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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, 2003 | 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)

14200 Shady Grove Road, Rockville, Md. 20850-7464

(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.     þ

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, 2004 was 129,478,427. As
of June 30, 2003, 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
$1,124,564,760.*

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 40,259,506 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 30, 2003. 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 a mid-stage development
biopharmaceutical company with a significant product pipeline
derived from proprietary genomic technology. Our goal is to
build a global biopharmaceutical company that discovers,
develops, manufactures and markets gene-based protein and
antibody 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. We focus our internal product development
efforts on novel human protein and antibody drugs discovered
through genomics-based research, and on new long-acting versions
of existing protein drugs created using our albumin fusion
technology. We use collaborations for the development of
additional protein and antibody drugs, gene therapy products,
small molecule drugs, and diagnostic products discovered using
our genomics-based technology.

We are conducting clinical trials with a number
of our products. Our current focus is to advance clinical trials
in two main therapeutic areas: immunology/ infectious disease
and oncology. Additional products are in clinical development by
companies with which we are collaborating. We also have a number
of new drugs in advanced preclinical studies.

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 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 development 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 construction 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

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our products in North America. We may add sales
and marketing staff as our products approach commercialization.


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, licensing
fees 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 are a Delaware corporation headquartered at
14200 Shady Grove Road, Rockville, Maryland 20850-7464. Our
telephone number is (301) 309-8504. Our website is
www.hgsi.com. Information contained on our website is not a part
of, and is not incorporated into, this annual report on
Form 10-K. Our filings with the SEC are available without
charge on our website as soon as reasonably practicable after
filing.

Strategy

Our goal is to build a global biopharmaceutical
company that discovers, develops, manufactures and markets
gene-based protein and antibody drugs to treat and cure disease.
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 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.                                                                                                        
|
| |  | Expand our understanding of medically useful
    genes.We have created a set of
    integrated skills that allow us to understand the natural
    function of new genes. 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 either by ourselves or 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 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 our portfolio. As of March 1, 2004, we had
    384 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. A majority of the novel protein and antibody drugs
that we have entered into clinical trials are derived from
genomics-based research. Our other

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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 antibody drugs in clinical development are
LymphoStat-BTM (human monoclonal antibody to BLyS),
ABthrax (human monoclonal antibody to Bacillus
anthracisprotective antigen), TRAIL-R1 agonistic human
monoclonal antibody (HGS-ETR1, TRAIL-R1mAb), and TRAIL-R2
agonistic human monoclonal antibody (HGS-ETR2, TRAIL-R2 mAb).
LymphoStat-B is in clinical development for the treatment of
autoimmune diseases such as lupus and rheumatoid arthritis.
Results of a Phase 1 clinical trial show that LymphoStat-B
is well tolerated and biologically active. Phase 2 clinical
trials of LymphoStat-B in patients with systemic lupus
erythematosus and in patients with rheumatoid arthritis are
ongoing. ABthrax is in clinical development for the prevention
and treatment of anthrax infections. We recently completed
enrollment and dosing in a Phase 1 clinical trial designed
to evaluate the safety and pharmacokinetics of ABthrax in
healthy adult volunteers. Data collection and analysis are
underway. HGS-ETR1 and HGS-ETR2 are in Phase 1 clinical
trials for the treatment of certain solid tumors and
hematological malignancies. A therapeutic protein,
LymphoRadTM 131 (radioiodinated B-lymphocyte
stimulator) is in Phase 1 clinical trials for the treatment
of B-cell tumors such as multiple myeloma and non-Hodgkins
lymphomas. Interim results suggest that LymphoRad is well
tolerated and biologically active. Our albumin fusion proteins
in clinical development are Albuferon (albumin-interferon
alpha), Albutropin (albumin-human growth hormone), and
Albuleukin(albumin-interleukin-2). Interim results of an
ongoing Phase 1/2 clinical trial have shown that Albuferon
is well tolerated, has a prolonged half-life, and is
biologically active. We have completed a Phase 1 clinical
trial of Albutropin in adults with growth hormone deficiency.
Albuleukin is the subject of ongoing Phase 1 clinical
studies in patients with solid tumors.

Our partners have advanced a number of 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, has
completed 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. GlaxoSmithKline has
indicated that it expects to enter 480848 into Phase 3
clinical trials in 2004 and to submit a New Drug Application
(NDA) to the FDA in 2008. An additional 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 and expects to seek FDA clearance to
begin Phase 2b clinical trials of VEGF-2 in 2004.

We also have an evolving pipeline of additional
products in discovery and preclinical drug development.

Clinical Programs

The Human Genome Sciences clinical development
pipeline includes drugs to treat such diseases as cancer, lupus,
rheumatoid arthritis, and hepatitis C. Our partners are
conducting clinical trials of 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 long-acting versions of existing drugs created using our
albumin fusion technology.

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

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the bodys own healthy tissues.
Over-production of autoantibodies may be counteracted by
reducing BLyS levels with LymphoStat-B. We are developing
LymphoStat-B as a potential treatment for autoimmune diseases,
such as systemic lupus erythematosus and rheumatoid arthritis.
LymphoStat-B has received a Fast Track Product designation from
the FDA for the treatment of systemic lupus erythematosus, and
was recently selected for inclusion in the FDAs new
Continuous Marketing Application Pilot 2 Program. The
Pilot 2 program provides for frequent scientific feedback
and interactions based on a prospectively defined agreement
between the FDA and participating companies.


