The Lynx was the second handheld game system to be released with the Atari name. The first was Atari Inc.'s handheld electronic game Touch Me. Atari Inc. had previously worked on several other handheld projects including the Breakout, Space Invaders, and the Atari Cosmos portable/tabletop console. However, those projects were shut down during development, some just short of their intended commercial release.
The Lynx system was originally developed by Epyx as the Handy Game. In 1986, two former Amiga designers, R. J. Mical and Dave Needle, had been asked by former manager at Amiga, David Morse, if they could come up with a design for a portable gaming system. Morse now worked at Epyx, a game software company that had a recent string of hit games. Morse's son had asked him if he could make a portable gaming system, prompting the lunch with Mical and Needle to discuss the idea. Morse convinced Mical and Needle to develop the idea and they were hired by Epyx to be a part of the design team. Planning and design of the console began in 1986 and was completed in 1987. Epyx first showed the Handy system at the Winter Consumer Electronics Show (CES) in January 1989. Facing financial difficulties, Epyx sought out partners. Nintendo, Sega, and other companies declined, but Atari Corp. and Epyx eventually agreed that Atari Corp. would handle production and marketing, while Epyx would handle software development. Epyx declared bankruptcy by the end of the year, and Atari essentially owned the entire project; both Atari and others, however, had to purchase Amigas from Atari archrival Commodore to develop Lynx software.
The Handy was designed to run games from the cartridge format, and the game data must be copied from ROM to RAM before it can be used. Thus, less RAM is available and the games initially load relatively slowly. There are trace remnants of a cassette tape interface physically capable of being programmed to read a tape. Lynx developers have noted that "there is still reference of the tape and some hardware addresses" and an updated vintage Epyx manual describes the bare existence of what could be utilized for tape support. A 2009 retrospective interview clarifies that although some early reports claimed that games were loaded from tape, Mical says there was no truth in them: "We did think about hard disk a little".
Atari Corp. changed the internal speaker and removed the thumb-stick on the control pad before releasing it as the Lynx, initially retailing in the US at US$179.95. Atari Corp. then showed the Lynx to the press at the Summer 1989 CES as the "Portable Color Entertainment System", which was changed to "Lynx" when actual consoles were distributed to resellers.
The Lynx started off successfully. Atari reported that they had sold 90% of the 50,000 units it shipped in its launch month in the U.S. with a limited launch in New York. US sales in 1990 were approximately 500,000 units according to the Associated Press. In late 1991, it was reported that Atari sales estimates were about 800,000, which Atari claimed was within their expected projections. Lifetime sales by 1995 amounted to fewer than 7 million units when combined with the Game Gear. In comparison, the Game Boy sold 16 million units by 1995 because it was more rugged, cost half as much, had much longer battery life, was bundled with Tetris, and had a superior software library. In issue 129 of Retro Gamer magazine, a special article was published to celebrate the 25th anniversary of the console which included interviews with numerous ex-Atari and ex-Epyx staff where lifetime Lynx sales figures were confirmed as being in the region of 3 million.
As with the actual console units, the game cartridges themselves evolved over the first year of the console's release. The first generation of cartridges were flat, and were designed to be stackable for ease of storage. However, this design proved to be very difficult to remove from the console and was replaced by a second design. This style, called "tabbed" or "ridged", used the same basic design as the original cartridges with the addition of two small tabs on the cartridge's underside to aid in removal. The original flat style cartridges could be stacked on top of the newer cartridges, but the newer cartridges could not be easily stacked on each other, nor were they stored easily. Thus a third style, the "curved lip" style was produced, and all official and third-party cartridges during the console's lifespan were released (or re-released) using this style.
In May 1991, Sega launched its Game Gear portable gaming handheld. Also a color handheld, in comparison to the Lynx it had a higher cost and shorter battery life (34 hours as opposed to 4-5 for the Lynx), but it was slightly smaller and was backed up by significantly more games. In North America the Game Gear took second place, and while in Europe sales of the Lynx were initially quite strong on the back of the popular Atari ST, it still could not compete with the software library of the Game Gear and was eventually pushed into third place. Retailers such as Game and Toys R Us continued to sell the Lynx well into the mid-1990s on the back of the Atari Jaguar launch, helped by magazines such as Ultimate Future Games who continued to cover the Lynx alongside the new generation of 32-bit and 64-bit consoles.