Lexicon hereby grants to BMS and its
         Affiliates, within the Territory, an exclusive right and license, with
         the right to sublicense, under Lexicon's rights in the Program
         Intellectual Property to develop, make, have made, import, use, have
         used, offer for sale, sell and have sold BMS Development Compounds and
         BMS Products. Any sublicense under this Section 4.2.1 shall be set
         forth in a written agreement containing confidentiality, non-use,
         ownership of intellectual property and audit provisions consistent with
         and no less restrictive than those contained herein, shall be subject
         and subordinate to the terms and conditions of this Agreement, and
         shall obligate the Sublicensee to make the milestone and royalty
         payments required hereunder; provided that BMS shall remain responsible
         for all payments due to Lexicon hereunder. BMS shall provide Lexicon
         with an [**] copy of each sublicense agreement promptly after executing
         the same; provided, however, that subject to the exceptions set forth
         in Section 1.18, each such sublicense agreement shall be Confidential
         Information of BMS.

                  4.2.2    By BMS. Subject to the terms of this Agreement and
         any applicable [**], BMS hereby grants to Lexicon and its Affiliates,
         within the Territory, an exclusive right and license, with the right to
         sublicense, under BMS's rights in the Program Intellectual Property to
         develop, make, have made, import, use, have used, offer for sale, sell
         and have sold Lexicon Development Compounds and Lexicon Products. Any
         sublicense under this Section 4.2.2 shall be set forth in a written
         agreement containing confidentiality, non-use, ownership of
         intellectual property and audit provisions consistent with and no less
         restrictive than those contained herein, shall be subject and
         subordinate to the terms and conditions of this Agreement, and shall
         obligate the Sublicensee to make the milestone and royalty payments
         required hereunder; provided that Lexicon shall remain responsible for
         all payments due to BMS hereunder. Lexicon shall provide BMS with an
         [**] copy of each sublicense agreement promptly after executing the
         same; provided, however, that subject to the exceptions set forth in
         Section 1.18, each such sublicense agreement shall be Confidential
         Information of Lexicon.

         4.3      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.

         4.4      Right of First Offer for LG617 Target Collaboration. Lexicon
agrees that, during the period beginning on the Effective Date and ending on the
later of (a) the expiration of the Target Discovery Program Term or (b) the
commencement of a Phase 1 Trial in the U.S. for an LG617 Compound (the "LG617
Option Period"), BMS shall have the following right of first offer. During the
LG617 Option Period, Lexicon shall not grant any license or otherwise transfer
rights to any Third Party for the development or commercialization of any LG617
Compound (any such arrangement being referred to herein as an "LG617 License"),
[**] unless and until [**]. In the event that, at any time during the LG617
Option Period after an LG617 Compound [**], Lexicon desires to enter into an
LG617 License (or after the LG617 Option Period, if Lexicon has not previously
notified BMS of such desire), [**], Lexicon shall first notify BMS of its desire
to enter into an LG617 License and, if requested by BMS within [**] days of such
notice, shall enter into good faith negotiations with BMS with respect to an
LG617 License for a period of [**] days following such notice (the "LG617
Negotiation Period"). In the event Lexicon and BMS do not enter into an LG617
License within such LG617 Negotiation Period, Lexicon will be free, at any time
thereafter, to enter into negotiations with respect to an LG617 License with any
Third Party; provided that, during the LG617 Option Period (but not thereafter),
[**]. [**].

                                       29


                              ARTICLE 5. PAYMENTS

         5.1      Upfront Payment. In consideration of the rights granted to BMS
under this Agreement, BMS shall pay to Lexicon an upfront payment of thirty-six
million dollars (U.S. $36,000,000), which shall be due and payable within ten
(10) business days of the Effective Date, but in no event later than December
31, 2003.

         5.2      Target Discovery Program Payments. Subject to the other terms
and conditions of this Agreement, in consideration for and as a contribution
toward the Lexicon's costs of development and analysis of Mutant Mice in the
Target Discovery Program, BMS shall make the following payments to Lexicon on
the following schedule:

                  (a)      annual research payments of ten million dollars (U.S.
         $10,000,000) for each of the first three Contract Years of the Target
         Discovery Program Term, which annual research payments shall be payable
         [**];

                  (b)      in the event BMS elects to extend the Target
         Discovery Program Term under Section 2.2.2(a), annual research payments
         of [**] for each of the fourth and fifth Contract Years of the Target
         Discovery Program Term, which annual research payments shall be payable
         [**]; and

                  (c)      in the event BMS elects to extend the Target
         Discovery Program Term under Section 2.2.2(b), annual research payments
         of [**] for each of the fourth and fifth Contract Years of the Target
         Discovery Program Term, which annual research payments shall be payable
         [**].

         5.3      Research Program Milestone Payments. BMS shall pay Lexicon the
following Research Program milestone payments within [**] days of the occurrence
of the event giving rise to such payment:

                  (a)      after Compound Library Screening has been first
         commenced for a total of [**] Selected Targets [**], BMS shall pay
         Lexicon [**] for each subsequent Selected Target for which Compound
         Library Screening is first commenced [**];

                  (b)      during the Target Discovery Program Term, after a
         Full Phase Program has been first commenced for [**] Selected Target
         [**], BMS shall pay Lexicon [**] for each subsequent Selected Target
         [**] for which a Full Phase Program is first commenced; and

                  (c)      during the period beginning after the Target
         Discovery Program Term, after Full Phase Programs have been first
         commenced for a total of [**] Selected Targets in the Research Program
         (a total of [**] Selected Targets in the event BMS elected to extend
         the Target Discovery Program Term under Section 2.2.2), BMS shall pay
         Lexicon [**] for each subsequent Selected Target for which a Full Phase
         Program is first commenced;

provided that [**]. The Research Program milestone payments payable under this
Section 5.3 shall not be considered part of, or included in the calculation of
the Research Program Costs contributed by BMS to the Research Program. For
clarification, for purposes of determining the above Research Program milestone
payments, [**].

                                       30


         5.4      Product Development Milestone Payments.

                  5.4.1    BMS Products. For each BMS Target, BMS shall pay
         Lexicon the following milestone payments for [**]:



                                                              PAYMENTS FOR BMS TARGET       PAYMENTS FOR BMS TARGET
                                                              FOR WHICH [**]                FOR WHICH [**]

        MILESTONE EVENT
        ---------------------------------------------------   --------------------------    -------------------------
                                                                                      
        IND filing                                            U.S. $               [**]     U.S. $              [**]
        Commencement of a Phase 2 Trial                                            [**]                         [**]
        Commencement of a Phase 3 Trial                                            [**]                         [**]
        NDA Filing                                                                 [**]                         [**]
        MAA Filing                                                                 [**]                         [**]
        NDA Approval or MAA Approval (upon the first to                            [**]                         [**]
        occur)
                                                              --------------------------    -------------------------
                 TOTAL                                        U.S. $               [**]     U.S. $        76,000,000


         Subject to Section 5.4.3, BMS shall pay Lexicon milestone payments for
         [**]. For each BMS Product that is a Post Opt-out Product, milestone
         payment [**] as set forth in Section 2.5.3.4. For each BMS Product that
         acts through a BMS Target that was designated from a BMS Inactive
         Selected Target, the milestone payment [**] as set forth in Section
         2.3.4.2.

                  5.4.2    Lexicon Products. For each Lexicon Target, Lexicon
         shall pay BMS the following milestone payments for [**]:



                                                                                            PAYMENTS FOR LEXICON
        MILESTONE EVENT                                                                     TARGET
        --------------------------------------------------------------------------------    -------------------------
                                                                                         
        IND filing                                                                          U.S. $              [**]
        Commencement of a Phase 2 Trial                                                                         [**]
        Commencement of a Phase 3 Trial                                                                         [**]
        NDA Filing                                                                                              [**]
        MAA Filing                                                                                              [**]
        NDA Approval or MAA Approval (upon the first to occur)                                                  [**]
                                                                                            -------------------------
                 TOTAL                                                                      U.S. $        25,000,000


         Subject to Section 5.4.3, Lexicon shall pay BMS milestone payments for
         [**]. For each Lexicon Product that is a Post Opt-out Product,
         milestone payment [**] as set forth in Section 2.5.3.4. For each
         Lexicon Product that acts through a Lexicon Target that was designated
         from a Lexicon Inactive Selected Target, the milestone payment [**] as
         set forth in Section 2.3.4.2.

                  5.4.3    Milestone Conditions. The milestone payments payable
         under Sections 5.4.1 and 5.4.2 with respect to Products acting through
         a given BMS Target or Lexicon Target, as the case may be, shall be
         subject to the following conditions.

                           (a)      Only one set of milestone payments will be
                  paid for all Products containing a given Development Compound
                  (including all forms and formulations of Products containing
                  such Development Compound) upon the first occurrence of the
                  milestone event for a Product containing that Development
                  Compound, regardless of the number of times a milestone event
                  may be achieved for Products containing such

                                       31


                  Development Compound (for example, regardless of the number of
                  Phase 3 Trials and NDA Filings and Approvals that may be
                  obtained for Products containing such Development Compound).

                           (b)      Each milestone payment shall be payable upon
                  the first achievement of the milestone event for a given
                  Development Compound; provided, however, [**].

