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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934




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|                                            |                               
|------------------------------------------- | ------------------------------
|For the fiscal year ended December 31, 2002 | Commission File Number 0-22962

HUMAN GENOME SCIENCES, INC.

(Exact name of registrant)


|                        |  |                                        
|----------------------- |  | ---------------------------------------
|Delaware                |  | 22-3178468                             
|(State of organization) |  | (I.R.S. employer identification number)

9410 Key West Avenue, Rockville, Md. 20850-3338

(address of principal executive offices and zip
code )


(301) 309-8504

(Registrants telephone number)


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 $0.01 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 þ          No o

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 the 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.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

The number of shares of the registrants
common stock outstanding on January 31, 2003 was
128,863,098. As of June 28, 2002, the aggregate market
value of the common stock held by non-affiliates of the
registrant based on the closing price reported on the National
Association of Securities Dealers Automated Quotations System
was approximately $1,145,139,250.*

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Human Genome Sciences, Inc.s
Notice of Annual Stockholders Meeting and Proxy Statement,
to be filed within 120 days after the end of the
registrants fiscal year, are incorporated by reference
into Part III of this Annual Report.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Excludes 43,167,652 shares of common stock deemed
    to be held by officers and directors and stockholders whose
    ownership exceeds five percent of the shares outstanding at
    June 28, 2002. Exclusion of shares held by any person
    should not be construed to indicate that such person possesses
    the power, direct or indirect, to direct or cause the direction
    of the management or policies of the registrant, or that such
    person is controlled by or under common control with the
    registrant.



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PART I

ITEM 1.  BUSINESS

This annual report on Form 10-K contains
forward-looking statements, within the meaning of the Securities
Exchange Act of 1934 and the Securities Act of 1933, that
involve risks and uncertainties. In some cases, forward-looking
statements are identified by words such as believe,
anticipate, expect, intend,
plan, will, may and similar
expressions. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of
this report. All of these forward-looking statements are based
on information available to us at this time, and we assume no
obligation to update any of these statements. Actual results
could differ from those projected in these forward-looking
statements as a result of many factors, including those
identified in the section titled Factors That May Affect
Our Business, Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere. We
urge you to review and consider the various disclosures made by
us in this report, and those detailed from time to time in our
filings with the Securities and Exchange Commission, that
attempt to advise you of the risks and factors that may affect
our future results.

Overview

Human Genome Sciences is dedicated to discovery
for health. Our goal is to build a global bio-pharmaceutical
company that discovers, develops, manufactures and markets
gene-based drugs to treat and cure disease. The success of our
drug discovery efforts derives from our expertise in genomics,
the systematic collection and understanding of human genes and
their functions, and from our exclusive focus on developing
human protein and antibody drugs. We focus our internal product
development efforts on novel human protein and antibody drugs
discovered through genomics-based research, and on new improved
long-acting versions of existing protein drugs created using our
albumin fusion technology. We use collaborations for the
development of gene therapy products, small molecule drugs, and
diagnostic products discovered using our genomics-based
technology.

We are conducting clinical trials with eight of
our products. Four additional products are in clinical trials by
companies with which we are collaborating. The number of new
drugs we have in advanced preclinical studies continues to grow.

We have developed and continue to enhance the
human resource and physical infrastructure necessary to achieve
our goal of becoming a fully integrated global biopharmaceutical
company, including:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extensive genomics and informatics capabilities;                                                                                                   
|
| |  | A significant and growing patent estate to
    protect our genomic discoveries, proprietary technologies and
    product pipeline;                 
|
| |  | Significant expertise in the discovery of novel
    protein and antibody drug candidates;                                                          
|
| |  | Protein formulation technology, including the
    albumin fusion technology we use to create long-acting protein
    drugs;                        
|
| |  | The clinical and regulatory capabilities
    necessary to design and implement clinical trials of our own
    drugs; and                           
|
| |  | Specialized manufacturing facilities designed for
    the production of protein and antibody drugs for preclinical
    studies and clinical trials.

We are expanding our manufacturing facilities to
allow us to produce larger quantities and larger numbers of
protein and antibody drugs for clinical development. We are also
in the design phase of a large-scale manufacturing facility to
support our increasing needs for protein and antibody drug
production capacity related to the continuing progress of our
product candidates and, eventually, the initial
commercialization of our products in North America. We may add
sales and marketing staff as our products approach
commercialization.

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We have strategic partnerships with a number of
leading pharmaceutical and biotechnology companies to leverage
our strengths and to gain access to complementary technologies
and sales and marketing infrastructure. Some of these
partnerships have provided us with research funding and
milestone payments, along with royalty payments as products are
developed and commercialized. We also are entitled to certain
co-promotion, co-development, revenue sharing and other product
rights.

Strategy

Our goal is to build a global biopharmaceutical
company that discovers, develops, manufactures and markets
gene-based drugs to treat and cure disease. A central element of
our scientific and business strategy is our focus on protein and
antibody drugs. Our strategy consists of the following key
elements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Concentrate on new protein and antibody drugs
    and on long-acting versions of existing protein drugs.We intend to concentrate our internal
    product development efforts on novel human protein and antibody
    drugs and on new improved long-acting versions of existing
    protein drugs created using our albumin fusion technology. Novel
    human protein and antibody drugs derived from our gene
    discoveries account for the majority of our current product
    pipeline.                                                                                                                                                     
|
| |  | Discover and expand our understanding of
    medically useful genes.We have
    created a set of integrated skills that allow us to discover new
    genes and to understand their natural function. We test the
    effects of the proteins encoded by these genes on human cells
    whose behavior we wish to change for medical benefit. Proteins
    selected for further study are made and purified, then subjected
    to continued evaluation.                                                                                                                                                                                            
|
| |  | Develop, manufacture and commercialize our
    gene-based products on our own and with our strategic partners.Most of the new drugs we intend to
    develop are designed to meet unmet medical needs representing
    significant markets. We intend to select a limited number of the
    products in our current pipeline to develop, manufacture and
    market ourselves. Our goal is to co-develop and co-market a
    number of our products with partners. We also intend to license
    certain products to strategic partners in exchange for upfront
    payments, product milestone payments, royalties on sales, and
    other rights.
|
| |  | Expand our technology platform to accelerate
    our product development activities.We
    will continue to invest resources to expand and enhance our
    technology platform. We also may establish collaborations with
    leading biotechnology companies to gain access to complementary
    technologies for our product development efforts.                                                                                                                                                                                                                                                                                                
|
| |  | Pursue strategic acquisitions.We may pursue strategic acquisitions
    to augment our capabilities, to provide access to complementary
    technologies, and to expand our portfolio of new drug candidates
    in therapeutic categories we have identified as strategic areas
    of concentration.                                                                                                                                                                                                                                                                                                                                              
|
| |  | Capitalize on and expand our intellectual
    property portfolio.We pursue patents
    to protect our intellectual property and have developed a
    significant intellectual property portfolio. We intend to
    capitalize on and expand our portfolio as we make further
    discoveries. As of March 3, 2003, we had 301 issued U.S.
    patents covering genes, proteins and antibodies, and had filed
    U.S. patent applications covering many more human genes, the
    proteins they encode, antibodies, and proprietary technologies.                                                                                                  

Products

We have discovered a large number of medically
useful genes. Five of the eight novel drugs that we have entered
in clinical trials are derived from genomics-based research,
including three therapeutic proteins and two human monoclonal
antibodies. Our other three drugs in clinical trials are albumin
fusion proteins  novel long-acting forms of existing
therapeutic proteins that we have modified to improve their
pharmacological properties by using our albumin fusion
technology. Our therapeutic proteins currently in clinical
development are repifermin (KGF-2), BLyS (B-lymphocyte
stimulator), and LymphoRadTM 131 (radioiodinated
BLyS). Repifermin is in Phase 2b clinical trials for the
treatment of chronic venous ulcers, and in Phase 2 clinical
trials for the treatment of chemotherapy-induced mucositis. We
have completed a Phase 1 clinical trial of

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BLyS in patients with common variable
immunodeficiency (CVID). The results demonstrate that BLyS is
safe and well tolerated. BLyS also is the subject of an ongoing
Phase 1 clinical trial in patients with immunoglobulin-A
(IgA) deficiency. LymphoRad131 is in Phase 1
clinical trials for the treatment of B-cell tumors such as
multiple myeloma. Our two antibodies in clinical development are
LymphoStat-B and TRAIL-R1 agonistic human monoclonal
antibody (TRAIL-R1 mAb). LymphoStat-B is in clinical development
for the treatment of autoimmune diseases such as lupus and
rheumatoid arthritis, and is the subject of a Phase 1 study
in patients with systemic lupus erythematosus. TRAIL-R1 mAb is
in Phase 1 clinical trials for the treatment of certain
solid tumors and tumors of hematopoietic origin. Our three
albumin fusion proteins in clinical development are
Albuferon-alpha (albumin-interferon alpha),
Albutropin (albumin-human growth hormone) and
Albuleukin (albumin-interleukin-2). We have completed a
Phase 1 clinical trial of Albuferon-alpha in patients with
hepatitis C. Results show that Albuferon-alpha is well
tolerated, has a prolonged half-life, and is biologically
active. We are continuing to evaluate Albuferon-alphas
safety, tolerability and pharmacology at higher doses under an
amended protocol designed to seek the maximum biological
response that can be achieved at a tolerable dose. We have
completed a Phase 1 clinical trial of Albutropin in adults
with growth hormone deficiency. The results are positive and
support initiation of Phase 2 clinical trials of Albutropin
in the first half of 2003. Albuleukin is the subject of ongoing
Phase 1 clinical studies in patients with solid tumors.


Our partners have advanced four additional
products derived from our technology to clinical development.
GlaxoSmithKline (GSK) has entered three small-molecule
drugs into clinical development that were discovered by GSK
using our technology. 480848, an Lp-PLA2 inhibitor, is in
Phase 2 clinical trials for the control and treatment of
cardiovascular disease. Lp-PLA2 (lipoprotein-associated
phospholipase A2) has been identified as a significant risk
factor for heart disease. A second Lp-PLA2 inhibitor, 659032, is
in Phase 1 clinical trials in patients with cardiovascular
disease. 462795 is in Phase 1 clinical trials for the treatment
of patients with osteoporosis. 462795 inhibits the activity of
cathepsin K, an enzyme that appears to be implicated in
osteoporosis and certain other disorders causing bone
degradation. We licensed VEGF-2, a gene that we discovered and
characterized, to Corautus Genetics, Inc. for use in gene
therapy. Corautus was formed in February 2003 from the merger of
Vascular Genetics, Inc. and GenStar Therapeutics Corporation.
Corautus has completed Phase 1/2 clinical trials of VEGF-2
for the treatment of coronary artery disease and critical limb
ischemia. A clinical hold that the FDA had placed on VEGF-2 gene
therapy has been removed, and Corautus has said that it expects
to seek FDA clearance to begin Phase 2b/3 clinical trials
of VEGF-2 in 2003.

We also have a rapidly evolving pipeline of
additional products in discovery and preclinical drug
development to treat diseases such as cancer, HIV/AIDS,
diabetes, osteoporosis, and other debilitating and
life-threatening diseases.

Clinical Programs

Human Genome Sciences is conducting clinical
trials of eight drugs to treat diseases including cancer, lupus,
hepatitis C, growth hormone deficiency, chronic venous ulcers,
and immunodeficiencies. Our partners are conducting clinical
trials of four additional drugs to treat cardiovascular disease
and osteoporosis. Our internal research and development efforts
are focused on novel protein and antibody drugs discovered
through genomics-based research, and on new improved long-acting
versions of existing drugs created using our albumin fusion
technology.

Genomics-Derived Human Protein Drugs

BLyS
(B-Lymphocyte Stimulator)

BLyS is a novel human protein discovered by Human
Genome Sciences. BLyS stimulates immune system cells called B
cells to mature into plasma B cells, which produce antibodies.
Plasma B cells and the antibodies they produce constitute a
critical part of the bodys defense against infections and
cancer. We are currently developing BLyS as a potential
treatment for patients with immunodeficiencies.

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In 2002, we completed a Phase 1 clinical
trial to evaluate the safety and pharmacology of BLyS in
patients with common variable immunodeficiency, a group of
immunodeficiency syndromes in which B cell immunity is abnormal.
Results from this trial show that BLyS is safe and well
tolerated. BLyS also is the subject of an ongoing Phase 1
clinical trial to evaluate its potential as a treatment for an
immune disorder known as immunoglobulin-A (IgA) deficiency. The
Phase 1 study in IgA deficiency continues to enroll
patients.

In 2001, BLyS received an orphan drug
designation from the FDA for the treatment of common variable
immunodeficiency.

LymphoRad131

LymphoRad131 is a radioiodinated form
of B-lymphocyte stimulator (BLyS), a novel human protein
discovered by Human Genome Sciences. Preclinical studies show
that LymphoRad131 binds to receptors found
exclusively on B cells and B-cell tumors, and delivers low doses
of radiation that cause cell death.

We are developing LymphoRad131 as a
potential treatment for certain B-cell cancers, including
multiple myeloma and non-Hodgkins lymphoma. Preclinical
studies of LymphoRad in animal models of multiple myeloma and
non-Hodgkins lymphomas show that LymphoRad rapidly and
specifically targets lymphoid tissues and B-cell tumors
following intravenous injection. Such studies demonstrate
inhibition of tumor growth and prolonged survival.

In 2002, Human Genome Sciences initiated Phase 1
clinical trials of LymphoRad131 to evaluate its
safety and pharmacology. The first trial is in patients with
multiple myeloma. Enrollment is expected to continue throughout
2003 and into 2004.

Repifermin
(Keratinocyte Growth Factor-2, KGF-2)

Repifermin is a novel human protein discovered by
Human Genome Sciences that stimulates the repair of injured skin
and mucosal tissues. We are developing repifermin as a potential
treatment for chronic venous ulcers and cancer therapy-induced
mucositis.

Results from a Phase 2a clinical trial of
repifermin in patients with chronic venous ulcers demonstrated
that repifermin is well tolerated and capable of accelerating
wound healing. In 2002, we completed enrollment of 352
randomized patients into a double-blind placebo-controlled Phase
2b clinical trial of topically administered repifermin for the
treatment of chronic venous ulcers. We expect to complete the
treatment and follow-up phase of the Phase 2b protocol and to
have results available before the end of 2003. Decisions
regarding the appropriate design of a pivotal Phase 3 trial will
be made following analysis of data from the Phase 2b trial.

Human Genome Sciences also is conducting ongoing
Phase 2 clinical trials to evaluate the safety, optimal dosing
and preliminary efficacy of intravenously administered
repifermin for the treatment of cancer therapy-induced mucositis.

Our partner, GlaxoSmithKline, has exercised its
option to develop and commercialize repifermin jointly with
Human Genome Sciences. We expect to share equally in clinical
development costs for Phase 3 clinical trials and beyond.

Genomics-Derived Human Antibody
Drugs

LymphoStat-B

LymphoStat-B is the first antibody drug to emerge
from our human antibody drug discovery program. LymphoStat-B is
a fully human monoclonal antibody designed to inhibit the
biological activity of B-lymphocyte stimulator, or BLyS.
Preclinical studies indicate that higher than normal levels of
BLyS may trigger autoimmune diseases by stimulating production
of autoantibodies  antibodies that attack and destroy
the bodys own healthy tissues. Over-production of
autoantibodies may be counteracted by reducing BLyS

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levels with LymphoStat-B. We are developing
LymphoStat-B as a potential treatment for autoimmune diseases,
such as systemic lupus erythematosus and rheumatoid arthritis.


In 2002, we completed patient enrollment in a
Phase 1 clinical trial to evaluate the safety and pharmacology
of LymphoStat-B in patients with systemic lupus erythematosus.
We are in the process of completing the treatment and follow-up
phase of the protocol and expect to have results available in
the first half of 2003.

TRAIL-R1
Agonistic Human Monoclonal Antibody

TRAIL Receptor-1 agonistic human monoclonal
antibody (TRAIL-R1 mAb) is a novel anticancer drug that
specifically recognizes and binds to the TRAIL (tumor necrosis
factor-related apoptosis-inducing ligand) Receptor-1 protein.
This protein was discovered by Human Genome Sciences and is
found on the surface of a number of solid tumor and
hematopoietic cancer cells.

Preclinical studies demonstrate that solid tumors
and tumors of hematopoietic origin are sensitive to killing by
apoptosis, or programmed cell death, induced by binding to TRAIL
or to TRAIL-R1 mAb. Because TRAIL-R1 mAb mimics the activity of
native TRAIL when it binds to TRAIL Receptor 1, it is considered
an agonistic antibody.

We initiated a Phase 1 clinical trial in
2002 to evaluate the safety and pharmacology of TRAIL-R1 mAb in
patients with advanced tumors. This trial is currently enrolling
patients.

Albumin Fusion Protein Drugs

Albuferon-alpha
(albumin-interferon alpha)

Albuferon-alpha is a novel long-acting form of
interferon alpha. Recombinant interferon alpha is approved for
the treatment of hepatitis C, hepatitis B, and a broad range of
cancers. Human Genome Sciences modified interferon alpha to
improve its pharmacological properties by using the
Companys albumin fusion technology. We are developing
Albuferon-alpha as a potential treatment for chronic hepatitis
C. Albuferon-alpha may provide patients with similar or improved
efficacy and safety compared to either recombinant interferon
alpha or pegylated interferon, with a potentially more
convenient administration schedule compared to currently
available treatments.

In 2002, we completed a Phase 1 clinical
trial of Albuferon-alpha designed to determine the safety,
tolerability and pharmacology of Albuferon-alpha in adults with
chronic hepatitis C who have failed previous interferon alpha
treatments. Results demonstrate that Albuferon-alpha is well
tolerated, has a prolonged half-life, and is biologically
active. We are continuing to evaluate Albuferon-alphas
safety, tolerability, and pharmacology at higher doses, in
single-dose and repeat-dose cohorts, under an amended protocol
designed to seek the maximum biological response that can be
achieved at a tolerable dose.

Albuleukin
(albumin-interleukin-2)

Albuleukin is a novel long-acting form of
interleukin-2, a drug approved for cancer treatment. Human
Genome Sciences modified interleukin-2 to improve its
pharmacological properties by using the Companys albumin
fusion technology. We are developing Albuleukin as a potential
treatment for a broad range of cancers. Albuleukin may provide
patients with a long-acting therapeutic option that may offer
less frequent dosing and an improved side effect profile.

Preclinical studies in mice demonstrate that
Albuleukin has an improved ability to mediate a potent
anti-tumor response, with less frequent dosing and less
administered drug, compared with recombinant interleukin-2. The
data also show improved survival outcomes for Albuleukin.

In 2002, we initiated a Phase 1 clinical
trial to evaluate the safety and pharmacology of Albuleukin in
patients with solid tumors. This trial is currently enrolling
patients.

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Albutropin
(albumin-human growth hormone)

Albutropin is a novel long-acting form of human
growth hormone. Recombinant human growth hormone is approved for
the treatment of growth hormone deficiency in adults, and for
the treatment of growth retardation due to growth hormone
deficiency in children. Human Genome Sciences modified human
growth hormone to improve its pharmacological properties by
using the Companys albumin fusion technology. We are
developing Albutropin as a potential treatment for growth
hormone deficiency in adults, and for growth retardation due to
growth hormone deficiency in children. Albutropin may provide
patients with a long-acting treatment option that has efficacy
and safety similar to that of currently available treatments,
but with fewer injections, less discomfort, and better
compliance.

In 2002, we completed a Phase 1 trial
evaluating the safety, tolerability and pharmacology of
Albutropin in adults with growth hormone deficiency. Results
demonstrate that Albutropin is biologically active and well
tolerated. Albutropin remains in the blood substantially longer
than is reported for recombinant native human growth hormone.
The positive results support advancing Albutropin into the next
phase of clinical development. During 2003, we plan to initiate
a Phase 2 trial of Albutropin in adults with growth hormone
deficiency and a Phase 1/2 trial of Albutropin in children with
growth retardation due to growth hormone deficiency.

Genomics-Derived Small Molecule
Drugs

480848

The first genomics-derived small molecule drug to
enter clinical trials was discovered by our partner,
GlaxoSmithKline, using Human Genome Sciences technology.
The drug is an inhibitor of Lipoprotein-associated phospholipase
A2 (Lp-PLA2). Lp-PLA2 is an enzyme associated with the formation
of atherosclerotic plaques.

Under the terms of an agreement signed in 1993,
Human Genome Sciences is entitled to receive clinical
development milestone payments and royalties for compounds
discovered by GlaxoSmithKline through the use of Human Genome
Sciences technology and intellectual property. In
September 2001, we received a $1.0 million milestone
payment from GlaxoSmithKline in connection with the initiation
of Phase 1 clinical trials of 480848 to investigate its
potential use in the treatment of cardiovascular disease. We are
entitled to receive an additional milestone payment if 480848
moves through clinical development into registration and will
receive royalties if the compound is successfully
commercialized. In addition, we have an option to co-promote an
approved drug in North America and Europe.

659032

659032 is a second small molecule inhibitor of
Lp-PLA2. Our partner, GlaxoSmithKline, discovered 659032 using
Human Genome Sciences technology. In early 2003,
GlaxoSmithKline initiated Phase 1 clinical trials to evaluate
659032 for the control and treatment of cardiovascular disease.

Pursuant to the terms of the 1993 agreement noted
above, Human Genome Sciences received a $1.0 million
milestone payment from GlaxoSmithKline in February 2003, in
connection with the initiation of clinical trials of 659032. We
are entitled to receive an additional milestone payment if
659032 moves through clinical development into registration and
will receive royalties if the compound is successfully
commercialized. In addition, we have an option to co-promote an
approved drug in North America and Europe.

462795

In 2002, GlaxoSmithKline initiated clinical
trials of 462795 to evaluate its potential use in the treatment
of patients with osteoporosis. 462795 is a genomics-derived
small-molecule compound that inhibits the activity of cathepsin
K, an enzyme that appears to be implicated in osteoporosis and
certain other disorders causing bone degradation. 462795 was
discovered by GlaxoSmithKline using Human Genome Sciences
technology.

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Under the terms of the 1993 agreement, Human
Genome Sciences received a $1.0 million milestone payment
from GlaxoSmithKline in 2002, in connection with the initiation
of clinical trials of 462795. We are entitled to receive an
additional milestone payment if 462795 moves through clinical
development into registration and will receive royalties if the
compound is successfully commercialized. In addition, we have an
option to co-promote an approved drug in North America and
Europe.

Gene Therapy

VEGF-2
(Vascular Endothelial Growth Factor-2)

VEGF-2 is a novel gene that was discovered and
characterized by Human Genome Sciences. The VEGF-2 gene encodes
the VEGF-2 protein, which scientists believe signals the body to
grow new blood vessels. We licensed VEGF-2 to Corautus for use
in the field of gene therapy. Corautus was formed in February
2003 from the merger of Vascular Genetics and GenStar
Therapeutics. As of December 31, 2002, we owned
approximately 29% of Vascular Genetics and, as of
February 5, 2003, we owned approximately 18% of Corautus.
VEGF-2 gene therapy is being developed for the treatment of
critical limb ischemia and refractory coronary artery disease.

Corautus has completed Phase 1/2 clinical trials
of VEGF-2 for the treatment of coronary artery disease and
critical limb ischemia. A clinical hold that the FDA had placed
on VEGF-2 gene therapy has been removed, and Corautus has said
that it expects to seek FDA clearance to begin Phase 2b/3
clinical trials of VEGF-2 in 2003. Human Genome Sciences is
entitled to receive up to a 10% royalty on net sales of any
product brought to market by Corautus that is based on the
VEGF-2 gene.

Preclinical Programs

Human Genome Sciences has a pipeline of compounds
in internal preclinical development, including novel human
protein and antibody drugs discovered through genomics-based
research, and new improved long-acting versions of existing
proteins created using our albumin fusion technology. Our
preclinical candidates fall into several therapeutic areas,
including oncology, immunology, endocrinology/metabolism, and
infectious disease.

In addition, we have initiated a number of
research programs related to biodefense, in which we are using
our protein and antibody drug development capabilities to
develop therapeutic candidates to address microbial targets
including anthrax and other infectious agents. In March 2003, we
announced that we have developed a human monoclonal antibody
drug called ABthrax that is effective in protecting
against anthrax in multiple animal models. ABthrax specifically
recognizes and neutralizes Bacillus anthracis protective
antigen, a central component of the anthrax toxins that
contribute collectively to the pathogenesis of anthrax
infection. We plan to develop ABthrax for use as a prophylactic
and therapeutic drug to prevent and treat anthrax infection.

Research and Development
Capabilities

Human Genome Sciences has developed core
competencies in the discovery and understanding of human genes
and their biological functions, and in the discovery and
development of human protein and antibody drugs. We focus our
internal research and development efforts on novel human protein
and antibody drugs discovered through genomics-based research,
and on new improved long-acting versions of existing protein
drugs created using our albumin fusion technology.

Gene and Protein Discovery
Technology

We have created a set of skills that allow us to
discover new genes and to understand their natural function. We
have isolated a large collection of human genes in their useful
messenger RNA form. A gene in the form of messenger RNA can be
used to make one protein that carries out a specific function in
the human body. We have developed methods to make small
quantities of proteins. We have developed automated systems to
analyze the effects of these proteins on human cells and tissues.

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Collectively, these new methods make up our
Functional Proteomics Program. Our Functional Proteomics Program
begins with a large set of human genes. From these we select a
set of genes that produce proteins that we predict should be
located on the outside of human cells. Such proteins are called
secreted proteins. We test the effects of the secreted proteins
by placing each of them on an individual culture of a human cell
whose behavior we wish to change for medical benefit. In the
course of these experiments, we monitor many parameters of
change in each cell culture at intervals. We have developed an
informatics system to store and integrate the biological data
points that result from these experiments. Proteins selected for
further study are made and purified, then subjected to
preclinical evaluation.

Human Antibody Discovery and
Development

Proteins may be useful as drugs themselves, or
they may be useful as targets for other therapeutic approaches
such as human antibodies or small molecule drugs. Some proteins
are located partly in and partly on the surface of the cell.
Many such proteins function as receptors for biological signals.
Antibody drugs that block receptors or that trigger receptors to
respond to artificial signals can have significant biological
effects.

We have acquired rights to a variety of human
antibody technologies. We use our own set of antibody targets
arising from our collection of human secreted proteins. We have
integrated these technologies into our internal research and
development program. In addition, we have designed and leased
manufacturing facilities that allow us to make human monoclonal
antibodies for clinical trials. We also continue to collaborate
with a number of leading antibody companies.

Many medical conditions are the result of an
excess of a specific protein in the body. Some antibody drugs
can inactivate such proteins and bring therapeutic benefits to
patients. Such drugs are known as antagonistic antibodies. For
example, LymphoStat-B, which is currently in Phase 1 trials for
the treatment of autoimmune diseases such as lupus and
rheumatoid arthritis, is an antagonistic human monoclonal
antibody. All currently marketed antibody drugs are antagonistic
antibodies. In recent years, a number of antagonistic antibody
drugs have been approved for sale and have been highly
successful.

In certain medical conditions, it may be
desirable to stimulate artificially a specific biological
activity. For example, a great deal of scientific work is
currently focused on the study of apoptosis, or programmed cell
death. If scientists can discover a way to promote the death of
cancer cells while causing minimal or no damage to normal cells,
it might constitute significant progress in cancer therapy.
Human Genome Sciences has one such drug in clinical trials
 the TRAIL-R1 mAb. TRAIL-R1 mAb is currently in Phase 1
clinical trials for the treatment of certain solid tumors and
tumors of hematopoietic origin. TRAIL-R1 mAb recognizes the
TRAIL Receptor-1 protein. Binding of TRAIL-R1 mAb to TRAIL
Receptor-1 triggers cell death. TRAIL-R1 mAb is an agonistic
human monoclonal antibody that mimics the cancer-killing
activity of the natural TRAIL ligand. We believe that TRAIL-R1
mAb is the first human agonistic antibody to enter clinical
trials.

Albumin Fusion Technology

Our albumin fusion technology allows us to create
long-acting forms of protein drugs by fusing the gene that
expresses human albumin to the gene that expresses a
therapeutically active protein. We are actively pursuing the
development of albumin-fusion drugs based on therapeutic
proteins already on the market, as well as albumin-fusion
versions of therapeutic proteins that we are developing
ourselves. For example: Albuferon-alpha results from the genetic
fusion of human albumin and human interferon-alpha; Albutropin
results from the genetic fusion of human albumin and human
growth hormone; and Albuleukin results from the genetic fusion
of human albumin and human interleukin-2. Based on preclinical
and clinical results to date, we believe that albumin fusion
proteins may provide patients with long-acting treatment options
that have efficacy and safety similar to or better than that of
the existing protein drugs, with the potential additional
benefit of considerably more convenient dosage schedules.

Albumin fusion technology also provides for
efficient manufacture and purification of the product in our
existing facilities. Creation of albumin fusion proteins that
meet significant medical need provides Human Genome Sciences
with many additional product opportunities. This strategy
reduces development risk by

8



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broadening the profile of our product portfolio.
We have research and development staff dedicated to the
development of new drugs based on our albumin fusion technology.


Drug Development and Regulatory
Expertise

For the past several years, we have concentrated
on building drug development and regulatory expertise. We seek
to gather, document and analyze clinical trial data in such a
way that they can be submitted to regulatory authorities and
used to support Biologics License Applications at the
appropriate time. We have assembled experienced teams in key
strategic areas of development, including:



| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Clinical Research.The clinical research group is responsible for the design,
    planning and analysis of clinical trials, and matches novel
    biological molecules emerging from our protein and antibody
    discovery programs to unmet medical needs. The group includes
    our biostatistics team.   
|
| |  | Clinical Operations.The clinical operations group executes clinical trials and is
    responsible for managing clinical trial sites and ensuring that
    all proper procedures are followed during the collection of
    clinical data. The group includes our data management team.                        
|
| |  | Project Management.Our project management team oversees the process of development
    of a drug from the earliest stages of research through the
    conduct of clinical development and regulatory filings.                                                                                                
|
| |  | Drug Safety.As our
    products advance in clinical testing, our medical affairs group
    collects and analyzes information on drug experience and safety,
    and ensures that accurate medical information is distributed.                                                                                
|
| |  | Bioanalytical
    Sciences.The bioanalytical sciences
    group develops highly specialized assays that are used during
    monitoring of preclinical tests and clinical trials. Other
    assays ensure the quality and consistency of our products.                                                        
|
| |  | Regulatory Affairs and Clinical Quality
    Assurance.The regulatory affairs
    group manages communications with and submissions to regulatory
    authorities, while the quality assurance group ensures
    compliance with all regulatory requirements for the clinical
    development of new products.

Collaborative Arrangements

Forming strategic alliances with leading
pharmaceutical and biotechnology companies is an element of our
strategy. We currently have three major types of collaborations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Human Gene Therapeutic
    Consortium.Between 1993 and 1997, we
    entered into major collaborations with GlaxoSmithKline, Takeda,
    Schering-Plough, Merck KGaA and Sanofi-Synthelabo. We refer to
    these collaborations collectively as the Human Gene Therapeutic
    Consortium. The initial research term of these collaborations
    ended in June 2001, although certain aspects of these
    arrangements continue. Under these collaborations, we provided
    our drug discovery capabilities in exchange for access to our
    partners drug development and commercialization expertise
    as well as research funding and long-term value creation through
    potential milestone and royalty payments. We also are entitled
    to certain co-promotion, co-development, revenue sharing and
    other product rights.
|
| |  | Technology.These
    are collaborations in which we gain access to our partners
    technology to complement our own drug discovery and development
    capabilities in exchange for license fees, potential milestone
    and royalty payments, as well as equity investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Microbial.These are
    collaborations in which we provide other companies with access
    to gene sequence data for specific microbial organisms in
    exchange for license fees and royalty payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

9



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A summary of our most important collaborations is
provided below:



---

|                          |  |                               |  |                                                                                                  
|------------------------- |  | ----------------------------- |  | -------------------------------------------------------------------------------------------------
|YEAR ESTABLISHED          |  | PARTNER                       |  | FOCUS                                                                                            
|                          |  |                               |  |                                                                                                  
|HUMAN GENE                |  |                               |  |                                                                                                  
|THERAPEUTIC CONSORTIUM    |  |                               |  |                                                                                                  
|1993-97                   |  | GlaxoSmithKline               |  | Therapeutic proteins, antibodies, small molecule
    drugs, gene therapy vaccines and diagnostics
|1995                      |  | Takeda                        |  | Therapeutic proteins, antibodies and small
    molecule drugs                                    
|1996                      |  | Schering-Plough               |  | Therapeutic proteins, antibodies, small molecule
    drugs and gene therapy                      
|1996                      |  | Sanofi-Synthelabo             |  | Therapeutic proteins, antibodies and small
    molecule drugs                                    
|1996                      |  | Merck KGaA                    |  | Therapeutic proteins, antibodies and small
    molecule drugs                                    
|TECHNOLOGY COLLABORATIONS |  |                               |  |                                                                                                  
|1997                      |  | Corautus (Vascular Genetics)  |  | Gene therapy                                                                                     
|1998                      |  | Transgene                     |  | Gene therapy                                                                                     
|1999                      |  | Abgenix                       |  | Antibodies                                                                                       
|2000                      |  | Cambridge Antibody Technology |  | Antibodies                                                                                       
|2000                      |  | Dyax                          |  | Antibodies and peptides                                                                          
|2000                      |  | Vical                         |  | Gene therapy                                                                                     
|2000                      |  | Aventis Behring               |  | Albumin fusion technology                                                                        
|2000                      |  | Dow Chemical                  |  | Chelator technology                                                                              
|2001                      |  | Medarex                       |  | Antibodies                                                                                       
|2001                      |  | MDS Nordion                   |  | Radioiodinating technology                                                                       
|2002                      |  | Kirin                         |  | Antibodies                                                                                       
|MICROBIAL COLLABORATIONS  |  |                               |  |                                                                                                  
|1995-97                   |  | MedImmune                     |  | Infectious agents                                                                                
|1996                      |  | Pharmacia                     |  | Staphylococcus aureusand other                                                                   

Human Gene Therapeutic Consortium

General.We entered
into collaboration agreements with GlaxoSmithKline in May 1993,
which we amended in June 1996 and July 1997. Under these
agreements, we granted GlaxoSmithKline rights to develop and
commercialize therapeutic and diagnostic products based on human
genes discovered by us in GlaxoSmithKlines field, which is
the field of human and animal health care, including gene
therapy vaccines but excluding other gene therapy products,
antisense products and the use of genes for synthesizing drugs
that were known in May 1993. We and GlaxoSmithKline jointly
entered into collaboration agreements with four additional
pharmaceutical companies: Takeda, Schering-Plough, Merck KGaA
and Sanofi-Synthelabo. These partners, together with
GlaxoSmithKline, form our Human Gene Therapeutic Consortium.