In 2003, we reported results of a Phase 1
clinical trial designed to evaluate the safety and pharmacology
of LymphoStat-B in patients with systemic lupus erythematosus.
Results show that LymphoStat-B is well tolerated and
biologically active. Currently, we are conducting Phase 2
clinical trials of LymphoStat-B in patients with systemic lupus
erythematosus and in patients with rheumatoid arthritis. We plan
to complete the enrollment of both Phase 2 clinical trials of
LymphoStat-B in 2004.



| |                                                            
| | -----------------------------------------------------------
| | TRAIL-R1 Agonistic Human Monoclonal Antibody
    (HGS-ETR1)

HGS-ETR1 is a novel anticancer drug that
specifically recognizes, binds to and activates 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 HGS-ETR1. Because HGS-ETR1 mimics the activity of native
TRAIL when it binds to TRAIL Receptor 1, it is considered an
agonistic antibody.

We currently are conducting Phase 1 clinical
trials to evaluate the safety and pharmacology of HGS-ETR1 in
patients with advanced solid tumors and hematological
malignancies. We plan to advance HGS-ETR1 to Phase 2
clinical trials in 2004.



| |                                                            
| | -----------------------------------------------------------
| | TRAIL-R2 Agonistic Human Monoclonal Antibody
    (HGS-ETR2)

HGS-ETR2 is a novel anticancer drug that
specifically recognizes and binds to the TRAIL Receptor-2
protein. The TRAIL Receptor-2 protein was originally identified
by Human Genome Sciences, and is found on the surface of a
number of solid tumor and hematopoietic cancer cells.

Human Genome Sciences is currently enrolling
patients with advanced tumors into a Phase 1 open-label,
dose-escalating clinical trial of HGS-ETR2. The study will
evaluate the drugs safety and pharmacology, and is being
conducted in the United Kingdom. We plan to complete enrollment
of this trial in 2004. The Company recently received clearance
from the FDA of an IND application to initiate an additional
Phase 1 clinical trial of HGS-ETR2 in the United States.



| |         
| | --------
| | ABthrax

ABthrax is a novel drug developed by Human Genome
Sciences for the prevention and treatment of anthrax infections.
ABthrax is a human monoclonal antibody that blocks the binding
to cell surfaces of Bacillus anthracis protective
antigen, the key facilitator of anthrax infection. ABthrax has
received a Fast Track Product designation from the FDA for its
potential use in preventing and treating anthrax infections.

As previously reported, a single dose of ABthrax
administered prior to spore challenge increases survival
significantly in both rabbit and nonhuman primate models of
inhalational anthrax. Results from a more recent study in a
rabbit model of inhalational anthrax demonstrate that a single
dose of ABthrax also increases survival significantly when the
dose is administered following spore challenge, suggesting that
the drug may have the potential to protect against anthrax
infection when administered either prior to or after infection.

In March 2004, we reported the results of a
Phase 1 placebo-controlled, dose-escalation clinical trial
designed to evaluate the safety, tolerability and
pharmacokinetics of ABthrax in healthy adult volunteers. Data

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collection and analysis are in progress. Results
show that Abthrax is safe and well tolerated. Further
development of ABthrax will depend on government funding.


Genomics-Derived Human Protein Drugs



| |             
| | ------------
| | 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 LymphoRad as a potential
treatment for certain B-cell cancers, including multiple myeloma
and non-Hodgkins lymphomas. 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 December 2003, Human Genome Sciences reported
interim results of Phase 1 clinical trials of LymphoRad
that are designed to evaluate its safety and pharmacology in
patients with multiple myeloma and in patients with
non-Hodgkins lymphoma. The results to date suggest that
LymphoRad is safe and well tolerated, shows signs of anti-tumor
activity, and exhibits excellent dosimetry and tumor targeting.
Preliminary pharmacokinetic data from the first dose cohorts in
the Phase 1 studies show that the administered
radioactivity has a terminal half-life of approximately eighteen
to twenty-three hours, which is much shorter than is reported
for radiolabeled anti-CD20 antibodies. Enrollment in both trials
is expected to continue throughout most of 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.

In February 2004, Human Genome Sciences reported
that a Phase 2 clinical trial to evaluate repifermin for
the treatment of cancer therapy-induced mucositis did not meet
its primary endpoint, which was efficacy. Repifermin was well
tolerated across all doses administered, with a safety profile
similar to placebo. Based on the new data, we have decided not
to proceed with further development of repifermin. No other
clinical trials of repifermin are underway or planned in any
indication.



| |                               
| | ------------------------------
| | 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.
In 2003, we completed a Phase 1 clinical trial designed to
evaluate the safety and pharmacology of BLyS in patients with an
immune disorder known as immunoglobulin-A (IgA) deficiency.
Results from this trial, along with the results of an earlier
Phase 1 clinical trial in patients with common variable
immunodeficiency (CVID), show that BLyS is safe and well
tolerated. Human Genome Sciences does not plan to advance BLyS
into Phase 2 clinical trials at this time.

Albumin Fusion Protein Drugs



| |                                     
| | ------------------------------------
| | Albuferon (albumin-interferon alpha)

Albuferon 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 as a potential treatment for chronic hepatitis C.

In October 2003, interim results of a
Phase 1/2 clinical trial designed to determine the safety,
tolerability and pharmacology of Albuferon in adults with
chronic hepatitis C who have failed previous interferon
alpha

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treatments showed that Albuferon is well
tolerated, has a prolonged half-life, and is biologically
active. The Company is continuing to evaluate Albuferon 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. Human Genome
Sciences expects in 2004 to complete the ongoing Phase 1/2
clinical trial of Albuferon, and to complete enrollment for a
Phase 2 clinical trial of Albuferon in patients with
chronic hepatitis C who are naïve to treatment with
interferon-alpha.




| |                                   
| | ----------------------------------
| | 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.