                           (c)      Subject to the foregoing provisions of this
                  Section 5.4.3, if any milestone event for a Product is
                  achieved prior to or in the absence of the achievement of any
                  preceding milestone event for such Product (e.g., an NDA
                  filing for a Product without a Phase 3 Trial) then, effective
                  upon achievement of any such milestone event, all previously
                  unpaid payments for any such preceding milestone event(s)
                  shall also become due and payable.

                  5.4.4    Notice of Milestone Achievement. Each Product
         Licensee shall promptly notify the Product Licensor of the first
         occurrence of any milestone with respect to each Selected Target, and
         milestone payments shall be made within [**] days after such
         occurrence. Such milestone payments shall be non-refundable and shall
         not be credited against royalties payable to the Product Licensee under
         this Agreement, subject to Section 6.2.

         5.5      Product Royalties.

                  5.5.1    BMS Products. For each BMS Product, BMS shall pay to
         Lexicon the following royalties on aggregate annual Net Sales in the
         Territory of such BMS Product:



                                                                         ROYALTY ON NET         ROYALTY ON NET
                                                                         SALES FOR BMS          SALES FOR BMS
                                                                         PRODUCT ACTING         PRODUCT ACTING
                                                                         THROUGH A BMS          THROUGH A BMS
           AGGREGATE ANNUAL WORLDWIDE                                    TARGET THAT IS         TARGET THAT IS A
           NET SALES OF BMS PRODUCT IN CONTRACT YEAR                     NOT A LISTED           LISTED TARGET
                                                                         TARGET
           ----------------------------------------------------------    -------------------    ---------------------
                                                                                          
           Under U.S. $[**]                                                    [**]%                   [**]%
           From U.S. $[**]to U.S. $[**]                                        [**]%                   [**]%
           Above $[**]                                                         [**]%                   [**]%


         By way of example, in a given Contract Year, if the aggregate annual
         worldwide Net Sales of a given BMS Product acting through a BMS Target
         that is not a Listed Target is [**], the following royalty payment
         would be payable under this Section 5.5.1: [**]. For BMS Products which
         are Post Opt-out Products, the foregoing royalty payment amounts [**]
         as provided in Section 2.5.3.4. For BMS Products that act through a BMS
         Target that was designated from a BMS Inactive Selected Target, the
         above royalty payment amounts shall be reduced as set forth in Section
         2.3.4.2.

                  5.5.2    Lexicon Products. For each Lexicon Product, Lexicon
         shall pay to BMS the following royalties on aggregate annual Net Sales
         in the Territory of such Lexicon Product:





                  AGGREGATE ANNUAL WORLDWIDE                                          ROYALTY ON NET
                  NET SALES OF LEXICON PRODUCT IN CONTRACT YEAR                       SALES
                  ----------------------------------------------------------------    ----------------------
                                                                                   
                  Under U.S. $[**]                                                            [**]%
                  From U.S. $[**] to U.S. $[**]                                               [**]%
                  Above $[**]                                                                 [**]%


                                       32


         By way of example, in a given Contract Year, if the aggregate annual
         worldwide Net Sales of a given Lexicon Product is [**], the following
         royalty payment would be payable under this Section 5.5.2: [**]. For
         Lexicon Products which are Post Opt-out Products, the foregoing royalty
         payment amounts [**] as provided in Section 2.5.3.4. For Lexicon
         Products that act through a Lexicon Target that was designated from a
         Lexicon Inactive Selected Target, the above royalty payment [**] as set
         forth in Section 2.3.4.2.

                  5.5.3    Royalty Term. Royalties shall be payable, on a
         Product-by-Product and country-by-country basis, on Net Sales of
         Products for the longer of (a) the term of any Patents Rights
         Controlled by a party with a Valid Claim Covering the composition of
         matter or therapeutic use of such Product and providing marketing
         exclusivity for such Product in such country or (b) [**] years after
         the First Commercial Sale of such Product in such country.

                  5.5.4    Royalty Reduction. [**].

                  5.5.5    Third Party Patents. If the Product Licensee, in its
         reasonable judgment, is required to obtain a license from any Third
         Party under any patent in order to [**], and if the Product Licensee is
         required to pay to such Third Party a royalty under such license
         calculated on sales of a Product, and the infringement of such patent
         cannot reasonably be avoided by the Product Licensee, or if the Product
         Licensee is required by a court of competent jurisdiction to pay such a
         royalty to such a Third Party (and the infringement of such patent
         cannot reasonably be avoided by the Product Licensee), then the Product
         Licensee's obligation to pay royalties under Section 5.5.1 and 5.5.2
         hereof shall [**], provided however, that [**]. In addition, if the
         Product Licensee is required to pay upfront payments or milestone
         payments to such Third Party in consideration for such license, or if
         the Product Licensee is required by a court of competent jurisdiction
         to pay a similar such payment, then the royalties payable under Section
         5.5.1 and 5.5.2 shall [**], provided however, that [**]. The Product
         Licensee shall use its commercially reasonable efforts to minimize the
         amount of any of the foregoing payments owed by the Product Licensee to
         a Third Party. Prior to the Product Licensee exercising its reasonable
         judgment under this Section 5.5.5, the Product Licensee shall provide
         the Product Licensor with written notice of a potential need to obtain
         any license from Third Parties. The parties shall discuss the best
         course of action to resolve such potential license requirement(s),
         provided that such discussions shall not limit the Product Licensee's
         right to exercise its reasonable judgment.

                  5.5.6    Royalty Conditions. The royalties under Section 5.5.1
         and 5.5.2 shall be subject to the following conditions:

                           (a)      that only one royalty shall be due with
                  respect to the same unit of Product;

                           (b)      that no royalties shall be due upon the sale
                  or other transfer among Product Licensee, its Affiliates or
                  Sublicensees, but in such cases the royalty shall be due and
                  calculated upon Product Licensee's or its Affiliate's or
                  Sublicensee's Net Sales of Product to the first independent
                  Third Party; and

                           (c)      no royalties shall accrue on the disposition
                  of Product in reasonable quantities by Product Licensee, its
                  Affiliates or Sublicensees as part of an expanded access
                  program or as bona fide samples or as donations to non-profit
                  institutions or government agencies for non-commercial
                  purposes, provided, in each case, that neither Product
                  Licensee, its Affiliate or Sublicensees receives any payment
                  for such Product.

                                       33


                  5.5.7    Royalty Reports; Exchange Rates. During the term of
         this Agreement following the First Commercial Sale of any Product, the
         Product Licensee shall provide Product Licensor, within [**] days after
         the end of each Contract Quarter, an initial quarterly royalty report
         in a manner sufficient to enable Product Licensor to comply with its
         reporting requirements. Within [**] days after each Contract Quarter,
         Product Licensee shall furnish to the Product Licensor a written
         quarterly report showing, on a Product-by-Product basis:

                           (a)      the gross sales and Net Sales of Products
                  sold by such Product Licensee, its Sublicensees and their
                  respective Affiliates during the reporting period and the
                  calculation of Net Sales from such gross sales;

                           (b)      the royalties payable in United States
                                    dollars which shall have accrued hereunder
                  in respect of such Net Sales;

                           (c)      withholding taxes, if any, required by
                  applicable Law to be deducted in respect of such royalties;

                           (d)      the dates of the First Commercial Sales of
                  Products in any country during the reporting period; and

                           (e)      the exchange rates used in determining the
                  amount of United States 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 the Product Licensee for financial
         accounting purposes. If no royalty or payment is due for any royalty
         period hereunder, the Product Licensee shall so report. Each Product
         Licensee shall keep, and shall require its Sublicensees to keep (all in
         accordance with generally accepted accounting principles, consistently
         applied), 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.

                  5.5.8    Audits. Upon the written request of a Product
         Licensor, the Product Licensee shall permit an independent certified
         public accountant selected by the Product Licensor and acceptable to
         the Product Licensee, which acceptance shall not be unreasonably
         withheld, to have access, at reasonable times and during normal
         business hours, to such records of the Product Licensee as may be
         reasonably necessary to verify the accuracy of the royalty reports
         described herein, in respect of any fiscal year ending not more than
         [**] prior to the date of such request. The Product Licensor and the
         Product Licensee shall use commercially reasonable efforts to schedule
         all such verifications within [**] days after the Product Licensor
         makes its written request. All such verifications shall be conducted
         not more than [**]. The report of the Product Licensor's independent
         certified public accountant shall be made available to both parties.
         Subject to the Product Licensee's rights under Section 12.6, in the
         event the Product Licensor's independent certified public accountant
         concludes that additional royalties were owed to the Product Licensor
         for such period, the additional royalty shall be paid by the Product
         Licensee within [**] days of the date the Product Licensor delivers to
         the Product Licensee such independent certified public accountant's
         written report so concluding, unless such report contains manifest
         error. In the event the Product Licensor's independent certified public
         accountant concludes that there was an overpayment of royalties to the
         Product Licensor during such period, the overpayment shall be repaid by
         the Product Licensor within [**] days of the date the Product Licensor
         received such independent certified public accountant's written report
         so concluding, unless such report contains manifest error. The fees
         charged by such independent

                                       34


         certified public accountant shall be paid by the Product Licensor
         unless such audit discloses an underpayment of more than [**] of the
         amount due under this Agreement for the period in question, in which
         case the Product Licensee will bear the full cost of such audit. The
         Product Licensee shall include in each agreement with each applicable
         Sublicensee a provision requiring such Sublicensee to make reports to
         the Product Licensee, to keep and maintain records of sales made
         pursuant to such agreement and to grant access to such records by the
         Product Licensor's independent certified public accountant to the same
         extent required of the Product Licensee under this Agreement. The
         Product Licensor agrees that all information subject to review under
         this Section 5.5.8 or under any agreement with a Sublicensee of the
         Product Licensee is confidential and that the Product Licensor shall
         cause its independent certified public accountant to retain all such
         information in confidence. The Product Licensor's independent certified
         public accountant shall only report to the Product Licensor as to the
         computation of the royalties and other payments due to the Product
         Licensor under this Agreement and shall not disclose to the Product
         Licensor any other information of the Product Licensee or its
         Sublicensee.