Post-Initial Research
Term.The initial research term of our
Human Gene Therapeutic Consortium expired on June 30, 2001.
Our partners have informed us that they have been pursuing a
large number of research programs involving many different genes
for the creation of small molecule, protein and antibody drugs.
We cannot assure you that any of these programs will be
continued or result in any approved drugs.

GlaxoSmithKline.We
share equally with GlaxoSmithKline any license fees and
product-development milestone payments made under our Human Gene
Therapeutic Consortium, but we receive all royalty and research
support payments under those agreements. We are entitled to
receive royalty payments, based on net sales of products
developed from any of our patents or technologies that fall
within GlaxoSmithKlines field, for any sales made by
GlaxoSmithKline or its licensees. We also are entitled to
milestone payments in connection with the development of these
products. In 2001, we received a $1.0 million payment from
GlaxoSmithKline for 480848 in connection with a development
milestone met by GlaxoSmithKline. In 2002, we received a $1.0
million payment from GlaxoSmithKline for 462795 in connection
with a development milestone met by GlaxoSmithKline. In February
2003, we received a $1.0 million payment from

10



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GlaxoSmithKline for 659032 in connection with a
milestone met by GlaxoSmithKline. We hold an option to
co-promote any products sold by GlaxoSmithKline in the U.S.,
Canada, Mexico and Europe, subject to the rights granted to
Takeda and other collaborators. If we develop and market or
license to a third party any product in GlaxoSmithKlines
field pursuant to our rights under these agreements,
GlaxoSmithKline will usually be entitled to royalty payments
from, or to share in milestone payments and license fees we
receive with respect to, those products.


Our collaboration agreements with GlaxoSmithKline
include an option for GlaxoSmithKline to co-develop and
co-commercialize products in GlaxoSmithKlines field to
which we have exclusive development and commercialization rights
under our collaboration agreements with GlaxoSmithKline and for
which Schering-Plough has not exercised its option. In 2000,
GlaxoSmithKline exercised its option to develop and
commercialize repifermin jointly. GlaxoSmithKline is also
entitled to royalty payments on and an option to co-promote
products outside GlaxoSmithKlines field sold by us which
are based on or incorporate patents or information developed by
GlaxoSmithKline using our human gene technology.

Takeda.GlaxoSmithKline and Takeda entered into a license agreement
relating to the development and sale of products in
GlaxoSmithKlines field based upon rights licensed from us.
We are entitled to all royalty payments and one-half of the
milestone payments due from Takeda to GlaxoSmithKline under this
license agreement on sales of products developed by Takeda. We
entered into an option and license agreement with Takeda
pursuant to which we granted Takeda an exclusive option to
license rights under our patents and technology in the field of
human health care, other than gene therapy, antisense and
diagnostics, in order to make and sell up to three products in
Japan. The option period terminates on June 30, 2004.
During 2002, Takeda discontinued development of mirostipen and
exercised its option to develop and commercialize TRAIL-R1 mAb
in Japan. Takeda has two options remaining.

Schering-Plough.In
June 1996, we entered into a collaboration agreement with
Schering-Plough. Under this agreement, Schering-Plough has the
right to use our human gene technology and biological
information developed by us and GlaxoSmithKline to discover,
develop and commercialize products. Schering-Plough was also
granted an option to co-develop and co-commercialize up to two
of our therapeutic protein products to which we have exclusive
development and commercialization rights under our agreements
with GlaxoSmithKline. This option could also have been exercised
with respect to proteins we elect to license to third parties.
In 2000, Schering-Plough exercised one of its two options with
the selection of a novel interferon discovered by us. We will
receive milestones and royalty payments for any product
developed from this protein. In 2002, we granted Schering-Plough
exclusive rights to two human antigens in lieu of its remaining
option to a second therapeutic protein. Schering-Plough is
obligated to pay license fees, research payments and milestone
payments in connection with the development of products. We also
have a collaboration with Schering-Plough related to gene
therapy by which Schering-Plough was granted a non-exclusive
license to use our human gene technology to conduct research and
an option to obtain an exclusive license to specific genes in
the field of gene therapy.

Sanofi-Synthelabo.In June 1996, we entered into a collaboration agreement with
Sanofi-Synthelabo. Under this agreement, Sanofi-Synthelabo has
the right to use our human gene technology and biological
information developed by us and GlaxoSmithKline to discover,
develop and commercialize products. Sanofi-Synthelabo is
obligated to pay license fees, research payments and milestone
payments in connection with the development of products.

Merck KGaA.In July
1996, we entered into a collaboration agreement with Merck KGaA.
Under this agreement, Merck KGaA has the right to use our human
gene technology and biological information developed by us and
GlaxoSmithKline to discover, develop and commercialize products.
Merck KGaA is obligated to pay license fees, research payments,
and milestone payments in connection with the development of
products.

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Technology Collaborations

Antibodies
and Peptides

Abgenix.In November
1999, we entered into a collaboration and license agreement with
Abgenix relating to the field of fully human antibody drug
candidates, which was amended in 2001. Pursuant to this
agreement, as amended, we licensed technology from Abgenix that
we can use to generate fully human antibody drug candidates. We
will independently develop and seek to commercialize
antibody-based drugs from this collaboration. Abgenix also has
an option to develop and commercialize products derived from our
antigens. We and Abgenix will pay reciprocal milestone and
royalty payments for products developed and commercialized.

Cambridge Antibody Technology
(CAT).In August 1999, we entered into
an antibody license agreement with CAT for the development of
fully human antibody therapeutics for up to three of our target
human proteins. Pursuant to this agreement, we have entered into
an exclusive license agreement to an anti-BLyS antibody
discovered in collaboration with CAT. Under this 1999 agreement,
we have paid CAT $2.3 million for one milestone and fees
through the end of 2002. In February 2000, we entered into a
broader agreement with CAT that provides us with the right to
use their technology to develop and sell an unlimited number of
fully human antibodies for therapeutic and diagnostic purposes.
Under this 2000 agreement, we paid CAT $12.0 million for
ten years of committed research support. We also plan to combine
our resources to develop and sell a significant number of
therapeutic antibody products. CAT has the right to select up to
twenty-four of our proprietary antigens for preclinical
development. We have the option to share clinical development
costs and to share the profits equally with them on up to
eighteen such products. CAT has rights to develop six such
products on their own. We are entitled to clinical development
milestone and royalty payments on those six products. We have
exercised our option with respect to TRAIL Receptor 1 and TRAIL
Receptor 2. Under the 2000 agreement, we have paid to CAT
$3.5 million in milestone payments through the end of 2002.

Dyax.In February
2000, we entered into a license agreement with Dyax relating to
Dyaxs phage display and peptide technology, which was
amended in 2001. Under the agreement, as amended, we have the
right to use Dyaxs phage display technology to develop an
unlimited number of therapeutic and diagnostic products that we
may sell or outlicense. In 2000, we paid Dyax $6.0 million
for the technology license. Through 2002, we have paid
$5.7 million for research support. In 2003, we will pay
Dyax approximately $0.3 million for committed research
support. We will provide milestone and royalty payments to Dyax
on products we develop and sell or will share revenue we receive
from outlicensees. The licensed technologies include Dyaxs
phage display technology to create peptide drugs, human
monoclonal antibody drugs and in vitro diagnostic products. In
addition, we have the right to require that Dyax perform
research in the fields of protein separation and high-throughput
screening technology. We also have rights to improvements in
Dyaxs phage display technology.

Kirin.In October
2002, we entered into a license agreement with the
Pharmaceutical Division of Kirin Brewery Company, Ltd. relating
to the development and commercialization of agonistic human
antibodies to TRAIL Receptor-2. Under the agreement, we will
work together to identify and optimize the best candidate for
clinical development. Kirin will develop and commercialize any
resulting drug in Japan and Asia/ Australasia. We will develop
and commercialize any resulting drug in North America, Europe
and the rest of the world.

Medarex.In July
2001, we entered into a collaboration agreement with Medarex
relating to the creation of fully human antibodies. Under the
agreement, Medarex plans to use its technology to create
antibody leads that are specific for target proteins that we
discovered. We have the option to exclusively license
therapeutic and diagnostic antibody products and Medarex is
entitled to receive license fees, milestone payments and
royalties on any commercial sales of products resulting from the
collaboration.

Gene
Therapy

Transgene.In
February 1998, we entered into an agreement with Transgene
relating to the field of human gene therapy, including gene
therapy vaccines, to the extent that it will not conflict with
our other

12



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collaboration agreements. Under this agreement,
we granted Transgene the right to license exclusively up to 10
genes. We obtained a 10% equity interest in Transgene and
certain co-development and co-marketing rights. Transgene
selected two genes from our database, CTGF-2 and TIMP-4, as its
first two exclusive gene therapy products. CTGF-2 stimulates the
formation of blood vessels and could be an effective tool in the
control of coronary artery disease. TIMP-4 prevents restenosis,
which is the growth of blood-vessel obstruction following an
angioplasty. Our collaboration with Transgene will end in 2008.


Vical.In February
2000, we entered into a license agreement with Vical relating to
the field of gene therapy. Under this agreement, we licensed
technology from Vical and granted Vical the right to license up
to three genes. The agreement provides for reciprocal royalty
payments. Our collaboration with Vical will end in 2004.

Corautus.In
November 1997, we entered into an agreement with Vascular
Genetics, the predecessor to Corautus, whereby we granted an
exclusive license in the field of gene therapy for our VEGF-2
gene. As of December 31, 2002, we owned approximately 29%
of Vascular Genetics and, as of February 5, 2003,
approximately 18% of Corautus.

Other

Dow Chemical.In
October 2000, we entered into an agreement with Dow Chemical
Company to develop a drug for the treatment of B-cell
malignancies. This agreement combines one of Dows patented
technologies, bifunctional chelation agents (BFCA) with
BLyS, one of our protein discoveries. Dows BFCA technology
is capable of attaching a variety of radioactive metals to BLyS,
resulting in a radioiodinated version of the protein.

MDS Nordion.In
October 2001, we entered into an agreement with MDS Nordion, a
unit of MDS Inc., whereby MDS Nordion will radioiodinate
proteins for us at a cGMP manufacturing suite at its Ottawa,
Canada facility. We will supply MDS Nordion with the targeting
protein, BLyS, and MDS Nordion will use a process it developed
for us that covalently binds the radioactive isotopes to the
BLyS protein.

Microbial Collaborations

MedImmune.We
entered into a collaboration and license agreement with
MedImmune in July 1995, which we amended in March and December
1997. This agreement is related to the development of drugs
based upon certain infectious agents sequenced by us or The
Institute For Genomic Research (TIGR) or to which we hold
licenses. Programs under this agreement include the creation of
vaccines and immunotherapeutics for non-encapsulated
Haemophilus influenzae, Streptococcus pneumoniae, Escherichia
coli, Helicobacter pyloriand Borrelia burgdorferi.
MedImmune sub-licensed the Streptococcus pneumoniae
vaccine technology to GlaxoSmithKline. We are entitled to a
portion of the payments received by MedImmune under its
sub-license. In 2000, we received $1.0 million from
MedImmune.

Pharmacia.In
October 1996, we entered into an agreement with Pharmacia in
which we granted to Pharmacia a nonexclusive license to conduct
research and to make, use and sell products based on genes of
Staphylococcus aureusand the pathogenicity islands of
Escherichia colisequenced by us.

Patents and Proprietary Rights

We seek U.S. and foreign patent protection for
the genes, proteins and antibodies that we discover, as well as
patents on therapeutic and diagnostic products and processes,
screening and manufacturing technologies, and other inventions
based on genes, proteins and antibodies. We also seek patent
protection or rely upon trade secret rights to protect certain
technologies which may be used to discover and characterize
genes, proteins and antibodies and which may be used to develop
novel therapeutic and diagnostic products and processes. We
believe that, in the aggregate, our patent applications, patents
and licenses under patents owned by third parties are of
material importance to our operations.

Important legal issues remain to be resolved as
to the extent and scope of available patent protection for
biotechnology products and processes in the U.S. and other
important markets outside the U.S. We expect

13



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that litigation or administrative proceedings
will likely be necessary to determine the validity and scope of
certain of our and others proprietary rights. We are
currently involved in a number of administrative proceedings
relating to the scope of protection of our patents and those of
others. Any such lawsuit or proceeding may result in a
significant commitment of resources in the future. In addition,
changes in, or different interpretations of, patent laws in the
U.S. and other countries may result in patent laws that allow
others to use our discoveries or develop and commercialize our
products. We cannot assure you that the patents we obtain or the
unpatented technology we hold will afford us significant
commercial protection.


We have filed U.S. patent applications with
respect to many human genes and their corresponding proteins. We
have also filed U.S. patent applications with respect to all or
portions of the genomes of several infectious and non-infectious
microorganisms. As of March 3, 2003, we had 301 U.S.
patents covering genes and proteins. Our remaining applications
may not result in the issuance of any patents. Our applications
may not be sufficient to meet the statutory requirements for
patentability in all cases. In certain instances, we will be
dependent upon our collaborators to file and prosecute patent
applications.

Other companies or institutions have filed, and
may in the future file, patent applications which attempt to
patent genes similar to those covered in our patent
applications, including applications based on our potential
products. Any patent application filed by a third party may
prevail over our patent applications, in which event the third
party may require us to stop pursuing a potential product or to
negotiate a royalty arrangement to pursue the potential product.

We also are aware that others, including
universities and companies working in the biotechnology and
pharmaceutical fields, have filed patent applications and have
been granted patents in the U.S. and in other countries that
cover subject matter potentially useful or necessary to our
business. Some of these patents and patent applications claim
only specific products or methods of making products, while
others claim more general processes or techniques useful in the
discovery and manufacture of a variety of products. The risk of
additional patents and patent applications will continue to
increase as the biotechnology industry expands. We cannot
predict the ultimate scope and validity of existing patents and
patents that have been or may be granted to third parties, nor
can we predict the extent to which we may wish or be required to
obtain licenses to such patents, or the availability and cost of
acquiring such licenses. To the extent that licenses are
required, the owners of the patents could bring legal actions
against us to claim damages or to stop our manufacturing and
marketing of the affected products.

Issued patents may not provide commercially
meaningful protection against competitors and may not provide us
with competitive advantages. Other parties may challenge our
patents or design around our issued patents or develop products
providing effects similar to our products. In addition, others
may discover uses for genes, proteins or antibodies other than
those uses covered in our patents, and these other uses may be
separately patentable. The holder of a patent covering the use
of a gene, protein or antibody for which we have a patent claim
could exclude us from selling a product for a use covered by its
patent.

We rely on trade secret protection to protect our
confidential and proprietary information. We believe we have
developed proprietary procedures for making libraries of DNA
sequences and genes. We have not sought patent protection for
these procedures. We have developed a substantial database
concerning genes we have identified. We have taken security
measures to protect our data and continue to explore ways to
further enhance the security for our data. However, we may not
be able to meaningfully protect our trade secrets. While we have
entered into confidentiality agreements with employees and
academic collaborators, we may not be able to prevent their
disclosure of these data or materials. Others may independently
develop substantially equivalent information and techniques.

Competition

General.We face
intense competition from a wide range of pharmaceutical,
biotechnology and diagnostic companies, as well as academic and
research institutions and government agencies. Some of these
competitors have substantially greater financial, marketing,
research and development and human resources. Most large
pharmaceutical companies have considerably more experience in
undertaking clinical trials and in obtaining regulatory approval
to market pharmaceutical products.

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Basis of
Competition.Principal competitive
factors in our industry include:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the quality and breadth of an organizations
    technology;                                                                                      
|
| |  | the skill of an organizations employees and
    its ability to recruit and retain skilled employees;                                             
|
| |  | an organizations intellectual property
    estate;                                                                                               
|
| |  | the range of capabilities, from target
    identification and validation to drug discovery and development
    to manufacturing and marketing; and
|
| |  | the availability of substantial capital resources
    to fund discovery, development and commercialization activities.                            

We believe that the quality and breadth of our
technology platform, the skill of our employees and our ability
to recruit and retain skilled employees, our patent portfolio,
our capabilities for early stage research and drug discovery and
our capital resources are competitive strengths. However, many
large pharmaceutical and biotechnology companies have
significantly larger intellectual property estates than we do,
more substantial capital resources than we have, and greater
capabilities and experience than we do in preclinical and
clinical development, sales, marketing, manufacturing and
regulatory affairs.

Products.We are
aware of products in research or development by our competitors
that address all of the diseases we are targeting. Any of these
products may compete with our product candidates. Our
competitors may succeed in developing their products before we
do, obtaining approvals from the FDA or other regulatory
agencies for their products more rapidly than we do, or
developing products that are more effective than our products.
These products or technologies might render our technology
obsolete or noncompetitive. In addition, our fusion protein
products are designed to be long-acting versions of existing
products. While we believe our fusion protein products will be a
more attractive alternative to the existing products, the
existing product in many cases has an established market that
may make the introduction of our product more difficult.
Competition is based primarily on product efficacy, safety,
timing and scope of regulatory approvals, availability of
supply, marketing and sales capability, reimbursement coverage,
price and patent position.

Government Regulation

Regulations in the U.S. and other countries have
a significant impact on our research, product development and
manufacturing activities and will be a significant factor in the
marketing of our products. All of our products will require
regulatory approval prior to commercialization. In particular,
our products are subject to rigorous preclinical and clinical
testing and other premarket approval requirements by the FDA and
similar regulatory authorities in other countries. Various
statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and
marketing of our products. The lengthy process of seeking these
approvals, and the subsequent compliance with applicable
statutes and regulations, require the expenditure of substantial
resources. Any failure by us to obtain, or any delay in
obtaining, regulatory approvals could materially adversely
affect our ability to commercialize our products in a timely
manner, or at all.

Preclinical Testing.Before a drug may be marketed in the U.S., it must be the
subject of rigorous preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and animal
studies to assess the potential safety and efficacy of the
product and its formulations. The results of these studies must
be submitted to the FDA as part of an investigational new drug
application, which is reviewed by the FDA before clinical
testing in humans can begin.

Clinical Testing.Typically, clinical testing involves a three-phase process,
which generally lasts four to seven years, and sometimes longer:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase 1 clinical trials are conducted with a
    small number of subjects to determine the early safety profile
    and the pattern of drug distribution and metabolism.

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| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase 2 clinical trials are conducted with groups
    of patients afflicted with a specified disease in order to
    provide enough data to statistically evaluate preliminary
    efficacy and optimal dosages and to expand evidence of safety.
|
| |  | Phase 3 clinical trials are large-scale,
    multicenter, comparative trials, which are designed to gather
    additional information for proper dosage and labeling of the
    drug and to demonstrate its overall safety and efficacy.         

The FDA monitors the progress of each phase of
testing, and may require the modification, suspension, or
termination of a trial if it is determined to present excessive
risks to patients. The clinical trial process may be accompanied
by substantial delay and expense and there can be no assurance
that the data generated in these studies will ultimately be
sufficient for marketing approval by the FDA.

Marketing Approvals.Before a product can be marketed and sold, the results of the
preclinical and clinical testing must be submitted to the FDA
for approval. This submission will be either a new drug
application or a biologic license application, depending on the
type of drug. In responding to a new drug application or a
biologic license application, the FDA may grant marketing
approval, request additional information or deny the application
if it determines that the application does not provide an
adequate basis for approval. We cannot assure you that any
approval required by the FDA will be obtained on a timely basis,
or at all.

In addition, the FDA may condition marketing
approval on the conduct of specific post-marketing studies to
further evaluate safety and efficacy. Rigorous and extensive FDA
regulation of pharmaceutical products continues after approval,
particularly with respect to compliance with current good
manufacturing practices, or cGMPs, reporting of adverse effects,
advertising, promotion and marketing. Discovery of previously
unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the
market as well as possible civil or criminal sanctions, any of
which could materially adversely affect our business.

Other Regulation.We
are also subject to various laws and regulations relating to
safe working conditions, laboratory and manufacturing practices,
the experimental use of animals and the use and disposal of
hazardous or potentially hazardous substances used in connection
with our research, including radioactive compounds and
infectious disease agents. We also cannot accurately predict the
extent of regulations that might result from any future
legislative or administrative action.

In addition, ethical, social and legal concerns
about gene therapy, genetic testing and genetic research could
result in additional regulations restricting or prohibiting the
processes we or our suppliers may use. Federal and state
agencies, congressional committees and foreign governments have
expressed interest in further regulating biotechnology. More
restrictive regulations or claims that our products are unsafe
or pose a hazard could prevent us from commercializing our
products.

Foreign Regulation.We must obtain regulatory approval by governmental agencies in
other countries prior to commercialization of our products in
those countries. Foreign regulatory systems may be just as
rigorous, costly and uncertain as in the U.S.

Possible Pricing
Restrictions.The levels of revenues
and profitability of biopharmaceutical companies like ours may
be affected by the continuing efforts of government and third
party payers to contain or reduce the costs of health care
through various means. For example, in certain foreign markets,
pricing or profitability of therapeutic and other pharmaceutical
products is subject to governmental control. In the U.S. there
have been, and we expect that there will continue to be, a
number of federal and state proposals to implement similar
governmental control. While we cannot predict whether any
legislative or regulatory proposals will be adopted, the
adoption of such proposals could have a material adverse effect
on our business, financial condition and profitability. In
addition, in the U.S. and elsewhere, sales of therapeutic and
other pharmaceutical products depend in part on the availability
of reimbursement to the consumer from third party payers, such
as government and private insurance plans. Third party payers
are increasingly challenging the prices charged for medical
products and services. We cannot assure you that any of our
products will be considered cost

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effective or that reimbursement to the consumer
will be available or will be sufficient to allow us to sell our
products on a competitive and profitable basis.


Sources of Supply

Raw materials and other supplies required in our
business are generally available from various suppliers in
quantities adequate to meet our needs. However, we rely on one
manufacturer, MDS Nordion of Ottawa, Canada, for all of our
current radioiodinating requirements. If we are unable to secure
an adequate supply of this product at commercially reasonable
rates, our ability to continue with intended clinical trials
would be adversely affected.

Manufacturing

We are able to manufacture multiple protein and
antibody drugs for use in research and clinical activities. We
produce and purify these protein and antibody drugs at a 127,000
square foot process development and manufacturing facility. We
do not manufacture any products for commercial use and do not
have any experience in manufacturing materials suitable for
commercial use.

We are actively building our manufacturing
organization and facilities with the intent of manufacturing our
own commercial materials. Our long-range plan is to establish
additional manufacturing capabilities to allow us to meet our
commercial manufacturing requirements. We are designing a
290,000 square foot large-scale manufacturing facility to allow
for the production of protein and antibody drugs for both
clinical and commercial use. This facility is expected to be
available for occupancy in 2005. The FDA must inspect and
license these facilities to determine compliance with cGMP
requirements for commercial production. We may not be able
successfully to establish manufacturing capabilities or
manufacture our products economically or in compliance with
cGMPs and other regulatory requirements. For a description of
the financing arrangements for these facilities, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital
Resources.

While we are expanding our manufacturing
capabilities, we also may contract with third party
manufacturers or develop products with partners and use the
partners manufacturing capabilities. If we use others to
manufacture our products, we will depend on those parties to
comply with cGMPs and other regulatory requirements, and to
deliver materials on a timely basis. These parties may not
perform adequately. Any failures by these third parties may
delay our development of products or the submission of these
products for regulatory approval.

Marketing

We do not have any marketed products. We have
established a strategic marketing group to analyze the
commercial value of our product portfolio and the competitive
environment. The strategic marketing group also analyzes patient
needs and customer preferences with respect to our product
development and planning. If we develop products that can be
marketed, we intend to market the products either independently
or together with collaborators or strategic partners.
GlaxoSmithKline, Schering-Plough and others have co-marketing
rights with respect to certain of our products. If we decide to
market any products independently, we will incur significant
additional expenditures and commit significant additional
management resources to establish a sales force. For any
products that we market together with partners, we will rely, in
whole or in part, on the marketing capabilities of those
parties. We may also contract with third parties to market
certain of our products. Ultimately, we and our partners may not
be successful in marketing our products.

Employees

As of March 3, 2003, we had 1,086 full-time
employees, of whom 850 were in research and development,
including 279 scientists holding doctoral degrees. We anticipate
hiring approximately 70 additional employees during the next six
months, including process development, manufacturing, and
clinical development staff. None of our employees is covered by
a collective bargaining agreement and we consider relations with
our employees to be good.

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FACTORS THAT MAY AFFECT OUR BUSINESS

There are a number of important factors that
could cause our actual results to differ materially from those
that are indicated by forward-looking statements. Those factors
include, without limitation, those listed below and elsewhere
herein.

Because our business strategy is still largely
untested, we do not know whether we will be able to
commercialize any of our products or to what extent we will
generate revenue.

We do not know whether we can implement our
business strategy successfully because we are in the early
stages of development. We initially set out to find as many
genes as possible and are now using that information to develop
medical and pharmacological products. We use automated
high-speed technology to:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | rapidly identify the function of, and obtain
    proprietary rights to, a substantial number of genes; and
|
| |  | select genes with the greatest potential for the
    treatment and diagnosis of human disease.            

Nobody has tested our strategy. Other companies
first target particular diseases and try to find cures for them
through gene-based therapies. If our strategy does not result in
the development of products that we can sell profitably, we will
be unable to generate revenue.

If we are unable to commercialize products, we
may not be able to recover our investment in our product
development and manufacturing efforts.

We invested significant time and resources to
isolate and study genes and determine their functions. We now
devote an ever-increasing portion of our resources to
identifying and developing proteins, antibodies and other
compounds for the treatment of human disease. We are also
devoting substantial resources to the establishment of our own
manufacturing capabilities, both to support clinical testing and
eventual commercialization. We have made and are continuing to
make substantial expenditures and have hired and are continuing
to hire additional personnel to foster these activities. Before
we can commercialize a product, we must rigorously test the
product in the laboratory and complete extensive human studies.
We cannot assure you that expenses for testing and study will
yield profitable products or even products approved for
marketing by the FDA. We will incur additional costs to continue
these activities. If we are not successful in commercializing
products, we may be unable to recover the large investment we
have made in research, development and manufacturing.

Because our product development efforts depend
on new and rapidly-evolving technologies, we do not know whether
our efforts will be successful.

To date, companies have developed and
commercialized relatively few gene-based products. Our work
depends on new, rapidly evolving technologies and on the
marketability and profitability of innovative products.
Commercialization involves risks of failure inherent in the
development of products based on innovative technologies and the
risks associated with drug development generally. These risks
include the possibility that:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | these technologies or any or all of the products
    based on these technologies will be ineffective or toxic, or
    otherwise fail to receive necessary regulatory clearances;
|
| |  | the products, if safe and effective, will be
    difficult to manufacture on a large scale or uneconomical to
    market;                                                       
|
| |  | proprietary rights of third parties will prevent
    us or our collaborators from exploiting technologies or
    marketing products;                                            
|
| |  | third parties will market superior or equivalent
    products; and                                                                                                              
|
| |  | we may not be able to obtain or exploit new and
    superior technology, which could render obsolete the
    technologies we use.                                               

18



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Because we are an early stage company, we do
not know whether we can develop our business or achieve
profitability.

We expect to continue to incur increasing losses
and we cannot assure you that we will ever become profitable. We
are in the early stages of development, and it will be a number
of years, if ever, before we are likely to receive revenue from
product sales or royalty payments. We will continue to incur
substantial expenses relating to research and development
efforts. We anticipate that we will increase these efforts as we
focus on the laboratory and human studies that are required
before we can sell a product. The development of our products
requires significant further research, development, testing and
regulatory approvals. We may not be able to develop products
that will be commercially successful or that will generate
revenue in excess of the cost of development.

PRODUCT DEVELOPMENT RISKS

Because we have limited experience in
developing and commercializing products, we may be unsuccessful
in our efforts to do so.

Our ability to develop and commercialize products
based on proteins, antibodies and other compounds will depend on
our ability to:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop products internally;                                                                                                                                                    
|
| |  | complete laboratory testing and human studies;                                                                                                                                  
|
| |  | obtain and maintain necessary intellectual
    property rights to our products;                                                                                                 
|
| |  | obtain and maintain necessary regulatory
    approvals related to the efficacy and safety of our products;                                                                      
|
| |  | develop efficient production facilities meeting
    all regulatory requirements or enter into arrangements with
    third parties to manufacture our products on our behalf; and
|
| |  | deploy sales and marketing resources effectively
    or enter into arrangements with third parties to provide these
    functions.                                              

Although we are conducting human studies with
respect to eight products, we have limited experience with these
activities and may not be successful in developing or
commercializing these or other products.

Because clinical trials for our products will
be expensive and protracted and their outcome is uncertain, we
must invest substantial amounts of time and money that may not
yield viable products.

Conducting clinical trials is a lengthy,
time-consuming and expensive process. Before obtaining
regulatory approvals for the commercial sale of any product, we
must demonstrate through laboratory, animal and human studies
that such product is both effective and safe for use in humans.
We will incur substantial expense for and devote a significant
amount of time to these studies.

Before a drug may be marketed in the U.S., it
must be the subject of rigorous preclinical testing. The results
of these studies must be submitted to the FDA as part of an
investigational new drug application, which is reviewed by the
FDA before clinical testing in humans can begin. The results of
preliminary studies do not predict clinical success. A number of
potential drugs have shown promising results in early testing
but subsequently failed to obtain necessary regulatory
approvals. Data obtained from tests are susceptible to varying
interpretations, which may delay, limit or prevent regulatory
approval. Regulatory authorities may refuse or delay approval as
a result of many other factors, including changes in regulatory
policy during the period of product development.

Completion of clinical trials may take many
years. The length of time required varies substantially
according to the type, complexity, novelty and intended use of
the product candidate. The FDA monitors the progress of each
phase of testing, and may require the modification, suspension,
or termination of a trial if it is

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determined to present excessive risks to
patients. Our rate of commencement and completion of clinical
trials may be delayed by many factors, including:




| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | our inability to manufacture sufficient
    quantities of materials for use in clinical trials;   
|
| |  | variability in the number and types of patients
    available for each study;                     
|
| |  | difficulty in maintaining contact with patients
    after treatment, resulting in incomplete data;
|
| |  | unforeseen safety issues or side effects;                                                         
|
| |  | poor or unanticipated effectiveness of products
    during the clinical trials; or                
|
| |  | government or regulatory delays.                                                                  

For all of our trials except the repifermin wound
healing trial, only a limited number of patients are involved.
To date, data obtained from these clinical trials have been
insufficient to demonstrate safety and efficacy under applicable
FDA guidelines and are not sufficient to support an application
for regulatory approval without further studies. In two trials
of repifermin and in one study of mirostipen, the drug was shown
to be safe, but was not shown to be effective. Studies conducted
by us or by third parties on our behalf may not demonstrate
sufficient effectiveness and safety to obtain the requisite
regulatory approvals for these or any other potential products.
Regulatory authorities may not permit us to undertake any
additional clinical trials. The clinical trial process may be
accompanied by substantial delay and expense and there can be no
assurance that the data generated in these studies will
ultimately be sufficient for marketing approval by the FDA.

The clinical success of VEGF-2 gene therapy is
uncertain.

Clinical trials of VEGF-2 gene therapy by
Corautus were placed on clinical hold by the FDA in February
2000. These trials were removed from clinical hold in October
2001. Corautus is seeking clearance for new trials of VEGF-2
gene therapy. These trials would be conducted with patients for
whom conventional treatments have been unsuccessful or for whom
no conventional treatment exists. During the course of
treatment, these patients could die or suffer adverse medical
effects for reasons that may not be related to VEGF-2. Deaths in
the patient population for the earlier VEGF-2 trials did occur,
in both active and placebo groups, and Corautus has reviewed the
relevant data regarding these patients and provided an analysis
of the reasons for these deaths to the FDA. These adverse
effects may affect the interpretation of the clinical trial
results and the success of the trials. Later clinical trials may
be extensive, expensive and time-consuming. VEGF-2 gene therapy
may never be approved for use in humans.

We face risks in connection with our ABthrax
product in addition to risks generally associated with drug
development.

Our entry into the biodefense field with the
development of ABthrax presents risks beyond those associated
with the development of our other products. Numerous other
companies and governmental agencies, including the U.S. Army,
are known to be developing biodefense pharmaceuticals and
related products to combat anthrax. These competitors may have
financial or other resources greater than ours, and may have
easier or preferred access to the likely distribution channels
for biodefense products. In addition, since the primary
purchaser of biodefense products is the U.S. government and its
agencies, the success of ABthrax will depend on government
spending policies and pricing restrictions. The funding of
government biodefense programs is dependent, in part, on
budgetary constraints, political partisanship and military
developments. Moreover, even if ABthrax is approved by the FDA,
the revenues available for the sale of ABthrax could be
significantly curtailed by the efforts of government payors to
limit the selling price of ABthrax. In the case of the U.S.
government, executive or legislative action could attempt to
impose production and pricing requirements on us. Moreover, we
do not know whether the U.S. government will purchase ABthrax,
and if it does, the timing, extent and amount of such purchases.

20



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Because neither we nor any of our
collaboration partners have received marketing approval for any
product resulting from our research and development efforts, and
may never be able to obtain any such approval, we may not be
able to generate any product revenue.

We have not completed development of any product
based on our genomics research. It is possible that we will not
receive FDA marketing approval for any of our products. Although
a number of our potential products have entered clinical trials,
we cannot assure you that any of these products will receive
marketing approval. All the products being developed by our
collaboration partners will also require additional research and
development, extensive preclinical studies and clinical trials
and regulatory approval prior to any commercial sales. In some
cases, the length of time that it takes for our collaboration
partners to achieve various regulatory approval milestones may
affect the payments that we are eligible to receive under our
collaboration agreements. We and our collaboration partners may
need to successfully address a number of technical challenges in
order to complete development of our products. Moreover, these
products may not be effective in treating any disease or may
prove to have undesirable or unintended side effects, toxicities
or other characteristics that may preclude our obtaining
regulatory approval or prevent or limit commercial use.

RISKS FROM OUR COLLABORATION RELATIONSHIPS AND
STRATEGIC ACQUISITIONS

Our plan to use collaborations to leverage our
capabilities and to grow in part through the strategic
acquisition of other companies and technologies will not be
successful if we are unable to integrate our partners
capabilities or the acquired companies with our other operations
or if they do not meet our expectations.