Phase 1 clinical trials to evaluate the
safety and pharmacology of Albuleukin in patients with solid
tumors are ongoing. We plan to complete the Phase 1 trials,
but do not plan to advance Albuleukin to Phase 2 clinical
trials at this time.



| |                                              
| | ---------------------------------------------
| | Albutropin (albumin-human growth
    hormone)

Albutropin is a novel long-acting form of human
growth hormone. 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.

Results of a Phase 1 clinical trial of
Albutropin in adults with growth hormone deficiency were
reported in 2002. Results demonstrate that Albutropin is
biologically active, well tolerated, and support advancing
Albutropin into the next phase of clinical development. Human
Genome Sciences submitted proposed trial designs to the FDA for
Phase 2 studies of Albutropin in 2003. Although no
antibodies have been detected in the Phase 1 clinical
trials, the FDA has requested that we develop supplemental
immunoassays for the detection of the functional relevance of
antibodies, should they develop, to human growth hormone before
initiating Phase 2 studies. We are in the process of
responding to the FDAs request. At this time, the Company
intends to seek a partner before conducting further clinical
trials.

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.
480848 is an inhibitor of Lipoprotein-associated
phospholipase A2 (Lp-PLA2). Lp-PLA2 is an enzyme associated
with the formation of atherosclerotic plaques. In 2003,
GlaxoSmithKline announced that 480848 had completed Phase 2
clinical trials and would be advanced to Phase 3 clinical
trials in 2004. GlaxoSmithKline has stated that a New Drug
Application (NDA) submission is expected in 2008.

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 commercialized. In
addition, we have an option to co-promote an approved drug in
North America and Europe.

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659032

An additional small-molecule inhibitor of
Lp-PLA2, 659032, has been discovered by our partner,
GlaxoSmithKline, using Human Genome Sciences technology.
Phase 1 clinical trials to evaluate 659032 for the control
and treatment of cardiovascular disease are ongoing.
GlaxoSmithKline is conducting these trials.

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 additional milestone payments if 659032
moves through clinical development into registration, and will
receive royalties if either compound is commercialized. In
addition, we have an option to co-promote an approved drug in
North America and Europe.

462795

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.
GlaxoSmithKline is conducting Phase 1 clinical trials of
462795 to evaluate its potential use in the treatment of
patients with osteoporosis.

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 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 and expects to seek FDA clearance to
begin Phase 2b clinical trials of VEGF-2 in 2004. 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 preclinical development, including novel human protein and
antibody drugs discovered through genomics-based research, and
new long-acting versions of existing proteins created using our
albumin fusion technology.

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 long-acting versions of existing protein drugs
created using our albumin fusion technology.

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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.

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 2 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 two such drugs in clinical
trials  HGS-ETR1 (TRAIL-R1 mAb) and HGS-ETR2
(TRAIL-R2 mAb). HGS-ETR1 and HGS-ETR2 are currently in
Phase 1 clinical trials for the treatment of certain solid
tumors and tumors of hematopoietic origin. HGS-ETR1 recognizes
the TRAIL Receptor-1 protein, while HGS-ETR2 recognizes the
TRAIL Receptor-2 protein. Binding of the antibodies to their
respective TRAIL receptor triggers cell death. HGS-ETR1 and
HGS-ETR2 are agonistic human monoclonal antibodies that mimic
the cancer-killing activity of the natural TRAIL ligand. We
believe that HGS-ETR1 and HGS-ETR2 are the first human agonistic
antibodies 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 results from the genetic
fusion of human albumin and human interferon-alpha; Albutropin
results

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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 additional product opportunities. This strategy potentially
reduces development risk by 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.

9



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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                        

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                                                                   
|2003                      |  | Pfizer                        |  | Amends 1996 agreement with Pharmacia                                                             
|OTHER AGREEMENTS          |  |                               |  |                                                                                                  
|2003                      |  | Genentech                     |  | Biologic, small-molecule, and diagnostic products
    based on human gene                        
|2003                      |  | diaDexus                      |  | Diagnostic rights for TRAIL receptors 1 and 2                                                    

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 research
programs

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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
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.
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. Takeda has 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-

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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.

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. In
May 2003, Human Genome Sciences announced that we had acquired
an exclusive worldwide license from Abgenix to develop and
commercialize a fully human monoclonal antibody to the CCR5
receptor. CCR5 mAb is currently in late-stage preclinical
development at Human Genome Sciences.

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 for Lymphostat-B, which was
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 2003. 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,
TRAIL Receptor 2 and ABthrax. Under the 2000 agreement, we
have paid to CAT $4.5 million in milestone payments through
the end of 2003.

Dyax.In March 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 2003, we have paid
$6.5 million for 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 vitrodiagnostic 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.

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 license exclusively
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.

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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.



| |             
| | ------------
| | 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 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, which has
subsequently been diluted down to 5.9%, 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
February 2003, we obtained approximately an 18% equity interest
in Corautus Genetics Inc. (Corautus), a
publicly-traded company that resulted from the merger of
Vascular Genetics, Inc. (VGI) and GenStar
Therapeutics Corporation. Corautus assumed the exclusive license
in the field of gene therapy for our VEGF-2 gene, previously
granted to VGI.

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, B-Lymphocyte Stimulator (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 pneumoniaevaccine technology to
GlaxoSmithKline. We are entitled to a portion of the payments
received by MedImmune under its sub-license. In 2003, we
received a clinical development milestone payment from MedImmune
relating to the initiation of clinical trials of a vaccine
against Streptococcus pneumoniaeby GlaxoSmithKline, a
partner of MedImmunes. Through 2003, we have received
$1.1 million from MedImmune.