                  5.5.9    Royalty Payment Terms. Royalty payments for each
         Contract Quarter shall be due at the time the Product Licensee's report
         under Section 5.5.7 for such Contract Quarter shall be due.

         5.6      Withholding Taxes. In the event that any royalties or other
payments due to a Product Licensor are subject to withholding tax required by
applicable Law to be paid to the taxing authority of any foreign country, the
amount of such tax may be withheld from the applicable royalties or other
payment due the Product Licensor. The Product Licensee shall promptly pay such
tax on behalf of the Product Licensor and shall furnish the Product Licensor
with a certificate of withholding tax so deducted for the Product Licensor's
avoidance of duplicate taxation in United States. The Product Licensee may not
deduct any other withholding or any other governmental charges from the payments
agreed upon under this Agreement, except to the extent same are paid on behalf
of, or for the benefit of, the Product Licensor. The Product Licensee shall
maintain official receipts of payment of any such withholding taxes and shall
forward such receipts to the Product Licensor.

         5.7      Blocked Currency. If by applicable Law or fiscal policy of a
particular country, conversion into United States dollars or transfer of funds
of a convertible currency to the United States is restricted or forbidden, the
Product Licensee shall give the Product Licensor prompt written notice and shall
pay the royalty due under this Article 5 through such means or methods as are
lawful in such country as the Product Licensor may reasonably designate. Failing
the designation by the Product Licensor of such lawful means or methods within
[**] days after such written notice is given to the Product Licensor, the
Product Licensee shall deposit such royalty payment in local currency to the
credit of the Product Licensor in a recognized banking institution designated by
the Product Licensor, or if none is designated by the Product Licensor within
the [**] period described above, in a recognized banking institution selected by
the Product Licensee and identified in a written notice to the Product Licensor
by the Product Licensee, and such deposit shall fulfill all obligations of the
Product Licensee to the Product Licensor with respect to such royalties.

         5.8      Interest on Late Payments. A Product Licensor shall have the
right to seek to collect interest on any payments that are not paid on or before
[**] days after the date such payments are due under this Agreement at a rate
equal to [**], calculated on the total number of days payment is delinquent.

         5.9      Manner of Payment. Except as provided in Section 5.7, payments
to be made by a Product Licensee to the Product Licensor under this Agreement
shall be payable in United States dollars and shall be paid by check delivered
to the Product Licensor at its principal office at the address for notice
indicated in this Agreement or bank wire transfer in immediately available funds
to such bank account in

                                       35


the state in which such principal office is located as is designated in writing
by the Product Licensor from time to time.

                    ARTICLE 6. PRODUCT DEVELOPMENT DILIGENCE

         6.1      Diligence Obligations. Each Product Licensee shall use
Diligent Efforts to pursue the research and development of, and to obtain
Regulatory Approvals in major markets throughout the world as expeditiously as
possible for, at least one Product that acts through each Selected Target for
which such Product Licensee holds a license under Section 4.2 and, following
such Regulatory Approvals, to maximize Net Sales of such Product(s), in each
case in a manner consistent with the efforts such party devotes to products or
research, development or marketing projects of similar market potential, profit
potential or strategic value resulting from its own research efforts, based on
conditions then prevailing, without any diminution on account of any interest of
such Product Licensee in any competitive product in development or being
marketed for the same indication(s).

         6.2      Effect of Failure to Satisfy Diligence Obligations.

                  6.2.1    With respect to each Selected Target for which the
         Product Licensee fails to satisfy its Product diligence obligations
         under Section 6.1 above, at the option of the other party as its sole
         and exclusive remedy therefor, (a) the commercial licenses granted
         under Section 4.2 with respect to such Product(s) and related Selected
         Target shall terminate and [**]; provided, however, that Product
         Licensee's exclusive rights under Section 4.1 and 4.2 shall not
         terminate as set forth above [**] unless (i) Product Licensee is given
         [**] days' prior written notice by Product Licensor of Product
         Licensor's intent to terminate such licenses, stating the reasons and
         justification for such termination and recommending steps which Product
         Licensee should take, and (ii) Product Licensee, or any Sublicensee,
         has not used Diligent Efforts during such [**] period to pursue the
         research and/or development of, and/or to obtain Regulatory Approvals
         for, Products with respect to such Selected Target. The Product
         Licensor shall have the right, within the period of [**] days following
         the Product Licensee's [**] by delivering written notice thereof to the
         Product Licensee, subject to [**].

                  6.2.2    With respect to each Selected Target and related
         Products and Development Compounds for which a party exercises its
         right, under Section 6.2.1, [**] relating to such Product and related
         Development Compounds.

         6.3      Research and Development Reports. Each party shall keep
complete and accurate records of its activities conducted under this Agreement
and the results thereof. Within [**] after the end of each [**] following the
end of the Research Program Term, each party shall prepare and provide the other
party with a reasonably detailed written report of the activities conducted
under this Agreement, and the results thereof, through such date with respect to
the development and/or commercialization of Products.

                        ARTICLE 7. INTELLECTUAL PROPERTY

         7.1      Ownership of Intellectual Property.

                  7.1.1    Ownership by BMS of the BMS Background Materials and
         BMS Background Technology. Subject to the rights and licenses granted
         under this Agreement, BMS (and its licensors, as applicable) shall own
         and retain all rights to the BMS Background Materials and BMS
         Background Technology.

                                       36


                  7.1.2    Ownership by Lexicon of the Lexicon Background
         Materials and Lexicon Background Technology. Subject to the rights and
         licenses granted under this Agreement, Lexicon (and its licensors, as
         applicable) shall own and retain all rights to the Lexicon Background
         Materials and Lexicon Background Technology. Without limiting the
         foregoing, subject to the rights and licenses granted under this
         Agreement, Lexicon shall own and retain all rights to (a) all Mutant
         Mice and progeny thereof and any cells or other materials derived by
         Lexicon therefrom and (b) any invention or discovery that is conceived
         or first reduced to practice by Lexicon or any of its Affiliates during
         the course of any analysis of Mutant Mice performed in the Target
         Discovery Program.

                  7.1.3    Ownership of Program Intellectual Property.

                           7.1.3.1  Inventorship. Inventorship for patentable
                  inventions and discoveries conceived or reduced to practice
                  during the course of the performance of activities pursuant to
                  this Agreement shall be determined in accordance with U.S.
                  patent laws for determining inventorship. In the event of a
                  dispute regarding inventorship, if the parties are unable to
                  resolve such inventorship dispute, the Joint Management
                  Committee shall establish a procedure to resolve such dispute,
                  which may include engaging a Third Party patent attorney
                  jointly selected by the parties to resolve such dispute, which
                  resolution by such patent attorney shall be binding upon the
                  parties.

                           7.1.3.2  Ownership of Program Technology and Program
                  Intellectual Property for Selected Targets. Subject to the
                  rights and licenses granted under this Agreement, Lexicon
                  shall own all Program Technology and Program Intellectual
                  Property that directly relates to [**] ("Selected Target
                  Inventions"), whether such Selected Target Invention was
                  invented or discovered by employees, Affiliates, agents,
                  independent contractors or consultants of BMS, Lexicon or both
                  parties; provided, however, that Selected Target Inventions
                  shall not include Program Technology and Program Intellectual
                  Property [**].

                           7.1.3.3  Ownership of Other Program Technology and
                  Program Intellectual Property. Except as set forth in Section
                  7.1.3.2, title to all Program Technology and Program
                  Intellectual Property shall be based upon the inventorship for
                  such Program Technology and Program Intellectual Property.
                  Except as set forth in Section 7.1.3.2, Lexicon shall own,
                  Program Technology and Program Intellectual Property invented
                  solely by employees, agents, consultants and/or contractors of
                  Lexicon or a Lexicon Affiliate ("Lexicon Sole Program
                  Inventions"). Except as set forth in Section 7.1.3.2, BMS
                  shall own, Program Technology and Program Intellectual
                  Property invented solely by employees, agents, consultants
                  and/or contractors of BMS or a BMS Affiliate ("BMS Sole
                  Program Inventions"). Lexicon and BMS shall jointly own
                  Program Technology and Program Intellectual Property invented
                  jointly by employees, agents, consultants and/or contractors
                  of both Lexicon and BMS or Affiliates of Lexicon and BMS
                  ("Joint Program Inventions"). All Joint Program Inventions,
                  BMS Sole Program Inventions, Lexicon Sole Program Inventions
                  and Selected Target Inventions shall be collectively the
                  "Program Inventions." Each party shall disclose to the other
                  party promptly any Program Inventions made by such party's
                  Affiliates, employees, agents or consultants.