As part of our strategy, we intend to continue to
evaluate strategic partnership opportunities and consider
acquiring complementary technologies and businesses. In order
for our future collaboration efforts to be successful, we must
first identify partners whose capabilities complement and
integrate well with ours. Technologies to which we gain access
may prove ineffective or unsafe. Our partners may prove
difficult to work with or less skilled than we originally
expected. In addition, any past collaborative successes are no
indication of potential future success in this area. In order to
achieve the anticipated benefits of an acquisition, we must
integrate the acquired companys business, technology and
employees in an efficient and effective manner. The successful
combination of companies in a rapidly changing biotechnology and
genomics industry may be more difficult to accomplish than in
other industries. The combination of two companies requires,
among other things, integration of the companies
respective technologies and research and development efforts. We
cannot assure you that this integration will be accomplished
smoothly or successfully. The difficulties of integration are
increased by the necessity of coordinating geographically
separated organizations and addressing possible differences in
corporate cultures and management philosophies. The integration
of certain operations will require the dedication of management
resources which may temporarily distract attention from the
day-to-day operations of the combined companies. The business of
the combined companies may also be disrupted by employee
retention uncertainty and lack of focus during integration. The
inability of management to integrate successfully the operations
of the two companies, in particular, to integrate and retain key
scientific personnel, or the inability to integrate successfully
two technology platforms, could have a material adverse effect
on our business, results of operations and financial condition.

Because we depend on our collaboration
partners for revenue, we may not become profitable if we cannot
increase the revenue from our collaboration partners or other
sources.

We have received all our revenue from payments
made under our collaboration agreements with GlaxoSmithKline
and, to a lesser extent, other agreements. The GlaxoSmithKline
collaboration agreement and many of our other collaboration
agreements expired in 2001. None of these collaboration
agreements was renewed. We may not be able to enter into
additional collaboration agreements. We are entitled to certain
milestone and royalty payments from the existing collaborators,
but may not receive payments if our collaborators fail to:



| |   |                             
| | - | ----------------------------
| |  | develop marketable products;

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| |   |                                                        
| | - | -------------------------------------------------------
| |  | obtain regulatory approvals for products; or           
|
| |  | successfully market products based on our
    research.

If one of our collaborators pursues a product
that competes with our products, it may have a conflict of
interest and we may not receive the milestone or royalty
payments that we expect.

Each of our collaborators is developing a variety
of products, some with other partners. Our collaborators may
pursue existing or alternative technologies instead of products
they are developing in collaboration with us. Our collaborators
may also develop products that are similar to or compete with
products they are developing in collaboration with us. If our
collaborators pursue these other products instead of our
products, we may not receive milestone or royalty payments.

FINANCIAL AND MARKET RISKS

Because of our substantial indebtedness, we
may be unable to adjust our strategy to meet changing conditions
in the future.

As of December 31, 2002, we had long-term
obligations of approximately $503.0 million. We also had
future guarantee obligations under certain facility leases that
under current terms will increase to approximately $460.0
million. Our substantial debt and future guarantees will have
several important consequences for our future operations. For
instance:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | payments of interest on, and principal of, our
    indebtedness will be substantial, and may exceed then current
    revenues and available cash;
|
| |  | we may be unable to obtain additional future
    financing for capital expenditures, acquisitions or general
    corporate purposes;             
|
| |  | we may be unable to withstand changing
    competitive pressures, economic conditions and governmental
    regulations; and                      
|
| |  | we may be unable to make acquisitions or
    otherwise take advantage of significant business opportunities
    that may arise.                  

We have entered into two facility lease
arrangements that are not required to be reflected on our
balance sheet but that constitute significant financial
obligations and possible risks.

In the fourth quarter of 2001, we entered into
two facility leases with respect to three facilities that are
currently in design or under construction and one
previously-constructed facility. We lease these facilities from
trusts controlled by third parties established solely for the
transactions. Under accounting principles generally accepted in
the United States, these leases are treated as operating leases.
In the event we default on our obligations under the leases, we
may be responsible for up to $526.0 million of the cost of
these facilities because of guarantees we made in connection
with the leases. These obligations are not required to be
reflected as liabilities on our balance sheet, but are described
in footnotes to our financial statements. We are required to
pledge marketable securities as security for our obligations
under the leases and the related documents. As of
December 31, 2002, we included approximately
$205.4 million of restricted investments on our balance
sheet, of which approximately $192.8 million was held as
restricted investments providing collateral for our obligations
with respect to these facilities. As the facilities are
constructed, we will be required to restrict additional cash or
investments as collateral for our obligations under these leases
in order to reach the full amount of collateralization, which
will reduce our working capital. Unless we restructure the
leases or reduce the construction costs of these facilities, we
expect that we will include approximately $526.0 million in
restricted investments on our balance sheet when the facilities
are completed. We cannot assure you that we will be able to
restructure the leases or to reduce the construction costs. If
the value of our pledged investments declines, because of an
increase in interest rates or otherwise, we would need to pledge
additional investments, which would further reduce our working
capital. The rent under one of these leases is based on a
floating interest rate, but the trusts at our request can lock
in a fixed interest rate at an interest rate premium. To date,
one trust has fixed the interest rate for approximately
$76.0 million of the financed project

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cost. To the extent the trusts do not lock in a
fixed interest rate, if interest rates increase, our rent
obligations would also increase. These leases have a term of
seven years. If we desire to remain in the facilities upon lease
expiration, we would need to refinance or buy the facilities at
the financed project cost. We cannot assure you that refinancing
will be available on comparable terms, if at all. Further, in
the event the facilities are sold, we have guarantee obligations
which make us responsible to the extent that the value of the
facilities is less than the financed project cost and which
reach a maximum guarantee obligation of approximately
$459.4 million if the value of the facilities declined
below approximately 15% of the financed project cost. While we
believe that these leases provide a useful financing mechanism
for the facilities, adverse public perception of such lease
arrangements and the associated risks may cause our stock price
to decline. In addition, the accounting treatment for these
leases may be changed by the recent issuance of Financial
Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities and may
require us to include these leased facilities and the related
lease obligations on our balance sheet as assets and
liabilities. See Managements Discussion and Analysis
of Financial Condition and Results of Operations 
Liquidity and Capital Resources as well as Recent
Accounting Pronouncements within Note B, Summary of
Significant Accounting Policies in the Notes to the Consolidated
Financial Statements.


If we do not obtain substantial additional
funding on acceptable terms, we may not be able to continue to
grow our business and generate enough revenue to recover our
investment in our product development effort.

Since inception we have expended, and will
continue to expend, substantial funds to continue our research
and development programs. We may need additional financing
beyond that which we have projected to fund our operating
expenses and capital requirements. We may not be able to obtain
additional financing on acceptable terms. If we raise additional
funds by issuing equity securities, the new securities may
dilute the interests of our existing stockholders.

Because our stock price has been and will
likely continue to be volatile, the market price of our common
stock may be lower or more volatile than you expected.

Our stock price, like the stock prices of other
biotechnology companies, has been highly volatile. During 2002,
the closing price of our common stock has been as low as $8.49
per share and as high as $32.79 per share. The market price of
our common stock could fluctuate widely because of:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | future announcements about our company or our
    competitors, including the results of testing, technological
    innovations or new commercial products;
|
| |  | regulatory actions and changes in government
    regulations;                                                                                             
|
| |  | announcements relating to health care reform;                                                                                                             
|
| |  | our failure to acquire or maintain proprietary
    rights to the gene sequences we discover or the products we
    develop;                               
|
| |  | litigation; and                                                                                                                                           
|
| |  | public concern as to the safety of our products.                                                                                                          

The stock market has experienced extreme price
and volume fluctuations that have particularly affected the
market price for many emerging and biotechnology companies.
These fluctuations have often been unrelated to the operating
performance of these companies. These broad market fluctuations
may cause the market price of our common stock to be lower or
more volatile than you expected.

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INTELLECTUAL PROPERTY RISKS

If patent laws or the interpretation of patent
laws change, our competitors may be able to develop and
commercialize our discoveries.

Important legal issues remain to be resolved as
to the extent and scope of available patent protection for
biotechnology products and processes in the U.S. and other
important markets outside the U.S. We expect that litigation or
administrative proceedings will likely be necessary to determine
the validity and scope of certain of our and others
proprietary rights. We are currently involved in a number of
administrative proceedings relating to the scope of protection
of our patents and those of others. Any such lawsuit or
proceeding may result in a significant commitment of resources
in the future. In addition, changes in, or different
interpretations of, patent laws in the U.S. and other countries
may result in patent laws that allow others to use our
discoveries or develop and commercialize our products. We cannot
assure you that the patents we obtain or the unpatented
technology we hold will afford us significant commercial
protection.

If our patent applications do not result in
issued patents, our competitors may obtain rights to and
commercialize the discoveries we attempted to patent.

Our pending patent applications covering
full-length genes and their corresponding proteins may not
result in the issuance of any patents. Our applications may not
be sufficient to meet the statutory requirements for
patentability in all cases.

If others file patent applications or obtain
patents similar to ours, then the Patent and Trademark Office
may deny our patent applications, or others may restrict the use
of our discoveries.

We are aware that others, including universities
and companies working in the biotechnology and pharmaceutical
fields, have filed patent applications and have been granted
patents in the U.S. and in other countries that cover subject
matter potentially useful or necessary to our business. Some of
these patents and patent applications claim only specific
products or methods of making products, while others claim more
general processes or techniques useful in the discovery and
manufacture of a variety of products. The risk of additional
patents and patent applications will continue to increase as the
biotechnology industry expands. We cannot predict the ultimate
scope and validity of existing patents and patents that may be
granted to third parties nor can we predict the extent to which
we may wish or be required to obtain licenses to such patents,
or the availability and cost of acquiring such licenses. To the
extent that licenses are required, the owners of the patents
could bring legal actions against us to claim damages or to stop
our manufacturing and marketing of the affected products. We
believe that there will continue to be significant litigation in
our industry regarding patent and other intellectual property
rights. If we become involved in litigation, it could consume a
substantial portion of our resources.

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

Issued patents may not provide commercially
meaningful protection against competitors and may not provide us
with competitive advantages. Other parties may challenge our
patents or design around our issued patents or develop products
providing effects similar to our products. In addition, others
may discover uses for genes, proteins or antibodies other than
those uses covered in our patents, and these other uses may be
separately patentable. The holder of a patent covering the use
of a gene, protein or antibody for which we have a patent claim
could exclude us from selling a product for a use covered by its
patent.

We rely on our collaboration partners to seek
patent protection for the products they develop based on our
research.

Much of our future revenue may be derived from
royalty payments from our collaboration partners. These partners
face the same patent protection issues that we and other
biotechnology firms face. As a result, we cannot assure you that
any product developed by our collaboration partners will be
patentable, and therefore, we may never receive any royalty
payments. We also rely on our collaboration partners to
effectively prosecute their patent applications. Their failure
to obtain or protect necessary patents could also result in a
loss of royalty revenue to us.

24



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##### 



If we are unable to protect our trade secrets,
others may be able to use our secrets to compete more
effectively.

We may not be able to meaningfully protect our
trade secrets. We rely on trade secret protection to protect our
confidential and proprietary information. We believe we have
developed proprietary procedures for making libraries of DNA
sequences and genes. We have not sought patent protection for
these procedures. We have developed a substantial database
concerning genes we have identified. While we have entered into
confidentiality agreements with employees and academic
collaborators, we may not be able to prevent their disclosure of
these data or materials. Others may independently develop
substantially equivalent information and techniques.

REGULATORY RISKS

Because we are subject to extensive and
uncertain government regulatory requirements, we may be unable
to obtain government approval of our products in a timely
manner.

Regulations in the U.S. and other countries have
a significant impact on our research, product development and
manufacturing activities and will be a significant factor in the
marketing of our products. All of our products will require
regulatory approval prior to commercialization. In particular,
our products are subject to rigorous preclinical and clinical
testing and other premarket approval requirements by the FDA and
similar regulatory authorities in other countries. Various
statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and
marketing of our products. The lengthy process of seeking these
approvals, and the subsequent compliance with applicable
statutes and regulations, require the expenditure of substantial
resources. Any failure by us to obtain, or any delay in
obtaining, regulatory approvals could materially adversely
affect our ability to commercialize our products in a timely
manner, or at all.

Marketing Approvals.Before a product can be marketed and
sold, the results of the preclinical and clinical testing must
be submitted to the FDA for approval. This submission will be
either a new drug application or a biologic license application,
depending on the type of drug. In responding to a new drug
application or a biologic license application, the FDA may grant
marketing approval, request additional information or deny the
application if it determines that the application does not
provide an adequate basis for approval. We cannot assure you
that any approval required by the FDA will be obtained on a
timely basis, or at all.

In addition, the FDA may condition marketing
approval on the conduct of specific post-marketing studies to
further evaluate safety and efficacy. Rigorous and extensive FDA
regulation of pharmaceutical products continues after approval,
particularly with respect to compliance with current good
manufacturing practices, or cGMPs, reporting of adverse effects,
advertising, promotion and marketing. Discovery of previously
unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the
market as well as possible civil or criminal sanctions, any of
which could materially adversely affect our business.

Foreign Regulation.We must obtain regulatory approval by
governmental agencies in other countries prior to
commercialization of our products in those countries. Foreign
regulatory systems may be just as rigorous, costly and uncertain
as in the U.S.

Negative public opinion and increased
regulatory scrutiny of gene therapy, genetic testing and genetic
research could prevent us from commercializing our
products.

Ethical, social and legal concerns about gene
therapy, genetic testing and genetic research could result in
additional regulations restricting or prohibiting the processes
we or our suppliers may use. Federal and state agencies,
congressional committees and foreign governments have expressed
interest in further regulating biotechnology. More restrictive
regulations or claims that our products are unsafe or pose a
hazard could prevent us from commercializing our products.

25



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Because we are subject to environmental,
health and safety laws, we may be unable to conduct our business
in the most advantageous manner.

We are subject to various laws and regulations
relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the
use and disposal of hazardous or potentially hazardous
substances used in connection with our research, including
radioactive compounds and infectious disease agents. We also
cannot accurately predict the extent of regulations that might
result from any future legislative or administrative action. Any
of these laws or regulations could cause us to incur additional
expense or restrict our operations.

INDUSTRY RISKS

Many of our competitors have substantially
greater capabilities and resources and may be able to develop
and commercialize products before we do.

We face intense competition from a wide range of
pharmaceutical, biotechnology and diagnostic companies, as well
as academic and research institutions and government agencies.
Some of these competitors have substantially greater financial,
marketing, research and development and human resources. Most
large pharmaceutical companies have considerably more experience
in undertaking clinical trials and in obtaining regulatory
approval to market pharmaceutical products.

Principal competitive factors in our industry
include:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the quality and breadth of an organizations
    technology;                                                                                      
|
| |  | the skill of an organizations employees and
    its ability to recruit and retain skilled employees;                                             
|
| |  | an organizations intellectual property
    estate;                                                                                               
|
| |  | the range of capabilities, from target
    identification and validation to drug discovery and development
    to manufacturing and marketing; and
|
| |  | the availability of substantial capital resources
    to fund discovery, development and commercialization activities.                            

Many large pharmaceutical and biotechnology
companies have significantly larger intellectual property
estates than we do, more substantial capital resources than we
have, and greater capabilities and experience than we do in
preclinical and clinical development, sales, marketing,
manufacturing and regulatory affairs.

We are aware of products in research or
development by our competitors that address all of the diseases
we are targeting. Any of these products may compete with our
product candidates. Our competitors may succeed in developing
their products before we do, obtaining approvals from the FDA or
other regulatory agencies for their products more rapidly than
we do, or developing products that are more effective than our
products. These products or technologies might render our
technology obsolete or noncompetitive. In addition, our fusion
protein products are designed to be longer-acting versions of
existing products. The existing product in many cases has an
established market that may make the introduction of our product
more difficult.

If we lose or are unable to attract key
management or other personnel, we may experience delays in
product development.

We depend on our senior executive officers as
well as key scientific and other personnel. Only a few of our
key personnel are bound by employment agreements, and those with
employment agreements are bound only for a limited period of
time. Our employment agreement with Dr. William A.
Haseltine, our Chairman of the Board and Chief Executive
Officer, expires in February 2004. Although
Dr. Haseltines employment agreement automatically
extends for additional one year terms, either party can
terminate the agreement four months prior to the end of the
applicable term. If Dr. Haseltine decides to terminate his
employment with us, this termination could delay the
commercialization of our products or prevent us from becoming
profitable. Further, we have not purchased key-man life
insurance on any of our executive officers or key personnel, and
therefore may not have adequate funds to find acceptable
replacements for them. Competition for qualified

26



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employees is intense among pharmaceutical and
biotechnology companies, and the loss of qualified employees, or
an inability to attract, retain and motivate additional highly
skilled employees required for the expansion of our activities,
could hinder our ability to complete human studies successfully
and develop marketable products.


If the health care system or reimbursement
policies change, the prices of our potential products may fall
or our potential sales may decline.

The levels of revenues and profitability of
biopharmaceutical companies like ours may be affected by the
continuing efforts of government and third party payers to
contain or reduce the costs of health care through various
means. For example, in certain foreign markets, pricing or
profitability of therapeutic and other pharmaceutical products
is subject to governmental control. In the U.S. there have been,
and we expect that there will continue to be, a number of
federal and state proposals to implement similar governmental
control. While we cannot predict whether any legislative or
regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on our business,
financial condition and profitability. In addition, in the U.S.
and elsewhere, sales of therapeutic and other pharmaceutical
products depend in part on the availability of reimbursement to
the consumer from third party payers, such as government and
private insurance plans. Third party payers are increasingly
challenging the prices charged for medical products and
services. We cannot assure you that any of our products will be
considered cost effective or that reimbursement to the consumer
will be available or will be sufficient to allow us to sell our
products on a competitive and profitable basis.

OTHER RISKS RELATED TO OUR BUSINESS

Because we depend on a single manufacturer for
the radioiodinating of some of our products, we may be unable to
obtain sufficient quantities of these products at commercially
acceptable rates.

We rely on one manufacturer, MDS Nordion of
Ottawa, Canada, for all of our current radioiodinating
requirements. If we are unable to secure an adequate supply of
this product at commercially reasonable rates, our ability to
continue with intended clinical trials would be adversely
affected.

We may be unable successfully to establish a
manufacturing capability and may be unable to obtain required
quantities of our products economically.

We do not manufacture any products for commercial
use and do not have any experience in manufacturing materials
suitable for commercial use. We currently are having facilities
constructed to establish additional manufacturing capabilities
to allow us to meet our commercial manufacturing requirements.
The FDA must inspect and license these facilities to determine
compliance with cGMP requirements for commercial production. We
may not be able successfully to establish manufacturing
capabilities or manufacture our products economically or in
compliance with cGMPs and other regulatory requirements.

While we are expanding our manufacturing
capabilities, we may also contract with third party
manufacturers or develop products with partners and use the
partners manufacturing capabilities. If we use others to
manufacture our products, we will depend on those parties to
comply with cGMPs, and other regulatory requirements and to
deliver materials on a timely basis. These parties may not
perform adequately. Any failures by these third parties may
delay our development of products or the submission of these
products for regulatory approval.

Because we currently have no marketing
capability, we may be unable to commercialize our
products.

We do not have any marketed products. If we
develop products that can be marketed, we intend to market the
products either independently or together with collaborators or
strategic partners. GlaxoSmithKline, Schering-Plough and others
have co-marketing rights with respect to certain of our
products. If we decide to market any products independently, we
will incur significant additional expenditures and commit
significant additional management resources to establish a sales
force. For any products that we market together with partners,
we will rely, in whole or in part, on the marketing capabilities
of those parties. We may also contract

27



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##### 



with third parties to market certain of our
products. Ultimately, we and our partners may not be successful
in marketing our products.


Because we may depend on third parties to
conduct laboratory testing and human studies, we may encounter
delays in or lose some control over our efforts to develop
products.

We may be dependent on third-party research
organizations to design and conduct our laboratory testing and
human studies. If we are unable to obtain any necessary testing
services on acceptable terms, we may not complete our product
development efforts in a timely manner. If we rely on third
parties for laboratory testing and human studies, we may lose
some control over these activities and become too dependent upon
these parties. These third parties may not complete testing
activities on schedule or when we request.

Our certificate of incorporation, bylaws and
rights plan could discourage acquisition proposals, delay a
change in control or prevent transactions that are in your best
interests.

Provisions of our certificate of incorporation
and bylaws, as well as Section 203 of the Delaware General
Corporation Law, may discourage, delay or prevent a change in
control of our company that you as a stockholder may consider
favorable and may be against your best interest. We have also
adopted a rights plan, or poison pill, that may
discourage, delay or prevent a change in control. Our
certificate of incorporation and bylaws contain provisions that:



| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance of up to 20,000,000 shares
    of blank check preferred stock that could be issued
    by our board to increase the number of outstanding shares and
    discourage a takeover attempt;
|
| |  | classify the directors of our board with
    staggered, three-year terms, which may lengthen the time
    required to gain control of our board of directors;                                                   
|
| |  | limit who may call special meetings of
    stockholders; and                                                                                                                                                    
|
| |  | establish advance notice requirements for
    nomination of candidates for election to the board or for
    proposing matters that can be acted upon by stockholders at
    stockholder meetings.               

ITEM
2.     PROPERTIES

We currently lease and occupy approximately
682,000 square feet of laboratory and office space in twelve
buildings in Rockville, Maryland. Our leased space includes
approximately 352,000 square feet of laboratory space,
approximately 187,000 of manufacturing space secured through
long-term leases and approximately 143,000 square feet of office
space.

In addition, several construction projects are
underway that will significantly increase our square footage
under lease as follows:

|                                   |  |                  |         |  |                |  |      | 
|---------------------------------- |  | ---------------- | ------- |  | -------------- |  | ---- | 
|                                   |  | Approximate Size |         |  | Anticipated    | 
|Project                            |  | (Square Feet)    |         |  | Occupancy Date | 
|                                   |  |                  |         |  |                | 
|Research building                  |  |                  | 73,000  |  |                |  | 2003 | 
|Laboratory and office campus       |  |                  | 624,000 |  |                |  | 2003 | 
|Large-scale manufacturing facility |  |                  | 290,000 |  |                |  | 2005 | 

For additional discussion of the financing of
these three facilities, see Managements Discussion
and Analysis of Financial Condition and Results of Operations
 Liquidity and Capital Resources.

We anticipate that the construction of the
laboratory and office campus will enable us to continue to
expand our operations in close proximity to one another. We
believe that our properties are generally in good condition,
well maintained, suitable and adequate to carry on our business.

28



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##### 



ITEM 3.     LEGAL
PROCEEDINGS

We are not a party to any material pending legal
proceedings, other than ordinary routine litigation incidental
to our business.

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

No matters were submitted to a vote of our
security holders during the fourth quarter of the fiscal year
ended December 31, 2002.

29



---



##### 



PART II



|        |                                                                            
|------- | ---------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDERS MATTERS

Our common stock has been traded on the NASDAQ
National Market System under the symbol HGSI since
December 2, 1993. The following table presents the
quarterly high and low closing prices as quoted by NASDAQ.

|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|2001           |  | High |       |  | Low |  
|First Quarter  |  | $    | 67.81 |  |     | $ | 40.38 | 
|Second Quarter |  | $    | 75.31 |  |     | $ | 39.19 | 
|Third Quarter  |  | $    | 58.80 |  |     | $ | 28.00 | 
|Fourth Quarter |  | $    | 47.28 |  |     | $ | 30.88 | 

|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|2002           |  | High |       |  | Low |  
|First Quarter  |  | $    | 32.79 |  |     | $ | 20.52 | 
|Second Quarter |  | $    | 22.34 |  |     | $ | 12.30 | 
|Third Quarter  |  | $    | 18.65 |  |     | $ | 10.27 | 
|Fourth Quarter |  | $    | 13.64 |  |     | $ | 8.49  | 

As of January 31, 2003, there were
approximately 804 holders of record of our common stock. We have
never declared or paid any cash dividends. We do not anticipate
declaring or paying cash dividends for the foreseeable future,
in part because existing contractual agreements prohibit such
dividends. Instead, we will retain our earnings, if any, for the
future operation and expansion of our business.

30



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##### 





|        |                                     
|------- | ------------------------------------
|ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA

We present below our selected consolidated
financial data for the years ended December 31, 2002, 2001
and 2000, and as of December 31, 2002 and 2001, which have
been derived from the audited consolidated financial statements
included elsewhere herein and should be read in conjunction with
such consolidated financial statements and the accompanying
notes. We present below our selected financial data for the
years ended December 31, 1999 and 1998, and as of
December 31, 2000, 1999 and 1998, which have been derived
from audited financial statements not included herein. The
results of operations of prior periods are not necessarily
indicative of results that may be expected for any other period.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business. Per share amounts have been restated to
reflect two two-for-one stock splits, paid in the form of stock
dividends on January 28, 2000 and on October 5, 2000.

|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         |        |         |        |         |        |         |        | 
|------------------------------------------------------------------------------------------ | ------------------------------ | ----------------------------------------------- | --------------------------------------------- | ------- | -------- | ------- | -------- | ------- | -------- | ------- | -------- | ------- | -------- | ------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | 
|                                                                                           |                                |                                                
|                                                                                           |                                | Years Ended December 31,                        |                                              
|                                                                                           |                                |                                                 |                                              
|                                                                                           |                                | 2002                                            |                                               |         | 2001     |         |          | 2000    |          |         | 1999     |         |          | 1998    |        
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|                                                                                           |                                |                                                
|                                                                                           |                                | (In thousands, except per share and ratio data) |                                              
|Statement of Operations Data:                                                              |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         |        |         |        |         |       
|Revenue  research and development
    collaborative contracts                             |                                | $                                               | 3,568                                         |         |          | $       | 12,818   |         |          | $       | 22,068   |         |          | $       | 24,524  |        |         | $      | 29,598  |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|Costs and expenses:                                                                        |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         |        |         |        |         |       
|                                                                                           | Research and development:      |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         |        |         |        |         |        |        
|                                                                                           |                                |                                                 | Direct expenditures                           |         |          | 191,162 |          |         |          | 146,276 |          |         |          | 91,456  |         |        |         | 60,607 |         |        |         | 47,006 | 
|                                                                                           |                                |                                                 | Charge for construction design changes        |         |          | 14,238  |          |         |          |        |          |         |          |        |         |        |         |       |         |        |         |       | 
|                                                                                           |                                |                                                 | Purchased in-process research and development |         |          |        |          |         |          |        |          |         |          | 134,050 |         |        |         |       |         |        |         |       | 
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|                                                                                           | Total research and development |                                                 |                                               | 205,400 |          |         |          | 146,276 |          |         |          | 225,506 |          |         |         | 60,607 |         |        |         | 47,006 |        
|                                                                                           | General and administrative     |                                                 |                                               | 44,175  |          |         |          | 38,714  |          |         |          | 27,083  |          |         |         | 14,838 |         |        |         | 14,370 |        
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|Total costs and expenses                                                                   |                                |                                                 | 249,575                                       |         |          |         | 184,990  |         |          |         | 252,589  |         |          |         | 75,445  |        |         |        | 61,376  |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|                                                                                           |                                | Income (loss) from operations                   |                                               |         | (246,007 | )       |          |         | (172,172 | )       |          |         | (230,521 | )       |         |        | (50,921 | )      |         |        | (31,778 | )     
|Net interest income                                                                        |                                |                                                 | 58,449                                        |         |          |         | 81,228   |         |          |         | 40,147   |         |          |         | 8,977   |        |         |        | 11,047  |       
|Charge for impaired investments                                                            |                                |                                                 | (32,158                                       | )       |          |         | (22,314  | )       |          |         |         |         |          |         |        |        |         |        |        |       
|Debt conversion expenses                                                                   |                                |                                                 |                                              |         |          |         | (3,894   | )       |          |         | (50,818  | )       |          |         |        |        |         |        |        |       
|Other income                                                                               |                                |                                                 |                                              |         |          |         |         |         |          |         | 5,861    |         |          |         |        |        |         |        |        |       
|Equity in income (loss) in joint venture                                                   |                                |                                                 |                                              |         |          |         |         |         |          |         |         |         |          |         |        |        |         |        | (2,226  | )     
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|Income (loss) before taxes and cumulative effect
    of change in accounting principle (1) |                                |                                                 | (219,716                                      | )       |          |         | (117,152 | )       |          |         | (235,331 | )       |          |         | (41,944 | )      |         |        | (22,957 | )     
|Provision for income taxes                                                                 |                                |                                                 |                                              |         |          |         |         |         |          |         | 225      |         |          |         | 225     |        |         |        | 225     |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|Net income (loss) before cumulative effect of
    change in accounting principle (1)       |                                |                                                 | (219,716                                      | )       |          |         | (117,152 | )       |          |         | (235,556 | )       |          |         | (42,169 | )      |         |        | (23,182 | )     
|Cumulative effect of change in accounting
    principle (2)                                |                                |                                                 |                                              |         |          |         |         |         |          |         | (8,250   | )       |          |         |        |        |         |        |        |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        
|Net income (loss) (1)                                                                      |                                | $                                               | (219,716                                      | )       |          | $       | (117,152 | )       |          | $       | (243,806 | )       |          | $       | (42,169 | )      |         | $      | (23,182 | )     
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |        

31



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##### 



|        |                                                    
|------- | ---------------------------------------------------
|ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA,
    CONTINUED

|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                          |                                                            |                                                
|                                                                                                                          |                                                            | Years Ended December 31,                        |         
|                                                                                                                          |                                                            |                                                 |         
|                                                                                                                          |                                                            | 2002                                            |          |   | 2001 |   |          | 2000 |  |   | 1999     |          |   | 1998 |        
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |        
|                                                                                                                          |                                                            |                                                
|                                                                                                                          |                                                            | (In thousands, except per share and ratio data) |         
|Statement of Operations Data:                                                                                             |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |         |         |   |   |         |        
|Net income (loss) per share before cumulative
    effect of change in accounting principle, basic and
    diluted (1) (3) |                                                            | $                                               | (1.71    | ) |      | $ | (0.92    | )    |  | $ | (2.12    | )        |   | $    | (0.46   | )       |   | $ | (0.26   | )      
|Cumulative effect of change in accounting
    principle (2)                                                               |                                                            |                                                 |         |   |      |   |         |      |  |   | (0.08    | )        |   |      |        |         |   |   |        |        
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |        
|Net income (loss) per share, basic and
    diluted (1) (3)                                                                |                                                            | $                                               | (1.71    | ) |      | $ | (0.92    | )    |  | $ | (2.20    | )        |   | $    | (0.46   | )       |   | $ | (0.26   | )      
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |        
|Pro forma amounts assuming the accounting change
    is applied retroactively:                                            |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |         |         |   |   |         |        
|                                                                                                                          | Net income (loss) (3) (4)                                  |                                                 |          |   |      |   |          |      |  |   | $        | (235,556 | ) |      | $       | (42,169 | ) |   | $       | (24,182 | )
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |        
|                                                                                                                          | Net income (loss) per share, basic and
    diluted (3) (4) |                                                 |          |   |      |   |          |      |  |   | $        | (2.12    | ) |      | $       | (0.46   | ) |   | $       | (0.27   | )
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |        
|Other Data:                                                                                                               |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |         |         |   |   |         |        
|Ratio of earnings to fixed charges                                                                                        |                                                            |                                                 |         |   |      |   |         |      |  |   |         |          |   |      |        |         |   |   |        |        
|Coverage deficiency (1)                                                                                                   |                                                            | $                                               | (219,716 | ) |      | $ | (117,152 | )    |  | $ | (235,331 | )        |   | $    | (41,944 | )       |   | $ | (22,957 | )      
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |          |   |      |        

|                                                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | -------- | - |  | - | ------- | -
|                                                                      |  |                   
|                                                                      |  | As of December 31, |          
|                                                                      |  |                    |          
|                                                                      |  | 2002               |           |   | 2001 |   |           | 2000 |  |   | 1999      |   |  | 1998 |         
|                                                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |         
|                                                                      |  |                   
|                                                                      |  | (In thousands)     |          
|Balance Sheet Data:                                                   |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |          |   |  |   |         |  
|Cash, cash equivalents, short-term and restricted
    investments (5) |  | $                  | 1,491,740 |   |      | $ | 1,689,311 |      |  | $ | 1,774,640 |   |  | $    | 466,192  |   |  | $ | 188,516 |  
|Total assets (6)                                                      |  |                    | 1,662,187 |   |      |   | 1,865,004 |      |  |   | 1,948,525 |   |  |      | 527,725  |   |  |   | 244,247 |  
|Total debt and capital lease, less current
    portion (6)            |  |                    | 503,281   |   |      |   | 503,970   |      |  |   | 533,146   |   |  |      | 326,336  |   |  |   | 1,780   |  
|Retained deficit                                                      |  |                    | (701,547  | ) |      |   | (481,831  | )    |  |   | (364,679  | ) |  |      | (120,873 | ) |  |   | (78,704 | )
|Total stockholders equity                                            |  |                    | 1,100,553 |   |      |   | 1,304,463 |      |  |   | 1,362,955 |   |  |      | 169,068  |   |  |   | 208,848 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For 2002, amounts include charges aggregating
    $46,396 arising from a charge for an impaired investment and a
    charge for construction design changes of $32,158, or $0.25 per
    share, and $14,238, or $0.11 per share, respectively. For 2001,
    amounts include charges aggregating $26,208 arising from a
    charge for an impaired investment and debt conversion expenses
    of $22,314, or $0.17 per share, and $3,894, or $0.03 per share,
    respectively. For 2000, amounts include charges aggregating
    $184,868 arising from purchased in-process research and
    development and debt conversion expenses of $134,050, or $1.21
    per share, and $50,818, or $0.46 per share, respectively.                                  
|   
|(2) | The cumulative effect of change in accounting
    principle is a one-time, non-cash charge relating to our
    implementation of Staff Accounting Bulletin No. 101
    (SAB 101). SAB 101 was issued by the Securities and
    Exchange Commission (SEC) in December 1999. SAB 101 provides
    guidance related to revenue recognition policies based on
    interpretations and practices followed by the SEC. The impact of
    our implementation of SAB 101 was to defer revenue recognition
    for certain portions of the revenue we previously recognized
    under our collaborative agreements into future accounting
    periods. For further discussion, see Note B of the notes to
    our consolidated financial statements included herein.
|   
|(3) | Restated to reflect two two-for-one stock splits
    paid in the form of a stock dividend on January 28, 2000
    and on October 5, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) | Pro forma presentation of the accounting change
    is not applicable for 2002 and 2001 as the change was
    implemented in 2000, retroactive to January 1, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(5) | Cash, cash equivalents, short-term and
    restricted investments for 2002, 2001, 2000, 1999 and 1998
    includes $205,352, $144,901, $12,332, $11,637 and $6,749,
    respectively, of restricted investments relating to certain
    operating leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(6) | Total assets for 2002, 2001, 2000,
    1999 and 1998 includes $205,352, $144,901, $12,332, $11,637 and
    $6,749, respectively, of restricted investments relating to
    certain operating leases. Total debt and capital lease,
    less current portion for 2002 and 2001 does not include
    any operating lease obligations under various facility and
    equipment lease arrangements. See Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Liquidity and Capital Resources for
    additional discussion.                                                                                                                                                                                     

32



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|        |                                                                                                
|------- | -----------------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND 
     RESULTS OF OPERATIONS

Overview

Human Genome Sciences is dedicated to discovery
for health. Our goal is to build a global biopharmaceutical
company that discovers, develops, manufactures and markets
gene-based drugs to treat and cure disease. The success of our
drug discovery efforts derives from our expertise in genomics,
the systematic collection and understanding of human genes and
their functions, and from our exclusive focus on developing
human protein and antibody drugs. We focus our internal product
development efforts on novel human protein and antibody drugs
discovered through genomics-based research, and on new improved
long-acting versions of existing protein drugs created using our
albumin fusion technology.