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Pfizer.In October
1996, we entered into an agreement with Pharmacia in which we
granted to Pharmacia a non-exclusive license to conduct research
and to make, use and sell products based on genes of
Staphylococcus aurreusand the pathogenicity islands of
Escherichia colisequenced by us. In 2003, we amended the
Pharmacia agreement with Pfizer Corporation
(Pfizer), which acquired Pharmacia. We received and
recognized in full the license fee paid as a result of the
amendment.

Other

diaDexus.During
2003, diaDexus announced that the FDA had cleared its PLAC
test for marketing as a diagnostic aid for use in helping
predict an individuals risk for coronary heart disease.
The PLAC test measures the level of lipoprotein-associated
phospholipase A2 (Lp-PLA2) in human blood. The PLAC test was
discovered through the use of Human Genome Sciences
technology, and Human Genome Sciences is entitled to receive
royalties on sales of the PLAC test.

In 2003, Human Genome Sciences acquired
exclusive, worldwide rights from diaDexus to develop and
commercialize diagnostic immunohistochemical (IHC) tests based
on the TRAIL Receptor-1 (TRAIL-R1) and TRAIL Receptor-2
(TRAIL-R2) proteins.

Genentech.In August
2003, we entered into an agreement with Genentech in which we
granted to Genentech an exclusive, worldwide patent rights to
develop and commercialize therapeutic biologic products for
human use based on a human gene discovered by Human Genome
Sciences that may have potential applications in immunology,
oncology and neurology. Non-exclusive, worldwide rights for the
development and commercialization of diagnostic and small
molecule products for human use based on the same gene also were
granted.

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 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 1, 2004, we had 384 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

14



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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.

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

15



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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.                                                                         
|
| |  | 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

16



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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 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 within 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.

17



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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 currently
expanding the capacity of our existing process development and
manufacturing facility. We have completed construction and are
in the process of commissioning 102,600 square feet of
manufacturing space at our Traville site to be completed in
2004. We are constructing a 291,000 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 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 1, 2004, we had 1,100 full-time
employees. None of our employees is covered by a collective
bargaining agreement and we consider relations with our
employees to be good.

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 still in
development of our products. We initially set out to find as
many genes as possible and are now using that information to
develop medical and pharmacological products. We used 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.            

18



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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 most of our resources to developing proteins and
antibodies 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. 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.                                               

Because we are a mid-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 mid-stage 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.

We continually evaluate our business strategy
and may modify this strategy in light of developments in our
business and other factors.

In the past, we have redirected the focus of our
business from the discovery of genes to the development of
medically useful products based on those genes. We continue to
evaluate our business strategy and, as a result, may modify this
strategy in the future. In this regard, we may, from time to
time, focus our product development efforts on different
products or may delay or halt the development of various
products. In

19



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addition, as a result of changes in our strategy,
we may also change or refocus our existing drug discovery,
development, commercialization and manufacturing activities.
This could require changes in our facilities and personnel and
the restructuring of various financial arrangements. We cannot
assure you that changes will occur or that any changes that we
implement will be successful.


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 a number of 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 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;                                                         

20



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| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | poor or unanticipated effectiveness of products
    during the clinical trials; or
|
| |  | government or regulatory delays.                                                  

To date, data obtained from our 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
trials of repifermin, 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.

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 considerations 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.

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

21



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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 initial research
term of 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;                           
|
| |  | 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, 2003, we had long-term
obligations of approximately $503.7 million. We also had
future guarantee obligations under certain facility leases that
under current terms will increase to approximately $240.1
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                      

22



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| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and in the second
quarter of 2003, we entered into two facility leases with
respect to two facilities, one of which is recently completed
and the other was a previously-constructed facility. 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 $276.0 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, 2003,
we included approximately $280.8 million of restricted
investments on our balance sheet, of which approximately
$267.9 million was held as restricted investments providing
collateral for our obligations with respect to these facilities.
We expect that we will include approximately $295.0 million
in restricted investments on our balance sheet when the final
payments are made with respect to the recently completed
facility. 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 lessors at our
request can lock in a fixed interest rate at an interest rate
premium. To date, one lessor has fixed the interest rate for
approximately $76.0 million of the financed project cost. To the
extent the lessors 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 $240.1 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. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Off-Balance
Sheet Arrangements 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 2003,
the closing price of our common stock has been as low as $6.34
per share and as high as $16.36 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;                                                                                             

23



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##### 





| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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

24



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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.

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.

25



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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.

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.

26



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##### 



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 2005. 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 any key employee decides to terminate his or
her 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 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.

27



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##### 



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 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
1,164,000 square feet of laboratory and office space in eleven
buildings in Rockville, Maryland. Our leased space includes
approximately 481,000 square feet of laboratory space,
approximately 375,000 of manufacturing space secured through
long-term leases and approximately 308,000 square feet of office
space.

In addition, we are constructing a 291,000 square
foot large-scale manufacturing facility that we expect to occupy
in 2005.

For additional discussion of the financing of
certain of our leases, see Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Off-Balance Sheet Arrangements.

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, 2003.