         7.2      Prosecution and Maintenance of Program Patent Rights.

                  7.2.1    Primary Prosecution Rights. The responsibility for
         (a) preparing, filing and prosecuting patent applications (including,
         but not limited to, provisional, reissue, continuing,

                                       37


         continuation, continuation-in-part, divisional, and substitute
         applications and any foreign counterparts thereof) Covering a Program
         Invention; (b) maintaining any Program Patent Rights; and (c) managing
         any interference or opposition or similar proceedings relating to the
         foregoing ((a) through (c), collectively, "Patent Prosecution") shall
         be the responsibility of the party owning such Program Invention;
         provided, however, that with respect to any Joint Program Inventions,
         such responsibility shall be assigned by the Joint Management Committee
         on a case-by-case basis. In determining which party shall be
         responsible for Patent Prosecution of a jointly owned patent
         application, the Joint Management Committee shall consider, among other
         factors, the relative contribution of each party to the claimed subject
         matter and the relatedness of the claimed subject matter to that in
         other patent applications being prosecuted by each party. Each party
         shall bear all Patent Prosecution expenses, including attorneys' fees,
         incurred by such party in the performance of Patent Prosecution, except
         that, unless the parties agree otherwise the Patent Prosecution
         expenses, including attorneys' fees, for Joint Program Inventions shall
         be shared equally by the parties.

                  7.2.2    Secondary Prosecution Rights. If the prosecuting
         party elects not to continue pursuing Patent Prosecution for Program
         Inventions (and the other party has joint ownership of or a license
         under such Program Patent Rights pursuant to this Agreement), then the
         prosecuting party shall notify the other party in writing of such
         election at least [**] days prior to the last available date for action
         to preserve such Program Patent Rights. If such other party elects to
         continue Patent Prosecution, it may do so at its own expense. The party
         taking over Patent Prosecution responsibility will not be liable to the
         other party in any way with respect to its handling of, or the results
         obtained from, such Patent Prosecution. The other party will provide
         the party taking over Patent Prosecution with such assistance and
         execute such documents as are necessary to continue or permit such
         Patent Prosecution.

                  7.2.3    Cooperation. Each party hereby agrees:

                           (a)      to take all reasonable additional actions
                  and execute such agreements, instruments and documents as may
                  be reasonably required to perfect the other's ownership
                  interest in accordance with the intent of this Agreement;

                           (b)      to make its employees, Affiliates, agents,
                  independent contractors and consultants reasonably available
                  to the other party (or to the other party's authorized
                  attorneys, agents or representatives), to the extent
                  reasonably necessary to enable the prosecuting party to
                  undertake Patent Prosecution;

                           (c)      to provide the other party with copies of
                  all material correspondence with the U.S. Patent and Trademark
                  Office or its foreign counterparts;

                           (d)      to cooperate, if necessary and appropriate,
                  with the other party in gaining patent term extensions
                  wherever applicable to Program Patent Rights for Program
                  Inventions; and

                           (e)      to endeavor in good faith to coordinate its
                  efforts with the other party to minimize or avoid interference
                  with the Patent Prosecution of the other party's patent
                  applications related to Program Inventions.

         7.3      Patent Term Extension. The Product Licensor shall cooperate
with the Product Licensee in obtaining patent term extension or supplemental
protection certificates or their equivalents in any country with respect to the
Program Patent Rights. In the event that elections with respect to obtaining

                                       38



such patent term extension, supplemental protection certificates or their
equivalents are to be made, the Product Licensee shall have the right to make
the election and the Product Licensor agrees to abide by such election, provided
that such election by the Product Licensee will be made so as to maximize the
period of marketing exclusivity for the Product.

         7.4      Enforcement of the Program Patent Rights.

                  7.4.1    Notices of Third Party Infringement. Each Party shall
         promptly provide the other Party with written notice reasonably
         detailing any known or alleged infringement of Program Patent Rights by
         a Third Party.

                  7.4.2    Hatch-Waxman Notifications. Each party shall provide
         to the other party copies of any allegations of alleged patent
         invalidity, unenforceability or non-infringement of a patent or patents
         with respect to Program Technology, Program Materials or Products
         pursuant to a Paragraph IV Patent Certification by a Third Party filing
         an Abbreviated New Drug Application (i.e., an action under the
         Hatch-Waxman Act). Such copies shall be provided promptly after receipt
         of such certification.

                  7.4.3    Other Notifications. Each party shall provide to the
         other party copies of any notices it receives from Third Parties
         regarding any patent nullity actions, any declaratory judgment actions,
         any alleged infringement of Program Patent Rights or any alleged
         misappropriation of intellectual property with respect to Program
         Technology, Program Materials or Products. Such copies shall be
         provided promptly following receipt thereof.

                  7.4.4    Product-Related Infringement.

                           7.4.4.1  The Product Licensee for a Product shall
                  have the sole right, but not the obligation, to institute and
                  direct legal proceedings against any Third Party believed to
                  be infringing the Program Patent Rights of either party
                  (including, without limitation, the Program Patent Rights
                  Claiming Selected Target Inventions related to the Selected
                  Target through which such Product acts) by the manufacture,
                  use, importation, offer for sale or sale of a product
                  competitive with such Product (whether a clinical or
                  commercial product). Each party will bear its own costs,
                  including attorneys' fees, relating to such legal proceedings;
                  provided that the Product Licensee shall bear the Product
                  Licensor's out-of-pocket expenses, including attorneys' fees,
                  incurred in complying with requests for cooperation made by
                  the Product Licensee. Any recovery in connection with such
                  suit or proceeding will first be applied to reimburse the
                  parties for their out-of-pocket expenses, including attorney's
                  fees. All recoveries resulting from such legal proceedings
                  that are in excess of the parties' costs of bringing or
                  participating in such action, including attorney's fees, shall
                  be allocated fifty percent (50%) to BMS and fifty percent
                  (50%) to Lexicon; provided, however, that, [**]. The Product
                  Licensee and the Product Licensor shall share in any enhanced
                  damages due to willful infringement in proportion to their
                  entitlement to actual damages.

                           7.4.4.2  In the event that a Product Licensee takes
                  action under this Section 7.3.2, the other party shall
                  cooperate to the extent reasonably necessary at the sole
                  expense of the Product Licensee. Upon the reasonable request
                  of the Product Licensee, the other party shall join the suit
                  and shall be represented in any such legal proceedings using
                  counsel of its own choice. Neither party shall settle any
                  claim or proceeding relating to Program Patent Rights
                  Controlled in whole or in part by the other party or licensed
                  under

                                       39


                  this Agreement to the other party without the prior written
                  consent of such other party, which consent shall not be
                  unreasonably withheld.

                  7.4.5    Non-Product-Related Infringement. Each party shall
         have the sole right, but not the obligation, to institute and direct
         legal proceedings against any Third Party believed to be infringing the
         Sole Program Patent Rights of such party other than infringement
         relating to a Product. All costs, including attorneys' fees, relating
         to such legal proceedings shall be borne by the party instituting such
         legal proceedings, and all recoveries resulting from such legal
         proceedings shall be retained by such party. The parties shall consult
         with each other regarding the institution, prosecution and control of
         any action or proceeding with respect to infringement of any of the
         Joint Program Patent Rights other than infringement relating to a
         Product.

         7.5      Notices of Other Proceedings.

                  7.5.1    Each party shall notify the other in writing of any
         allegations it receives from a Third Party that the manufacture, use,
         sale, offer for sale or import of Program Technology, Program Materials
         or any Product infringes the intellectual property rights of such Third
         Party. Such notice shall be provided promptly following receipt of such
         allegations.

                  7.5.2    In the event that a party receives notice that it or
         any of its Affiliates have been individually named as a defendant in a
         legal proceeding by a Third Party alleging infringement of a Third
         Party patent or other intellectual property right as a result of the
         manufacture, use, sale, offer for sale or import of Program Technology,
         Program Materials or a Product, such party shall immediately notify the
         other party in writing after the receipt of such notice. Such written
         notice shall include a copy of any summons or complaint (or the
         equivalent thereof) received regarding the foregoing.

                           ARTICLE 8. CONFIDENTIALITY

         8.1      Nondisclosure Obligations.


                  8.1.1    General. Except as otherwise provided in this Article
         8, each Receiving Party shall maintain the Confidential Information of
         each Disclosing Party in confidence and use it only for purposes
         specifically authorized under this Agreement. Except as otherwise
         specifically provided in this Article 8, each party shall disclose
         Confidential Information of the other party only to those employees,
         representatives and agents requiring knowledge thereof in connection
         with fulfilling the party's obligations under this Agreement, and not
         to any other Third Party. Each party further agrees to inform all such
         employees, representatives and agents of the terms and provisions of
         this Agreement relating to Confidential Information and their duties
         hereunder and to have obtained their prior written agreement to keep
         such Confidential Information in confidence under terms and conditions
         no less restrictive than those contained herein. Each party shall
         exercise the same standard of care as it would itself exercise in
         relation to its own confidential information (but in no event less than
         a reasonable standard of care) to protect and preserve the proprietary
         and confidential nature of the Confidential Information disclosed to it
         by the other party. Upon termination or expiration of this Agreement,
         each party shall promptly, upon request of the other party, use good
         faith commercially reasonable efforts to return or destroy (as
         requested by the disclosing party) all documents and any copies thereof
         containing Confidential Information belonging to, or disclosed by, such
         other party, save that it may retain one copy of the same solely for
         the purposes of ensuring compliance with this Section 8.1. Any breach
         of this Section 8.1 by any person to whom Confidential Information is
         disclosed by a party is considered a breach by the party itself.