We are conducting clinical trials with eight of
our products. Four additional products are in clinical trials by
companies with which we are collaborating. The number of new
drugs we have in advanced preclinical studies continues to grow.

We have established strategic partnerships with a
number of leading pharmaceutical and biotechnology companies to
leverage our strengths and to gain access to complementary
technologies and sales and marketing infrastructure. Some of
these partnerships provide us with research funding and
milestone payments, along with royalty payments as products are
developed and commercialized. We also are entitled to certain
co-promotion, co-development, revenue sharing and other product
rights.

We have not received any product sales revenue or
royalties from product sales and do not anticipate revenues from
product sales or from royalties on product sales in the next
several years. To date, all of our revenue relates to payments
made under our collaboration agreements with GlaxoSmithKline
and, to a lesser extent, other agreements. The GlaxoSmithKline
collaboration agreement and many of our other collaboration
agreements expired in 2001 and will only generate additional
milestone and royalty payments if our collaborators successfully
develop drugs based on our technology. We may not receive any of
these payments and may not be able to enter into additional
collaboration agreements.

We expect that our revenue or income sources for
at least the next several years may be limited to interest
income, payments under various collaboration agreements to the
extent milestones are met, payments from the sale of product
rights and other payments from other collaborators and licensees
under existing or future arrangements, to the extent that we
enter into any future arrangements. We expect to continue to
incur substantial expenses relating to our research and
development efforts, as we focus on preclinical and clinical
trials required for the development of therapeutic protein,
antibody and fusion protein product candidates. As a result, we
expect to incur continued and increasing losses over the next
several years unless we are able to realize additional revenues
under existing or new collaboration agreements. The timing and
amounts of such revenues, if any, cannot be predicted with
certainty and will likely fluctuate sharply. Results of
operations for any period may be unrelated to the results of
operations for any other period. In addition, historical results
should not be viewed as indicative of future operating results.

Critical Accounting Policies and the Use of
Estimates

A critical accounting policy is one
that is both important to the portrayal of our financial
condition and results and that requires managements most
difficult, subjective or complex judgments. Such judgments are
often the result of a need to make estimates about the effect of
matters that are inherently uncertain. The preparation of our
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 reporting
period. Actual results could differ materially from those
estimates.

33



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##### 



Critical Accounting Policies and the Use of
Estimates (continued)


We currently believe the following accounting
policies to be critical:

We carry our cash, cash equivalents, investments,
other assets, accounts payable and accrued expenses and other
accrued expenses at their respective fair values. We
periodically monitor these fair values to determine if
impairment write-downs are required. Because we may determine
that market or business conditions may lead us to sell a
short-term investment prior to maturity, we classify our
short-term investments as available-for-sale.
Investments in securities that are classified as
available-for-sale and have readily determinable fair values are
measured at fair market value in the balance sheets, and
unrealized holding gains and losses for these investments are
reported as a separate component of stockholders equity
until realized. If we held investments that were classified as
held-to-maturity securities, these would be carried
at amortized cost rather than at fair market value. If we held
investments that were classified as trading
securities, these would be carried at fair market value, with a
corresponding adjustment to earnings for any change in fair
market value.

Our other assets include deferred financing costs
relating to our convertible subordinated notes. We are
amortizing these costs over the life of the notes and, in the
event the notes are converted to equity, we would reclassify the
unamortized deferred financing costs to equity. In the event the
notes are repurchased, we would net the unamortized deferred
financing costs with any gain or loss recognized on the
extinguishment of this debt.

We lease various real properties under operating
leases that generally require us to pay taxes, insurance and
maintenance. Two of our operating leases are commonly referred
to as synthetic leases. A synthetic lease is a form
of off-balance sheet financing under which an unrelated third
party funds 100% of the costs for the acquisition and/or
construction of the property and leases the asset to the lessee.
Under these leases, we provide a residual value guarantee which
guarantees the lessor that the residual value of the leased
assets will be at least equal to a specified amount at lease
termination. We have determined that the entities that own the
properties have sufficient substance such that they can be
treated as unrelated entities to us and, accordingly, do not
require consolidation into our financial statements. Further, we
have determined that the terms of the property leases qualify
them as operating leases under generally accepted accounting
principles. Accordingly, these synthetic leases are treated as
operating leases for accounting purposes and capital leases for
tax purposes. Changes in the equity participation of the third
parties or our obligations under the agreements could affect the
classification of these leases from operating to capital. In
that event, we would include both the cost and debt associated
with the properties on our consolidated balance sheet. We are
currently evaluating the impact of Financial Accounting
Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46) and
potential changes to the ownership or lease structures of these
real properties on our accounting treatment. We are exploring a
restructuring of these operating lease arrangements in which the
lessor would be considered a variable interest entity under
FIN 46. If the lessors were determined to be variable
interest entities, it is likely that FIN 46 would require
us to consolidate them when FIN 46 is adopted.

We recognize revenue from non-refundable upfront
license fees where we have a continuing obligation to provide
access to our technology ratably over the period of obligation
in accordance with the guidance provided in the SECs Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). We
recognize deferred revenues related to these obligations on a
straight-line basis over the life of the obligation. Our
revenues with Transgene are being recognized on a straight-line
basis over the shorter of the ten-year term of the agreement or
prorated upon the selection of genes by Transgene.

Revenue associated with performance milestones is
recognized based on the achievement of the milestones, as
defined in the applicable agreement.

Research and development expenses primarily
include related salaries, outside services, materials and
supplies, and allocated facility costs. Such costs are charged
to research and development expense as incurred. Our drug
development expenses include accruals for clinical site and
clinical research organization costs. We make estimates of the
costs incurred to date but not yet invoiced in relation to
clinical site costs and clinical research organization
(CRO) costs. We analyze the progress of the clinical
trials, including levels of patient

34



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##### 



Critical Accounting Policies and the Use of
Estimates (continued)


enrollment, invoices received and contracted
costs, when evaluating the adequacy of the accrued liabilities.
Significant judgments and estimates must be made and used in
determining the accrued balance in any accounting period. Actual
results could differ significantly from those estimates under
different assumptions.

We have stock option plans under which options to
purchase shares of our common stock may be granted to employees,
consultants and directors at a price no less than the fair
market value on the date of grant. We account for our
stock-based compensation in accordance with the provisions of
APB No. 25, Accounting for Stock Issued to Employees(APB No. 25). Under APB No. 25,
compensation expense is based on the difference, if any, on the
date of the grant between the fair value of our stock and the
exercise price of the option and is recognized ratably over the
vesting period of the option. Because our options must be
granted at fair market value, we recognize no compensation
expense at the time of the grant in accordance with APB
No. 25. If we were to adopt Statement of Financial
Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation(SFAS
No. 123), we would recognize compensation expense
based upon the fair value at the grant date for awards under the
plans using the fair value method. The amount of compensation
expense recognized using the fair value method requires us to
exercise judgment and make assumptions relating to the factors
that determine the fair value of our stock option grants. We
have provided pro forma disclosures in the notes to our
consolidated financial statements of our net loss and net loss
per share as if we used the fair value method. We account for
equity instruments issued to non-employees in accordance with
SFAS No. 123 and Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments that are
issued to other than employees for acquiring, or in conjunction
with selling goods or services.

Results of Operations

Years
Ended December 31, 2002 and 2001

Revenues.We had
revenues of $3.6 million and $12.8 million for the
years ended December 31, 2002 and December 31, 2001,
respectively. The 2002 revenues consisted of the recognition of
$2.6 million from our collaboration with Transgene and
$1.0 million in a milestone payment from GlaxoSmithKline.
The 2001 revenues consisted of the recognition of
$9.2 million in license fees and additional payments from
collaborations with Schering-Plough, Sanofi-Synthelabo, and
Merck KGaA, substantially all of which was due to the
implementation of SAB 101, retroactive to January 1, 2000,
the recognition of $2.6 million from our collaboration with
Transgene and $1.0 million in a milestone payment from
GlaxoSmithKline.

Expenses.Research
and development expenses increased to $191.2 million for
the year ended December 31, 2002 from $146.3 million
for the year ended December 31, 2001, excluding the
$14.2 million charge for construction design changes in
2002. We expect to continue to incur substantial expenses
relating to our research and development efforts, as we focus on
preclinical and clinical trials required for the development of
our protein, antibody and fusion product candidates.

We track our research and development
expenditures by type of cost incurred  discovery,
drug development, manufacturing and clinical development costs.

Our discovery costs increased to
$45.9 million for the year ended December 31, 2002 from
$36.8 million for the year ended December 31, 2001.
This increase is due primarily to increased costs in antibody
development related to collaboration payments made to Cambridge
Antibody Technology along with the expense recognition of the
remaining prepaid license fees to Dyax Corporation.

Our drug development costs increased to
$53.7 million for the year ended December 31, 2002
from $48.0 million for the year ended December 31,
2001. This increase is due primarily to increased toxicology
activity, where we are conducting studies to support our
investigational new drug filings that were made or will be made
in the future.

Our manufacturing costs increased to
$56.7 million for the year ended December 31, 2002
from $38.1 million for the year ended December 31,
2001. This increase is due to the increased production activities

35



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##### 



Results of Operations (continued)




Years
Ended December 31, 2002 and 2001 (continued)


within our process development and manufacturing
facilities needed to support our increased clinical activities.

Our clinical development costs increased to
$34.9 million for the year ended December 31, 2002
from $23.4 million for the year ended December 31,
2001. This increase is due primarily to the cost of continuing
ongoing trials from 2001 along with the cost of filing,
initiating and sustaining new trials that began in 2002. We had
eight drugs in clinical trials ongoing as of December 31,
2002 compared to seven drugs in clinical trials ongoing as of
December 31, 2001.

The charge for construction design changes of
$14.2 million for the year ended December 31, 2002
relates to our decision to modify the initial design of the
large scale manufacturing facility. See Note J, Commitments
and Other Matters, for additional discussion.

General and administrative expenses increased to
$44.2 million for the year ended December 31, 2002
from $38.7 million for the year ended December 31,
2001 to support the increase in our development activities. The
increase also resulted from increased legal expenses associated
with filing and prosecuting a larger number of patent
applications relating to genes and proteins we discovered, along
with increased recruiting and relocation expenses.

Interest income decreased to $82.2 million
for the year ended December 31, 2002 from
$105.9 million for the year ended December 31, 2001,
due to lower average cash and short-term investment balances and
reduced yield due to declining interest rates. The yield on our
investments was 5.2% for the year ended December 31, 2002,
as compared to 6.1% for the year ended December 31, 2001.
Our average cash balance decreased during 2002 as a result of
our net loss and capital expenditures in 2002. Interest expense
decreased for the year ended December 31, 2002 in
comparison to the year ended December 31, 2001, due
primarily to a reduction in the average debt balance as a result
of the conversion to equity of $28.6 million of convertible
notes during 2001.

The charge for impaired investment of
$32.2 million for the year ended December 31, 2002
relates to the reduction made to the carrying value in our
equity investment in Cambridge Antibody Technology
(CAT). During the third quarter of 2002, we reduced
the carrying value of this investment to $13.0 million from
$45.2 million due to the significant reduction in market
value of CATs shares that we believe may not be temporary.
The charge for impaired investment of $22.3 million for the
year ended December 31, 2001 relates to the reduction made
to the carrying value in our equity investment in Transgene. We
reduced the carrying value of this investment to
$3.4 million from $25.7 million due to an impairment that
we deemed to be other-than-temporary. See Note D of the
Notes to Consolidated Financial Statements for additional
discussion.

Debt conversion expenses of $3.9 million for
the year ended December 31, 2001 relate primarily to the
conversion of $25.0 million aggregate principal of 5%
convertible subordinated notes due 2007 into equity. See Note I
of the Notes to Consolidated Financial Statements for additional
discussion.

Net Income (Loss).We recorded a net loss of
$219.7 million, or $1.71 per share, for the year ended
December 31, 2002, compared to a net loss of $117.2
million, or $0.92 per share, for the year ended
December 31, 2001. The increased loss for 2002 compared to
2001 reflects charges for increased impairment of investments
and construction design changes, increased manufacturing
operations, increased investment in the discovery and
development of our drug candidates, reduced net interest income,
increased general and administrative activities and reduced
revenue. Excluding the charge for construction design changes
incurred in 2002, the charges for impaired investments incurred
in 2002 and 2001, and the charge for debt conversion expenses
for 2001, our net loss would have been $173.3 million, or
$1.35 per share, for the year ended December 31, 2002,
compared to $90.9 million, or $0.72 per share, for the year
ended December 31, 2001.

36



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##### 



Results of Operations (continued)


Years
Ended December 31, 2001 and 2000

Revenues.We had
revenues of $12.8 million and $22.1 million for the
years ended December 31, 2001 and December 31, 2000,
respectively. The 2001 revenue consisted of the recognition of
$9.2 million in license fees and additional payments from
collaborations with Schering-Plough, Sanofi-Synthelabo, and
Merck KGaA, substantially all of which was due to SAB 101,
the recognition of $2.6 million from the collaboration with
Transgene and $1.0 million in a milestone payment from
GlaxoSmithKline. The 2000 revenue consisted of
$18.5 million in license fees and additional payments from
collaborations with Schering-Plough, Sanofi-Synthelabo, and
Merck KGaA, the recognition of $2.6 million from the
collaboration with Transgene and $1.0 million in license
revenue from MedImmune.

Expenses.Research
and development expenses increased to $146.3 million for
the year ended December 31, 2001 from $91.5 million
for the year ended December 31, 2000, excluding the
$134.1 million charge for Purchased in-process research and
development in 2000.

Our discovery costs increased to
$36.8 million for the year ended December 31, 2001
from $27.5 million for the year ended December 31,
2000. This increase is due primarily to expanded activities in
the area of antibody development, including increased outside
collaboration costs and milestone payments.

Our drug development costs increased to
$48.0 million for the year ended December 31, 2001
from $40.7 million for the year ended December 31,
2000. This increase is due primarily to expanded activities,
including toxicology studies, needed to support our
investigational new drug filings that were made or will be made
in the future.

Our manufacturing costs increased to
$38.1 million for the year ended December 31, 2001
from $13.7 million for the year ended December 31,
2000. This increase is due to the increased production
activities within our process development and manufacturing
facilities needed to support our increased clinical activities.

Our clinical development costs increased to
$23.4 million for the year ended December 31, 2001
from $9.6 million for the year ended December 31,
2000. This increase is due primarily to the cost of continuing
ongoing trials from 2000 along with the cost of filing,
initiating and sustaining new trials that began in 2001. We had
seven drugs in clinical trials ongoing as of December 31,
2001 compared to four drugs in clinical trials ongoing as of
December 31, 2000.

Purchased in-process research and development
expense of $134.1 million for the year ended
December 31, 2000 relates to the acquisition of Principia
Pharmaceutical Corporation on September 8, 2000. This
amount represents that portion of the $135.1 million
purchase price allocated to in-process research and development.
See Note C of the Notes to Consolidated Financial
Statements for additional discussion.

General and administrative expenses increased to
$38.7 million for the year ended December 31, 2001
from $27.1 million for the year ended December 31,
2000 to support the increase in our activities. The increase
also resulted from increased market research costs in connection
with our expanding clinical activities and higher legal expenses
associated with filing and prosecuting a larger number of patent
applications relating to genes and proteins we discovered.

Interest income was $105.9 million for the
year ended December 31, 2001, compared to
$62.2 million for the year ended December 31, 2000,
due to higher average cash and short-term investment balances.
While we had higher average cash balances, the yield on our
investments was 6.1% for the year ended December 31, 2001
as compared to 6.7% for the year ended December 31, 2000.
Our average cash balance decreased during 2001 as a result of
our net loss and capital expenditures in 2001, partially offset
by proceeds from the issuance of stock pursuant to our stock
option and employee stock purchase plans. Interest expense
increased for the year ended December 31, 2001 in
comparison to the year ended December 31, 2000 due
primarily to a full year of interest expense in 2001 relating to
the issuance of $525.0 million of convertible subordinated
notes during the first quarter of 2000 partially offset by a
reduction in interest expense associated with previously-issued
convertible subordinated notes that were converted to equity
during the first quarter of 2000.

37



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##### 



Results of Operations (continued)


Years
Ended December 31, 2001 and 2000 (continued)

The charge for impaired investment of
$22.3 million for the year ended December 31, 2001
relates to the reduction made to the carrying value in our
equity investment in Transgene. We reduced the carrying value of
this investment to $3.4 million from $25.7 million due
to an impairment that we deemed to be other-than-temporary. See
Note D of the Notes to Consolidated Financial Statements
for additional discussion.

Debt conversion expenses decreased to
$3.9 million for the year ended December 31, 2001 from
$50.8 million for the year ended December 31, 2000.
The debt conversion expenses of $3.9 million relate
primarily to the second quarter of 2001 conversion of
$25.0 million aggregate principal of 5% convertible
subordinated notes due 2007 into equity. The debt conversion
expenses of $50.8 million relate to the first quarter of
2000 conversion costs of $318.3 million aggregate principal
amount of convertible subordinated notes into equity. We
converted $118.3 million of our $125.0 million
aggregate principal amount of 5 1/2% notes due 2006 into
common stock at a cost of $20.8 million, substantially all
of which was paid in the form of common stock. In addition, we
converted all of our $200.0 million aggregate principal
amount of 5% notes due 2006 into common stock at a cost of
$30.0 million, all of which was paid in cash. See Note I of
the Notes to Consolidated Financial Statements for additional
discussion.

Other income of $5.9 million for the year
ended December 31, 2000 relates to the gain realized on the
sale of 290,000 ordinary shares of our investment in Cambridge
Antibody Technology. See Note D of the Notes to
Consolidated Financial Statements for additional discussion.

Cumulative effect of a change in accounting
principle of $8.3 million for the year ended
December 31, 2000 relates to our implementation of
SAB 101.

Net Income (Loss).We recorded a net loss of
$117.2 million, or $0.92 per share, for the year ended
December 31, 2001, compared to a net loss of $243.8
million, or $2.20 per share, for the year ended
December 31, 2000. The decreased loss for 2001 compared to
2000 reflects the absence of Purchased in-process research and
development expense of $134.1 million, or $1.21 per share,
reduction of debt conversion expenses, an increase in net
interest income and the result of the cumulative effect of a
change in accounting principle recognized in 2000, partially
offset by the charge for impaired investment, decreased revenue
and the increase in manufacturing operations, increased
investment in the discovery and development of our drug
candidates, and increased general and administrative activities.
Excluding the charge for impaired investment incurred in 2001,
the charges for debt conversion expenses for both 2001 and 2000,
the Purchased in-process research and development and the
cumulative effect of a change in accounting principle incurred
in 2000, our net loss would have been $90.9 million, or
$0.72 per share, for the year ended December 31, 2001,
compared to $50.7 million, or $0.46 per share, for the year
ended December 31, 2000.

Liquidity and Capital Resources

We had working capital of $1.25 billion at
December 31, 2002 as compared to $1.51 billion at
December 31, 2001. The decrease in working capital is due
to our net loss and capital expenditures, along with an increase
in our restricted investments. Our restricted investments
totaled approximately $205.4 million and
$144.9 million at December 31, 2002 and 2001,
respectively. If the full amount of $450.0 million of lease
financing is used for construction activities and our other
collateral obligations remain in place, our restricted
investments would increase to approximately $541.0 million
by 2005. However, we have announced that we are redesigning and
reducing the size of the proposed large scale manufacturing
facility. We currently believe our restricted investments upon
completion of the projects may be reduced as a result of this
redesign and the possible restructuring of the lease financings.
We will be required to maintain this collateral in the form of
restricted investments until 2008, at which time all or a
portion of the collateral may be used to satisfy our residual
value guarantees under the leases or to exercise our options to
acquire the related properties. As a result, this increase in
restricted investments will reduce our working capital.

We expect to continue to incur substantial
expenses relating to our research and development efforts. Such
expenses are expected to increase relative to historical levels
as we focus on preclinical and clinical trials

38



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##### 



Liquidity and Capital Resources
(continued)


required for the development of an increasing
number of therapeutic protein, antibody and fusion protein
product candidates. At December 31, 2002, we had
outstanding commitments for construction and equipment purchases
totaling approximately $10.1 million.

The amounts of expenditures that will be needed
to carry out our business plans are subject to numerous
uncertainties, which may adversely affect our liquidity and
capital resources. We are proceeding with numerous clinical
trials. We have several Phase 1 and Phase 2 trials
underway and expect to initiate additional trials in the future.
Completion of these trials may extend several years or more, but
the length of time generally varies considerably according to
the type, complexity, novelty and intended use of the drug
candidate. We estimate that the completion periods for our
Phase 1, Phase 2 and Phase 3 trials could span
one year, one to two years and two to four years, respectively.
The duration and cost of our clinical trials are a function of
numerous factors such as the number of patients to be enrolled
in the trial, the amount of time it takes to enroll them, the
length of time they must be treated and observed, and the number
of clinical sites and countries for the trial.

We identify our potential drug candidates by
conducting numerous preclinical studies. We may conduct multiple
clinical trials to cover a variety of indications for each drug
candidate. Based upon the results from our trials, we may elect
to discontinue clinical trials for certain indications or
certain drugs in order to concentrate our resources on more
promising drug candidates.

We are advancing many drug candidates, including
therapeutic proteins, antibodies and albumin fusion proteins, in
part to diversify the risks associated with our research and
development spending. In addition, our manufacturing plants have
been designed to enable multi-product manufacturing capability.
Accordingly, we believe our future financial commitments,
including those for preclinical, clinical or manufacturing
activities, are not substantially dependent on any single drug
candidate. Should we be unable to sustain a multi-product drug
pipeline, our dependence on the success of one or a few drug
candidates would increase.

We must receive FDA clearance to advance each of
our products into and through each phase of clinical testing.
Moreover, we must receive FDA regulatory approval to
commercially launch any of our products. In order to receive
such approval, the FDA must conclude that our clinical data
establish safety and efficacy and that our products and the
manufacturing facilities meet all FDA requirements. We cannot be
certain that we will establish sufficient safety and efficacy
data to receive regulatory approval for any of our drugs or that
our products and the manufacturing facilities will meet all FDA
requirements.

In addition, part of our business plan includes
collaborating with others. For example, GlaxoSmithKline
(GSK) is developing three products discovered by GSK
as part of our collaboration with them. We have no control over
the progress of GSKs development plans. While we have
received payments of $2.0 million from GSK in connection
with development milestones met by GSK during 2002 and 2001, we
cannot forecast with any degree of certainty the likelihood of
receiving future milestone or royalty payments. We also cannot
forecast with any degree of certainty whether any of our current
or future collaborations will affect our drug development
efforts and therefore, our capital and liquidity requirements.

Because of the uncertainties discussed above, the
costs to advance our research and development projects are
difficult to estimate and may vary significantly. We expect that
our existing funds and interest income will be sufficient to
fund our operations for the next several years. Our future
capital requirements and the adequacy of our available funds
will depend on many factors, including scientific progress in
our research and development programs (including our discovery
and development activities), the magnitude of those programs,
the ability to establish collaborative and licensing
arrangements, the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and
competing technological and market developments. There can be no
assurance that any additional financing required in the future
will be available on acceptable terms, if at all.

Depending upon market and interest rate
conditions, we are exploring, and, from time to time, may take
actions to strengthen further our financial position, including
the restructure of our outstanding lease

39



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##### 



Liquidity and Capital Resources
(continued)


obligations in order to reduce our restricted
investments and the repurchase or restructure of some or all of
our outstanding convertible debt instruments.

Our future liquidity and capital resources will
be affected by our contractual obligations. These obligations as
of December 31, 2002 are summarized below:

|                                                            |  |                        |       |      |         |   |        |             |         |      |       |       |      |       |       |  |  |   |      | 
|----------------------------------------------------------- |  | ---------------------- | ----- | ---- | ------- | - | ------ | ----------- | ------- | ---- | ----- | ----- | ---- | ----- | ----- |  |  | - | ---- | 
|                                                            |  |                       
|                                                            |  | Payments Due by Period |      
|                                                            |  | (dollars in millions)  |      
|                                                            |  |                        |      
|                                                            |  |                        |       | One  |         |   |        |             | Four to |      |       | After |     
|                                                            |  |                        |       | year |         |   | Two to |             |         | five |       |       | five |      
|                                                            |  | Total                  |       |      | or less |   |        | three years |         |      | years |       |      | years |      
|Contractual Obligations                                     |  |                        |       |      |         |   |        |             |         |      |       |       |      |       |      
|                                                            |  |                        |       |      |         |   |        |             |         |     
|Long-term debt                                              |  | $                      | 503.5 |      |         | $ | 0.5    |             |         | $    |      |       |      | $     | 503.0 |  |  | $ |     | 
|Capital lease obligation                                    |  |                        | 0.5   |      |         |   | 0.2    |             |         |      | 0.3   |       |      |       |      |  |  |   |     | 
|Operating leases                                            |  |                        | 111.5 |      |         |   | 10.5   |             |         |      | 19.3  |       |      |       | 16.1  |  |  |   | 65.6 | 
|Operating leases with residual value
    guarantees (1) (2) |  |                        | 60.6  |      |         |   | 5.2    |             |         |      | 18.8  |       |      |       | 25.3  |  |  |   | 11.3 | 
|Unconditional purchase obligations (3)                      |  |                        | 10.4  |      |         |   | 10.4   |             |         |      |      |       |      |       |      |  |  |   |     | 
|Long-term collaboration obligations (4)                     |  |                        |      |      |         |   |       |             |         |      |      |       |      |       |      |  |  |   |     | 
|                                                            |  |                        |       |      |         |   |        |             |         |      |       |       |      |       |      
|Total contractual cash obligations (5)                      |  | $                      | 686.5 |      |         | $ | 26.8   |             |         | $    | 38.4  |       |      | $     | 544.4 |  |  | $ | 76.9 | 
|                                                            |  |                        |       |      |         |   |        |             |         |      |       |       |      |       |      



|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain of our current or future lease payments
    are based upon currently applicable interest rates. See
    additional discussion of these facility leases below.                                                           
|   
|(2) | Certain of our operating leases contain residual
    value guarantees relating to two facility leases described below.                                                                                                          
|   
|(3) | Our unconditional purchase obligations relate
    primarily to commitments for capital expenditures, consisting
    primarily of laboratory space build-out and equipment.                                                      
|   
|(4) | Because we cannot forecast with any degree of
    certainty whether any of our current collaborations will require
    us to make future milestone or royalty payments, we have
    excluded these amounts from the above table.
|   
|(5) | For additional discussion of our debt obligations
    and lease commitments, see Notes I and J of the Notes to the
    Consolidated Financial Statements.                                                                       

During 2001, we entered into two seven-year lease
agreements (the October 2001 lease and the
November 2001 lease) relating to research,
manufacturing, and administrative space either acquired or under
construction by two trusts controlled by third parties
established solely for that purpose. None of our directors,
officers or employees has any financial interest with regard to
these lease arrangements or with any of the trusts used in these
arrangements. As part of these agreements, we are required to
maintain collateral, in the form of restricted investments, in
amounts equal to 100% of the financed project cost for the
duration of the leases.

Under these lease agreements, which we have
accounted for as operating leases, we have the option to
purchase the properties, during and at the end of the lease
terms, at an aggregate amount of approximately
$526.0 million. Alternatively, we can cause the properties
to be sold to third parties. We are contingently liable for the
residual value guarantee associated with each property in the
event the net sale proceeds are less than the original financed
costs of the facilities. The residual value guarantee for the
October 2001 lease and the November 2001 lease is approximately
$64.6 million and $394.8 million, respectively, assuming
the full amount of the financings is used for construction
activities. However, with respect to the November 2001 lease, we
are currently modifying the design of the large-scale
manufacturing facility, based on an assessment of production
requirements for products currently in clinical development. The
modified design will likely result in a reduction in the total
cost of the facility and the residual value guarantee. As a
result of the planned redesign, during 2002 we recorded an
expense of $14.2 million associated with the previous
facility design.

40



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##### 



Liquidity and Capital Resources
(continued)


The October 2001 lease relates to a research and
development complex adjacent to our current corporate campus. We
are leasing this property for seven years from a trust
established solely for this purpose by Allfirst Bank. The trust
is leasing the property from the Maryland Economic Development
Corporation (MEDCO), which is the owner of the
property. The cost of the existing property along with a
building currently under construction is approximately
$76.0 million. We are required to maintain collateral in
the form of marketable securities equal to 100% of the financed
project cost with the lending institution for the duration of
the lease. The rent under this lease is fixed. As of
December 31, 2002, the weighted-average interest rate was
approximately 4.3%.

We have a residual value guarantee of 85% of the
total financed cost under the October 2001 lease at lease
termination. In the event of our default, we are responsible for
100% of the total financed cost of the project. Although the
trust is responsible for servicing and repaying the debt and
equity financings to various parties, we have made the residual
value guarantee to the trust. This trust was established solely
for this one lease. In the event the trust defaults to the
lender or in the event the trust is terminated, we have the
right to cure the default or exercise our option to acquire the
property. At any time during the lease term, we have the option
to purchase legal and/or beneficial interest in the project for
100% of the lease balance plus any unpaid indemnity amounts.

The November 2001 lease relates to the
construction of our research and development and administrative
main campus and a large-scale manufacturing facility. We will
lease these properties for approximately five years, following
an estimated two-year construction period, from a trust
established solely for this purpose by BancBoston Leasing
Investment, Inc. and First Union National Bank, now part of
Wachovia Bank, National Association. The trust has entered into
agreements with BancBoston and Wachovia to provide financing for
construction of the properties in the aggregate amount of
$450.0 million. We are required to maintain collateral in
the form of marketable securities equal to 100% of the financed
project cost with the lending institutions for the duration of
the lease. The rent under these leases is currently based on a
floating interest rate, but the trust can lock in a fixed
interest rate at any time at our request. To the extent the
trust does not lock in a fixed interest rate, if interest rates
increase, our rent obligations would also increase. If interest
rates decrease, our rent obligations would decrease. At
December 31, 2002, the floating interest rate based
primarily on short-term commercial paper was approximately 1.4%.

We have retained ownership of the land for the
main campus component of this project. We have entered into a
ground lease with the trust for the land at fair market value
rates. Thereafter, rent will be reduced to a nominal amount. We
are recording these lease payments on our balance sheet as
deferred rental income over the two-year construction period and
then we will amortize this deferral over the remaining term
(approximately five years).

We have a residual value guarantee of 87.74% of
the total financed cost under the November 2001 lease at lease
termination. In the event of default, we are responsible for
100% of the total financed cost of the project. During the
construction period, we have a residual value guarantee of 89.9%
of the financed cost incurred. Although the trust is responsible
for servicing and repaying the debt and equity financings to
various parties, we have made the residual value guarantee to
the trust. This trust was established solely for this one lease.
In the event the trust defaults to the lender or in the event
the trust is terminated, we have the right to cure the default
or exercise our option to acquire the property. At any time
during the lease term, we have the option to purchase legal
and/or beneficial interest in the project for 100% of the lease
balance plus any unpaid indemnity amounts.

There are no recourse provisions under either the
October 2001 or November 2001 lease that would enable us to
recover from third parties any of the amounts paid under the
guarantees. We have set aside collateral in the form of
restricted investments sufficient to satisfy all obligations
under the guarantees. In addition, we have the right to cause
the sale of the properties covered by the leases and may recover
all or a portion of the money paid under the guarantees.

41



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##### 



Liquidity and Capital Resources
(continued)


Our commitments and their expiration dates are as
follows:

|                                    |  |                                            |       |         |  |             |   |         |  |       |   |  |  |   |   |  |  |   |       | 
|----------------------------------- |  | ------------------------------------------ | ----- | ------- |  | ----------- | - | ------- |  | ----- | - |  |  | - | - |  |  | - | ----- | 
|                                    |  |                                           
|                                    |  | Amount of Commitment Expiration per Period |      
|                                    |  | (dollars in millions)                      |      
|                                    |  |                                            |      
|Other Commercial Commitments        |  |                                            |       | One     |  |             |   | Four to |  | After |  
|                                    |  | Total Amounts                              |       | year    |  | Two to      |   | five    |  | five  |  
|                                    |  | Committed                                  |       | or less |  | three years |   | years   |  | years |  
|                                    |  |                                            |       |         |  |             |   |         |  |       |  
|Lines of credit                     |  | $                                          |      |         |  | $           |  |         |  | $     |  |  |  | $ |  |  |  | $ |      | 
|Standby letters of credit           |  |                                            |      |         |  |             |  |         |  |       |  |  |  |   |  |  |  |   |      | 
|Guarantee  October 2001 lease (1)  |  |                                            | 64.6  |         |  |             |  |         |  |       |  |  |  |   |  |  |  |   | 64.6  | 
|Guarantee  November 2001 lease (2) |  |                                            | 100.3 |         |  |             |  |         |  |       |  |  |  |   |  |  |  |   | 100.3 | 
|Standby repurchase obligations      |  |                                            |      |         |  |             |  |         |  |       |  |  |  |   |  |  |  |   |      | 
|Other commercial commitments        |  |                                            |      |         |  |             |  |         |  |       |  |  |  |   |  |  |  |   |      | 
|                                    |  |                                            |       |         |  |             |   |         |  |       |   |  |  |   |  
|Total commercial commitments        |  | $                                          | 164.9 |         |  | $           |  |         |  | $     |  |  |  | $ |  |  |  | $ | 164.9 | 
|                                    |  |                                            |       |         |  |             |   |         |  |       |   |  |  |   |  



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The guarantee of 85.0% included above is based
    upon the loaned amount of $76.0 million as of
    December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | The construction-period guarantee of 89.9%
    included above is based upon a financed cost incurred of
    approximately $111.6 million as of December 31, 2002.
    Our post-construction guarantee will be 87.74% of financed
    project costs and will increase to approximately
    $394.8 million if we reach the full $450.0 million
    financed cost of the project at the end of the construction
    period. However, we are currently modifying the design of the
    large-scale manufacturing facility. The modified design will
    likely result in a reduction in the total cost of the facility
    and the residual value guarantee.