29



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##### 



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.

|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|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  | 

|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|2003           |  | High |       |  | Low |  
|First Quarter  |  | $    | 9.36  |  |     | $ | 6.34  | 
|Second Quarter |  | $    | 16.30 |  |     | $ | 8.51  | 
|Third Quarter  |  | $    | 16.36 |  |     | $ | 12.26 | 
|Fourth Quarter |  | $    | 15.47 |  |     | $ | 11.81 | 

As of January 31, 2004, there were
approximately 840 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, 2003, 2002
and 2001, and as of December 31, 2003 and 2002, 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, 2000 and 1999, and as of
December 31, 2001, 2000 and 1999, 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,                        |                                              
|                                                                                           |                                |                                                 |                                              
|                                                                                           |                                | 2003                                            |                                               |         | 2002     |         |          | 2001    |          |         | 2000     |         |          | 1999    |         
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|                                                                                           |                                |                                                
|                                                                                           |                                | (In thousands, except per share and ratio data) |                                              
|Statement of Operations Data:                                                              |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |          |         |          |         |         |       
|Revenue  research and development
    collaborative contracts                             |                                | $                                               | 8,168                                         |         |          | $       | 3,568    |         |          | $       | 12,818   |         |          | $       | 22,068   |         |          | $       | 24,524  |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|Costs and expenses:                                                                        |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |          |         |          |         |         |       
|                                                                                           | Research and development:      |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |          |         |          |         |         |        |        
|                                                                                           |                                |                                                 | Direct expenditures                           |         |          | 191,483 |          |         |          | 191,162 |          |         |          | 146,276 |          |         |          | 91,456  |         |        |         | 60,607 | 
|                                                                                           |                                |                                                 | Charge for construction design changes        |         |          |        |          |         |          | 14,238  |          |         |          |        |          |         |          |        |         |        |         |       | 
|                                                                                           |                                |                                                 | Purchased in-process research and development |         |          |        |          |         |          |        |          |         |          |        |          |         |          | 134,050 |         |        |         |       | 
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|                                                                                           | Total research and development |                                                 |                                               | 191,483 |          |         |          | 205,400 |          |         |          | 146,276 |          |         |          | 225,506 |          |         |         | 60,607 |        
|                                                                                           | General and administrative     |                                                 |                                               | 43,608  |          |         |          | 44,175  |          |         |          | 38,714  |          |         |          | 27,083  |          |         |         | 14,838 |        
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|Total costs and expenses                                                                   |                                |                                                 | 235,091                                       |         |          |         | 249,575  |         |          |         | 184,990  |         |          |         | 252,589  |         |          |         | 75,445  |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|                                                                                           |                                | Income (loss) from operations                   |                                               |         | (226,923 | )       |          |         | (246,007 | )       |          |         | (172,172 | )       |          |         | (230,521 | )       |         |        | (50,921 | )     
|Net investment income                                                                      |                                |                                                 | 41,599                                        |         |          |         | 58,449   |         |          |         | 81,228   |         |          |         | 46,008   |         |          |         | 8,977   |       
|Charge for impaired investments                                                            |                                |                                                 |                                              |         |          |         | (32,158  | )       |          |         | (22,314  | )       |          |         |         |         |          |         |        |       
|Debt conversion expenses                                                                   |                                |                                                 |                                              |         |          |         |         |         |          |         | (3,894   | )       |          |         | (50,818  | )       |          |         |        |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|Income (loss) before taxes and cumulative effect
    of change in accounting principle (1) |                                |                                                 | (185,324                                      | )       |          |         | (219,716 | )       |          |         | (117,152 | )       |          |         | (235,331 | )       |          |         | (41,944 | )     
|Provision for income taxes                                                                 |                                |                                                 |                                              |         |          |         |         |         |          |         |         |         |          |         | 225      |         |          |         | 225     |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|Net income (loss) before cumulative effect of
    change in accounting principle (1)       |                                |                                                 | (185,324                                      | )       |          |         | (219,716 | )       |          |         | (117,152 | )       |          |         | (235,556 | )       |          |         | (42,169 | )     
|Cumulative effect of change in accounting
    principle (2)                                |                                |                                                 |                                              |         |          |         |         |         |          |         |         |         |          |         | (8,250   | )       |          |         |        |       
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         
|Net income (loss) (1)                                                                      |                                | $                                               | (185,324                                      | )       |          | $       | (219,716 | )       |          | $       | (117,152 | )       |          | $       | (243,806 | )       |          | $       | (42,169 | )     
|                                                                                           |                                |                                                 |                                               |         |          |         |          |         |          |         |          |         |          |         |         

31



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##### 



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

|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |          |          |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | -------- | - | - | ------- | ------- | -
|                                                                                                                          |                                                            |                                                
|                                                                                                                          |                                                            | Years Ended December 31,                        |         
|                                                                                                                          |                                                            |                                                 |         
|                                                                                                                          |                                                            | 2003                                            |          |   | 2002 |   |          | 2001 |  |   | 2000     |   |  | 1999 |         
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |         
|                                                                                                                          |                                                            |                                                
|                                                                                                                          |                                                            | (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) |                                                            | $                                               | (1.44    | ) |      | $ | (1.71    | )    |  | $ | (0.92    | ) |  | $    | (2.12    | )        |   | $ | (0.46   | )      
|Cumulative effect of change in accounting
    principle (2)                                                               |                                                            |                                                 |         |   |      |   |         |      |  |   |         |   |  |      | (0.08    | )        |   |   |        |        
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |         
|Net income (loss) per share, basic and
    diluted (1) (3)                                                                |                                                            | $                                               | (1.44    | ) |      | $ | (1.71    | )    |  | $ | (0.92    | ) |  | $    | (2.20    | )        |   | $ | (0.46   | )      
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |         
|Pro forma amounts assuming the accounting change
    is applied retroactively:                                            |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |          |          |   |   |         |        
|                                                                                                                          | Net income (loss) (3) (4)                                  |                                                 |          |   |      |   |          |      |  |   |          |   |  |      | $        | (235,556 | ) |   | $       | (42,169 | )
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |         
|                                                                                                                          | Net income (loss) per share, basic and
    diluted (3) (4) |                                                 |          |   |      |   |          |      |  |   |          |   |  |      | $        | (2.12    | ) |   | $       | (0.46   | )
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |         
|Other Data:                                                                                                               |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |          |          |   |   |         |        
|Ratio of earnings to fixed charges                                                                                        |                                                            |                                                 |         |   |      |   |         |      |  |   |         |   |  |      |         |          |   |   |        |        
|Coverage deficiency (1)                                                                                                   |                                                            | $                                               | (185,324 | ) |      | $ | (219,716 | )    |  | $ | (117,152 | ) |  | $    | (235,331 | )        |   | $ | (41,944 | )      
|                                                                                                                          |                                                            |                                                 |          |   |      |   |          |      |  |   |          |   |  |      |         