                                       40


                  8.1.2    Limitations. To the extent it is reasonably necessary
         or appropriate to fulfill its obligations or exercise its rights under
         this Agreement and subject to advance written notification to the
         Disclosing Party: (a) a party may disclose to Third Parties
         Confidential Information it is otherwise obligated not to disclose
         under this Section 8.1, to its Affiliates, Sublicensees, consultants,
         outside contractors and clinical investigators, on a strict
         need-to-know basis for the purposes contemplated by this Agreement and
         on the condition that such entities or persons agree to keep the
         Confidential Information confidential for the same time periods and to
         the same extent as such party is required to keep the Confidential
         Information confidential hereunder; and (b) a party or its Sublicensees
         may disclose, using appropriate measures to preserve confidentiality,
         such Confidential Information to government or other regulatory
         authorities to the extent that such disclosure is reasonably necessary
         to obtain authorizations to conduct clinical trials of, and to
         commercially market, Products pursuant to this Agreement. Furthermore,
         a Receiving Party may request permission from the Disclosing Party to
         disclose such Confidential Information to the extent that such
         disclosure is [**].

                  8.1.3    Required Disclosure. A Receiving Party may disclose
         Confidential Information pursuant to interrogatories, requests for
         information or documents, subpoena, civil investigative demand issued
         by a court or governmental agency or as otherwise required by Law;
         provided, however, that the Receiving Party shall notify the Disclosing
         Party promptly upon receipt thereof, giving [**] the Disclosing Party
         sufficient advance notice to permit it to oppose, limit or seek
         confidential treatment for such disclosure; and provided, further, that
         the Receiving Party shall furnish only that portion of the Confidential
         Information which it is advised by counsel is legally required whether
         or not a protective order or other similar order is obtained by the
         Disclosing Party.

                  8.1.4    Securities Filings. In the event either party
         proposes to file with the Securities and Exchange Commission or the
         securities regulators of any state or other jurisdiction a registration
         statement or any other disclosure document which describes or refers to
         this Agreement under the Securities Act of 1933, as amended, the
         Securities Exchange Act, of 1934, as amended, or any other applicable
         securities law, the party shall notify the other party of such
         intention and shall provide such other party with a copy of relevant
         portions of the proposed filing not less than ten (10) business days
         prior to such filing (and any revisions to such portions of the
         proposed filing a reasonable time prior to the filing thereof),
         including any exhibits thereto relating to the Agreement, and shall
         [**] to obtain confidential treatment of any information concerning the
         Agreement that such other party requests be kept confidential, and
         shall only disclose Confidential Information which it is advised by
         counsel is legally required to be disclosed. No such notice shall be
         required under this Section 8.1.4 if the substance of the description
         of or reference to this Agreement contained in the proposed filing has
         been included in any previous filing made by the either party hereunder
         or otherwise approved by the other party.

         8.2      Terms of Agreement. The existence and the terms and conditions
of the Agreement that the parties have not specifically agreed to disclose
pursuant to Section 8.1.4 and Section 12.8 shall be considered Confidential
Information of both parties. Either party may disclose such terms to bona fide
potential Sublicensee, investor, investment banker, acquiror, merger partner or
other potential financial partner, and their attorneys and agents, provided that
each such person to whom such information is to be disclosed is informed of the
confidential nature of such information and has entered into a written agreement
with the party requiring such person to keep such information confidential.

         8.3      Injunctive Relief. The parties hereto understand and agree
that remedies at law may be inadequate to protect against any breach of any of
the provisions of this Article 8 by either party or their

                                       41


employees, agents, officers or directors or any other person acting in concert
with it or on its behalf. Accordingly, each party shall be entitled to the
granting of injunctive relief by a court of competent jurisdiction against any
action that constitutes any such breach of this Article 8.

         8.4      Publication. BMS and/or Lexicon (each, a "Submitting Party")
may each publish or present data and/or results relating to a Product for which
the Submitting Party holds a commercial license, subject to the prior written
approval of the other party and the prior review of the proposed disclosure by
the other party (each, a "Reviewing Party"), solely to determine (a) whether the
proposed disclosure contains the Confidential Information of the Reviewing Party
or (b) whether the information contained in the proposed disclosure should be
the subject of a patent application to be filed prior to such disclosure. The
Submitting Party shall provide the Reviewing Party with the opportunity to
review any proposed abstract, manuscript or presentation which discloses the
results of research relating to the Product by delivering a copy thereof to the
Reviewing Party no less than [**] days before its intended submission for
publication or presentation. The Reviewing Party shall have [**] days from its
receipt of any such abstract, manuscript or presentation in which to notify the
Submitting 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. In the event
the Reviewing Party objects to the disclosure, the Submitting 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 [**] days) to seek patent
protection for any material in the disclosure which the Reviewing Party believes
is patentable (subject, in all events, to Section 8.3) or, in the case of
Confidential Information, to allow the Submitting Party to delete any
Confidential Information of the Reviewing Party from the proposed disclosure.
The Submitting Party agrees to delete from the proposed disclosure any
Confidential Information of the Reviewing Party upon request.

                   ARTICLE 9. REPRESENTATIONS AND WARRANTIES

         9.1      Representations, Warranties and Covenants of Lexicon. Lexicon
represents and warrants to and covenants with BMS that:

                  9.1.1    Lexicon is a corporation duly organized, validly
         existing and in corporate good standing under the Laws of the state of
         Delaware;

                  9.1.2    Lexicon has the corporate and legal right, authority
         and power to enter into this Agreement, and to extend the rights and
         licenses granted to BMS in this Agreement;

                  9.1.3    Lexicon has taken all necessary action to authorize
         the execution, delivery and performance of this Agreement;

                  9.1.4    upon the execution and delivery of this Agreement,
         this Agreement shall constitute a valid and binding obligation of
         Lexicon, enforceable in accordance with its terms, except as
         enforceability may be limited by applicable bankruptcy, insolvency,
         reorganization, moratorium or similar Laws affecting creditors' and
         contracting parties' rights generally and except as enforceability may
         be subject to general principles of equity (regardless of whether such
         enforceability is considered in a proceeding in equity or at law);

                  9.1.5    the performance of Lexicon's obligations under this
          Agreement will not conflict with its charter documents or result in a
         breach of any agreements, contracts or other arrangements to which it
         is a party; and

                                       42


                  9.1.6    Lexicon will not after the Effective Date enter into
         any agreements, contracts or other arrangements with others that would
         be inconsistent with or in conflict with or in derogation of BMS's
         rights and licenses under this Agreement or Lexicon's obligations under
         this Agreement;

                  9.1.7    except as otherwise disclosed to BMS prior to the
         Effective Date, Lexicon is not aware of any legal obstacles, including
         the patent rights of others, that are likely to prevent it from
         carrying out the provisions of this Agreement;

                  9.1.8    Lexicon has enforceable written agreements with all
         of its employees who receive Confidential Information under this
         Agreement assigning to Lexicon ownership of all intellectual property
         rights created in the course of their employment;

                  9.1.9    [**];

                  9.1.10   [**]; and

                  9.1.11   [**].

         9.2      Representations, Warranties and Covenants of BMS. BMS
represents and warrants to and covenants with Lexicon that:

                  9.2.1    BMS is a corporation duly organized, validly existing
         and in corporate good standing under the Laws of the state of Delaware;

                  9.2.2    BMS has the corporate and legal right, authority and
         power to enter into this Agreement, and to extend the rights and
         licenses granted to Lexicon in this Agreement;

                  9.2.3    BMS has taken all necessary action to authorize the
         execution, delivery and performance of this Agreement;

                  9.2.4    upon the execution and delivery of this Agreement,
         this Agreement shall constitute a valid and binding obligation of BMS
         enforceable in accordance with its terms, except as enforceability may
         be limited by applicable bankruptcy, insolvency, reorganization,
         moratorium or similar Laws affecting creditors' and contracting
         parties' rights generally and except as enforceability may be subject
         to general principles of equity (regardless of whether such
         enforceability is considered in a proceeding in equity or at law);

                  9.2.5    the performance of its obligations under this
         Agreement will not conflict with BMS's charter documents or result in a
         breach of any agreements, contracts or other arrangements to which it
         is a party; and

                  9.2.6    BMS will not after the Effective Date enter into any
         agreements, contracts or other arrangements with others that would be
         inconsistent with or in conflict with or in derogation of its
         obligations under this Agreement;

                  9.2.7    except as otherwise disclosed to Lexicon prior to the
         Effective Date, BMS is not aware of any legal obstacles, including the
         patent rights of others, that are likely to prevent it from carrying
         out the provisions of this Agreement;

                                       43


                  9.2.8    BMS has enforceable written agreements with all of
         its employees who receive Confidential Information under this Agreement
         assigning to BMS ownership of all intellectual property rights created
         in the course of their employment; and

                  9.2.9    [**].


         9.3      Warranty Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY PRODUCT,
PATENT RIGHTS, GOODS, SERVICES, PROGRAM MATERIALS, BACKGROUND MATERIALS OR ANY
OTHER SUBJECT MATTER OF THIS AGREEMENT, AND EACH PARTY HEREBY DISCLAIMS
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NON-INFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE FOREGOING.