As of December 31, 2002, we had net
operating loss carry forwards for federal income tax purposes of
approximately $657.9 million, which expire, if unused, by
the year 2022. We also have available research and development
tax credit and other tax credit carry forwards of approximately
$27.3 million, the majority of which will expire, if
unused, by the year 2022.

Our funds may be invested in U.S. Treasuries,
government agency obligations, high grade debt securities and
various money market instruments rated A or better.
Such investments reflect our policy regarding the investment of
liquid assets, which is to seek a reasonable rate of return
consistent with an emphasis on safety, liquidity and
preservation of capital.

Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995

Certain statements contained in
Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. The forward-looking statements are based on our current
intent, belief and expectations. These statements are not
guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. Actual
results may differ materially from these forward-looking
statements because of our unproven business model, our
dependence on new technologies, the uncertainty and timing of
clinical trials, our ability to develop and commercialize
products, our dependence on collaborators for services and
revenue, our substantial indebtedness and lease obligations, our
changing requirements and costs associated with planned
facilities, intense competition, the uncertainty of patent and
intellectual property protection, our dependence on key
management and key suppliers, the uncertainty of regulation of
products, the impact of future alliances or transactions and
other risks described in this filing and our other filings with
the Securities and Exchange Commission. Existing and prospective
investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of todays
date. We undertake no obligation to update or revise the
information contained in this announcement whether as a result
of new information, future events or circumstances or otherwise.

42



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##### 





|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

We do not have operations subject to risks of
foreign currency fluctuations, nor do we use derivative
financial instruments in our operations or investment portfolio.
Our investment portfolio may be comprised of low-risk U.S.
Treasuries, government agency obligations, high-grade debt
having at least an A rating and various money market
instruments. The short-term nature of these securities, which
currently have an average term of approximately 17 months,
significantly decreases the risk of a material loss caused by a
market change. We believe that a hypothetical 100 basis point
adverse move (increase) in interest rates along the entire
interest rate yield curve would adversely affect the fair value
of our cash, cash equivalents and short-term and restricted
investments by approximately $21.0 million, or
approximately 1.4% of the aggregate fair value of
$1.49 billion, at December 31, 2002. For these
reasons, and because these securities are generally held to
maturity, we believe we do not have significant exposure to
market risks associated with changes in interest rates related
to our debt securities held as of December 31, 2002. We believe
that any market change related to our investment securities held
as of December 31, 2002 is not material to our consolidated
financial statements. However, given the short-term nature of
these securities, a general decline in interest rates would
adversely affect the interest income from our portfolio as
securities mature and are replaced with securities having a
lower interest rate.

As of December 31, 2002, the carrying values
of our equity investments in Transgene, Cambridge Antibody
Technology (CAT) and Ciphergen were approximately
$2.9 million, $11.4 million and $0.8 million,
respectively. Our investments in Transgene and Ciphergen are
subject to equity market risk. Our investment in CAT is
denominated in pounds sterling and is subject to both foreign
currency risk as well as equity market risk.

In 2002, we reduced the carrying value of our
equity investment in CAT to $13.0 million from
$45.2 million due to an impairment of the value of the
investment that we deemed to be other-than-temporary. See Note D
of the Notes to Consolidated Financial Statements for additional
discussion.

In 2001, we reduced the carrying value of our
equity investment in Transgene to $3.4 million from
$25.7 million due to an impairment of the value of the
investment that we deemed to be other-than-temporary. See Note D
of the Notes to Consolidated Financial Statements for additional
discussion.

The facility leases we entered into during 2001
require us to maintain minimum levels of restricted investments
as collateral for these facilities. By 2005, our maximum
restricted investments for these leases could be approximately
$526.0 million. However, our restricted investments under
these leases could be lower in light of design changes currently
under consideration for our large-scale manufacturing facility,
which may reduce the cost of the facility. We are also required
to maintain up to approximately $15.0 million in restricted
investments with respect to our process development and
manufacturing facility leases. Although the market value for
these investments may rise or fall as a result of changes in
interest rates, we will be required to maintain this level of
restricted investments in both a rising or declining interest
rate environment.

The rent under the November 2001 lease is based
on a floating interest rate. We can direct the trust, which owns
the facilities and leases them to us, to lock in a fixed
interest rate. As of December 31, 2002, such a fixed rate
for six years would be approximately 3.4% compared to the
floating rate as of December 31, 2002 of approximately
1.4%. If interest rates increase, our rent obligations would
also increase, which would adversely affect our operating
expenses.

In December 2002, we established a wholly-owned
subsidiary, Human Genome Sciences Europe GmbH (HGS
Europe), that will manage our clinical trials and clinical
research collaborations in European countries. Although HGS
Europes activities will be denominated primarily in euros,
we believe the foreign currency fluctuation risks for 2003 to be
immaterial to our operations as a whole.

43



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##### 





|        |                                                
|------- | -----------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA

The information required by this item is set
forth on pages F-1  F-34.



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

None.

44



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##### 



PART III

ITEM
10.     DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT

We incorporate herein by reference the
information concerning directors and executive officers in our
Notice of Annual Stockholders Meeting and Proxy Statement
to be filed within 120 days after the end of our fiscal
year (the 2003 Proxy Statement).

ITEM
11.     EXECUTIVE
COMPENSATION

We incorporate herein by reference the
information concerning executive compensation to be contained in
the 2003 Proxy Statement.



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

We incorporate herein by reference the
information concerning security ownership of certain beneficial
owners and management to be contained in the 2003 Proxy
Statement.



|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

We incorporate herein by reference the
information concerning certain relationships and related
transactions to be contained in the 2003 Proxy Statement.



|         |                        
|-------- | -----------------------
|ITEM 14. | CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this
report, we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information
relating to us required to be included in our periodic SEC
filings. There have been no significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of that evaluation and no
corrective actions with regard to significant deficiencies and
material weaknesses.

45



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##### 



PART IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 14. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K

(a) The following documents are filed as
part of this Annual Report:

(1) Index to Consolidated Financial
Statements

|                                                                                                         |  |        |     | 
|-------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                                                                         |  | Page   |    
|                                                                                                         |  | Number |    
|                                                                                                         |  |        |    
|Report of Ernst & Young LLP, Independent
    Auditors                                                    |  |        | F-2 | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                            |  |        | F-3 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2002, 2001 and 2000           |  |        | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2002, 2001 and 2000 |  |        | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000           |  |        | F-6 | 
|Notes to Consolidated Financial Statements                                                               |  |        | F-8 | 

(2) Financial Statement Schedules

Financial statement schedules are omitted because
they are not required.

(3) Exhibits

|            |       |  |  |                                                                                                                                                                                                                                                                                                                                                             
|----------- | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       |  | 
|            |       |  | 
|            | 3.1*  |  |  | Certificate of Incorporation of the Registrant
    (Filed as Exhibit 3.1 to the Registrants Form 10-K
    for the fiscal year ended December 31, 1993,
    Exhibit 3.3 to the Form 10-K for the fiscal year ended
    December 31, 1997, Exhibit 3.1 to the Form 8-K
    filed December 16, 1999 and Exhibit 3.1 to the
    Form 10-Q filed July 31, 2001).
|            | 3.2*  |  |  | By-laws of the Registrant (Filed as
    Exhibit 3.2 to the Registrants Form 10-Q filed
    August 3, 2000).                                                                                                                                                                                                                                                
|            | 4.1*  |  |  | Form of Common Stock certificate. (Filed as
    Exhibit 4.1 to the Registrants Form S-3
    Registration Statement, as amended (Commission File
    No. 333-45272), filed September 6, 2000).                                                                                                                                                              
|            | 4.2*  |  |  | Rights Agreement between the Registrant and
    American Stock Transfer & Trust Company, as Rights Agent,
    dated as of May 20, 1998 (Filed as Exhibit 4 to the
    Registrants Form 8-K filed May 28, 1998.)                                                                                                                                            
|            | 4.3*  |  |  | Indenture dated as of June 25, 1999 between
    the Registrant and The Bank of New York, as trustee, including
    the form of 5 1/2% Convertible Subordinated Notes due 2006
    (Filed as Exhibit 4.1 to the Registrants
    Form 8-K filed June 28, 1999).                                                                                              
|            | 4.4*  |  |  | Indenture dated as of February 1, 2000
    between the Registrant and The Bank of New York, as trustee,
    including the form of 5% Convertible Subordinated Notes due 2007
    (Filed as Exhibit 4.1 to the Registrants
    Form 8-K filed February 2, 2000).                                                                                            
|            | 4.5*  |  |  | Indenture dated as of March 10, 2000 between
    the Registrant and The Bank of New York, as trustee, including
    the form of 3 3/4% Convertible Subordinated Notes due 2007
    (filed as Exhibit 4.1 to the Registrants
    Form 8-K filed March 13, 2000).                                                                                            
|            | 10.1* |  |  | Stock Purchase and Restriction Agreement, dated
    December 31, 1992, between the Registrant and William A.
    Haseltine, Ph.D. (Filed as Exhibit 10.15 to the
    Registrants Form S-1 Registration Statement, as
    amended (Commission File No. 33-69850), originally filed
    October 1, 1993).                                                    
|            | 10.2* |  |  | Employment Agreement, dated February 25,
    1997, with William A. Haseltine, Ph.D. (Filed as
    Exhibit 10.44 to the Registrants Form 10-K for the
    fiscal year ended December 31, 1996).                                                                                                                                                             

46



---



##### 



|            |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ------ |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  | 
|            |        |  | 
|            | 10.3*  |  |  | Restricted Stock Purchase Agreement, dated
    May 18, 1993, between the Registrant and William A.
    Haseltine, Ph.D. (Filed as Exhibit 10.24 to the
    Registrants Form S-1 Registration Statement, as
    amended (Commission File No. 33-69850), originally filed
    October 1, 1993).                                                                                    
|            | 10.4*  |  |  | Promissory Note, dated March 4, 1994, given
    by William A. Haseltine, Ph.D. to the Registrant (Filed as
    Exhibit 10.58 to the Registrants Form 10-K for
    the fiscal year ended December 31, 1993).                                                                                                                                                                      
|            | 10.5*  |  |  | First Along to Promissory Note, dated
    December 16, 1994, given by William A. Haseltine, Ph.D. to
    the Registrant (Filed as Exhibit 10.65 to the Registrants
    Form 10-K for the fiscal year ended December 31, 1994).                                                                                                                                                   
|            | 10.6*  |  |  | Pledge Agreement, dated March 4, 1994,
    between William A. Haseltine, Ph.D. and Registrant (Filed as
    Exhibit 10.59 to the Registrants Form 10-K for
    the fiscal year ended December 31, 1993).                                                                                                                                                                         
|            | 10.7*  |  |  | First Amendment to Pledge Agreement, dated
    December 16, 1994, between William A. Haseltine, Ph.D. and
    Registrant (Filed as Exhibit 10.67 to the Registrants
    Form 10-K for the fiscal year ended December 31, 1994).                                                                                                                                                  
|            | 10.8*  |  |  | Employment Agreement, dated October 1992, with
    Craig A. Rosen, Ph.D. (Filed as Exhibit 10.17 to the
    Registrants Form S-1 Registration Statement, as
    amended (Commission File No. 33-69850), originally filed
    October 1, 1993).                                                                                                                                   
|            | 10.9*  |  |  | Restricted Stock Purchase Agreement, dated
    April 21, 1993, between the Registrant and Craig A. Rosen,
    Ph.D. (Filed as Exhibit 10.22 to the Registrants
    Form S-1 Registration Statement, as amended (Commission
    File No. 33-69850), originally filed October 1, 1993).                                                                                            
|            | 10.10* |  |  | 2000 Stock Incentive Plan (Filed as
    Exhibit A to the Registrants Definitive Proxy
    Statement on Schedule 14A filed April 18, 2001).                                                                                                                                                                                                                                       
|            | 10.11* |  |  | Principia Pharmaceutical Corporation 1999 Equity
    Compensation Plan (Filed as Exhibit 4.6 to the
    Registrants Registration Statement on Form S-8, File
    No. 333-46298, filed September 21, 2000).                                                                                                                                                                       
|            | 10.12* |  |  | 2000 Employee Stock Purchase Plan (Filed as
    Exhibit B to the Registrants Definitive Proxy
    Statement on Schedule 14A filed April 24, 2000).                                                                                                                                                                                                                               
|            | 10.13* |  |  | $4,000,000 Maryland Industrial Development
    Financing Authority Taxable Variable Rate Demand Economic
    Development Revenue Bonds dated December 21, 1994 (Filed as
    Exhibit 10.90 to the Registrants Form 10-K for
    the fiscal year ended December 31, 1994).                                                                                                        
|            | 10.14* |  |  | Lease Agreement between Maryland Economic
    Development Corporation and Human Genome Sciences, Inc., dated
    December 1, 1997 (Filed as Exhibit 10.67 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 1997).                                                                                                                                     
|            | 10.15* |  |  | Lease Agreement between Maryland Economic
    Development Corporation and Human Genome Sciences, Inc. dated
    December 1, 1999 (Filed as Exhibit 10.43 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 1999).                                                                                                                                      
|            | 10.16* |  |  | Participation Agreement between Human Genome
    Sciences, Inc., Genome Statutory Trust 2001A, Wells Fargo Bank
    Northwest, N.A., BancBoston Leasing Investments Inc., First
    Union National Bank and the other parties named therein dated
    November 7, 2001 (Filed as Exhibit 10.16 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 2001).
|            | 10.17* |  |  | Appendix A to Participation Agreement dated
    November 7, 2001 (Filed as Exhibit 10.17 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 2001).                                                                                                                                                                                                      
|            | 10.18* |  |  | Lease Agreement between Genome Statutory Trust
    2001A and Human Genome Sciences, Inc. dated November 7,
    2001 (Filed as Exhibit 10.18 to the Registrants
    Form 10-K for the fiscal year ended December 31, 2001).                                                                                                                                                       
|            | 10.19* |  |  | Construction Agency Agreement between Genome
    Statutory Trust 2001A and Human Genome Sciences, Inc. dated
    November 7, 2001 (Filed as Exhibit 10.19 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 2001).                                                                                                                                     

47



---



##### 



|            |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | ------ |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  | 
|            |        |  | 
|            | 10.20* |  |  | Security Agreement between Eagle Funding Capital
    Corporation, Fleet Securities, Inc., Fleet National Bank, First
    Union National Bank, BancBoston Leasing Investments Inc., Genome
    Statutory Trust 2001A and Human Genome Sciences, Inc. dated
    November 7, 2001 (Filed as Exhibit 10.20 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 2001).                                                                                                                          
|            | 10.21* |  |  | Fleet National Bank Liquid Collateral Agreement
    between Human Genome Sciences, Inc., Genome Statutory Trust
    2001A, Fleet National Bank and the other parties identified
    therein. An identical Liquid Collateral Agreement was entered
    into between First Union National Bank, Human Genome Sciences,
    Inc., Genome Statutory Trust 2001A and the other parties
    identified therein (Filed as Exhibit 10.21 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 2001).
|            | 10.22* |  |  | Lease Agreement between Wells Fargo Bank
    Northwest, National Association as Trustee under Trust Agreement
    and Human Genome Sciences, Inc. dated October 25, 2001
    (Filed as Exhibit 10.22 to the Registrants
    Form 10-K for the fiscal year ended December 31, 2001).                                                                                                                                                                                                                                
|            | 10.23* |  |  | Cash Collateral Pledge Agreement between Human
    Genome Sciences, Inc., Allfirst Bank and Allfirst Trust Company
    National Association dated October 25, 2001 (Filed as
    Exhibit 10.23 to the Registrants Form 10-K for
    the fiscal year ended December 31, 2001).                                                                                                                                                                                                                                      
|            | 10.24* |  |  | Guarantee by Human Genome Sciences, Inc. as
    Guarantor in favor of Allfirst Bank, as Agent dated
    October 25, 2001 (Filed as Exhibit 10.24 to the
    Registrants Form 10-K for the fiscal year ended
    December 31, 2001).                                                                                                                                                                                                                                                                                
|            | 10.25* |  |  | Amendment No. 1 dated March 29, 2002 to
    Lease Agreement between Wells Fargo Bank Northwest, National
    Association as Trustee under Trust Agreement and Human Genome
    Sciences, Inc. dated October 25, 2001 (Filed as
    Exhibit 10.25 to the Registrants Form 10-K for
    the fiscal year ended December 31, 2001).                                                                                                                                                                                    
|            | 10.26* |  |  | Amendment No. 1 dated March 29, 2002 to
    Guarantee by Human Genome Sciences, Inc. as Guarantor in favor
    of Allfirst Bank, as Agent dated October 25, 2001 (Filed as
    Exhibit 10.26 to the Registrants Form 10-K for
    the fiscal year ended December 31, 2001).                                                                                                                                                                                                                                        
|            | 10.27  |  |  | Amendment No. 1 dated July 19, 2002 to
    Participation Agreement between Human Genome Sciences, Inc.,
    Genome Statutory Trust 2001A, Wells Fargo Bank Northwest, N.A.,
    BancBoston Leasing Investments Inc., Wachovia Bank, National
    Association and the other parties named therein dated
    November 7, 2001.                                                                                                                                                                                        
|            | 10.28  |  |  | Amendment No. 2 dated December 31, 2002
    to Participation Agreement between Human Genome Sciences, Inc.,
    Genome Statutory Trust 2001A, Wells Fargo Bank Northwest, N.A.,
    BancBoston Leasing Investments Inc., Wachovia Bank, National
    Association and the other parties named therein dated
    November 7, 2001.                                                                                                                                                                                    
|            | 12.1   |  |  | Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 21.1   |  |  | Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 23.1   |  |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 99.1   |  |  | Certification of Chief Executive Officer as
    required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 99.2   |  |  | Certification of Chief Financial Officer as
    required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                          



---



|  |                           
|- | --------------------------
|* | Incorporated by reference.

(b) Reports on Form 8-K

None.


48



---



##### 



SIGNATURES

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



| |                            
| | ---------------------------
| | HUMAN GENOME SCIENCES, INC.



| |     |                                
| | --- | -------------------------------
| | BY: | /s/ William A. Haseltine, Ph.D.

| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | William
    A. Haseltine, Ph.D. 
               Chairman
    and Chief Executive Officer

Dated: March 26, 2003

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 the dates indicated:

|                                                           |  |                                                                                                    |  |               
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                  |  | Title                                                                                              |  | Date          
|                                                           |  |                                                                                                    |  |               
|                                                          
|/s/ William A. Haseltine, Ph.D.William A. Haseltine, Ph.D. |  | Chairman of the Board and Chief Executive Officer
    (principal executive officer)                |  | March 26, 2003
|                                                          
|/s/ Craig A. Rosen, Ph.D.Craig A. Rosen, Ph.D.             |  | President, Research and Development and Director                                                   |  | March 26, 2003
|                                                          
|/s/ Steven C. MayerSteven C. Mayer                         |  | Senior Vice President and Chief Financial Officer
    (principal financial and accounting officer) |  | March 26, 2003
|                                                          
|/s/ Richard J. DanzigRichard J. Danzig                     |  | Director                                                                                           |  | March 26, 2003
|                                                          
|/s/ Jürgen Drews, M.D.Jürgen Drews, M.D.                   |  | Director                                                                                           |  | March 26, 2003
|                                                          
|/s/ Richard C. HolbrookeRichard C. Holbrooke               |  | Director                                                                                           |  | March 26, 2003
|                                                          
|/s/ Robert HormatsRobert Hormats                           |  | Director                                                                                           |  | March 26, 2003
|                                                          
|/s/ Argeris N. Karabelas, Ph.D.Argeris N. Karabelas, Ph.D. |  | Director                                                                                           |  | March 26, 2003
|                                                          
|/s/ Max Link, Ph.D.Max Link, Ph.D.                         |  | Director                                                                                           |  | March 26, 2003
|                                                          
|/s/ Alan G. SpoonAlan G. Spoon                             |  | Director                                                                                           |  | March 26, 2003

49



---



##### 



|                                                                   |  |          |  |               
|------------------------------------------------------------------ |  | -------- |  | --------------
|Signature                                                          |  | Title    |  | Date          
|                                                                   |  |          |  |               
|                                                                  
|/s/ Laura DAndrea Tyson, Ph.D.Laura DAndrea Tyson, Ph.D.         |  | Director |  | March 26, 2003
|                                                                  
|/s/
    James Barnes Wyngaarden, M.D.James Barnes Wyngaarden, M.D. |  | Director |  | March 26, 2003

50



---



##### 



CERTIFICATIONS

I, William A. Haseltine, Ph.D., certify that:

1. I have reviewed this annual report on
Form 10-K of Human Genome Sciences, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 26, 2003



| |                                     
| | ------------------------------------
| | /s/ William A. Haseltine, Ph.D.     
| |                                     
| | William A. Haseltine, Ph.D.         
| | Chairman and Chief Executive Officer

51



---



##### 



I, Steven C. Mayer, certify that:

1. I have reviewed this annual report on
Form 10-K of Human Genome Sciences, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 26, 2003



| |                                                  
| | -------------------------------------------------
| | /s/ Steven C. Mayer                              
| |                                                  
| | Steven C. Mayer                                  
| | Senior Vice President and Chief Financial Officer

52



---



##### 



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                         |  |        |     | 
|-------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                                                                         |  | Page   |    
|                                                                                                         |  | Number |    
|                                                                                                         |  |        |    
|Report of Ernst & Young LLP, Independent
    Auditors                                                    |  |        | F-2 | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                            |  |        | F-3 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2002, 2001 and 2000           |  |        | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2002, 2001 and 2000 |  |        | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000           |  |        | F-6 | 
|Notes to Consolidated Financial Statements                                                               |  |        | F-8 | 

F-1



---



##### 



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Board of Directors and Stockholders

Human Genome Sciences, Inc.


Rockville, Maryland


We have audited the accompanying consolidated
balance sheets of Human Genome Sciences, Inc. as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2002. 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.

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 Human Genome Sciences, Inc.
at December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note B of Notes to Consolidated
Financial Statements, in 2000 the Company changed its method of
accounting for revenue recognition in accordance with guidance
provided in Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial
Statements.

/s/ Ernst & Young LLP

McLean, Virginia

February 6, 2003


F-2



---



##### 



HUMAN GENOME SCIENCES, INC.



CONSOLIDATED BALANCE SHEETS


|                                                                                     |                                                                                                                                                                |                                            |         |           |           |  |         |           |           | 
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | --------- | --------- |  | ------- | --------- | --------- | 
|                                                                                     |                                                                                                                                                                |                                           
|                                                                                     |                                                                                                                                                                | December 31,                               |        
|                                                                                     |                                                                                                                                                                |                                            |        
|                                                                                     |                                                                                                                                                                | 2002                                       |         |           | 2001      | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                |                                           
|                                                                                     |                                                                                                                                                                | (dollars in thousands, except              |        
|                                                                                     |                                                                                                                                                                | share and per share amounts)               |        
|Assets                                                                               |                                                                                                                                                                |                                            |         |           |           |  |         |          
|Current assets:                                                                      |                                                                                                                                                                |                                            |         |           |           |  |         |          
|                                                                                     | Cash and cash equivalents                                                                                                                                      |                                            | $       | 25,205    |           |  | $       | 88,319    |          
|                                                                                     | Short-term investments                                                                                                                                         |                                            |         | 1,261,183 |           |  |         | 1,456,091 |          
|                                                                                     | Prepaid expenses and other current assets                                                                                                                      |                                            |         | 10,528    |           |  |         | 3,988     |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total current assets                       |         |           | 1,296,916 |  |         |           | 1,548,398 | 
|Long-term investments                                                                |                                                                                                                                                                |                                            | 15,071  |           |           |  | 43,824  |          
|Property, plant and equipment (net of accumulated
    depreciation and amortization) |                                                                                                                                                                |                                            | 126,437 |           |           |  | 101,282 |          
|Restricted investments                                                               |                                                                                                                                                                |                                            | 205,352 |           |           |  | 144,901 |          
|Other assets                                                                         |                                                                                                                                                                |                                            | 18,411  |           |           |  | 26,599  |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | TOTAL ASSETS                               |         | $         | 1,662,187 |  |         | $         | 1,865,004 | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|Liabilities and Stockholders
    Equity                                             |                                                                                                                                                                |                                            |         |           |           |  |         |          
|Current liabilities:                                                                 |                                                                                                                                                                |                                            |         |           |           |  |         |          
|                                                                                     | Current portion of long-term debt                                                                                                                              |                                            | $       | 448       |           |  | $       | 444       |          
|                                                                                     | Current portion of capital lease obligation                                                                                                                    |                                            |         | 241       |           |  |         | 241       |          
|                                                                                     | Accounts payable and accrued expenses                                                                                                                          |                                            |         | 34,570    |           |  |         | 32,915    |          
|                                                                                     | Accrued payroll and related taxes                                                                                                                              |                                            |         | 7,911     |           |  |         | 5,600     |          
|                                                                                     | Deferred revenues                                                                                                                                              |                                            |         | 2,568     |           |  |         | 2,568     |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total current liabilities                  |         |           | 45,738    |  |         |           | 41,768    | 
|Long-term debt, net of current portion                                               |                                                                                                                                                                |                                            | 503,020 |           |           |  | 503,468 |          
|Capital lease obligation, net of current portion                                     |                                                                                                                                                                |                                            | 261     |           |           |  | 502     |          
|Deferred revenues                                                                    |                                                                                                                                                                |                                            | 10,271  |           |           |  | 12,839  |          
|Other liabilities                                                                    |                                                                                                                                                                |                                            | 2,344   |           |           |  | 1,964   |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total liabilities                          |         |           | 561,634   |  |         |           | 560,541   | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|Stockholders equity:                                                                |                                                                                                                                                                |                                            |         |           |           |  |         |          
|                                                                                     | Preferred stock  $0.01 par value;
    shares authorized  20,000,000; no shares issued                                                                        |                                            |         |          |           |  |         |          |          
|                                                                                     | Common stock  $0.01 par value; shares
    authorized  400,000,000; shares issued 128,850,551
    and 128,278,407 at December 31, 2002 and 2001, respectively |                                            |         | 1,289     |           |  |         | 1,283     |          
|                                                                                     | Additional paid-in capital                                                                                                                                     |                                            |         | 1,757,685 |           |  |         | 1,753,235 |          
|                                                                                     | Unearned portion of compensatory stock options                                                                                                                 |                                            |         | (229      | )         |  |         | (294      | )        
|                                                                                     | Accumulated other comprehensive income (loss)                                                                                                                  |                                            |         | 43,355    |           |  |         | 32,070    |          
|                                                                                     | Retained deficit                                                                                                                                               |                                            |         | (701,547  | )         |  |         | (481,831  | )        
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total stockholders equity                 |         |           | 1,100,553 |  |         |           | 1,304,463 | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |         | $         | 1,662,187 |  |         | $         | 1,865,004 | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 

The accompanying Notes to Consolidated Financial
Statements are an integral part hereof.


F-3



---



##### 



HUMAN GENOME SCIENCES, INC.



CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |        |         |             |          |        |         |         | 
|-------------------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------- | ------------------------------ | ------ | ------- | ----------- | ---- | ------ | ------- | ----------- | -------- | ------ | ------- | ------- | 
|                                                                                       |                                                    |                                                           
|                                                                                       |                                                    | Year Ended December 31,                                    |                                              
|                                                                                       |                                                    |                                                            |                                              
|                                                                                       |                                                    | 2002                                                       |                                               |                                | 2001   |         |             | 2000 |       
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|                                                                                       |                                                    |                                                           
|                                                                                       |                                                    | (dollars in thousands, except share and per share amounts) |                                              
|Revenue  research and development
    collaborative contracts                         |                                                    | $                                                          | 3,568                                         |                                |        | $       | 12,818      |      |        | $       | 22,068      |         
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Costs and expenses:                                                                    |                                                    |                                                            |                                               |                                |        |         |             |      |        |         |             |         
|                                                                                       |                                                    | Research and development:                                  |                                               |                                |        |         |             |      |        |         |             |          |        |        
|                                                                                       |                                                    |                                                            | Direct expenditures                           |                                |        | 191,162 |             |      |        | 146,276 |             |          |        | 91,456  |        
|                                                                                       |                                                    |                                                            | Charge for construction design changes        |                                |        | 14,238  |             |      |        |        |             |          |        |        |        
|                                                                                       |                                                    |                                                            | Purchased in-process research and development |                                |        |        |             |      |        |        |             |          |        | 134,050 |        
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|                                                                                       |                                                    |                                                            |                                               | Total research and development |        |         | 205,400     |      |        |         | 146,276     |          |        |         | 225,506 | 
|                                                                                       |                                                    | General and administrative                                 |                                               |                                | 44,175 |         |             |      | 38,714 |         |             |          | 27,083 |        
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|                                                                                       |                                                    |                                                            |                                               | Total costs and expenses       |        |         | 249,575     |      |        |         | 184,990     |          |        |         | 252,589 | 
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Income (loss) from operations                                                          |                                                    |                                                            | (246,007                                      | )                              |        |         | (172,172    | )    |        |         | (230,521    | )       
|Interest income                                                                        |                                                    |                                                            | 82,195                                        |                                |        |         | 105,866     |      |        |         | 62,235      |         
|Interest expense                                                                       |                                                    |                                                            | (23,746                                       | )                              |        |         | (24,638     | )    |        |         | (22,088     | )       
|Charge for impaired investments                                                        |                                                    |                                                            | (32,158                                       | )                              |        |         | (22,314     | )    |        |         |            |         
|Debt conversion expenses                                                               |                                                    |                                                            |                                              |                                |        |         | (3,894      | )    |        |         | (50,818     | )       
|Other income                                                                           |                                                    |                                                            |                                              |                                |        |         |            |      |        |         | 5,861       |         
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Income (loss) before taxes and cumulative
    effect of change in accounting principle |                                                    |                                                            | (219,716                                      | )                              |        |         | (117,152    | )    |        |         | (235,331    | )       
|Provision for income taxes                                                             |                                                    |                                                            |                                              |                                |        |         |            |      |        |         | 225         |         
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Income (loss) before cumulative effect of
    change in accounting principle           |                                                    |                                                            | (219,716                                      | )                              |        |         | (117,152    | )    |        |         | (235,556    | )       
|Cumulative effect of change in accounting
    principle                                |                                                    |                                                            |                                              |                                |        |         |            |      |        |         | (8,250      | )       
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Net income (loss)                                                                      |                                                    | $                                                          | (219,716                                      | )                              |        | $       | (117,152    | )    |        | $       | (243,806    | )       
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Basic and diluted net income (loss) per
    share:                                     |                                                    |                                                            |                                               |                                |        |         |             |      |        |         |             |         
|Before cumulative effect of change in accounting
    principle                         |                                                    | $                                                          | (1.71                                         | )                              |        | $       | (0.92       | )    |        | $       | (2.12       | )       
|Cumulative effect of change in accounting
    principle                                |                                                    |                                                            |                                              |                                |        |         |            |      |        |         | (0.08       | )       
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Basic and diluted net income (loss) per share                                          |                                                    | $                                                          | (1.71                                         | )                              |        | $       | (0.92       | )    |        | $       | (2.20       | )       
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Weighted average shares outstanding, basic and
    diluted                             |                                                    |                                                            | 128,591,153                                   |                                |        |         | 126,990,788 |      |        |         | 110,929,292 |         
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|Pro forma amounts assuming the accounting change
    is applied retroactively:         |                                                    |                                                            |                                               |                                |        |         |             |      |        |         |             |         
|                                                                                       | Net income (loss)                                  |                                                            |                                               |                                |        |         |             |      |        |         | $           | (235,556 | )     
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       
|                                                                                       | Net income (loss) per share, basic and
    diluted |                                                            |                                               |                                |        |         |             |      |        |         | $           | (2.12    | )     
|                                                                                       |                                                    |                                                            |                                               |                                |        |         |             |      |       

The accompanying Notes to Consolidated Financial
Statements are an integral part hereof.