|                                                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|--------------------------------------------------------------------- |  | ------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | -------- | -
|                                                                      |  |                   
|                                                                      |  | As of December 31, |          
|                                                                      |  |                    |          
|                                                                      |  | 2003               |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |          
|                                                                      |  |                   
|                                                                      |  | (In thousands)     |          
|Balance Sheet Data:                                                   |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Cash, cash equivalents, short-term and restricted
    investments (5) |  | $                  | 1,262,458 |   |      | $ | 1,491,740 |      |  | $ | 1,689,311 |   |  | $    | 1,774,640 |   |  | $ | 466,192  |  
|Total assets (6)                                                      |  |                    | 1,466,204 |   |      |   | 1,662,187 |      |  |   | 1,865,004 |   |  |      | 1,948,525 |   |  |   | 527,725  |  
|Total debt and capital lease, less current
    portion (6)            |  |                    | 503,664   |   |      |   | 503,281   |      |  |   | 503,970   |   |  |      | 533,146   |   |  |   | 326,336  |  
|Retained deficit                                                      |  |                    | (886,871  | ) |      |   | (701,547  | )    |  |   | (481,831  | ) |  |      | (364,679  | ) |  |   | (120,873 | )
|Total stockholders equity                                            |  |                    | 903,333   |   |      |   | 1,100,553 |      |  |   | 1,304,463 |   |  |      | 1,362,955 |   |  |   | 169,068  |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                            
|   
|(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 2003, 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 2003, 2002, 2001, 2000 and 1999
    includes $280,776, $205,352, $144,901, $12,332 and $11,637,
    respectively, of restricted investments relating to certain
    operating leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(6) | Total assets for 2003, 2002, 2001,
    2000 and 1999 includes $280,776, $205,352, $144,901, $12,332 and
    $11,637, respectively, of restricted investments relating to
    certain operating leases. Total debt and capital lease,
    less current portion for 2003 and 2002 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 a mid-stage development
company with a significant product pipeline derived from
proprietary genomic technology. Our goal is to build a global
biopharmaceutical company that discovers, develops, manufactures
and markets gene-based protein and antibody 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. We focus our
internal product development efforts on novel human protein and
antibody drugs discovered through genomics-based research, and
on new long-acting versions of existing protein drugs created
using our albumin fusion technology. We use collaborations for
the development of other protein and antibody drugs, gene
therapy products, small molecule drugs, and diagnostic products
discovered using our genomics-based technology.

We have products in clinical development and
additional products in clinical trials by companies with which
we are collaborating. We continue to evaluate new drugs for
advancement into clinical development.

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 significant product
sales revenue or royalties from product sales and any
significant revenue from product sales or from royalties on
product sales in the next several years is uncertain. To date,
all of our revenue relates to payments made under our
collaboration agreements with GlaxoSmithKline and, to a lesser
extent, other agreements. The initial research term associated
with the GlaxoSmithKline collaboration agreement and many of our
other collaboration agreements expired in 2001 and those
agreements 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 any significant revenue or income
for at least the next several years may be limited to investment
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 significant 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. See Note B of the Notes to our Consolidated Financial
Statements for further discussion.

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 certain other accrued
liabilities at their respective fair values. We periodically
evaluate the fair values of our investments to determine whether
any declines in the fair value of investments represent an other
than temporary impairment. This evaluation consists of a review
of several factors and is subjective in nature. If management
determines that such an impairment exists we would recognize an
impairment charge. 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.

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. 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. In June 2003, we restructured these two leases to
comply with the new requirements of Financial Accounting
Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46).

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. Our other
revenues in 2003 have been earned and recognized in full as we
have no continuing obligation.

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 (CRO) costs. We make
estimates of the costs incurred to date but not yet invoiced in
relation to clinical site costs and CRO costs. We analyze the
progress of the clinical trials, including levels of patient
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

34



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##### 



Critical Accounting Policies and the Use of
Estimates (continued)


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 the fair
value based method set forth in 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. We do not report the
compensation expense using the fair value method shown in
Note B of the notes to the consolidated financial
statements. 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. 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 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, 2003 and 2002

Revenues.We had
revenues of $8.2 million and $3.6 million for the
years ended December 31, 2003 and December 31, 2002,
respectively. The 2003 revenues consisted of the recognition of
an aggregate of $4.6 million in revenue received from
Pfizer, Inc. (Pfizer), Genentech, Inc.
(Genentech) and from MedImmune, Inc.
(MedImmune), $2.6 million recognized from our
collaboration with Transgene, S.A. (Transgene) and a
$1.0 million milestone payment from GlaxoSmithKline
(GSK). 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 GSK.

Expenses.Research
and development expenses decreased to $191.5 million for
the year ended December 31, 2003 from $205.4 million
for the year ended December 31, 2002, including a
$14.2 million charge for construction design changes to the
large-scale manufacturing facility in 2002. Excluding the
$14.2 million charge, research and development expenses
increased slightly to $191.5 million for the year ended
December 31, 2003 from $191.2 million for the year
ended December 31, 2002.

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

Our research costs decreased to
$34.3 million for the year ended December 31, 2003
from $45.9 million for the year ended December 31,
2002. This decrease is due primarily to reduced activity in gene
discovery and in the study of preclinical therapeutic protein
drug candidates, including a decrease of $5.4 million in
services and expense recognition of license fees to Dyax
Corporation and a decrease of $4.0 million in collaboration
payments to Cambridge Antibody Technology.