         9.4      Limited Liability. EXCEPT AS SPECIFICALLY SET FORTH IN THIS
AGREEMENT, NEITHER LEXICON NOR BMS WILL BE LIABLE WITH RESPECT TO ANY MATTER
ARISING UNDER THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY FOR ANY PUNITIVE, EXEMPLARY, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OR LOST PROFITS.

                             ARTICLE 10. INDEMNITY

         10.1     BMS Indemnity Obligations. BMS agrees to defend, indemnify and
hold Lexicon, its Affiliates and their respective employees and agents harmless
from all claims, losses, damages or expenses (including reasonable attorneys'
fees and costs of litigation) in connection with any claims made or suits
brought against Lexicon by a Third Party relating to this Agreement arising as a
result of: (a) actual or asserted violations of any applicable Law by BMS, its
Sublicensees and their respective Affiliates by virtue of which any BMS Products
manufactured, distributed or sold hereunder shall be alleged or determined to be
adulterated, misbranded, mislabeled or otherwise not in compliance with any
applicable Law; (b) claims for bodily injury, death or property damage
attributable to the manufacture, distribution, sale or use of any BMS Products
by BMS, its Sublicensees and their respective Affiliates; (c) a BMS Product
recall ordered by a governmental agency or required by a confirmed BMS Product
failure as reasonably determined by the parties hereto; (d) BMS's breach of any
of its representations, warranties or covenants hereunder; or (e) the negligence
or willful misconduct of BMS, its officers, employees or agents.

         10.2     Lexicon Indemnity Obligations. Lexicon agrees to defend,
indemnify and hold BMS, its Affiliates and their respective employees and agents
harmless from all claims, losses, damages or expenses (including reasonable
attorneys' fees and costs of litigation) in connection with any claims made or
suits brought against BMS by a Third Party relating to this Agreement arising as
a result of: (a) actual or asserted violations of any applicable Law by Lexicon,
its Sublicensees and their respective Affiliates by virtue of which any Lexicon
Products manufactured, distributed or sold hereunder shall be alleged or
determined to be adulterated, misbranded, mislabeled or otherwise not in
compliance with any applicable Law; (b) claims for bodily injury, death or
property damage attributable to the manufacture, distribution, sale or use of
any Lexicon Products by Lexicon, its Sublicensees and their respective
Affiliates; (c) a Lexicon Product recall ordered by a governmental agency or
required by a confirmed Lexicon Product failure as reasonably determined by the
parties hereto; (d) Lexicon's breach of any of its representations, warranties
or covenants hereunder; or (e) the negligence or willful misconduct of Lexicon,
its officers, employees or agents.

                                       44


         10.3     Limitation on Indemnity Obligations. Neither party, its
Affiliates or their respective employees and agents shall be entitled to the
indemnities set forth in Sections 10.1 or 10.2, respectively, to the comparative
extent the claim, loss, damage or expense for which indemnification is sought
was caused by the negligence, willful misconduct, reckless or intentional act or
omission or material breach of this Agreement by such party, its directors,
officers, employees or authorized agents.

         10.4     Procedure. If a party or any of its Affiliates or their
respective employees or agents (collectively, the "Indemnitee") intends to claim
indemnification under this Article 10, the Indemnitee shall promptly notify the
other party (the "Indemnitor") of any loss, claim, damage, liability or action
in respect of which the Indemnitee intends to claim such indemnification, and
the Indemnitor shall assume the defense thereof with counsel selected by the
Indemnitor and reasonably acceptable to the Indemnitee, provided, however, that
an Indemnitee shall have the right to retain its own counsel, with the fees and
expenses to be paid by the Indemnitee, if representation of such Indemnitee by
the counsel retained by the Indemnitor would be inappropriate due to actual or
potential differing interests between such Indemnitee and any other party
represented by such counsel in such proceedings. The Indemnitor shall have the
right to settle or compromise any claims for which it is providing
indemnification under this Article 10, provided that the consent of the
Indemnitee (which shall not be unreasonably withheld or delayed) shall be
required in the event any such settlement or compromise would adversely affect
the interests of the Indemnitee. The indemnity agreement in this Article 10
shall not apply to amounts paid in settlement of any loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Indemnitor. The failure to deliver notice to the Indemnitor within a reasonable
time after the commencement of any such action, if prejudicial to the
Indemnitor's ability to defend such action, shall relieve such Indemnitor of any
liability to the Indemnitee under this Article 10, but the omission so to
deliver notice to the Indemnitor will not relieve it of any liability that it
may have to any Indemnitee otherwise than under this Article 10. The Indemnitee
under this Article 10, its employees and agents, shall cooperate fully with the
Indemnitor and its legal representatives in the investigation of any action,
claim or liability covered by this indemnification.

         10.5     Insurance. Each party shall maintain appropriate product
liability insurance (and/or self-insurance) with respect to development,
manufacture and sale of Products by such party in such amount as such party
customarily maintains with respect to sales of its other products. Each party
shall maintain such insurance for so long as it continues to manufacture or sell
Products, and thereafter for so long as such party customarily maintains
insurance with respect to sales of its other products.

                     ARTICLE 11. EXPIRATION AND TERMINATION

         11.1     Term of Agreement. The term of this Agreement shall commence
on the Effective Date and shall continue, unless earlier terminated under
Section 11.2, until the later of (a) the expiration of the obligations of both
parties to pay royalties under this Agreement and (b) the expiration or
termination of the last to expire of any Valid Claim included in the Program
Patent Rights. The expiration or termination of the Target Discovery Term and
Research Program Term shall not affect the term of this Agreement.

         11.2     Termination for Material Breach.

                  11.2.1   If either party believes that the other is in
         material breach of this Agreement, then the non-breaching party may
         deliver notice of such breach to the other party. In such notice, the
         non-breaching party shall identify the actions or conduct that such
         party would consider to be an acceptable cure of such breach. For any
         breach arising from a failure to make a payment set forth in Article 5,
         the allegedly breaching party shall have [**] days to cure such breach,
         unless such payment is in dispute. For all material breaches other than
         a failure to make a payment set forth

                                       45


         in Article 5, the allegedly breaching party shall have [**] days to
         either cure such breach or, if cure cannot be reasonably effected
         within such [**] period, to deliver to the other party a plan for
         curing such breach that is reasonably sufficient to effect a cure. Such
         a plan shall set forth a program for achieving cure as rapidly as
         practicable. Following delivery of such plan, the breaching party shall
         use Diligent Efforts to carry out the plan and cure the material
         breach.

                  11.2.2   If the party receiving notice of material breach
         fails to cure such breach within the [**] period or [**] period (as
         applicable), the party originally delivering the notice shall have the
         right, at its option exercisable in its sole discretion, in addition to
         any other rights or remedies available to it at law or in equity and
         subject to the limitations set forth in Sections 3.7.2, 9.4 and 12.6
         hereof, to terminate this Agreement upon [**] days' notice thereof to
         the other party, in which case the licenses granted to the defaulting
         party pursuant to Article 4 shall terminate; provided [**]. The
         provisions of Sections 5.3 through 5.9 hereof and Article 6 shall
         survive any such termination of this Agreement. The rights and licenses
         granted to the defaulting party under Section 4.2 with respect to any
         Selected Target and related Products and Development Compounds with
         respect to which no default has occurred shall, subject to such party's
         obligations to pay milestones and royalties pursuant to Article 5,
         continue.

         11.3     Effect of Expiration or Termination of Agreement. The
expiration or termination of this Agreement shall not relieve the parties of any
obligation accruing prior to such expiration or termination. The provisions of
Articles 7, 8, 9, 10 and 11, and Sections 12.2 through 12.6 hereof shall survive
the expiration or termination of this Agreement. The provisions of Sections 5.3
through 5.9 hereof and Article 6 shall survive any termination of this Agreement
under which a party, its Sublicensees or their respective Affiliates retains the
right to sell Products until such time as all royalty payment obligations
applicable to such Products under Section 5.5 have expired in accordance with
their terms.

                           ARTICLE 12. MISCELLANEOUS

         12.1     Force Majeure. Neither party shall be held liable or
responsible to the other party nor be deemed to have defaulted under or breached
this Agreement for failure or delay in fulfilling or performing any obligation
under this Agreement when such failure or delay is caused by or results from
causes beyond the reasonable control of the affected party, including but not
limited to fire, floods, embargoes, war, acts of war (whether war is declared or
not), insurrections, riots, civil commotions, strikes, lockouts or other labor
disturbances, acts of God or acts, omissions or delays in acting by any
governmental authority; provided, however, that the party so affected shall use
reasonable commercial efforts to avoid or remove such causes of nonperformance,
and shall continue performance hereunder with reasonable dispatch whenever such
causes are removed. Either party shall provide the other party with prompt
written notice of any delay or failure to perform that occurs by reason of force
majeure. The parties shall mutually seek a resolution of the delay or the
failure to perform as noted above.

         12.2     Assignment. This Agreement may not be assigned or otherwise
transferred, in whole or in part, by either party without the consent of the
other party; provided, however, that either Lexicon or BMS may, without such
consent, assign its rights and obligations under this Agreement (a) to any
Affiliate, or (b) in connection with a merger, consolidation or sale of all or
substantially all of its business assets to an unrelated Third Party; provided,
further, that such party's rights and obligations under this Agreement shall be
assumed by its successor in interest in any such transaction and shall not be
transferred separate from all or substantially all of its other business assets,
including those business assets that are the subject of this Agreement. Any
purported assignment in violation of the preceding sentence shall be void. Any
permitted assignee shall assume all obligations of its assignor under this
Agreement, unless the parties otherwise agree.