F-4



---



##### 



HUMAN GENOME SCIENCES, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


(dollars in thousands, except share
amounts)

|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        |  |   |          |          |   |   |           |          |  
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------------ | ----------- | - | ---------- | -------- | ----- | ------------ | ----- | ----------- | ------------- | - |  | -------- | ---- | - | --------- | - | ------ | ------ |  | - | -------- | -------- | - | - | --------- | -------- | -
|                                                                                                                           |                                |              |             |   |            |          |       |              |       | Accumulated |               |   |  |          |     
|                                                                                                                           |                                |              |             |   |            | Unearned |       |              | Other |             |               |   |  |         
|                                                                                                                           |                                | Common Stock |             |   | Additional |          |       | Portion of   |       |             | Comprehensive |   |  | Retained |      |   |          
|                                                                                                                           |                                |              |             |   | Paid-In    |          |       | Compensatory |       |             | Income        |   |  | Earnings |      |   |          
|                                                                                                                           |                                | Shares       |             |   | Amount     |          |       | Capital      |       |             | Stock Options |   |  | (Loss)   |      |   | (Deficit) |   |        | Total  | 
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 
|Balance  December 31, 1999                                                                                                |                                |              | 93,314,256  |   |            | $        | 933   |              |       | $           | 299,324       |   |  | $        | (335 | ) |           | $ | (9,981 | )      |  | $ | (120,873 | )        |   | $ | 169,068   |         
|                                                                                                                          
|Comprehensive income (loss):                                                                                               |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        |  |   |          |          |   |   |           |         
|                                                                                                                           | Net loss                       |              |             |  |            |          |       |             |       |             |               |  |  |          |      |  |           |   |        |       |  |   |          | (243,806 | ) |   |           | (243,806 | )
|                                                                                                                           | Unrealized gain on investments |              |             |  |            |          |       |             |       |             |               |  |  |          |      |  |           |   |        | 38,171 |  |   |          |         |   |   |           | 38,171   |  
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 
|Comprehensive income (loss)                                                                                                |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        |  |   |          |          |   |   | (205,635  | )       
|Issuance of common stock pursuant to the public
    offering (net of expenses)                                             |                                |              | 12,650,000  |   |            |          | 127   |              |       |             | 912,531       |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 912,658   |         
|Issuance of common stock pursuant to conversion
    of convertible subordinated notes                                      |                                |              | 15,158,568  |   |            |          | 151   |              |       |             | 328,197       |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 328,348   |         
|Issuance of common stock pursuant to acquisition
    of Principal Pharmaceutical Corporation                               |                                |              | 1,582,204   |   |            |          | 16    |              |       |             | 134,752       |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 134,768   |         
|Exercises relating to employee stock option plan                                                                           |                                |              | 2,480,240   |   |            |          | 25    |              |       |             | 23,506        |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 23,531    |         
|Warrants exercised                                                                                                         |                                |              | 7,276       |   |            |          |      |              |       |             | 1             |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 1         |         
|Compensatory stock options issued                                                                                          |                                |              |            |   |            |          |      |              |       |             | 73            |   |  |          | (73  | ) |           |   |       |        |  |   |         |          |   |   |          |         
|Compensatory stock options earned                                                                                          |                                |              |            |   |            |          |      |              |       |             |              |   |  |          | 216  |   |           |   |       |        |  |   |         |          |   |   | 216       |         
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 
|Balance  December 31, 2000                                                                                                |                                |              | 125,192,544 |   |            |          | 1,252 |              |       |             | 1,698,384     |   |  |          | (192 | ) |           |   | 28,190 |        |  |   | (364,679 | )        |   |   | 1,362,955 |         
|                                                                                                                          
|Comprehensive income (loss):                                                                                               |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        |  |   |          |          |   |   |           |         
|                                                                                                                           | Net loss                       |              |             |  |            |          |       |             |       |             |               |  |  |          |      |  |           |   |        |       |  |   |          | (117,152 | ) |   |           | (117,152 | )
|                                                                                                                           | Unrealized gain on investments |              |             |  |            |          |       |             |       |             |               |  |  |          |      |  |           |   |        | 3,880  |  |   |          |         |   |   |           | 3,880    |  
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 
|Comprehensive income (loss)                                                                                                |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        |  |   |          |          |   |   | (113,272  | )       
|Issuance of common stock pursuant to conversion
    of convertible subordinated notes                                      |                                |              | 782,167     |   |            |          | 8     |              |       |             | 32,153        |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 32,161    |         
|Exercises of 2,284,752 and 18,944 options
    relating to employee stock option and stock purchase plans,
    respectively |                                |              | 2,303,696   |   |            |          | 23    |              |       |             | 22,371        |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 22,394    |         
|Compensatory stock options issued                                                                                          |                                |              |            |   |            |          |      |              |       |             | 327           |   |  |          | (327 | ) |           |   |       |        |  |   |         |          |   |   |          |         
|Compensatory stock options earned                                                                                          |                                |              |            |   |            |          |      |              |       |             |              |   |  |          | 225  |   |           |   |       |        |  |   |         |          |   |   | 225       |         
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 
|Balance  December 31, 2001                                                                                                |                                |              | 128,278,407 |   |            |          | 1,283 |              |       |             | 1,753,235     |   |  |          | (294 | ) |           |   | 32,070 |        |  |   | (481,831 | )        |   |   | 1,304,463 |         
|                                                                                                                          
|Comprehensive income (loss):                                                                                               |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        |  |   |          |          |   |   |           |         
|                                                                                                                           | Net loss                       |              |             |  |            |          |       |             |       |             |               |  |  |          |      |  |           |   |        |       |  |   |          | (219,716 | ) |   |           | (219,716 | )
|                                                                                                                           | Unrealized gain on investments |              |             |  |            |          |       |             |       |             |               |  |  |          |      |  |           |   |        | 11,285 |  |   |          |         |   |   |           | 11,285   |  
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 
|Comprehensive income (loss)                                                                                                |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        |  |   |          |          |   |   | (208,431  | )       
|Exercises of 495,207 and 76,937 options relating
    to employee stock option and stock purchase plans, respectively       |                                |              | 572,144     |   |            |          | 6     |              |       |             | 4,250         |   |  |          |     |   |           |   |       |        |  |   |         |          |   |   | 4,256     |         
|Compensatory stock options issued                                                                                          |                                |              |            |   |            |          |      |              |       |             | 200           |   |  |          | (200 | ) |           |   |       |        |  |   |         |          |   |   |          |         
|Compensatory stock options earned                                                                                          |                                |              |            |   |            |          |      |              |       |             |              |   |  |          | 265  |   |           |   |       |        |  |   |         |          |   |   | 265       |         
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 
|Balance  December 31, 2002                                                                                                |                                |              | 128,850,551 |   |            | $        | 1,289 |              |       | $           | 1,757,685     |   |  | $        | (229 | ) |           | $ | 43,355 |        |  | $ | (701,547 | )        |   | $ | 1,100,553 |         
|                                                                                                                           |                                |              |             |   |            |          |       |              |       |             |               |   |  |          |      |   |           |   |        |        | 

The accompanying Notes to Consolidated Financial
Statements are an integral part hereof.


F-5



---



##### 



HUMAN GENOME SCIENCES, INC.



CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |          |         |         |            |            |         |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------------------------- | -------- | -------- | ------ | -------- | ---------- | -------- | ------- | ------- | ---------- | ---------- | ------- | -
|                                                         |                                                                                                            |                                                                         
|                                                         |                                                                                                            | Year Ended December 31,                                                  |                                          
|                                                         |                                                                                                            |                                                                          |                                          
|                                                         |                                                                                                            | 2002                                                                     |                                           |          | 2001     |        |          | 2000       |         
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|                                                         |                                                                                                            |                                                                         
|                                                         |                                                                                                            | (dollars in thousands)                                                   |                                          
|Cash flows from operating
    activities:                |                                                                                                            |                                                                          |                                           |          |          |        |          |            |          |         |         |           
|                                                         | Net income (loss)                                                                                          |                                                                          | $                                         | (219,716 | )        |        | $        | (117,152   | )        |         | $       | (243,806   | )         
|                                                         | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                          |                                           |          |          |        |          |            |          |         |         |            |           
|                                                         |                                                                                                            | Accrued interest on short-term and restricted
    investments            |                                           |          | 12,050   |        |          |            | 1,016    |         |         |            | (17,562    | )      
|                                                         |                                                                                                            | Depreciation and amortization                                            |                                           |          | 18,837   |        |          |            | 13,237   |         |         |            | 10,400     |        
|                                                         |                                                                                                            | Charge for impaired investments                                          |                                           |          | 32,158   |        |          |            | 22,314   |         |         |            |           |        
|                                                         |                                                                                                            | Charge for construction design changes                                   |                                           |          | 14,238   |        |          |            |         |         |         |            |           |        
|                                                         |                                                                                                            | Inducement costs paid in the form of common stock                        |                                           |          |         |        |          |            | 3,875    |         |         |            | 19,433     |        
|                                                         |                                                                                                            | Purchased in-process research and development                            |                                           |          |         |        |          |            |         |         |         |            | 134,050    |        
|                                                         |                                                                                                            | Cumulative effect of change in accounting
    principle                  |                                           |          |         |        |          |            |         |         |         |            | 8,250      |        
|                                                         |                                                                                                            | Gain on sale of long-term investment                                     |                                           |          |         |        |          |            |         |         |         |            | (5,861     | )      
|                                                         |                                                                                                            | Loss due to disposal and write-down of property,
    plant and equipment |                                           |          | 214      |        |          |            | 382      |         |         |            | 35         |        
|                                                         |                                                                                                            | Compensation expense related to stock options                            |                                           |          | 265      |        |          |            | 225      |         |         |            | 216        |        
|                                                         |                                                                                                            | Changes in operating assets and liabilities:                             |                                           |          |          |        |          |            |          |         |         |            |            |        
|                                                         |                                                                                                            |                                                                          | Prepaid expenses and other current assets |          |          | (281   | )        |            |          | 4,450   |         |            |            | (4,146  | )
|                                                         |                                                                                                            |                                                                          | Other assets                              |          |          | 5,948  |          |            |          | 3,034   |         |            |            | (14,638 | )
|                                                         |                                                                                                            |                                                                          | Accounts payable and accrued expenses     |          |          | (2,097 | )        |            |          | 5,866   |         |            |            | 8,513   |  
|                                                         |                                                                                                            |                                                                          | Accrued payroll and related taxes         |          |          | 2,311  |          |            |          | 1,780   |         |            |            | 1,356   |  
|                                                         |                                                                                                            |                                                                          | Deferred revenues                         |          |          | (2,568 | )        |            |          | (11,818 | )       |            |            | (2,568  | )
|                                                         |                                                                                                            |                                                                          | Other liabilities                         |          |          | 373    |          |            |          | (369    | )       |            |            | 1,879   |  
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|                                                         |                                                                                                            | Net cash provided by (used in) operating
    activities                  |                                           |          | (138,268 | )      |          |            | (73,160  | )       |         |            | (104,449   | )      
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|Cash flows from investing
    activities:                |                                                                                                            |                                                                          |                                           |          |          |        |          |            |          |         |         |           
|                                                         | Capital expenditures  property, plant
    and equipment                                                   |                                                                          |                                           | (58,704  | )        |        |          | (64,110    | )        |         |         | (18,539    | )         
|                                                         | Purchase of short-term investments and marketable
    securities                                           |                                                                          |                                           | (548,018 | )        |        |          | (1,315,776 | )        |         |         | (1,196,064 | )         
|                                                         | Proceeds from sale and maturities of short-term
    investments and marketable securities                  |                                                                          |                                           | 736,886  |          |        |          | 1,155,866  |          |         |         | 226,905    |           
|                                                         | Purchase of long-term investments                                                                          |                                                                          |                                           |         |          |        |          |           |          |         |         | (54,744    | )         
|                                                         | Proceeds from sale of long-term investment                                                                 |                                                                          |                                           |         |          |        |          |           |          |         |         | 15,368     |           
|                                                         | Acquisition, net of acquired cash                                                                          |                                                                          |                                           |         |          |        |          |           |          |         |         | 875        |           
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|                                                         |                                                                                                            | Net cash provided by (used in) investing
    activities                  |                                           |          | 130,164  |        |          |            | (224,020 | )       |         |            | (1,026,199 | )      
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|Cash flows from financing
    activities:                |                                                                                                            |                                                                          |                                           |          |          |        |          |            |          |         |         |           
|                                                         | Restricted investments                                                                                     |                                                                          |                                           | (58,581  | )        |        |          | (129,394   | )        |         |         | (695       | )         
|                                                         | Proceeds from issuance of common stock (net of
    expenses)                                               |                                                                          |                                           | 4,256    |          |        |          | 22,394     |          |         |         | 936,190    |           
|                                                         | Repayment of long-term debt                                                                                |                                                                          |                                           | (444     | )        |        |          | (1,368     | )        |         |         | (520       | )         
|                                                         | Payments on capital lease                                                                                  |                                                                          |                                           | (241     | )        |        |          |           |          |         |         |           |           
|                                                         | Proceeds from issuance of long-term debt (net of
    expenses)                                             |                                                                          |                                           |         |          |        |          |           |          |         |         | 508,701    |           
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|                                                         |                                                                                                            | Net cash provided by (used in) financing
    activities                  |                                           |          | (55,010  | )      |          |            | (108,368 | )       |         |            | 1,443,676  |        
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                            |                                                                          | (63,114                                   | )        |          |        | (405,548 | )          |          |         | 313,028 |           
|Cash and cash equivalents  beginning
    of year        |                                                                                                            |                                                                          | 88,319                                    |          |          |        | 493,867  |            |          |         | 180,839 |           
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|Cash and cash equivalents  end of
    year              |                                                                                                            | $                                                                        | 25,205                                    |          |          | $      | 88,319   |            |          | $       | 493,867 |           
|                                                         |                                                                                                            |                                                                          |                                           |          |          |        |          |            |         
|Supplemental disclosures of cash flow information:       |                                                                                                            |                                                                          |                                           |          |          |        |          |            |          |         |         |           
|                                                         | Cash paid during the year for:                                                                             |                                                                          |                                           |          |          |        |          |            |          |         |         |            |           
|                                                         |                                                                                                            |                                                                          | Interest                                  |          | $        | 21,574 |          |            | $        | 22,795  |         |            | $          | 41,736  |  
|                                                         |                                                                                                            |                                                                          | Income taxes                              |          | $        |       |          |            | $        | 75      |         |            | $          | 200     |  

The accompanying Notes to Consolidated Financial
Statements are an integral part hereof.


F-6



---



##### 



SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES

(DOLLARS IN THOUSANDS):


In December 2001, the Company entered into a
capital lease for computer equipment with an aggregate value of
$763, with thirty-six monthly payments of $23 of principal and
interest. Principal payments of $241 and $0 were made for 2002
and 2001, respectively.

In June 2001, the Company converted $25,000 of 5%
Convertible Subordinated Notes Due 2007 into common stock and
incurred $3,875 in inducement costs paid in the form of common
stock as an inducement to convert. In addition, the Company
reclassified $673 of unamortized debt financing costs associated
with these notes to stockholders equity as part of the
conversion.

During 2001, the Company converted an aggregate
of $3,595 of 5 1/2% Convertible Subordinated Notes Due 2006
into common stock and incurred $19 in inducement costs paid in
the form of cash as an inducement to convert. In addition, the
Company reclassified $78 of unamortized debt financing costs
associated with these notes to stockholders equity as part
of the conversion.

In March 2000, the Company converted $200,000 of
5% Convertible Subordinated Notes Due 2006 into common stock. In
connection with this conversion, the Company made a $30,000 cash
make-whole payment. In addition, the Company
reclassified $6,000 of unamortized debt financing costs
associated with these notes to stockholders equity as part
of the conversion.

In January 2000, the Company converted $118,285
of 5 1/2% Convertible Subordinated Notes Due 2006 into
common stock and incurred $19,433 in inducement costs paid in
the form of common stock as an inducement to convert. In
addition, the Company reclassified $3,470 of unamortized debt
financing costs associated with these notes to
stockholders equity as part of the conversion.

The accompanying Notes to Consolidated Financial
Statements are an integral part hereof.

F-7



---



##### 



HUMAN GENOME SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share
data)


(NOTE A)  The
Company

Human Genome Sciences, Inc. (the
Company) was incorporated and commenced operations
on June 26, 1992. The Company is dedicated to discovery for
health. The Companys goal is to build a global
biopharmaceutical company that discovers, develops, manufactures
and markets gene-based drugs to treat and cure disease. The
success of the Companys drug discovery efforts is derived
from its expertise in genomics, the systematic collection and
understanding of human genes and their functions, and from the
Companys exclusive focus on developing human protein and
antibody drugs. The Company focuses its internal product
development efforts on novel human protein and antibody drugs
discovered through genomics-based research, and on new improved
long-acting versions of existing protein drugs created using its
albumin fusion technology. The Companys revenues are
currently derived from license fees and research payments under
collaboration agreements. The Company does not yet generate any
revenues from product sales. The Company believes it operates in
a single business segment.

(NOTE B)  Summary of Significant
Accounting Policies

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 reporting period. Actual
results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the
accounts of Human Genome Sciences, Inc. and its subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.

Cash Equivalents and Short-Term
Investments

The Company considers all highly liquid
investment instruments purchased with a maturity of three months
or less to be cash equivalents.

The Company classifies its short-term investments
as available-for-sale. Investments in securities
that are classified as available-for-sale and have readily
determinable fair values are measured at fair market value in
the balance sheets, and unrealized holding gains and losses for
these investments are reported as a separate component of
stockholders equity until realized. Additionally, certain
of the Companys investments are held as restricted
investments. See Note D, Investments, for additional information.

Investment Risk

The Company has invested its cash in obligations
of the U.S. Government, government agencies and in high-grade
corporate debt securities and various money market instruments.
The Companys investment policy limits investments to
certain types of instruments issued by institutions with credit
ratings of A or better, and places restrictions on
maturities and concentrations in certain industries and by
issuer.

Investments

Investments in which the Company has the ability
to exercise significant influence over the investee, but less
than a controlling voting interest, are accounted for under the
equity method of accounting. Under the equity method of
accounting, the Companys share of the investees
earnings or losses are included in operations, to

F-8



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE B)  Summary of Significant
Accounting Policies (continued)




Investment (continued)


the extent the Company has an investment or
receivable from the investee company recorded as an asset plus
the amount of any continuing commitment to fund the investee.

Impairment of Investments Other than
Temporary

Periodically, management reviews whether any
investments have incurred an other-than-temporary impairment,
based on the criteria established in Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. If management determines that such an impairment
exists, the carrying value of the investment will be reduced to
the current fair value of the investment and the Company will
recognize a charge in the consolidated statement of operations
equal to the amount of the carrying value reduction.

Depreciation and Amortization

Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the
assets as follows:

|                               |  |                                            
|------------------------------ |  | -------------------------------------------
|Laboratory equipment           |  | 3 - 10 years                               
|Computers and EDP equipment    |  | 3 years                                    
|Furniture and office equipment |  | 3 - 5 years                                
|Leasehold improvements         |  | lesser of the lease term or the useful life

Impairment of Long-Lived Assets

Periodically, management determines whether any
property and equipment or any other assets have been impaired
based on the criteria established in SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.

Fair Value of Financial Instruments

The carrying amounts for the Companys cash
and cash equivalents, investments, other assets, accounts
payable and accrued expenses and other accrued expenses
reflected in the consolidated balance sheets at
December 31, 2002 and 2001 approximate their respective
fair values. See Note D, Investments, for additional discussion.

The fair value of the Companys long-term
debt is based on quoted market prices. The Companys other
debt was valued by discounting the future stream of payments at
the prime rate of interest in effect as of the applicable date.
See Note I, Long-Term Debt, for additional discussion.

Stock-Based Compensation

The Company accounts for its stock-based
compensation under the intrinsic value method in accordance with
the provisions of APB No. 25, Accounting for Stock
Issued to Employees(APB No. 25) and has
provided the pro forma disclosures of net loss and net loss per
share in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation(SFAS No. 123)
using the fair value method. Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the
grant between the fair value of the Companys stock and the
exercise price of the option and is recognized ratably over the
vesting period of the option. The Company accounts for equity
instruments issued to non-employees in accordance with SFAS
No. 123 and

F-9



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE B)  Summary of Significant
Accounting Policies (continued)

Stock-Based Compensation (continued)

Emerging Issues Task Force Issue No. 96-18,
Accounting for Equity Instruments that are issued to other
than employees for acquiring, or in conjunction with selling
goods or services. See Note K, Stockholders Equity,
for further information.

In accordance with SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure(SFAS 148), the effect
on net loss and net loss per share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation is as follows:

|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |   |   |          |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ----------------------- | -------- | ----- | ---- | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                                                                                                    |                                 |                        
|                                                                                                                                                    |                                 | Year Ended December 31, |         
|                                                                                                                                                    |                                 |                         |         
|                                                                                                                                                    |                                 | 2002                    |          |       | 2001 |   |          | 2000  |  
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|Net income (loss), as reported                                                                                                                      |                                 | $                       | (219,716 | )     |      | $ | (117,152 | )     |   | $ | (243,806 | )    
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                                 |                         | (118,897 | )     |      |   | (125,688 | )     |   |   | (56,979  | )    
|Add: Stock-based non-employee compensation
    included in net income (loss)                                                                        |                                 |                         | 266      |       |      |   | 225      |       |   |   | 216      |      
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|Pro forma net income (loss)                                                                                                                         |                                 | $                       | (338,347 | )     |      | $ | (242,615 | )     |   | $ | (300,569 | )    
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|Net income (loss) per share:                                                                                                                        |                                 |                         |          |       |      |   |          |       |   |   |          |      
|                                                                                                                                                    | Basic and diluted  as reported |                         | $        | (1.71 | )    |   | $        | (0.92 | ) |   | $        | (2.20 | )
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|                                                                                                                                                    | Basic and diluted  pro forma   |                         | $        | (2.63 | )    |   | $        | (1.91 | ) |   | $        | (2.71 | )
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  

The effect of applying SFAS No. 123 on 2002,
2001 and 2000 pro forma net loss and net loss per share as
stated above is not necessarily representative of the effects on
reported net loss for future years due to, among other things,
(1) the vesting period of the stock options and
(2) the fair value of additional stock options in future
years.

Revenue Recognition

Collaborative research and development agreements
provide for periodic license fees, research payments, additional
payments and milestone payments. License fees, research
payments, and additional payments are recognized ratably over
the term of the agreement or as milestones are achieved.
Payments received in advance of work performed are recorded as
deferred revenue.

The Company recognizes nonrefundable fees related
to certain arrangements monthly over the term of the related
research collaboration agreement.

Research and Development

Research and development costs, including
internal expenditures, as well as contracted research and
development, are charged to expense as incurred. Research and
development costs include salaries and related benefits, outside
services, materials and supplies, building costs and allocations
of certain support costs. Research and development direct
expenditures were $191,162, $146,276 and $91,456 for 2002, 2001
and 2000, respectively.

F-10



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE B)  Summary of Significant
Accounting Policies (continued)


Financing Costs Related to Long-term
Debt

Costs associated with obtaining long-term debt
are deferred and amortized over the term of the related debt.

Patent Application Costs

Patent application costs are charged to expense
as incurred.

Net Income (Loss) Per Share

The Company follows the provisions of SFAS
No. 128, Earnings Per Share, which requires the
Company to present basic and fully diluted earnings per share.
The Companys basic and fully diluted loss per share are
calculated by dividing the net loss by the weighted average
number of shares of common stock outstanding during all periods
presented.

Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive
Income, requires unrealized gains or losses on the
Companys available-for-sale short-term securities, and on
the Companys long-term investments in Transgene, S.A.
(Transgene), Cambridge Antibody Technology
(CAT) and Ciphergen to be included in other
comprehensive income. Comprehensive income (loss) included
unrealized gains (losses) on the following:

|                                                          |                              |                         |         |         |      |   |         |         |   |   |        |        | 
|--------------------------------------------------------- | ---------------------------- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------ | ------ | 
|                                                          |                              |                        
|                                                          |                              | Unrealized Gain (Loss)  |        
|                                                          |                              | Year Ended December 31, |        
|                                                          |                              |                         |        
|                                                          |                              | 2002                    |         |         | 2001 |   |         | 2000    |  
|                                                          |                              |                         |         |         |      |   |         |         |  
|Available-for-sale short-term investments                 |                              | $                       | 6,011   |         |      | $ | 27,904  |         |   | $ | 8,781  |       
|Transgene                                                 |                              |                         | (443    | )       |      |   | (9,032  | )       |   |   | (5,313 | )     
|CAT                                                       |                              |                         | (27,333 | )       |      |   | (39,352 | )       |   |   | 32,854 |       
|Ciphergen                                                 |                              |                         | (978    | )       |      |   | (1,129  | )       |   |   | 1,849  |       
|Available-for-sale restricted investments                 |                              |                         | 1,870   |         |      |   | 3,175   |         |   |   |       |       
|                                                          |                              |                         |         |         |      |   |         |         |  
|                                                          | Subtotal                     |                         |         | (20,873 | )    |   |         | (18,434 | ) |   |        | 38,171 | 
|Impairment charge relating to investment in CAT           |                              |                         | 32,158  |         |      |   |        |         |   |   |       |       
|Impairment charge relating to investment in
    Transgene |                              |                         |        |         |      |   | 22,314  |         |   |   |       |       
|                                                          |                              |                         |         |         |      |   |         |         |  
|                                                          | Total unrealized gain (loss) |                         | $       | 11,285  |      |   | $       | 3,880   |   |   | $      | 38,171 | 
|                                                          |                              |                         |         |         |      |   |         |         |  

During the third quarter of 2002, the Company
recorded an impairment charge relating to its investment in CAT
in the amount of $32,158 and reversed the previously-recorded
unrealized loss relating to this investment due to the
significant reduction in market value of CATs shares that
the Company believes may not be temporary. As a result, the
Company had an adjusted cost of $13,079 as determined by the
current market value of CATs publicly-traded common stock
and no unrealized loss as of the date of the charge. As of
December 31, 2002, the Companys investment in CAT had
a market value of $11,407 and an unrealized loss of $1,672.

During the fourth quarter of 2001, the Company
recorded an impairment charge relating to its investment in
Transgene in the amount of $22,314 and reversed the
previously-recorded unrealized loss relating to this investment.
As a result, the Company had an adjusted cost of $3,365 as
determined by the market value of Transgenes
publicly-traded common stock and no unrealized loss as of the
date of the charge. As of

F-11



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE B)  Summary of Significant
Accounting Policies (continued)




Comprehensive Income (Loss)
(continued)


December 31, 2002, the Companys
investment in Transgene had a market value of $2,922 and an
unrealized loss of $443.

Change in Accounting Principle

During the fourth quarter of 2000, the Company
implemented the SECs Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements(SAB 101). SAB 101 provides guidance
related to revenue recognition based on interpretations and
practices followed by the SEC. SAB 101 requires revenues to
be recognized ratably over the life of a contract period whereas
previously, the Company generally recognized revenue as
non-refundable cash payments were made assuming no significant
obligations remained. It requires companies to report any
changes in revenue recognition as a cumulative effect of a
change in accounting principle at the time of implementation in
accordance with APB No. 20, Accounting Changes.
Historically, the Company has recognized non-refundable license
fees, research payments, additional payments and milestone
payments in connection with collaboration agreements when the
revenue is earned in accordance with the applicable performance
requirements and/or contractual terms. This revenue recognition
policy was applicable to certain multi-year agreements the
Company entered into with Schering-Plough, Sanofi-Synthelabo and
Merck KGaA during 1996 (the 1996 Agreements). The
Company recognized revenue under these collaboration agreements
when it had performed all significant obligations and the
collaborator was obligated to pay. The Company generally
considered any remaining performance obligation, such as
maintaining access to its genomic databases, as insignificant.
However, SAB 101 provides guidance that indicates revenue
recognition over the collaboration term is generally the
required treatment for all fees, regardless of the significance
of remaining performance obligations.

As a result of the implementation of SAB 101, the
Company recorded a charge of $8,250, or $0.08 per share, as a
cumulative effect of a change in accounting principle,
retroactive to January 1, 2000. This amount represents that
portion of revenue recognized in 1999 for which the contract
periods of the 1996 Agreements extended into 2000. The
implementation of SAB 101 had no effect on the Companys
revenue for the year ended December 31, 2000. As a result
of the implementation of SAB 101, the Company had additional
deferred revenue as of December 31, 2000 in the amount of
$8,250. The Company recorded this amount as revenue ratably over
the first two quarters of 2001.

Pro forma financial information presented in the
consolidated statements of operations was calculated assuming
the accounting change was applied retroactively to the period
presented.

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards
Board issued SFAS No. 145, Rescission of FASB
Statements 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections(SFAS 145).Primarily, SFAS 145
rescinds SFAS 4, Reporting Gains and Losses from
Extinguishment of Debt, an amendment of APB Opinion No. 30,which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. As a
result, the criteria in APB Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, now will
be used to classify those gains and losses. SFAS 145 is
effective for financial statements issued for fiscal years
beginning after May 15, 2002. The Company does not expect
adoption of SFAS 145 to have a material effect on its
financial condition, results of operations or liquidity.

F-12



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE B)  Summary of Significant
Accounting Policies (continued)

Recent Accounting Pronouncements
(continued)

In July 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities(SFAS
146), which addresses accounting for restructuring and
similar costs. SFAS 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)(EITF 94-3). Application of SFAS 146 is required
for restructuring activities initiated after December 31,
2002. SFAS 146 requires recognition of the liability for costs
associated with an exit or disposal activity when the liability
is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of the Companys commitment to an
exit plan. SFAS 146 also establishes that the liability should
be initially measured and recorded at fair value. The Company
does not expect adoption of SFAS 146 to have a material effect
on its financial condition, results of operations or liquidity.

In November 2002, the Emerging Issues Task Force
reached consensus on EITF Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables
(EITF 00-21). EITF 00-21 provides a model for how to
account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use
assets. The model requires that revenue arrangements with
multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain
criteria. EITF 00-21 is effective for fiscal periods beginning
after June 15, 2003. The Company does not expect adoption
of EITF 00-21 to have a material effect on its financial
condition, results of operations or liquidity.

In November 2002, the Financial Accounting
Standards Board issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others(FIN 45). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45
are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company does
not expect adoption of FIN 45 to have a material effect on its
financial condition, results of operations or liquidity.

In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure. SFAS 148 amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods
of transition to SFAS 123s fair value method of accounting
for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies the effects of an
entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements. SFAS 148 is
effective for fiscal years ending after December 31, 2002,
except for certain disclosures which are effective for fiscal
years ending after December 15, 2002. The Company does not
expect adoption of SFAS 148 to have a material effect on its
financial condition, results of operations or liquidity.

In January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities(FIN
46). FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. FIN 46 applies

F-13



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE B)  Summary of Significant
Accounting Policies (continued)




Recent Accounting Pronouncements
(continued)


immediately to variable interest entities created
after January 31, 2003 and for periods beginning after
June 15, 2003 for all other variable interest entities. The
Company is currently exploring a restructuring of certain
operating lease arrangements in which the lessor would be
considered a variable interest entity under FIN 46. If the
lessors were determined to be variable interest entities, it is
likely that FIN 46 would require the Company to consolidate them
when FIN 46 is adopted. As of December 31, 2002, these entities
had assets of approximately $190,000 and long-term debt of
approximately $190,000. The results of operations of these
entities for the years ended December 31, 2002 and 2001
were not significant. The Company is currently in the process of
evaluating what impact, if any, FIN 46 will have on its
financial condition, results of operations or liquidity.

Sources of Supply

The Company is currently able to obtain its
chemicals and equipment from various sources, and therefore, has
no dependence upon a single supplier. The Company is currently
dependent upon one manufacturer, MDS Nordion of Ottawa, Canada,
for radioiodinating of certain products. No assurance can be
given that the Company will be able to continue to obtain
commercial quantities at costs that are not economically
prohibitive.

Reclassifications

Certain balances have been reclassified to
conform to 2002 presentation.

(NOTE C)  Acquisition of
Principia Pharmaceutical Corporation

On September 8, 2000, the Company acquired
all of the outstanding shares of capital stock of Principia
Pharmaceutical Corporation (Principia) from its
stockholders. The cost of the acquisition was $135,071,
including fees and expenses. The purchase price was paid with
1,582,204 shares of the Companys common stock. The Company
valued the shares of the Companys common stock at $82.23
per share, which the Company estimates as the fair market value
of its common stock on the acquisition date. The consolidated
financial statements include the results of operations of
Principia since the date of acquisition. In addition, the
Company issued incentive stock options exercisable for 49,364
shares of its common stock at a weighted-average exercise price
of $0.91 per share to replace the Principia options that were
outstanding as of the date of the acquisition. The options were
valued at approximately $4,000 using the Black-Scholes
option-pricing model.

The acquisition has been accounted for as a
purchase and, accordingly, the purchase price has been allocated
to the assets and liabilities acquired at their estimated fair
values as of the date of acquisition. Of the purchase price,
$521 was allocated to Principias net assets, and the
remainder was allocated as follows:

|                                            |  |   |         | 
|------------------------------------------- |  | - | ------- | 
|Purchased In-Process Research & Development |  | $ | 134,050 | 
|Assembled Workforce                         |  | $ | 500     | 

The charge of $134,050 for Purchased In-Process
Research & Development was recorded as an expense in the
Companys results of operations for the year ended
December 31, 2000. The Purchased In-Process Research &
Development was analyzed through an independent third-party
valuation using the expected cash flow approach to valuation.

F-14



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE C)  Acquisition of
Principia Pharmaceutical Corporation (continued)


The Companys unaudited pro forma
consolidated condensed statement of operations information for
the year ended December 31, 2000, assuming the acquisition
of Principia was effected at the beginning of 2000, and
including the one-time write-off of the Purchased In-Process
Research and Development, is summarized as follows:

|                                                           |  |                   |             |  
|---------------------------------------------------------- |  | ----------------- | ----------- | -
|                                                           |  | Year Ended        |            
|                                                           |  | December 31, 2000 |            
|                                                           |  |                   |            
|Revenue                                                    |  | $                 | 22,068      |  
|Net loss                                                   |  | $                 | (247,068    | )
|Weighted average shares outstanding, basic and
    diluted |  |                   | 112,378,738 |  
|Net income (loss) per share, basic and
    diluted         |  | $                 | (2.20       | )

This pro forma information does not purport to be
indicative of the results which may have been obtained had the
acquisition been consummated at the date assumed.

During the first quarter of 2001, the Company
announced its decision to relocate Principias operations
from Norristown, Pennsylvania to the Companys Rockville,
Maryland location. As a result, the Company recorded a one-time
charge of approximately $1,950 in unit closure costs in the
first quarter of 2001. Because most of the Principia employees
chose not to relocate, this one-time charge included a write-off
of $427, representing the remaining book value of the Assembled
Workforce. During 2001, the Company incurred approximately $341
in personnel relocation costs which were charged to the
consolidated statement of operations. During 2002, approximately
$490 in facility and severance related costs were charged to the
unit closure reserve. As of December 31, 2002 and 2001, the
unit closure reserve had a balance of $760 and $1,250,
respectively. In addition, as of December 31, 2002, the
Company merged Principia into Human Genome Sciences, Inc.

