The Lynx was the second handheld game with the Atari name to actually be produced, the first was Atari Inc.'s handheld electronic game Touch Me. Atari Inc. had previously worked on several other handheld projects including the Breakout and Space Invaders, 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. Planning and design of the console began in 1986 and 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. Atari Corp. and Epyx eventually agreed that Atari Corp. would handle production and marketing, while Epyx would handle software development.

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$189.95. 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.

However, Nintendo's new Game Boy was also introduced at the 1989 CES. At $90, it was much less expensive than the Lynx, without the color or custom chips. Nintendo had no problems supplying retailers with the Game Boy for the Christmas season while Atari Corp. only managed limited distribution of their Lynx by year's end.

During 1990, the Lynx had moderate sales but Nintendo's Game Boy continued to gain market share. In 1991, Atari Corp. relaunched the Lynx with a new marketing campaign, new packaging, slightly improved hardware, and a new sleek look. The new system (referred to within Atari Corp. as the "Lynx II") featured rubber hand grips and a clearer backlit color screen with a power save option (which turned off the LCD panel's backlighting). It also replaced the monaural headphone jack of the original Lynx with one wired for stereo. The new packaging made the Lynx available without any accessories, dropping the price to $99. Although sales improved, Nintendo still dominated the handheld market.

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, smaller bulk, and better battery life. However, the Game Gear was backed up by significantly more popular titles and consequently the market became dominated by Nintendo followed by Sega in a distant second and the Lynx in third.

In 1994, Atari Corp. shifted its focus away from the Lynx. As Nintendo's Super Nintendo and Sega's Mega Drive/Genesis filled retailers' shelves, Atari Corp. refocused its efforts on its Jaguar console. A handful of games were released during this time, including Battlezone 2000. In 1996, Atari shut down its internal game development.

Telegames released a number of games in the second half of the 1990s, including a port of Raiden, a platformer called Fat Bobby, and an action sports game called Hyperdrome. At the end of the 1990s, Hasbro, the owners of the Atari properties at the time, released the rights to develop for the system to the public domain. Since then a number of independent developers released games into the new decade, like Championship Rally, CyberVirus, and Alpine Games. Some of the late 90s/early 2000s games were under development by other companies at one time, but rights to the game programs and all of the existing code was bought and finished by other developers.