                                       46


         12.3     Severability. Each party hereby agrees that it does not intend
to violate any public policy, statutory or common laws, rules, regulations,
treaty or decision of any government agency or executive body thereof of any
country or community or association of countries. Should one or more provisions
of this Agreement be or become invalid, the parties hereto shall substitute, by
mutual consent, valid provisions for such invalid provisions which valid
provisions in their economic effect are sufficiently similar to the invalid
provisions that it can be reasonably assumed that the parties would have entered
into this Agreement with such valid provisions in lieu of such invalid
provisions. In case such valid provisions cannot be agreed upon, the invalidity
of one or several provisions of this Agreement shall not affect the validity of
this Agreement as a whole, unless the invalid provisions are of such essential
importance to this Agreement that it is to be reasonably assumed that the
parties would not have entered into this Agreement without the invalid
provisions.

         12.4     Notices. Any consent, notice or report required or permitted
to be given or made under this Agreement by one of the notification parties
hereto to the other shall be in writing, delivered personally or by facsimile
(and promptly confirmed by telephone, personal delivery or courier) or courier,
postage prepaid (where applicable), addressed to such other party at its address
indicated below, or to such other address as the addressee shall have last
furnished in writing to the addressor and shall be effective upon receipt by the
addressee.

                         
         If to Lexicon:             Lexicon Genetics Incorporated
                                    8800 Technology Forest Place
                                    The Woodlands, Texas 77381
                                    Attention:       President and Chief Executive Officer
                                    Telephone:       (281) 863-3000
                                    Facsimile:       (281) 863-8095

         With a copy to:            Lexicon Genetics Incorporated
                                    8800 Technology Forest Place
                                    The Woodlands, Texas 77381
                                    Attention:       General Counsel
                                    Telephone:       (281) 863-3000
                                    Facsimile:       (281) 863-8010

         If to BMS:                 Bristol-Myers Squibb Company
                                    P.O. Box 4000
                                    Route 206 & Province Line Road
                                    Princeton, New Jersey 08543-4000
                                    Attention:  Vice President, External Science, Technology & Licensing
                                    Telephone:  609-252-4712
                                    Facsimile:  609-252-7212

         With a copy to:            Bristol-Myers Squibb Company
                                    P.O. Box 4000
                                    Route 206 & Province Line Road
                                    Princeton, New Jersey 08543-4000
                                    Attention:  Vice President & Senior Counsel, Corporate Development
                                    Telephone:  609-252-4311
                                    Facsimile:  609-252-4232

        

All such communications shall be effective upon receipt.

                                       47



         12.5     Applicable Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Delaware, without
reference to the conflicts of law principles thereof.

         12.6     Dispute Resolution. Subject to Section 3.7.2, the parties
hereby agree that they will first attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiations. Any such
dispute shall be brought to the attention of the Alliance Managers for
resolution. The Alliance Managers will endeavor to propose and define mutually
acceptable solutions and facilitate communications in an attempt to bring the
dispute to a mutually agreeable resolution. If after discussing the matter in
good faith and attempting to find a mutually satisfactory resolution to the
issue, the parties are unable to resolve such dispute, the matter shall be
referred to the [**] (the "Representatives"). If the matter has not been
resolved within [**] days of the first meeting of the Representatives of the
parties (which period may be extended by mutual agreement) concerning such
matter, the parties shall be free to pursue all available recourse both at law
and in equity, subject to the following. Any dispute between the parties arising
out of or relating to the validity or interpretation of, compliance with, breach
or alleged breach of or termination of this Agreement that is not finally
resolved by the Joint Management Committee or executive officers as described
above will be resolved through binding arbitration as set forth below. Any such
binding arbitration shall be conducted in accordance with the then current
Commercial Arbitration Rules of the American Arbitration Association. To the
extent the parties cannot agree on a single arbitrator, each party shall have
the right to designate one arbitrator, who shall have no prior or existing
personal or financial relationship with the designating party, and the two (2)
arbitrators shall designate a third arbitrator. If the two (2) arbitrators
cannot agree on the designation of the third arbitrator, the American
Arbitration Association shall designate the third arbitrator. Unless otherwise
agreed by the parties, any arbitration initiated by BMS shall be conducted in
Houston, Texas and any arbitration initiated by Lexicon shall be conducted in
New York, New York. In any such arbitration proceeding, the parties shall be
entitled to all remedies to which they would be entitled in a United States
District Court and to full discovery to the same degree permitted under the
Federal Rules of Civil Procedure. Any such arbitration shall be completed and an
award rendered within [**] days of the notice of dispute. The arbitrator shall
render a "reasoned decision" within the meaning of the Commercial Arbitration
Rules which shall include findings of fact and conclusions of law. For avoidance
of doubt, the decisions set forth in Section 3.4 shall not be subject to
arbitration under this Section.

         12.7     Entire Agreement. This Agreement, together with the exhibits
and appendices hereto and any confidentiality agreement(s) executed in
contemplation of this Agreement, contains the entire understanding of the
parties with respect to the subject matter hereof. All express or implied
agreements and understandings, either oral or written, heretofore made are
expressly merged in and made a part of this Agreement. This Agreement may be
amended, or any term hereof modified, only by a written instrument duly executed
by both parties hereto. Notwithstanding the foregoing, the LexVision Agreement
shall remain in full force and effect in accordance with its terms.

         12.8     Publicity. Upon execution of this Agreement, the parties shall
issue the press release announcing the existence of this Agreement in the form
and substance previously agreed to by the parties. Any announcements or similar
publicity with respect to this Agreement shall be agreed upon between the
parties in advance of such announcement. The parties understand that this
Agreement is likely to be of significant interest to investors, analysts and
others, and that the parties therefore may make such public announcements with
respect thereto, subject to the remainder of this Section 12.8. The parties
agree that any such announcement will not contain confidential business or
technical information and, if disclosure of confidential business or technical
information is required by Law, the parties will use reasonable efforts to
minimize such disclosure and obtain confidential treatment for any such
information which is disclosed to a governmental agency. Each party agrees to
provide to the other party a copy of any public announcement regarding this
Agreement or the subject matter thereof as soon as reasonably practicable under
the circumstances prior to its scheduled release. Except under extraordinary
circumstances, each

                                       48


party shall provide the other with an advance copy of any such announcement at
least [**] prior to its scheduled release. Each party shall have the right to
expeditiously review and recommend changes to any such announcement and, except
as otherwise required by Law, the party whose announcement has been reviewed
shall remove any information the reviewing party reasonably deems to be
inappropriate for disclosure. The contents of any announcement or similar
publicity which has been reviewed and approved by the reviewing party can be
re-released by either party without a requirement for re-approval.

         12.9     Headings. The captions to the several Articles and Sections
hereof are not a part of this Agreement, but are merely guides or labels to
assist in locating and reading the several Articles and Sections hereof.

         12.10    No Partnership. It is expressly agreed that the relationship
between Lexicon and BMS shall not constitute a partnership, joint venture or
agency. Neither Lexicon nor BMS shall have the authority to make any statements,
representations or commitments of any kind, or to take any action, which shall
be binding on the other, without the prior consent of the other party to do so.

         12.11    Exports. The parties acknowledge that the export of technical
data, materials or products is subject to the exporting party receiving any
necessary export licenses and that the parties cannot be responsible for any
delays attributable to export controls which are beyond the reasonable control
of either party. Lexicon and BMS agree not to export or re-export, directly or
indirectly, any information, technical data, the direct product of such data,
samples or equipment received or generated under this Agreement in violation of
any applicable export control Laws. Lexicon and BMS agree to obtain similar
covenants from their Sublicensees and contractors with respect to the subject
matter of this Section 12.11.

         12.12    Interpretation.

                  12.12.1  In the event an ambiguity or a question of intent or
         interpretation arises, this Agreement shall be construed as if drafted
         jointly by the parties and no presumption or burden of proof shall
         arise favoring or disfavoring any party by virtue of the authorship of
         any provisions of this Agreement.

                  12.12.2  The definitions of the terms herein shall apply
         equally to the singular and plural forms of the terms defined. Whenever
         the context may require, any pronoun shall include the corresponding
         masculine, feminine and neuter forms. The words "include", "includes"
         and "including" shall be deemed to be followed by the phrase "without
         limitation". The word "will" shall be construed to have the same
         meaning and effect as the word "shall". The word "any" shall mean "any
         and all" unless otherwise clearly indicated by context.

                  12.12.3  Unless the context requires otherwise, (a) any
         definition of or reference to any agreement, instrument or other
         document herein shall be construed as referring to such agreement,
         instrument or other document as from time to time amended, supplemented
         or otherwise modified (subject to any restrictions on such amendments,
         supplements or modifications set forth herein or therein), (b) any
         reference to any laws herein shall be construed as referring to such
         laws as from time to time enacted, repealed or amended, (c) any
         reference herein to any person shall be construed to include the
         person's successors and assigns, (d) the words "herein", "hereof" and
         "hereunder", and words of similar import, shall be construed to refer
         to this Agreement in its entirety and not to any particular provision
         hereof, and (e) all references herein to Articles, Sections, Appendices
         or Schedules, unless otherwise specifically provided, shall be
         construed to refer to Articles, Sections, Appendices and Schedules of
         this Agreement.