(NOTE D) 
Investments

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

|                           |                                   |                   |         |           |            |   |        |            |  |   |        |        |   |   |         |           | 
|-------------------------- | --------------------------------- | ----------------- | ------- | --------- | ---------- | - | ------ | ---------- |  | - | ------ | ------ | - | - | ------- | --------- | 
|                           |                                   |                  
|                           |                                   | December 31, 2002 |        
|                           |                                   |                   |        
|                           |                                   |                   |         | Gross     |            |   | Gross  |            |  |  
|                           |                                   | Amortized         |         |           | Unrealized |   |        | Unrealized |  |   | Fair   |       
|Available for Sale         |                                   | Cost              |         |           | Gains      |   |        | Losses     |  |   | Value  |       
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       
|U.S. Treasury and agencies |                                   | $                 | 324,145 |           |            | $ | 12,444 |            |  | $ | (6     | )      |   | $ | 336,583 |          
|Corporate debt securities  |                                   |                   | 896,355 |           |            |   | 28,446 |            |  |   | (201   | )      |   |   | 924,600 |          
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       
|                           | Subtotal  Short-term investments |                   |         | 1,220,500 |            |   |        | 40,890     |  |   |        | (207   | ) |   |         | 1,261,183 | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       
|Investment in Transgene    |                                   |                   | 3,365   |           |            |   |       |            |  |   | (443   | )      |   |   | 2,922   |          
|Investment in CAT          |                                   |                   | 13,079  |           |            |   |       |            |  |   | (1,672 | )      |   |   | 11,407  |          
|Investment in Ciphergen    |                                   |                   | 1,000   |           |            |   |       |            |  |   | (258   | )      |   |   | 742     |          
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       
|                           | Subtotal  Long-term investments  |                   |         | 17,444    |            |   |        |           |  |   |        | (2,373 | ) |   |         | 15,071    | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       
|Cash and cash equivalents  |                                   |                   | 10,477  |           |            |   |       |            |  |   |       |        |   |   | 10,477  |          
|U.S. Treasury and agencies |                                   |                   | 36,183  |           |            |   | 1,568  |            |  |   |       |        |   |   | 37,751  |          
|Corporate debt securities  |                                   |                   | 153,647 |           |            |   | 3,481  |            |  |   | (4     | )      |   |   | 157,124 |          
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       
|                           | Subtotal  Restricted investments |                   |         | 200,307   |            |   |        | 5,049      |  |   |        | (4     | ) |   |         | 205,352   | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       
|                           | Total                             |                   | $       | 1,438,251 |            |   | $      | 45,939     |  |   | $      | (2,584 | ) |   | $       | 1,481,606 | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |        |       

F-15



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE D)  Investments
(continued)


|                           |                                   |                   |           |           |            |   |        |            |  |   |        |        |   |   |           |           | 
|-------------------------- | --------------------------------- | ----------------- | --------- | --------- | ---------- | - | ------ | ---------- |  | - | ------ | ------ | - | - | --------- | --------- | 
|                           |                                   |                  
|                           |                                   | December 31, 2001 |          
|                           |                                   |                   |          
|                           |                                   |                   |           | Gross     |            |   | Gross  |            |  |  
|                           |                                   | Amortized         |           |           | Unrealized |   |        | Unrealized |  |   | Fair   |       
|Available for Sale         |                                   | Cost              |           |           | Gains      |   |        | Losses     |  |   | Value  |       
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       
|U.S. Treasury and agencies |                                   | $                 | 246,338   |           |            | $ | 6,629  |            |  | $ | (234   | )      |   | $ | 252,733   |          
|Corporate debt securities  |                                   |                   | 1,175,080 |           |            |   | 28,967 |            |  |   | (689   | )      |   |   | 1,203,358 |          
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       
|                           | Subtotal  Short-term investments |                   |           | 1,421,418 |            |   |        | 35,596     |  |   |        | (923   | ) |   |           | 1,456,091 | 
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       
|Investment in Transgene    |                                   |                   | 3,365     |           |            |   |       |            |  |   |       |        |   |   | 3,365     |          
|Investment in CAT          |                                   |                   | 45,237    |           |            |   |       |            |  |   | (6,498 | )      |   |   | 38,739    |          
|Investment in Ciphergen    |                                   |                   | 1,000     |           |            |   | 720    |            |  |   |       |        |   |   | 1,720     |          
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       
|                           | Subtotal  Long-term investments  |                   |           | 49,602    |            |   |        | 720        |  |   |        | (6,498 | ) |   |           | 43,824    | 
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       
|Cash and cash equivalents  |                                   |                   | 29,081    |           |            |   |       |            |  |   |       |        |   |   | 29,081    |          
|U.S. Treasury and agencies |                                   |                   | 20,692    |           |            |   | 827    |            |  |   | (15    | )      |   |   | 21,504    |          
|Corporate debt securities  |                                   |                   | 91,953    |           |            |   | 2,418  |            |  |   | (55    | )      |   |   | 94,316    |          
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       
|                           | Subtotal  Restricted investments |                   |           | 141,726   |            |   |        | 3,245      |  |   |        | (70    | ) |   |           | 144,901   | 
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       
|                           | Total                             |                   | $         | 1,612,746 |            |   | $      | 39,561     |  |   | $      | (7,491 | ) |   | $         | 1,644,816 | 
|                           |                                   |                   |           |           |            |   |        |            |  |   |        |       

During the third quarter of 2002, the Company
determined that its investment in CAT had incurred an
other-than-temporary impairment, and accordingly, made an
adjustment to the carrying value of this asset. As a result, the
amortized cost for this investment has been reduced by $32,158
from $45,237 to $13,079 as determined by the current market
value of CATs publicly-traded common stock as of the date
of the adjustment. The adjustment of $32,158 has been recorded
as a charge for the year ended December 31, 2002 in the
consolidated statement of operations. See Note B, Summary of
Significant Accounting Policies, for additional discussion.

During the fourth quarter of 2001, the Company
determined that its investment in Transgene had incurred an
other-than-temporary impairment, and accordingly, made an
adjustment to the carrying value of this asset. As a result, the
amortized cost for this investment has been reduced by $22,314
from $25,679 to $3,365, which was the fair market value of the
investment as of the date of the adjustment. The adjustment of
$22,314 has been recorded as a charge for the year ended
December 31, 2001 in the consolidated statement of
operations. See Note B, Summary of Significant Accounting
Policies, for additional discussion.

During 2001, the Company entered into two
seven-year lease agreements (the October 2001 lease
and the November 2001 lease) relating to research,
manufacturing, and administrative space either acquired or under
construction by two trusts established solely for that purpose.
The total financed cost of the facilities originally anticipated
to be covered under the October 2001 lease and the November 2001
lease was approximately $76,000 and $450,000, respectively.
Assuming the full amount of the leases is used for construction
purposes, by the conclusion of the construction period, the
Company will be required to restrict investments equal to the
full amount of the financed project costs, approximately
$526,000, as collateral for the duration of the leases. However,
during the fourth quarter of 2002, the Company initiated a
redesign of the large-scale manufacturing facility that is part
of the November 2001 lease. This redesign is expected to reduce
the cost of this facility, which may reduce the Companys
total future collateral requirements. See Note J, Commitments
and Other Matters, for additional discussion.

F-16



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE D)  Investments
(continued)

In addition, the Companys restricted
investments which serve as collateral for the existing process
development and manufacturing facility, were $11,897 and $11,622
as of December 31, 2002 and 2001, respectively. Though
subject to fluctuations in fair value, this collateral, with
accrued interest, will not exceed $15,000. This collateral,
along with the collateral for the two seven-year leases, will
bring the total collateral requirements of the Company for these
leases to $541,000. In addition, as described in Note I,
Long-Term Debt, the Company had pledged as of December 31,
2002 and 2001, $646 and $1,164, respectively, in connection with
its 1994 loan agreement. At December 31, 2002 and 2001, the
Company had pledged $205,352 and $144,901, respectively, in
connection with all of these leases, which is classified as
Restricted investments on the consolidated balance sheets.

The following table summarizes maturities of the
Companys investment securities at December 31, 2002:

|                           |       |             |         |           |             |   |           |           |  |      |         |         |  |   |         |         | 
|-------------------------- | ----- | ----------- | ------- | --------- | ----------- | - | --------- | --------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                           |       |             |         |          
|                           |       | Short-term  |         |           | Restricted  |  
|                           |       | investments |         |           | investments |  
|                           |       |             |         |           |             |  
|                           |       | Amortized   |         |           |             |   | Amortized |           |  | Fair |        
|                           |       | Cost        |         |           | Fair Value  |   |           | Cost      |  |      | Value   |        
|                           |       |             |         |           |             |   |           |           |  |      |         |        
|Less than one year         |       | $           | 228,469 |           |             | $ | 232,496   |           |  | $    | 102,306 |         |  | $ | 104,040 |        
|Due in one to two years    |       |             | 581,353 |           |             |   | 602,155   |           |  |      | 46,937  |         |  |   | 48,477  |        
|Due in three to five years |       |             | 366,383 |           |             |   | 381,240   |           |  |      | 38,939  |         |  |   | 40,405  |        
|Due after five years       |       |             | 44,295  |           |             |   | 45,292    |           |  |      | 12,125  |         |  |   | 12,430  |        
|                           |       |             |         |           |             |   |           |           |  |      |         |        
|                           | Total |             | $       | 1,220,500 |             |   | $         | 1,261,183 |  |      | $       | 200,307 |  |   | $       | 205,352 | 
|                           |       |             |         |           |             |   |           |           |  |      |         |        

The Companys short-term investments include
mortgage-backed securities with an aggregate cost of $192,382
and an aggregate fair value of $195,088 at December 31, 2002.
The Companys restricted investments include
mortgage-backed securities with an aggregate cost of $32,929 and
an aggregate fair value of $33,660 at December 31, 2002.
These securities have no single maturity date and, accordingly,
have been allocated on a pro rata basis to each maturity range
based on each maturity ranges percentage of the total
value.

The Companys gross proceeds, realized gains
and realized losses from its investments are as follows:

|                |  |                         |         |   |      |   |         |      |  |   |        | 
|--------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | 
|                |  |                        
|                |  | Year Ended December 31, |        
|                |  |                         |        
|                |  | 2002                    |         |   | 2001 |   |         | 2000 | 
|                |  |                         |         |   |      |   |         |      | 
|Gross proceeds  |  | $                       | 483,061 |   |      | $ | 709,975 |      |  | $ | 15,368 | 
|Realized gains  |  | $                       | 7,782   |   |      | $ | 6,622   |      |  | $ | 5,861  | 
|Realized losses |  | $                       | (582    | ) |      | $ | (146    | )    |  |   |       | 

In 2002 and 2001, the realized gains and losses
relate to the Companys short-term and restricted
investments and are included in interest income in the
consolidated statement of operations. In 2000, the realized gain
relates to the Companys sale of 290,000 ordinary shares of
CAT in November 2000 and is included in other income in the
consolidated statement of operations. These ordinary shares were
included in the Companys April 2000 purchase of 1,670,000
ordinary shares of CAT for the sterling equivalent of
approximately $54,744, which gave the Company an equity stake of
approximately six percent in CAT. In November 2000, the Company
sold 290,000 ordinary shares for approximately $15,368,
realizing a gain of approximately $5,861. Gross proceeds and
realized gains and losses on all other sales of investments for
2000 were immaterial. The cost of securities sold is based on
the specific identification method.

F-17



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE E)  Collaboration
Agreements

Agreements with SmithKline Beecham Corporation
(now GlaxoSmithKline Corporation)

In May 1993, the Company entered into a
collaboration agreement as amended (SB Collaboration
Agreement), providing SmithKline Beecham Corporation
(SB), now GlaxoSmithKline Corporation
(GSK), a first right to develop and market products
in human and animal healthcare (SB Products), based
upon human genes identified by the Company. In addition, the
Company is entitled to (1) royalties on the net sales of SB
Products, (2) product development progress payments and
(3) the option to co-promote up to 20% of any product
developed by SB under the collaboration agreement. In both 2002
and 2001, the Company received $1,000 from GSK in connection
with development milestones met by GSK during these years.

In June 1996, the SB Collaboration Agreements
were substantially amended (the SB Amendment) to
allow the Company and SB together to enter into collaboration
agreements with additional pharmaceutical companies
(Collaboration Partners) in certain pre-specified
areas (the SB Field). The SB Amendment restricted
the Company from entering into further collaborations in the SB
Field during the initial research term, which expired in June
2001.

The SB Amendment provides that GSK and the
Company share equally in any license fee payments paid by the
Collaboration Partners and that the Company will receive all
royalties and research payments paid by the Collaboration
Partners.

Other Collaboration Agreements in the SB
Field

In June 1995, the Company entered into an Option
and License Agreement with Takeda Chemical Industries, Ltd.
(Takeda) pursuant to which Takeda was granted an
exclusive option to license rights under the Companys
patents and technology in the field of human healthcare (other
than gene therapy, antisense and diagnostics) to make and sell a
limited number (equal to the number of collaboration partners
other than SB and Takeda with which the Company enters into
collaboration agreements in the SB Field) of products in Japan.
In consideration of the grant of the option, Takeda paid the
Company $5,000, which was recognized as revenue by the Company
in 1995, and agreed to pay to the Company royalties based on the
sale of Takeda products covered by the Option and License
Agreement and certain milestone payments. During 2002, Takeda
discontinued development of one product and exercised its option
to develop and commercialize a second product in Japan. Takeda
has two options remaining as of December 31, 2002.

In June 1996, the Company and SB entered into
collaboration agreements (Additional Collaboration Partner
Agreements) with Schering Corporation and Schering-Plough
Ltd. (Schering-Plough), Sanofi-Synthelabo S.A., and
Merck KGaA (Merck) (collectively Additional
Collaboration Partners). The Additional Collaboration
Partner Agreements provide the Additional Collaboration Partners
the rights and licenses to access the Companys human gene
technology, as well as biological information developed by the
Company and SB prior to, and in the case of the Company, after
the effective date of such Agreement, to discover, develop and
commercialize products based upon or derived from such Company
technology in the SB Field (other than diagnostics and animal
healthcare). The Additional Collaboration Partners are obligated
to pay license fees, research payments, milestone payments and
royalties in connection with the agreements. The initial
research term expired in June 2001. The Company has recognized
revenue of $0, $9,250 and $17,500 in license fees and additional
payments during 2002, 2001 and 2000, respectively, related to
the Additional Collaboration Partner Agreements. In 2000, the
Company implemented SAB 101. SAB 101 impacted the Companys
revenues pertaining to these agreements for 2001 and 2000. See
Note B, Summary of Significant Accounting Policies, for
additional discussion.

F-18



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE E)  Collaboration
Agreements (continued)

Post-Initial Research Term

The initial research term under the collaboration
agreements with GlaxoSmithKline and the other four collaboration
partners expired on June 30, 2001. The Company has been
informed that its partners have been pursuing a large number of
research programs involving many different genes for the
creation of small molecule, protein and antibody drugs. The
Company cannot provide any assurance that any of these programs
will be continued or result in any approved drugs.

Collaborative Agreements Outside of the SB
Field

During 1996, the Company entered into several
collaborative agreements with an initial aggregate research
value of $33,000. These collaboration partners included Pioneer
Hi-Bred International, Inc., Pharmacia & Upjohn Company,
Schering-Plough Ltd. and F. Hoffman-La Roche, Ltd. The Company
received no payments and did not recognize any revenues in 2002
or 2001 pursuant to these agreements. For 2000, the Company
received a payment of $1,000 from these collaborators and
recognized revenue of $1,000 pursuant to these agreements. In
addition, the Company received $1,000 in revenue in 2000 from
MedImmune, Inc. pursuant to a 1995 license and royalty agreement.

In March 1998, the Company entered into a gene
therapy collaboration agreement with Transgene, of Strasbourg,
France. Under this agreement, the Company received a 10% equity
interest in Transgene valued at $25,679 based on
Transgenes initial public offering (IPO) share
price in exchange for giving Transgene the right to develop and
co-market gene therapy products from 10 genes selected by
Transgene from the Companys database. In 2001, Transgene
issued additional shares of common stock, which resulted in a
dilution of the Companys equity interest to approximately
5.9%. The Company initially recorded its investment in Transgene
at the IPO price with an offsetting entry to deferred revenue.
The Company is recognizing the $25,679 of revenue from this
transaction over the shorter of the ten-year term of the
agreement or prorated upon the selection of genes by Transgene.
The Company recognized $2,568 as revenue in 2002, 2001 and 2000.
Because of the reduction of the Companys equity investment
in Transgene from 10% to 5.9% and the Companys lack of
operational involvement or control of Transgene, the Company is
no longer classifying Transgenes revenues as related party
revenues and has reclassified Transgenes revenues for all
years presented as non-related party revenues.

In August 1999, the Company entered into a
collaborative agreement with Cambridge Antibody Technology Ltd.
of Melbourn, United Kingdom to jointly pursue the development of
fully human monoclonal antibody therapeutics. Under the
agreement, CAT will conduct research to identify fully human
monoclonal antibodies specific for the Companys
proprietary proteins. CAT will receive milestone payments from
the Company in connection with the development of any such
antibodies as well as royalty payments on the Companys net
sales of such licensed product following regulatory approval.
During 2000, the Company paid CAT a total of $62 in support
payments. In addition, during 2000, the Company paid $375 based
on the achievement of a clinical development antibody pursuant
to this agreement. During 2002, the Company paid CAT $1,500 for
one milestone payment pursuant to this agreement. The agreement
provides for additional payments to CAT for each product
relating to the achievement of milestones corresponding to the
regulatory approval process. In the event of the achievement of
other milestones or successful product launch, the Company would
be obligated to pay CAT additional compensation and royalties.
Subject to early termination under certain circumstances, this
agreement will expire on the later of the expiration date of
certain CAT patents or ten years after the date of first
commercial sale of a product licensed by the Company.

In December 1999, the Company entered into a
collaborative agreement, which was amended in 2001, with
Abgenix, Inc. (ABX), of Fremont, California to
exchange technology to identify novel human antibody

F-19



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE E)  Collaboration
Agreements (continued)



Collaborative Agreements Outside of the SB
Field (continued)


drug candidates for development and
commercialization. The Company has the right to use ABXs
proprietary technology to generate fully human antibody drug
candidates. In addition, ABX has a future option to develop and
commercialize products derived from the Companys pool of
novel human antibody drug candidates. Under this reciprocal
agreement, depending upon which partys product moves
through the regulatory approval process, the Company or ABX
would be obligated to the other for milestone payments for each
therapeutic product or each diagnostic product along with
royalties in the event of a successful product launch. Subject
to early termination under certain circumstances, this agreement
will expire on the last of each partys royalty obligations.

In February 2000, the Company entered into a
second agreement with Cambridge Antibody Technology. The
ten-year agreement provides the Company with rights to use CAT
technology to develop and sell an unlimited number of fully
human antibodies for therapeutic and diagnostic purposes. The
Company also has rights to use CAT antibody technology for the
use and sale of research tools, for which the Company will pay
CAT a share of revenues received. The Company will also pay CAT
clinical development milestones and royalties based on product
sales. The Company and CAT also plan to combine resources to
develop and sell therapeutic antibody products. CAT has the
right to select up to twenty-four of the Companys
proprietary antigens for laboratory development. The Company has
the option to share clinical development costs and to share the
profits equally with CAT on up to eighteen such products. CAT
has rights to develop six such products on its own. The Company
is entitled to clinical development milestones and royalty
payments on the products developed by CAT. In December 2001, the
Company exercised an option to enter into an exclusive
development partnership with CAT relating to a fully human
monoclonal antibody and paid $1,000 to CAT in accordance with
the terms of this agreement. During 2002, the Company paid CAT
an aggregate of $2,500 relating to the exercise of two options
and one clinical milestone payment pursuant to this agreement.

In March 2000, the Company paid $12,000 in
licensing fees to CAT, which includes research support at CAT
for ten years to help CAT develop the Companys human
antibody products. The Company has capitalized this cost and is
amortizing it on a straight-line basis of ten years. The
unamortized amount of this research support was $8,600 and
$9,800 as of December 31, 2002 and 2001, respectively.

In March 2000, the Company entered into a
multi-year agreement with Dyax Corporation (Dyax),
which was amended in July 2001. The agreement, as amended,
provides the Company with rights to use Dyaxs technology
for ten years to develop an unlimited number of therapeutic and
diagnostic products which the Company may elect to market itself
or to out-license. The amended agreement also modifies the
existing collaborative terms and requires the Company to make
minimum quarterly payments of $250 to Dyax in exchange for
research services to be provided to the Company through the
first quarter of 2003. The Company will also pay Dyax clinical
development milestones and royalties based on product sales. In
2000, the Company paid $6,000 to Dyax for the technology
license. The unamortized amount of this license fee was $0 and
$3,900 as of December 31, 2002 and 2001, respectively. The
Company paid $1,000 and $2,623 in support payments during 2002
and 2001, respectively.

F-20



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE E)  Collaboration
Agreements (continued)

Collaborative Agreements Outside of the SB
Field (continued)

The Companys other ongoing technology
collaborations as of December 31, 2002 are as follows:

|                            |  |                                             |  |                |      | 
|--------------------------- |  | ------------------------------------------- |  | -------------- | ---- | 
|Collaborator                |  | Focus                                       |  | Year Initiated |     
|                            |  |                                             |  |                |     
|Vical Incorporated          |  | Gene therapy                                |  |                | 2000 | 
|Praecis Pharmaceuticals     |  | Metabolic disorders and infectious diseases |  |                | 2000 | 
|Dow Chemical                |  | Chelator technology                         |  |                | 2000 | 
|Medarex, Inc.               |  | Antibodies                                  |  |                | 2001 | 
|MDS Nordion                 |  | Radioiodinating technology                  |  |                | 2001 | 
|Kirin Brewery Company, Ltd. |  | Antibodies                                  |  |                | 2002 | 

During 2002 and 2001, the Company paid an
aggregate of $2,753 and $942, respectively, in research services
to certain of the above collaborators. No payments for research
services were paid to these collaborators in 2000. While license
or royalty payments may occur in the future in connection with
these collaborations, no license or royalty payments were made
or received during 2002, 2001 or 2000.

(NOTE F)  Property, Plant and
Equipment

Property, plant and equipment are stated at cost
and are summarized as follows:

|                                                |  |              |         |  |      |   |         | 
|----------------------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                                |  |             
|                                                |  | December 31, |        
|                                                |  |              |        
|                                                |  | 2002         |         |  | 2001 |  
|                                                |  |              |         |  |      |  
|Laboratory equipment                            |  | $            | 56,980  |  |      | $ | 38,593  | 
|Computers and EDP equipment                     |  |              | 21,382  |  |      |   | 14,293  | 
|Furniture, transportation and office equipment  |  |              | 4,123   |  |      |   | 3,224   | 
|Leasehold improvements                          |  |              | 49,118  |  |      |   | 27,413  | 
|Construction in progress                        |  |              | 49,365  |  |      |   | 56,671  | 
|                                                |  |              |         |  |      |  
|                                                |  |              | 180,968 |  |      |   | 140,194 | 
|Less: accumulated depreciation and amortization |  |              | 54,531  |  |      |   | 38,912  | 
|                                                |  |              |         |  |      |  
|                                                |  | $            | 126,437 |  |      | $ | 101,282 | 
|                                                |  |              |         |  |      |  

The Company entered into a capital lease for
computer equipment in 2001. The capital lease is included in the
Computer and EDP equipment amount above, at a cost of $763 and
accumulated amortization of $275 and $21 as of December 31,
2002 and 2001, respectively. Amortization expense for this
equipment is included in depreciation and amortization within
the consolidated statements of cash flows.

F-21



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE G)  Other
Assets

Other assets are comprised of the following:

|                                             |                                          |              |        |       |      |   |        |        | 
|-------------------------------------------- | ---------------------------------------- | ------------ | ------ | ----- | ---- | - | ------ | ------ | 
|                                             |                                          |             
|                                             |                                          | December 31, |       
|                                             |                                          |              |       
|                                             |                                          | 2002         |        |       | 2001 |  
|                                             |                                          |              |        |       |      |  
|Deferred financing costs, net of accumulated |                                          |              |        |       |      |   |        |       
|                                             | amortization of $6,400 and $4,175, as of |              |        |       |      |   |        |        | 
|                                             | December 31, 2002 and 2001, respectively |              | $      | 9,179 |      |   | $      | 11,404 | 
|Prepaid services                             |                                          |              | 9,044  |       |      |   | 10,300 |       
|License fee                                  |                                          |              |       |       |      |   | 3,900  |       
|Note receivable from Officer                 |                                          |              |       |       |      |   | 891    |       
|All other assets                             |                                          |              | 188    |       |      |   | 104    |       
|                                             |                                          |              |        |       |      |  
|                                             |                                          | $            | 18,411 |       |      | $ | 26,599 |       
|                                             |                                          |              |        |       |      |  

Deferred financing costs were incurred in
connection with the Companys four convertible subordinated
debt offerings during 2000 and 1999. Debt issuance costs for the
total $525,000 of Notes amounted to approximately $16,305,
representing primarily underwriting fees of approximately 3% of
the gross amount of notes, and are being amortized on a
straight-line basis which approximates an effective interest
method over the life of the Notes.

During 1999, in connection with the private
placement of $125,000 of 5 1/2% Convertible Subordinated
Notes due 2006 and $200,000 of 5% Convertible Subordinated Notes
due 2006, the Company incurred financing costs of approximately
$10,174, representing primarily underwriting fees of 3% of the
gross amount of notes issued. These costs were being amortized
on a straight-line basis over the life of the Notes. However, in
January 2000, the Company completed a tender offer to
substantially all of the holders of the 5 1/2% Convertible
Subordinated Notes due 2006, which resulted in a
reclassification of $3,470 of unamortized deferred financing
costs associated with these Notes to stockholders equity.
In March 2000, the Company announced and completed the call of
its $200,000 5% Convertible Subordinated Notes due 2006. As a
result, the Company reclassified $6,000 of remaining unamortized
debt financing costs to stockholders equity.

During 2001, the Company converted an aggregate
of $28,595 of convertible subordinated notes to common stock. In
addition, the Company reclassified $751 of unamortized debt
financing costs associated with these notes to
stockholders equity as part of the conversion.

See Note I, Long-Term Debt, for additional
discussion of the Companys convertible subordinated debt.

See Note E, Collaboration Agreements, for
discussion of prepaid services and license fees relating to CAT
and Dyax Corporation, respectively. Prepaid services also
includes $500 paid to MDS Nordion in 2001 that is being
amortized over an eighteen-month period that began in 2002 in
connection with services being provided to the Company. The
unamortized amount of this prepaid service was $444 as of
December 31, 2002.

In July 2002, the Company was repaid in full on a
note receivable from an officer of $891 that was due on demand
and did not bear interest. The note had been collateralized by
shares of the Companys common stock owned by the officer
that had a market value of at least 200% of the outstanding
balance of the note.

F-22



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE H)  Accounts Payable and
Accrued Expenses

Accounts payable and accrued expenses are
comprised of the following:

|                       |  |              |        |  |      |   |        | 
|---------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                       |  |             
|                       |  | December 31, |       
|                       |  |              |       
|                       |  | 2002         |        |  | 2001 |  
|                       |  |              |        |  |      |  
|Fixed asset purchases  |  | $            | 15,616 |  |      | $ | 11,747 | 
|Accrued interest       |  |              | 7,444  |  |      |   | 7,531  | 
|Other accrued expenses |  |              | 6,281  |  |      |   | 6,091  | 
|Professional fees      |  |              | 5,229  |  |      |   | 7,546  | 
|                       |  |              |        |  |      |  
|                       |  | $            | 34,570 |  |      | $ | 32,915 | 
|                       |  |              |        |  |      |  

Fixed asset purchases, as of December 31,
2002, includes an accrued expense of $11,181, in connection with
the Companys 2002 decision to redesign the large-scale
manufacturing facility. See Note J, Commitments and Other
Matters, for additional discussion.

(NOTE I)  Long-Term
Debt

The components of long-term debt are as follows:

|                                     |  |                     |       |  |            |               |      |   |         |      |  |   |         | 
|------------------------------------ |  | ------------------- | ----- |  | ---------- | ------------- | ---- | - | ------- | ---- |  | - | ------- | 
|                                     |  |                     |       |  |            |              
|                                     |  |                     |       |  |            | December 31,  |     
|                                     |  | December 31,        |       |  |            |               |      |  
|Debt                                 |  | 2002 Interest Rates |       |  | Maturities |               | 2002 |   |         | 2001 | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 
|MIDFA                                |  |                     | 1.35% |  |            | December 2003 |      | $ | 448     |      |  | $ | 892     | 
|5.5% Convertible Subordinated Notes  |  |                     | 5.50% |  |            | June 2006     |      |   | 3,120   |      |  |   | 3,120   | 
|5.0% Convertible Subordinated Notes  |  |                     | 5.00% |  |            | February 2007 |      |   | 199,900 |      |  |   | 199,900 | 
|3.75% Convertible Subordinated Notes |  |                     | 3.75% |  |            | March 2007    |      |   | 300,000 |      |  |   | 300,000 | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 
|                                     |  |                     |       |  |            |               |      |   | 503,468 |      |  |   | 503,912 | 
|Less current portion                 |  |                     |       |  |            |               |      |   | 448     |      |  |   | 444     | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 
|                                     |  |                     |       |  |            |               |      | $ | 503,020 |      |  | $ | 503,468 | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 

Annual maturities of all long-term debt are as
follows:

| |  |  |      |  |  |  |  |   |         |  |  |  |  | 
| |  |  | ---- |  |  |  |  | - | ------- |  |  |  |  | 
| |  |  | 2003 |  |  |  |  | $ | 448     |  |  |  |  | 
| |  |  | 2004 |  |  |  |  |   |        |  |  |  |  | 
| |  |  | 2005 |  |  |  |  |   |        |  |  |  |  | 
| |  |  | 2006 |  |  |  |  |   | 3,120   |  |  |  |  | 
| |  |  | 2007 |  |  |  |  |   | 499,900 |  |  |  |  | 
| |  |  |      |  |  |  |  |   |         |  | 
| |  |  |      |  |  |  |  | $ | 503,468 |  |  |  |  | 
| |  |  |      |  |  |  |  |   |         |  | 

F-23



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE I)  Long-Term Debt
(continued)


The carrying amount and fair value of the
Companys long-term debt and capital lease obligation are
as follows:

|                                     |  |              |         |  |       |   |         |          |  |   |         |  |  |   |         | 
|------------------------------------ |  | ------------ | ------- |  | ----- | - | ------- | -------- |  | - | ------- |  |  | - | ------- | 
|                                     |  |             
|                                     |  | December 31, |        
|                                     |  |              |        
|                                     |  |              |         | 
|                                     |  | 2002         |         |  | 2001  |  
|                                     |  |              |         |  |       |  
|                                     |  | Carrying     |         |  | Fair  |   |         | Carrying |  |   | Fair    | 
|                                     |  | Amount       |         |  | Value |   |         | Amount   |  |   | Value   | 
|                                     |  |              |         |  |       |   |         |          |  |   |         | 
|MIDFA                                |  | $            | 448     |  |       | $ | 434     |          |  | $ | 892     |  |  | $ | 846     | 
|5.5% Convertible Subordinated Notes  |  |              | 3,120   |  |       |   | 2,266   |          |  |   | 3,120   |  |  |   | 8,223   | 
|5.0% Convertible Subordinated Notes  |  |              | 199,900 |  |       |   | 144,978 |          |  |   | 199,900 |  |  |   | 183,502 | 
|3.75% Convertible Subordinated Notes |  |              | 300,000 |  |       |   | 195,844 |          |  |   | 300,000 |  |  |   | 220,878 | 
|Capital lease obligation             |  |              | 502     |  |       |   | 481     |          |  |   | 743     |  |  |   | 709     | 
|                                     |  |              |         |  |       |   |         |          |  |   |         | 
|                                     |  | $            | 503,970 |  |       | $ | 344,003 |          |  | $ | 504,655 |  |  | $ | 414,158 | 
|                                     |  |              |         |  |       |   |         |          |  |   |         | 

In December 1994, the Company entered into a loan
agreement with Maryland Industrial Development Financing
Authority (MIDFA). Major leasehold improvements were
financed with the proceeds of a $4,000 taxable variable rate
bond issue (the Bonds) from MIDFA. The Company is
required to make annual payments of $444 commencing December
1995 plus interest at a variable rate of interest (1.35% at
December 31, 2002 and 1.84% at December 31, 2001), to
the trustee on behalf of the bondholders which is equal to the
interest and principal requirements on the bonds. The variable
rate is equal to 50 basis points plus the higher of the yield
equivalent of the average 30-day or 90-day commercial paper
rate. Under certain circumstances, the rate may be adjusted
either upward or downward but in no event in excess of 10 basis
points above or below the rate determined above. MIDFA has
entered into an indenture with the Trustee whereby the Trustee
has obtained an irrevocable letter of credit on behalf of the
bondholders.

Required monthly principal payments of $37 plus
interest are deposited into a bond fund. The interest is
disbursed monthly to the bondholders. Principal is repaid to the
bondholders at the rate of $444 annually with a final payment of
$448 on December 1, 2003. The Company deposited $460, $502
and $559 of principal and interest into the bond fund during the
years ended December 31, 2002, 2001 and 2000, respectively.

In connection with the loan agreement, the
Company entered into an irrevocable Letter of Credit Agreement
with a bank for the account of the Company and in favor of the
trustee in the initial amount of $4,067, which expires on
December 15, 2003. Concurrently, the Company entered into a
Collateral Pledge Agreement with the bank. The Company is
required to maintain 43% of the outstanding principal amount of
the Bonds (50% is required under certain circumstances) with the
bank as Collateral for the Letter of Credit. Pursuant to the
Collateral Pledge Agreement at December 31, 2002 and 2001,
the Company had $646 and $1,164, respectively, on deposit with
the bank, which is included in Restricted investments in the
consolidated balance sheets. The collateral will be released
upon the payment and performance in full of the Companys
Letter of Credit obligations. The agreement contains covenants
with respect to tangible net worth, cash and cash equivalents
and investment securities, as well as other covenants, and
prohibits the payment of cash dividends.

During the second quarter of 1999, the Company
completed the private placement of $125,000 of 5 1/2%
Convertible Subordinated Notes due June 2006 convertible into
common stock at $13.05 per share. In January 2000, the Company
concluded an offer to the holders of its $125,000 aggregate
principal amount of 5 1/2% Notes to convert their notes
into common stock. As an inducement to convert, the Company
offered its 5 1/2% Note holders an additional one hundred
and eighty dollars per thousand dollars of principal amount of
the 5 1/2% Notes, payable in the Companys common
stock. This inducement was in addition to the 76.6284

F-24



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE I)  Long-Term Debt
(continued)


shares issuable for each thousand dollars of
principal amount of 5 1/2% Notes convertible at $13.05 per
share. As a result of the conversions, the Company converted
$118,285 of 5 1/2% Notes to common stock and issued a total
of 9,572,208 shares of common stock, including a total of
508,244 shares of common stock issued as an inducement to
convert. In the first quarter of 2000, the Company recorded a
one-time charge of $20,818, including $19,433 in inducement
costs associated with this conversion. In addition, the Company
reclassified $3,470 of unamortized debt financing costs to
stockholders equity as part of the conversion. During
2001, holders of $3,595 of these 5 1/2% Notes voluntarily
converted their Notes into 275,477 shares of common stock. In
addition, the Company reclassified $78 of unamortized debt
financing costs to stockholders equity as part of the
conversions. Total remaining debt issuance costs were
approximately $111, of which $56 and $40 had been amortized as
of December 31, 2002 and 2001, respectively.