Our drug development costs increased to
$56.5 million for the year ended December 31, 2003
from $53.7 million for the year ended December 31,
2002. This increase is due primarily to increased process
development activity, where we are evaluating ways to develop or
improve our product candidates and production processes.

Our manufacturing costs increased to
$60.0 million for the year ended December 31, 2003
from $56.7 million for the year ended December 31,
2002. This increase is due to the increased production and
quality assurance activities within our process development and
manufacturing facilities needed to support our increased
clinical activities.

35



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##### 



Results of Operations (continued)




Years
Ended December 31, 2003 and 2002 (continued)


Our clinical development costs increased to
$40.7 million for the year ended December 31, 2003
from $34.9 million for the year ended December 31,
2002. This increase is due primarily to the cost of continuing
ongoing trials from 2002 as well as initiating new trials in
2003.

The charge for construction design changes of
$14.2 million for the year ended December 31, 2002
related to our 2002 decision to modify the initial design of the
large-scale manufacturing facility mentioned above.

General and administrative expenses decreased to
$43.6 million for the year ended December 31, 2003
from $44.2 million for the year ended December 31,
2002. This decrease is due primarily to a $8.4 million
decrease in legal expenses associated with filing and
prosecuting patent applications relating to genes and proteins
we discovered, mostly offset by a $6.4 million increase in
facility and other costs relating primarily to the move of many
of our laboratories and offices to a new facility.

Investment income decreased to $64.3 million
for the year ended December 31, 2003 from
$82.2 million for the year ended December 31, 2002,
due to lower average cash and short-term investment balances and
reduced yield due to declining interest rates. Investment income
also includes realized gains and losses on our short-term and
restricted investments of $8.7 million and
$7.2 million for 2003 and 2002, respectively, along with a
realized gain of approximately $1.1 million relating to
sale of approximately 69% of our equity investment in Ciphergen
Biosystems, Inc. (Ciphergen) during the third
quarter of 2003. See Note C of the Notes to Consolidated
Financial Statements for additional discussion. The yield on our
investments was 4.6% for the year ended December 31, 2003,
as compared to 5.2% for the year ended December 31, 2002.
Our average cash balance decreased during 2003 as a result of
our net loss and capital expenditures in 2003. We believe
investment income will continue to be lower than the prior year
as our short-term investments mature and are reinvested at rates
lower than previously obtained. Interest expense decreased for
the year ended December 31, 2003 compared to the year ended
December 31, 2002, due to interest capitalized in 2003 of
$1.0 million relating primarily to the construction of our
large-scale manufacturing facility. Assuming the cost of the
manufacturing facility reaches approximately $233.4 million
when construction is complete in 2005, capitalized interest
could approximate $7.0 million. Total interest expense,
before capitalized interest, was $23.7 million for the year
ended December 31, 2003.

The charge for impaired investment of
$32.2 million for the year ended December 31, 2002
related 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 believed may not be
temporary. See Note C of the Notes to Consolidated Financial
Statements for additional discussion.

Net Income (Loss).We recorded a net loss of
$185.3 million, or $1.44 per share, for the year ended
December 31, 2003, compared to a net loss of
$219.7 million, or $1.71 per share, for the year ended
December 31, 2002. The decreased loss for 2003 compared to
2002 reflects the absence of both a charge for construction
design and a charge for impaired investment and an increase in
revenue, partially offset by a decrease in net investment income.

Excluding the charge for construction design
changes of $14.2 million and the charge for impaired
investment of $32.2 million incurred in 2002, our net loss
of $185.3 million, or $1.44 per share, for the year ended
December 31, 2003 would have compared to a pro forma net
loss of $173.3 million, or $1.35 per share, for the year
ended December 31, 2002 with the increased loss due
primarily to reduced net investment income partially offset by
increased revenue. These pro forma financial measures are not
prepared in accordance with generally accepted accounting
principles (GAAP). We refer to these non-GAAP
financial measures in making operational decisions because they
provide meaningful supplemental information regarding our
operational performance and facilitate comparisons to our
historical operating results.

36



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##### 



Results of Operations (continued)


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 $205.4 million for
the year ended December 31, 2002 from $146.3 million
for the year ended December 31, 2001, including the
$14.2 million charge for construction design changes in
2002. Excluding the $14.2 million charge, 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.

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

Our research 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
CAT 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 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.

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.

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.

Investment 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. Investment income
also includes realized gains and losses on our short-term and
restricted investments of $7.2 million and
$6.5 million for 2002 and 2001, respectively. See Note C of
the Notes to Consolidated Financial Statements for additional
discussion. 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

37



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##### 



Results of Operations (continued)




Years
Ended December 31, 2002 and 2001 (continued)


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 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 C 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 H
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 investment
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 pro forma 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. These pro
forma financial measures are not prepared in accordance with
GAAP. We refer to these non-GAAP financial measures in making
operational decisions because they provide meaningful
supplemental information regarding our operational performance
and facilitate comparisons to our historical operating results.

Liquidity and Capital Resources

We had working capital of $943.9 million at
December 31, 2003 as compared to $1.25 billion at
December 31, 2002. The decrease in working capital is
primarily due to our net loss, along with a net increase in our
restricted investments and capital expenditures during 2003. Our
capital expenditures for 2003 included approximately
$47.0 million for the construction of a large-scale
manufacturing facility that we anticipate completing by 2005 at
a total cost of approximately $233.4 million.

We expect to continue to incur substantial
expenses relating to our research and development efforts, which
may increase relative to historical levels as we focus on
development and clinical trials required for the development of
therapeutic protein, antibody and fusion protein product
candidates.