                                       49




                  12.12.4  References to sections of the Code of Federal
         Regulations and to the United States Code shall mean the cited
         sections, as these may be amended from time to time.

         12.13    Waiver. The waiver by either party hereto of any right
hereunder or the failure to perform or of a breach by the other party shall not
be deemed a waiver of any other right hereunder or of any other breach or
failure by said other party whether of a similar nature or otherwise.

         12.14    Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

                                      * * *

                            [signature page follows]


                                       50


         IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute and deliver this Agreement as of the Effective Date.

                                                       
LEXICON GENETICS INCORPORATED


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


BRISTOL-MYERS SQUIBB COMPANY


By:      /s/ James B. D. Palmer                           Date:    December 17, 2003
   ------------------------------------------------------        -------------------------------------

Name:    James B. D. Palmer
      ---------------------------------------------------

Title:   President, Research and Development
         ------------------------------------------------



                                       51





                                    EXHIBIT A

              DESCRIPTION OF FULL PHASE PROGRAM (SEE SECTION 1.31)

                                      
OBJECTIVE:                               Optimization and characterization of lead
                                         Program Compounds with the objective of
                                         identifying Development Candidate(s) and
                                         Back-up Compound(s) acting through a
                                         Selected Target for full pre-clinical and
                                         clinical development.


ESTIMATED ANNUALIZED FTE COMMITMENTS:    [**]




                                       52




                                    EXHIBIT B

          DESCRIPTION OF LEVEL 1 PHENOTYPIC ANALYSIS (SEE SECTION 1.42)

         Level 1 Phenotypic Analysis is an initial screen designed to identify
primary characteristics resulting from selected mutations in Mutant Mice. Level
1 Phenotypic Analysis currently includes the following assays, which may be
changed from time to time (a) by the Joint Scientific Committee, at the Joint
Scientific Committee's reasonable scientific discretion, for assays employed in
behavioral analysis, and (b) at Lexicon's reasonable scientific discretion, for
assays in other categories.

         [**]


                                       53




                                    EXHIBIT C

          DESCRIPTION OF LEVEL 2 PHENOTYPIC ANALYSIS (SEE SECTION 1.43)

         Level 2 Phenotypic Analysis involves one or more of the following
analyses, as appropriate, of the effects of selected mutations in Mutant Mice.

         [**]


                                       54




                                    EXHIBIT D

               DESCRIPTION OF MID-PHASE PROGRAM (SEE SECTION 1.60)
                                                        
OBJECTIVE:                                                 Identification and  characterization  of Program Compounds
                                                           with the objective of identifying  lead Program  Compounds
                                                           that justify  optimization efforts in a Full Phase Program
                                                           and that can be used to [**].


ESTIMATED ANNUALIZED FTE COMMITMENTS:                      [**]




                                       55



                                    EXHIBIT E

        ALLOCATION OF NET SALES IN BUNDLED TRANSACTION (SEE SECTION 1.65)

         With respect to Products sold in a Bundled Transaction in which BMS,
Lexicon or any of their respective Affiliates or Sublicensees discounts the
sales price of the Products to a greater degree than BMS, Lexicon, their
Affiliates or Sublicensees, respectively, generally discounts the price of its
other products to such customer, the amount to be included in Net Sales of such
Products shall be calculated in accordance with the following formula:

                   

                                      (ASP-P) x (N-P)
                   NS-P = --------------------------------------------------x BTF
                             (SIGMA)=1  (ASP-pi) x (N-pi) +(ASP-P) x (N-P)

         Where:

                  NS-P      =     Amount allocated to Net Sales of the Product
                  ASP-P     =     Average Selling Price (as defined  below)
                                  per unit, during the applicable
                                  period, of the Product when sold alone
                  ASP-pi    =     Average Selling Price per unit,
                                  during the applicable period, of each
                                  product, other than a Product, in the
                                  Bundled Transaction when sold alone
                  N-P       =     Total number of units of Product included in
                                  the Bundled Transaction during the applicable
                                  period
                  N-pi      =     Total number of units (i.e., corresponding to
                                  the same ASP-pi) of each product, other than a
                                  Product, included in the Bundled Transaction
                                  during the applicable period
                  (SIGMA)=1 =     The sum of the products of the formula
                                  (ASP-pi) x (N-pi) for each and every product,
                                  other than a Product, included in the Bundled
                                  Transaction during the applicable period
                  BTF       =     The aggregate amounts paid to the seller for
                                  the Bundled Transaction during the applicable
                                  period

         

         The Average Selling Price shall be based on the actual average selling
price of the applicable Product or product other than a Product, as the case may
be, determined for the applicable period.

         If a Product or other product is not sold separately, the Average
Selling Price with respect thereto shall be the bona fide list price.

         If a Product or other product is not sold separately and no bona fide
list price exists for such Product or other product, the Parties shall agree
upon an imputed bona fide list price for such Product or other product, and the
Average Selling Price with respect thereto shall be based on such imputed list
price.

                                       56



                                    EXHIBIT F

           FORM OF MATERIAL TRANSFER AGREEMENT FOR TRANSFER OF MUTANT
                        MICE TO BMS (SEE SECTION 2.2.5)


                                       57

EX-23.1

                                                                    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, 333-101549, 333-108855 and 333-111821)
and in the related prospectus of Lexicon Genetics Incorporated, of our report
dated February 12, 2004, 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, 2003.


                                                     /s/ ERNST & YOUNG LLP
Houston, Texas
March 11, 2004

EX-23.2

                                                                    EXHIBIT 23.2

                 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP

         The financial statements of Lexicon Genetics Incorporated as of
December 31, 2001, and for the year 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. Nos. 333-67294, 333-101549,
333-108855 and 333-111821) and the prospectuses relating thereto. Arthur
Andersen LLP has not reissued its report on Lexicon's financial statements as of
December 31, 2001, and for the year 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.

EX-31.1

                                                                    EXHIBIT 31.1

                                 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 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 report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this 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 report;

         4.       The registrant's other certifying officers and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in Exchange Act Rules
                  13a-15(e) and 15d-15(e)) for the registrant and have:

                  a)       designed such disclosure controls and procedures, or
                           caused such disclosure controls and procedures to be
                           designed under our supervision, 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 report
                           is being prepared;

                  b)       evaluated the effectiveness of the registrant's
                           disclosure controls and procedures and presented in
                           this report our conclusions about the effectiveness
                           of the disclosure controls and procedures, as of the
                           end of the period covered by this report based on
                           such evaluation; and

                  c)       disclosed in this report any change in the
                           registrant's internal control over financial
                           reporting that occurred during the registrant's most
                           recent fiscal quarter that has materially affected,
                           or is reasonably likely to materially affect, the
                           registrant's internal control over financial
                           reporting; and

         5.       The registrant's other certifying officers and I have
                  disclosed, based on our most recent evaluation of internal
                  control over financial reporting, to the registrant's auditors
                  and the audit committee of the registrant's board of directors
                  (or persons performing the equivalent functions):

                  a)       all significant deficiencies and material weaknesses
                           in the design or operation of internal control over
                           financial reporting which are reasonably likely to
                           adversely affect the registrant's ability to record,
                           process, summarize and report financial information;
                           and

                  b)       any fraud, whether or not material, that involves
                           management or other employees who have a significant
                           role in the registrant's internal control over
                           financial reporting.


Date: March 12, 2004

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

EX-31.2

                                                                    EXHIBIT 31.2

                                 CERTIFICATIONS

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 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 report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this 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 report;

         4.       The registrant's other certifying officers and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in Exchange Act Rules
                  13a-15(e) and 15d-15(e)) for the registrant and have:

                  a)       designed such disclosure controls and procedures, or
                           caused such disclosure controls and procedures to be
                           designed under our supervision, 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 report
                           is being prepared;

                  b)       evaluated the effectiveness of the registrant's
                           disclosure controls and procedures and presented in
                           this report our conclusions about the effectiveness
                           of the disclosure controls and procedures, as of the
                           end of the period covered by this report based on
                           such evaluation; and

                  c)       disclosed in this report any change in the
                           registrant's internal control over financial
                           reporting that occurred during the registrant's most
                           recent fiscal quarter that has materially affected,
                           or is reasonably likely to materially affect, the
                           registrant's internal control over financial
                           reporting; and

         5.       The registrant's other certifying officers and I have
                  disclosed, based on our most recent evaluation of internal
                  control over financial reporting, to the registrant's auditors
                  and the audit committee of the registrant's board of directors
                  (or persons performing the equivalent functions):

                  a)       all significant deficiencies and material weaknesses
                           in the design or operation of internal control over
                           financial reporting which are reasonably likely to
                           adversely affect the registrant's ability to record,
                           process, summarize and report financial information;
                           and

                  b)       any fraud, whether or not material, that involves
                           management or other employees who have a significant
                           role in the registrant's internal control over
                           financial reporting.


Date: March 12, 2004

                                /s/ Julia P. Gregory
                                -----------------------------------------------
                                Julia P. Gregory
                                Executive Vice President, Corporate Development
                                and Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

                                  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, 2003, and to which this Certification is attached
                  as Exhibit 32.1 (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 12th day of March, 2004.


                      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, Corporate Development
                               and Chief Financial Officer