During the fourth quarter of 1999, the Company
completed the private placement of $200,000 of 5% Convertible
Subordinated Notes due December 2006, convertible into common
stock at $35.8125 per share. In March 2000, the Company
announced and completed the call of its $200,000 aggregate
principal amount of 5% Convertible Subordinated Notes due 2006.
All of the holders of the notes converted their notes into
common stock at a price of $35.8125 per share, which is
equivalent to 27.9232 shares of common stock per one thousand
dollars of principal amount of notes. As a result of the
conversion, the Company issued 5,584,584 shares of common stock
to the holders of these Notes. In addition, the Company made a
make-whole payment of one hundred and fifty dollars
per one thousand dollars of principal amount of notes, which
resulted in a one-time charge to earnings of $30,000. In
addition, the Company reclassified $6,000 of unamortized debt
financing costs to stockholders equity as part of the
conversion.

During the first quarter of 2000, the Company
completed the private placement of $225,000 of 5% Convertible
Subordinated Notes due 2007 (5% Notes) and $300,000
of 3 3/4% Convertible Subordinated Notes due 2007
(3 3/4% Notes). The 5% Notes and the
3 3/4% Notes are convertible into common stock at $56.25
and $109.50 per share, respectively. Debt issuance costs for the
total $525,000 of Notes amounted to approximately $16,305,
including accrued expenses, of which $2,035 had been amortized
as of December 31, 2000. During 2000, holders of $100 of
these 5% Notes voluntarily converted their Notes into 1,776
shares of common stock. During 2001, holders of $25,000 of these
5% Notes voluntarily converted their Notes into 506,690 shares
of common stock. In addition, the Company reclassified $673 of
unamortized debt financing costs to stockholders equity as
part of the conversions. Total remaining debt issuance costs
were approximately $15,468, of which $6,344 and $4,135 had been
amortized as of December 31, 2002 and 2001, respectively.

F-25



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE J)  Commitments and Other
Matters

Leases

The Company leases office and laboratory premises
and equipment pursuant to operating leases expiring at various
dates through 2021. The leases contain various renewal options.
Minimum annual rentals are as follows:

|                                         |  |           |         |  |         |   |     | 
|---------------------------------------- |  | --------- | ------- |  | ------- | - | --- | 
|                                         |  | Operating |         |  | Capital |  
|Year Ending December 31,                 |  | Leases    |         |  | Lease   |  
|                                         |  |           |         |  |         |  
|2003                                     |  | $         | 15,669  |  |         | $ | 241 | 
|2004                                     |  |           | 17,308  |  |         |   | 261 | 
|2005                                     |  |           | 20,804  |  |         |   |    | 
|2006                                     |  |           | 21,174  |  |         |   |    | 
|2007                                     |  |           | 20,214  |  |         |   |    | 
|2008 and thereafter                      |  |           | 76,930  |  |         |   |    | 
|                                         |  |           |         |  |         |  
|                                         |  | $         | 172,099 |  |         |   | 502 | 
|                                         |  |           |         |  |         |  
|Current portion under capital lease      |  |           |         |  |         |   | 241 | 
|                                         |  |           |         |  |         |  
|Long-term obligation under capital lease |  |           |         |  |         | $ | 261 | 
|                                         |  |           |         |  |         |  

During 1997 and 1999, the Company entered into
two long-term leases expiring January 1, 2019 for a process
development and manufacturing facility aggregating 127,000
square feet and built to the Companys specifications.
Annual base rent under the leases is $3,765. Pursuant to the
terms of these leases, the Company had security deposits of
$11,897 and $11,622 as of December 31, 2002 and 2001,
respectively, on deposit with the financing bank which is
included in Restricted investments in the consolidated balance
sheets. The security deposit will accrue interest up to a total
security deposit of $15,000. Any amounts over $15,000 will be
released to the Company. The security deposits will be released
at the end of the lease term. The lease agreements contain
covenants with respect to tangible net worth, cash and cash
equivalents and investment securities, restrictions on
dividends, as well as other covenants. The leases require an
additional security deposit if the Company does not meet its
covenants. The Company has an option, but not an obligation, to
purchase these facilities during the lease term at various
prices or at the end of the lease term for an aggregate price of
approximately $19,400.

During 2001, the Company entered into two
seven-year lease agreements (the October 2001 lease
and the November 2001 lease). The October 2001 lease
relates primarily to a research campus, which the Company has
leased for seven years, from a trust controlled by third parties
established solely for this purpose. Rent obligations for the
October 2001 lease began in 2001. The November 2001 lease
relates to the construction of the Companys research and
development and administrative main campus and a large-scale
manufacturing facility. The Company originally planned to lease
these November 2001 properties for approximately five years,
following an estimated two-year construction period, from a
trust controlled by third parties established solely for this
purpose. Based upon the Companys review of the design for
the large-scale manufacturing facility, the construction
schedule for the manufacturing facility has been delayed. The
research and development and administrative main campus remains
on schedule and is expected to be completed in 2003 and the rent
for that portion of the lease will commence in 2003. Rent for
the large-scale manufacturing facility does not begin until the
end of the construction period, which is currently expected to
be 2005.

The total financed cost of the facilities
originally anticipated to be covered under the October 2001
lease and the November 2001 lease was approximately $76,000 and
$450,000, respectively. During the fourth quarter of 2002, the
Company initiated a redesign of the large-scale manufacturing
facility that is part of the November

F-26



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE J)  Commitments and Other
Matters (continued)

Leases (continued)

2001 lease. This redesign is expected to reduce
the cost of this facility and has delayed the construction
schedule. As part of this redesign, the Company recorded a
one-time charge of $14,238 in 2002 relating to engineering and
design work that does not have applicability to the new design.
The Company believes it will need to reimburse the trust, which
controls this lease, approximately $11,181. This amount
represents costs not applicable to the new design, paid or to be
paid by the trust as of December 31, 2002. The remaining
$3,057 represents those costs not applicable to the new design,
incurred and paid by the Company prior to the inception of the
November 2001 lease. The Companys rent obligations will
approximate the lessors debt service costs. With respect
to the Companys rent for the October 2001 lease, as of
December 31, 2002, the trust had fixed the interest rate on
$76,000 at a weighted-average interest rate of approximately
4.3%. The Companys rent obligation under the November 2001
lease is floating and is based primarily on short-term
commercial paper. This rate was approximately 1.4% as of
December 31, 2002.

The Companys operating lease commitments
include minimum annual rentals for these two seven-year leases
and have been computed using the appropriate interest rate as of
December 31, 2002. Over the life of these leases, an
aggregate rent obligation of approximately $60,639 has been
included in the Companys total operating lease commitment.

With respect to the November 2001 lease, the
Company has retained ownership of the land for the main campus
component of this project. The Company has entered into a ground
lease with the trust for the land at fair market value rates
during the construction period. Thereafter, rent will be reduced
to a nominal amount. The Company will record these lease
payments on its balance sheet as deferred rental income over the
two-year construction period and then amortize this deferral
over the remaining term (approximately five years). As of
December 31, 2002 and 2001, the Companys deferred
rental income was approximately $574 and $44, respectively.

Under these lease agreements, which the Company
has accounted for as operating leases, the Company has the
option to purchase the properties, during or at the end of the
lease terms, at an aggregate amount of approximately $526,000,
assuming the full amount of the financings is used for
construction activities. Alternatively, the Company can cause
the properties to be sold to third parties. The Company is
contingently liable for the residual value guarantee associated
with each property up to an aggregate amount of $459,430,
assuming the full amount of the leases is used for construction
activities.

With respect to the October 2001 lease, the
Company has a residual value guarantee of 85% of the total
financed cost at lease termination. In the event of the
Companys default, the Company is responsible for 100% of
the total financed cost of the project. Although the trust is
responsible for servicing and repaying the debt and equity
financings to various parties, the Company has made the residual
value guarantee to the trust. In the event the trust defaults to
the lender or in the event the trust is terminated, the Company
has the right to cure the default or exercise its option to
acquire the property. At any time during the lease term, the
Company has the option to purchase legal and/or beneficial
interest in the project for 100% of the lease balance plus any
unpaid indemnity amounts. As of December 31, 2002, the
Companys residual value guarantee for the October 2001
lease was $64,600.

With respect to the November 2001 lease, the
Company has a residual value guarantee of 87.74% of the total
financed cost at lease termination. In the event of default, the
Company is responsible for 100% of the total financed cost of
the project. During the construction period, the Company has a
residual value guarantee of 89.9% of the financed cost incurred.
Although the trust is responsible for servicing and repaying the
debt and equity financings to various parties, the Company has
made the residual value guarantee to the trust. In the event the
trust defaults to the lender or in the event the trust is
terminated, the Company has the right to cure

F-27



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE J)  Commitments and Other
Matters (continued)

Leases (continued)

the default or exercise its option to acquire the
property. At any time during the lease term, the Company has the
option to purchase legal and/or beneficial interest in the
project for 100% of the lease balance plus any unpaid indemnity
amounts. As of December 31, 2002, the Companys residual
value guarantee for the November 2001 lease was $100,265.

There are no recourse provisions under either the
October 2001 or November 2001 lease that would enable the
Company to recover from third parties any of the amounts paid
under the guarantees. The Company has set aside collateral in
the form of restricted investments sufficient to satisfy all
obligations under the guarantees. In addition, the Company has
the right to cause the sale of the properties covered by the
leases and may recover all or a portion of the money paid under
the guarantees.

In connection with the October 2001 lease, the
Company must maintain minimum levels of unrestricted cash, cash
equivalents and marketable securities as well as comply with
certain dividend restrictions. In connection with the November
2001 lease, the Company must maintain minimum levels of
unrestricted cash, cash equivalents and marketable securities
and certain debt ratios.

The Company has entered into leases for office
and laboratory space which provide for certain rent abatement
and rent escalations on each anniversary of the lease
commencement date. For financial reporting purposes, rent
expense is charged to operations on a straight-line basis over
the term of the lease, resulting in a liability for deferred
rent of $2,900 and $2,439 at December 31, 2002 and 2001,
respectively.

Certain other leases provide for escalation for
increases in real estate taxes and certain operating expenses,
as well as various renewal terms.

Rent expense aggregated $18,232, $14,713 and
$8,352 for the years ended December 31, 2002, 2001 and
2000, respectively.

Capital Expenditures

At December 31, 2002 and 2001, the Company
had commitments for capital expenditures, consisting primarily
of laboratory space and equipment, of approximately $10,134 and
$16,300, respectively.

401(k) Plan

The Company has adopted a 401(k) pension plan
available to eligible full-time employees. The Company made
contributions of $1,089, $857 and $600 to the plan for the years
ended December 31, 2002, 2001 and 2000, respectively.

(NOTE K)  Stockholders
Equity

Common Stock and Preferred Stock

In 2001, the Companys stockholders approved
an amendment to the 2000 Stock Incentive Plan (2000
Plan) which established a limit on the number of shares of
common stock that may be issued with respect to awards granted
each year. For 2001, 2002 and 2003, this limit will be equal to
five percent of the outstanding common stock as of the end of
the preceding fiscal year. Shares that are available for a given
year but not subject to awards granted in that year will be
carried forward (Carryover Shares) to the following
year. After 2003, only the carried forward shares and the shares
that are returned to the pool of available shares due to award
forfeitures will be available for issuance. In 2001, five
percent of the outstanding common stock as of December 31,
2000, or 6,259,627 shares, were reserved for issuance under the
2000 Plan. In 2002, five percent

F-28



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE K)  Stockholders
Equity (continued)

Common Stock and Preferred Stock
(continued)

of the outstanding common stock as of
December 31, 2001, or 6,413,920 shares, were additionally
reserved for issuance under the 2000 Plan.

On January 5, 2000, the Companys Board
of Directors approved a two-for-one stock split to be effected
in the form of a stock dividend payable to stockholders of
record as of January 14, 2000. On January 28, 2000,
the Company effected the two-for-one stock split.

On September 12, 2000, the Companys
Board of Directors approved a two-for-one stock split to be
effected in the form of a stock dividend payable to stockholders
of record as of September 28, 2000. On October 5,
2000, the Company effected the two-for-one stock split.

On November 1, 2000, the Company completed a
public offering of its common stock by issuing 12,650,000 shares
at an aggregate value of $948,750, or $75.00 per share. Stock
issuance costs for the offering amounted to approximately
$36,092. The Company received net proceeds of $912,658.

All share, per share and common stock amounts
presented in the financial statements and related footnotes for
all periods presented have been restated to reflect the two
two-for-one stock splits effected during 2000.

Stock Option and Employee Stock Purchase
Plans

The Company has stock option plans under which
options to purchase shares of the Companys common stock
may be granted to employees, consultants and directors at a
price no less than the fair market value on the date of grant.
At December 31, 2002, the total authorized number of shares
under all plans was 46,785,369. The vesting period of the
options is determined by the Board of Directors and is generally
four years. All options expire after ten years from the date of
grant.

The Company issued options for 188,150, 10,000
and 2,600 shares of common stock to non-employees during the
years ended December 31, 2002, 2001 and 2000, respectively.
The fair value of these options is being amortized to expense
over the service period.

Option transactions during 2002, 2001 and 2000
are summarized as follows:

|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       |  |            |   |  |   |       | 
|---------------------------------- |  | ----------------------- | ---------- | --------- | ----- | - | ----- | ------ | --------- |  | ---------- | - |  | --------- | ----- |  | ----- |  | ---------- | - |  | - | ----- | 
|                                   |  |                        
|                                   |  | Year Ended December 31, |           
|                                   |  |                         |           
|                                   |  |                         |            |           |       |  
|                                   |  | 2002                    |            |           | 2001  |   |       | 2000   |          
|                                   |  |                         |            |           |       |   |       |        |          
|                                   |  |                         |            | Weighted- |       |   |       |        | Weighted- |  |            |   |  | Weighted- |      
|                                   |  |                         |            | Average   |       |   |       |        | Average   |  |            |   |  | Average   |      
|                                   |  |                         |            | Exercise  |       |   |       |        | Exercise  |  |            |   |  | Exercise  |      
|                                   |  | Shares                  |            |           | Price |   |       | Shares |           |  | Price      |   |  | Shares    |       |  | Price | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 
|Outstanding at beginning of year   |  |                         | 24,700,767 |           |       | $ | 35.63 |        |           |  | 21,503,182 |   |  | $         | 31.49 |  |       |  | 17,234,972 |   |  | $ | 14.10 | 
|Options granted                    |  |                         | 5,816,516  |           |       |   | 13.13 |        |           |  | 6,751,719  |   |  |           | 44.06 |  |       |  | 7,070,139  |   |  |   | 65.99 | 
|Options exercised                  |  |                         | (495,207   | )         |       |   | 7.14  |        |           |  | (2,284,752 | ) |  |           | 9.50  |  |       |  | (2,480,240 | ) |  |   | 9.49  | 
|Options canceled or expired        |  |                         | (1,714,937 | )         |       |   | 43.43 |        |           |  | (1,269,382 | ) |  |           | 56.81 |  |       |  | (321,689   | ) |  |   | 27.42 | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 
|Outstanding at end of year         |  |                         | 28,307,139 |           |       |   | 31.03 |        |           |  | 24,700,767 |   |  |           | 35.63 |  |       |  | 21,503,182 |   |  |   | 31.49 | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 
|Options exercisable at end of year |  |                         | 13,829,582 |           |       |   | 30.09 |        |           |  | 9,223,400  |   |  |           | 24.67 |  |       |  | 6,583,926  |   |  |   | 12.96 | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 

F-29



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE K)  Stockholders
Equity (continued)



Stock Option and Employee Stock Purchase Plans
(continued)


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

|                        |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |            |  |  |   |       | 
|----------------------- |  | ------------------- | ---------- | --------- | ------------------- |  | --------- | -------- |  | - | ----------- | --------- |  | -------- | ---------- |  |  | - | ----- | 
|                        |  |                     |            |          
|                        |  | Options Outstanding |            |           | Options Exercisable | 
|                        |  |                     |            |           |                     | 
|                        |  |                     |            | Weighted- |                     |  |           |          | 
|                        |  |                     |            | Average   |                     |  | Weighted- |          |  |   |             | Weighted- | 
|                        |  |                     |            | Remaining |                     |  | Average   |          |  |   |             | Average   | 
|                        |  | Number              |            |           | Contractual Life    |  |           | Exercise |  |   | Number      |           |  | Exercise |           
|Range of Exercise Price |  | Outstanding         |            |           | (In Years)          |  |           | Price    |  |   | Exercisable |           |  | Price    |           
|                        |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |           
|$ 0.05 to $ 5.50        |  |                     | 151,923    |           |                     |  | 1.8       |          |  | $ | 4.52        |           |  |          | 151,923    |  |  | $ | 4.52  | 
|$ 5.51 to $ 8.63        |  |                     | 5,213,465  |           |                     |  | 4.8       |          |  |   | 7.40        |           |  |          | 4,585,113  |  |  |   | 7.36  | 
|$ 8.64 to $17.50        |  |                     | 5,861,167  |           |                     |  | 9.4       |          |  |   | 11.85       |           |  |          | 488,428    |  |  |   | 10.39 | 
|$17.51 to $32.74        |  |                     | 5,612,572  |           |                     |  | 5.8       |          |  |   | 25.97       |           |  |          | 3,773,199  |  |  |   | 25.66 | 
|$32.75 to $41.25        |  |                     | 4,190,843  |           |                     |  | 8.5       |          |  |   | 38.38       |           |  |          | 1,197,554  |  |  |   | 38.39 | 
|$41.26 to $64.48        |  |                     | 1,828,465  |           |                     |  | 7.8       |          |  |   | 49.75       |           |  |          | 831,502    |  |  |   | 50.04 | 
|$64.49 to $75.00        |  |                     | 4,585,843  |           |                     |  | 7.6       |          |  |   | 66.13       |           |  |          | 2,299,878  |  |  |   | 66.17 | 
|$75.01 to $110.00       |  |                     | 862,861    |           |                     |  | 7.3       |          |  |   | 79.84       |           |  |          | 501,985    |  |  |   | 79.82 | 
|                        |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |           
|                        |  |                     | 28,307,139 |           |                     |  | 7.2       |          |  |   | 31.03       |           |  |          | 13,829,582 |  |  |   | 30.09 | 
|                        |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |           

In 2000, the Companys stockholders approved
the establishment of an Employee Stock Purchase Plan that
qualifies under Section 423 of the Internal Revenue Code
and permits substantially all employees to purchase shares of
common stock. Participating employees may purchase common stock
through payroll deductions at the end of each participation
period at a purchase price equal to 85% of the lower of the fair
market value of the common stock at the beginning or the end of
the participation period. Common stock reserved for future
employee purchases under the plan aggregated 404,119 and 481,056
shares as of December 31, 2002 and 2001, respectively.
Common stock issued under this plan totaled 76,937 and 18,944 in
2002 and 2001, respectively. Under the plan, eligible employees
may purchase shares of common stock on certain dates and at
certain prices as set forth in the plan.

The weighted-average fair value of the stock
options granted during 2002, 2001 and 2000 is estimated as
$9.77, $31.26 and $57.08 per share, respectively. The
weighted-average fair value of the employee stock purchase plan
rights granted during 2002 and 2001 is estimated as $11.45 and
$23.71 per share, respectively. These weighted-average fair
values were determined based on the Black-Scholes option-pricing
model with the following assumptions:

|               |                              |                         |       |           |      |  |       |           |  |  |       |           | 
|-------------- | ---------------------------- | ----------------------- | ----- | --------- | ---- |  | ----- | --------- |  |  | ----- | --------- | 
|               |                              |                        
|               |                              | Year Ended December 31, |      
|               |                              |                         |      
|               |                              | 2002                    |       |           | 2001 |  |       | 2000      | 
|               |                              |                         |       |           |      |  |       |           | 
|Expected life: |                              |                         |       |           |      |  |       |           |  |  |       |          
|               | Stock options                |                         |       | 7.0 years |      |  |       | 6.0 years |  |  |       | 6.0 years | 
|               | Employee stock purchase plan |                         |       | 1.0 year  |      |  |       | 1.0 year  |  |  |       |          | 
|Interest rate  |                              |                         | 4.02% |           |      |  | 4.49% |           |  |  | 5.21% |          
|Volatility     |                              |                         | 79%   |           |      |  | 79%   |           |  |  | 111%  |          
|Dividend yield |                              |                         | 0%    |           |      |  | 0%    |           |  |  | 0%    |          

Options available for future grant were 6,985,491
at December 31, 2002.

F-30



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE L)  Preferred Share
Purchase Rights

On May 20, 1998, the Company adopted a
Shareholder Rights Plan which provided for the issuance of
rights to purchase shares of Junior Participating Preferred
Stock, par value $0.01 per share (the Preferred
Shares), of the Company. Under the Shareholder Rights
Plan, the Company distributed one preferred share purchase right
(a Right) for each outstanding share of common
stock, par value $0.01 (the Common Shares), of the
Company. The Rights were distributed on June 26, 1998 to
stockholders of record on May 27, 1998.

Each Right entitles the holder to purchase from
the Company one four-thousandth of a Preferred Share at a price
of $250 per one four-thousandth of a Preferred Share, subject to
adjustment. The rights become exercisable ten business days
after any party acquires or announces an offer to acquire
beneficial ownership of 15% or more of the Companys Common
Shares. In the event that any party acquires 15% or more of the
Companys Common Stock, the Company enters into a merger or
other business combination, or if a substantial amount of the
Companys assets are sold after the time that the Rights
become exercisable, the Rights provide that the holder will
receive, upon exercise, shares of the common stock of the
surviving or acquiring company, as applicable, having a market
value of twice the exercise price of the Right.

The Rights expire May 20, 2008, and are
redeemable by the Company at a price of $0.00025 per Right at
any time prior to the time that any party acquires 15% or more
of the Companys Common Shares. Until the earlier of the
time that the Rights become exercisable, are redeemed or expire,
the Company will issue one Right with each new Common Share
issued.

(NOTE M)  Income
Taxes

The Company provides for income taxes using the
liability method. The difference between the tax provision and
the amount that would be computed by applying the statutory
Federal income tax rate to income before taxes is attributable
to the following:

|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31, |        
|                                                                   |  |                         |        
|                                                                   |  | 2002                    |         |   | 2001 |   |         | 2000 | 
|                                                                   |  |                         |         |   |      |   |         |      | 
|Federal income tax provision at 34%                                |  | $                       | (74,703 | ) |      | $ | (39,832 | )    |  | $ | (82,818 | )
|State taxes, net of federal tax benefit                            |  |                         | (10,023 | ) |      |   | (5,412  | )    |  |   | (12,211 | )
|Tax credits, principally for research and
    development          |  |                         | (6,852  | ) |      |   | (6,552  | )    |  |   | (8,900  | )
|Stock option deduction for which no book benefit
    is available  |  |                         | (1,303  | ) |      |   | (32,794 | )    |  |   | (47,539 | )
|Debt conversion expenses for which no tax benefit
    is available |  |                         |        |   |      |   | 1,504   |      |  |   | 19,626  |  
|Purchased in-process R&D for which no tax
    benefit is available |  |                         |        |   |      |   |        |      |  |   | 51,770  |  
|Net operating loss adjustment                                      |  |                         |        |   |      |   |        |      |  |   | (6,347  | )
|Foreign taxes                                                      |  |                         |        |   |      |   |        |      |  |   | 149     |  
|Other                                                              |  |                         | 99      |   |      |   | 100     |      |  |   | (1,141  | )
|Increase in valuation allowance on deferred tax
    asset          |  |                         | 92,782  |   |      |   | 82,986  |      |  |   | 87,636  |  
|                                                                   |  |                         |         |   |      |   |         |      | 
|                                                                   |  | $                       |        |   |      | $ |        |      |  | $ | 225     |  
|                                                                   |  |                         |         |   |      |   |         |      | 

F-31



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE M)  Income Taxes
(continued)


Temporary differences and carryforwards which
give rise to a significant portion of deferred tax assets and
liabilities are as follows:

|                  |                                                                 |                   |       |        |                   |   |         |          |  
|----------------- | --------------------------------------------------------------- | ----------------- | ----- | ------ | ----------------- | - | ------- | -------- | -
|                  |                                                                 | Current           |       |        | Long-Term         |  
|                  |                                                                 | Asset/(Liability) |       |        | Asset/(Liability) |  
|                  |                                                                 |                   |       |        |                   |  
|December 31, 2002 |                                                                 |                   |       |        |                   |   |         |         
|                  | Net operating loss carryforward                                 |                   | $     |       |                   |   | $       | 254,076  |  
|                  | Research and development and other tax credit
    carryforwards |                   |       |       |                   |   |         | 27,270   |  
|                  | Loss on impaired investment                                     |                   |       |       |                   |   |         | 21,037   |  
|                  | Net unrealized gains on investments                             |                   |       |       |                   |   |         | (16,744  | )
|                  | Deferred revenue                                                |                   |       | 991    |                   |   |         | 2,975    |  
|                  | Depreciation                                                    |                   |       |       |                   |   |         | 2,654    |  
|                  | Reserves and accruals                                           |                   |       | 7,388  |                   |   |         | 1,875    |  
|                  | Other                                                           |                   |       |       |                   |   |         | 565      |  
|                  |                                                                 |                   |       |        |                   |  
|                  |                                                                 |                   | 8,379 |        |                   |   | 293,708 |         
|                  | Less valuation allowance                                        |                   |       | (8,379 | )                 |   |         | (293,708 | )
|                  |                                                                 |                   |       |        |                   |  
|                  |                                                                 | $                 |      |        |                   | $ |        |         
|                  |                                                                 |                   |       |        |                   |  

|                  |                                                                 |                   |       |        |                   |   |         |          |  
|----------------- | --------------------------------------------------------------- | ----------------- | ----- | ------ | ----------------- | - | ------- | -------- | -
|                  |                                                                 | Current           |       |        | Long-Term         |  
|                  |                                                                 | Asset/(Liability) |       |        | Asset/(Liability) |  
|                  |                                                                 |                   |       |        |                   |  
|December 31, 2001 |                                                                 |                   |       |        |                   |   |         |         
|                  | Net operating loss carryforward                                 |                   | $     |       |                   |   | $       | 184,445  |  
|                  | Research and development and other tax credit
    carryforwards |                   |       |       |                   |   |         | 24,968   |  
|                  | Net unrealized gains on investments                             |                   |       |       |                   |   |         | (12,385  | )
|                  | Loss on impaired investment                                     |                   |       |       |                   |   |         | 8,618    |  
|                  | Deferred revenue                                                |                   |       | 991    |                   |   |         | 3,967    |  
|                  | Reserves and accruals                                           |                   |       | 1,585  |                   |   |         | 3,408    |  
|                  | Depreciation                                                    |                   |       |       |                   |   |         | 1,523    |  
|                  | Other                                                           |                   |       | 196    |                   |   |         | 1,132    |  
|                  |                                                                 |                   |       |        |                   |  
|                  |                                                                 |                   | 2,772 |        |                   |   | 215,676 |         
|                  | Less valuation allowance                                        |                   |       | (2,772 | )                 |   |         | (215,676 | )
|                  |                                                                 |                   |       |        |                   |  
|                  |                                                                 | $                 |      |        |                   | $ |        |         
|                  |                                                                 |                   |       |        |                   |  

The Company recognized a valuation allowance to
the full extent of its deferred tax assets since the likelihood
of realization of the benefit cannot be determined.

F-32



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)




(NOTE M)  Income Taxes
(continued)


Provision for income taxes is comprised of the
following:

|         |               |              |   |      |  |      |   |   |  |   |     |     | 
|-------- | ------------- | ------------ | - | ---- |  | ---- | - | - |  | - | --- | --- | 
|         |               |             
|         |               | Year Ended   |  
|         |               | December 31, |  
|         |               |              |  
|         |               | 2002         |   | 2001 |  | 2000 |  
|         |               |              |   |      |  |      |  
|Current: |               |              |   |      |  |      |   |   |  |   |     |    
|         | Federal       |              | $ |     |  |      | $ |  |  |   | $   |    | 
|         | State         |              |   |     |  |      |   |  |  |   |     |    | 
|         | Foreign taxes |              |   |     |  |      |   |  |  |   |     | 225 | 
|Deferred |               |              |  |      |  |      |  |   |  |   |    |    
|         |               |              |   |      |  |      |   |   | 
|         |               | $            |  |      |  | $    |  |   |  | $ | 225 |    
|         |               |              |   |      |  |      |   |   | 

The Company has available tax credit
carryforwards of approximately $27,270, which expire, if unused,
from the year 2008 through the year 2022. The Company has net
operating loss (NOL) carryforwards for federal
income tax purposes of approximately $657,900 which expire, if
unused, from the year 2010 through the year 2022. The
Companys ability to utilize these NOLs may be limited
under Internal Revenue Code Section 382. The tax benefit of
approximately $235,800 of NOLs related to stock options will be
credited to equity when the benefit is realized through
utilization of the NOL carryforwards.

(NOTE N)  Investment in Vascular
Genetics, Inc.

In November 1997, the Company entered into an
agreement with three other parties to form Vascular Genetics,
Inc. (VGI) to pursue the development and
commercialization of gene therapy products for the treatment of
vascular diseases. As a result of the November 1997 agreement
and other transactions since that time, as of December 31,
2002, the Company held a significant minority equity interest in
VGI of 29%. The Company also held certain preemptive rights that
permitted retention of the Companys ownership position
under some circumstances in the event of a future financing by
VGI. In addition, the Company had the option to purchase 100% of
VGIs common stock at fair market value upon receiving the
approval of two-thirds of the shareholders. The Company had
appointed two directors to the Board of Directors of VGI.

The Company has no carrying value for its
investment in VGI at December 31, 2002 and 2001,
respectively. During 2002, the Company exchanged its loan and
receivable for equity of VGI. On February 5, 2003, the
Company tendered its equity interest in VGI in exchange for
approximately an 18% equity interest in Corautus Genetics Inc.,
a new company that resulted from the merger of VGI and GenStar
Therapeutics Corporation. Corautus Genetics holds an exclusive
license in the field of gene therapy for the Companys
VEGF-2 gene. The Company will be entitled to receive up to a 10%
royalty on net sales of any product brought to market by
Corautus Genetics that are based on the VEGF-2 gene.

F-33



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, except share and per share
data)


(NOTE O)  Net Loss Per
Share

The following table sets forth the computation of
basic and diluted net loss per share:

|                                                                                   |  |                         |             |   |      |   |             |      |  |   |             |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                   |  |                        
|                                                                                   |  | Year Ended December 31, |            
|                                                                                   |  |                         |            
|                                                                                   |  | 2002                    |             |   | 2001 |   |             | 2000 | 
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Numerator:                                                                         |  |                         |             |   |      |   |             |      |  |   |             |  
|Net loss before cumulative effect of change in
    accounting principle            |  | $                       | (219,716    | ) |      | $ | (117,152    | )    |  | $ | (235,556    | )
|Cumulative effect of change in accounting
    principle                            |  |                         |            |   |      |   |            |      |  |   | (8,250      | )
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Net loss                                                                           |  | $                       | (219,716    | ) |      | $ | (117,152    | )    |  | $ | (243,806    | )
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Denominator:                                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|Denominator for basic and diluted earnings per
    share  weighted-average shares |  |                         | 128,591,153 |   |      |   | 126,990,788 |      |  |   | 110,929,292 |  
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Net loss per share, basic and diluted:                                             |  |                         |             |   |      |   |             |      |  |   |             |  
|Net loss per share before cumulative effect of
    change in accounting principle  |  | $                       | (1.71       | ) |      | $ | (0.92       | )    |  | $ | (2.12       | )
|Cumulative effect of change in accounting
    principle                            |  |                         |            |   |      |   |            |      |  |   | (0.08       | )
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Net loss per share                                                                 |  | $                       | (1.71       | ) |      | $ | (0.92       | )    |  | $ | (2.20       | )
|                                                                                   |  |                         |             |   |      |   |             |      | 

(NOTE P)  Quarterly Financial
Information (unaudited)

Quarterly financial information for 2002 and 2001
is presented in the following tables:

|                                                           |  |         |         |   |         |   |         |         |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------- | ------- | - | ------- | - | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                           |  | 1st     |         |   | 2nd     |   |         | 3rd     |  |   | 4th     |  
|                                                           |  | Quarter |         |   | Quarter |   |         | Quarter |  |   | Quarter |  
|                                                           |  |         |         |   |         |   |         |         |  |   |         |  
|2002                                                       |  |         |         |   |         |   |         |         |  |   |         |   |  |   |         |  
|Revenue                                                    |  | $       | 642     |   |         | $ | 642     |         |  | $ | 1,642   |   |  | $ | 642     |  
|Income (loss) from operations (1)                          |  |         | (55,744 | ) |         |   | (60,829 | )       |  |   | (56,800 | ) |  |   | (72,634 | )
|Net income (loss) (1) (2)                                  |  |         | (38,288 | ) |         |   | (46,510 | )       |  |   | (75,073 | ) |  |   | (59,845 | )
|Net income (loss) per share, basic and
    diluted (1) (2) |  |         | (0.30   | ) |         |   | (0.36   | )       |  |   | (0.58   | ) |  |   | (0.46   | )
|                                                          
|2001                                                       |  |         |         |   |         |   |         |         |  |   |         |   |  |   |         |  
|Revenue                                                    |  | $       | 5,267   |   |         | $ | 5,267   |         |  | $ | 1,642   |   |  | $ | 642     |  
|Income (loss) from operations                              |  |         | (35,112 | ) |         |   | (40,896 | )       |  |   | (44,977 | ) |  |   | (51,187 | )
|Net income (loss) (3)                                      |  |         | (13,007 | ) |         |   | (24,024 | )       |  |   | (24,879 | ) |  |   | (55,242 | )
|Net income (loss) per share, basic and
    diluted (3)     |  |         | (0.10   | ) |         |   | (0.19   | )       |  |   | (0.19   | ) |  |   | (0.43   | )



|    |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys results for the fourth quarter
    of 2002 include a charge of $14,238, or $0.11 per share,
    relating to a charge recognized in connection with changes in
    the design of the large-scale manufacturing facility.
|   
|(2) | The Companys results for the third quarter
    of 2002 include a charge of $32,158, or $0.25 per share,
    relating to an impairment charge recognized in connection with
    the Companys investment in CAT.                     
|   
|(3) | The Companys results for the fourth quarter
    of 2001 include a charge of $22,314, or $0.17 per share,
    relating to an impairment charge recognized in connection with
    the Companys investment in Transgene.              

F-34