The amounts of expenditures that will be needed
to carry out our business plan 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.

38



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##### 



Liquidity and Capital Resources
(continued)


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 launch any
of our products commercially. 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 drugs and
the manufacturing facilities will meet all FDA requirements.

In addition, part of our business plan includes
collaborating with others. For example, GSK is developing
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 an aggregate of
$2.0 million from GSK in connection with development
milestones met by GSK during 2003 and 2002, 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 investment 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. In this
regard, in the second quarter of 2003, we restructured certain
of our outstanding lease obligations and may further modify our
lease financings and repurchase or restructure some or all of
our outstanding convertible debt instruments in the future
depending upon market and other conditions.

We have certain contractual obligations,
including some that are not recorded on our balance sheets,
which will have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial
condition, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
See Off-Balance Sheet Arrangements below for
additional discussion. Our operating leases, including those
with residual value guarantees, along with our unconditional
purchase obligations are not recorded on our balance sheets.

39



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##### 



Liquidity and Capital Resources
(continued)


These contractual obligations as of
December 31, 2003 are summarized as follows:

|                                                                                  |  |                        |       |          |         |   |        |             |  |         |            |  |       |            |       |  |  |   |      | 
|--------------------------------------------------------------------------------- |  | ---------------------- | ----- | -------- | ------- | - | ------ | ----------- |  | ------- | ---------- |  | ----- | ---------- | ----- |  |  | - | ---- | 
|                                                                                  |  |                       
|                                                                                  |  | Payments Due by Period |      
|                                                                                  |  | (dollars in millions)  |      
|                                                                                  |  |                        |      
|                                                                                  |  |                        |       | One year |         |   | Two to |             |  | Four to |            |  | After |           
|                                                                                  |  | Total                  |       |          | or less |   |        | three years |  |         | five years |  |       | five years |      
|Contractual Obligations                                                           |  |                        |       |          |         |   |        |             |  |         |            |  |       |            |      
|Long-term debt                                                                    |  | $                      | 503.0 |          |         | $ |       |             |  | $       | 3.1        |  |       | $          | 499.9 |  |  | $ |     | 
|Capital lease obligation                                                          |  |                        | 1.1   |          |         |   | 0.4    |             |  |         | 0.7        |  |       |            |      |  |  |   |     | 
|Operating leases                                                                  |  |                        | 139.5 |          |         |   | 17.2   |             |  |         | 32.8       |  |       |            | 28.7  |  |  |   | 60.8 | 
|Rental obligations for facility leases with
    residual value guarantees (1) (2) |  |                        | 42.6  |          |         |   | 7.1    |             |  |         | 15.1       |  |       |            | 14.5  |  |  |   | 5.9  | 
|Unconditional purchase obligations (3)                                            |  |                        | 51.2  |          |         |   | 51.2   |             |  |         |           |  |       |            |      |  |  |   |     | 
|Other long-term liabilities reflected on our
    balance sheets (4)               |  |                        |      |          |         |   |       |             |  |         |           |  |       |            |      |  |  |   |     | 
|                                                                                  |  |                        |       |          |         |   |        |             |  |         |            |  |       |            |      
|Total contractual cash obligations (5)                                            |  | $                      | 737.4 |          |         | $ | 75.9   |             |  | $       | 51.7       |  |       | $          | 543.1 |  |  | $ | 66.7 | 
|                                                                                  |  |                        |       |          |         |   |        |             |  |         |            |  |       |            |      



|    |                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 manufacturing space build-out and equipment. The
    amounts exclude anticipated, but not yet obligated costs,
    estimated at approximately $141.4 million associated with
    our construction of a large-scale manufacturing facility.
|   
|(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 H and I of the Notes to the
    Consolidated Financial Statements.                                                                                                                                                                                                                  

As of December 31, 2003, we had net
operating loss carry forwards for federal income tax purposes of
approximately $855.7 million, which expire, if unused, by
the year 2023. We also have available research and development
tax credit and other tax credit carry forwards of approximately
$34.0 million, the majority of which will expire, if
unused, by the year 2023.

Our unrestricted and restricted funds may be
invested in U.S. Treasury securities, government agency
obligations, high grade corporate 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.

Off-Balance Sheet Arrangements

We have entered into lease agreements for a
research and development and administrative facility and another
research facility (the Traville lease and the
9800 MCD lease, respectively) that have been
structured such that they are accounted for as operating leases.
This structure provides us with cost-effective financing and
future financing flexibility. None of our directors, officers or
employees has any financial interest with regard to these lease
arrangements.

The Traville lease has a term of approximately
seven years beginning in 2003 and relates to a research and
development and administrative facility located on the Traville
site in Rockville, Maryland. The total financed cost of the
Traville lease facility is $200.0 million. Construction of
the Traville facility was

40



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##### 



Off-Balance Sheet Arrangements
(continued)


substantially completed during 2003. Our rent
obligation approximates the lessors debt service costs
plus a return on the lessors equity investment. The rent
under this lease is currently based on the rate for short-term
commercial paper, but the lessor can lock in a fixed interest
rate at any time at our request. To the extent the lessor 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. The current
floating rate was approximately 1.1% as of December 31,
2003.

The 9800 MCD lease has a term of seven years
beginning in 2001 and relates to a $76.0 million research
facility located at 9800 Medical Center Drive, near our Traville
facility in Rockville, Maryland. The rent under this lease is
fixed. As of December 31, 2003, the weighted-average
interest rate was approximately 4.3%.

Our restricted investments with respect to the
Traville lease, the 9800 MCD lease and other leases for the
existing process development and manufacturing facility are
expected to reach approximately $295.0 million. These
restricted investments will serve as collateral for the duration
of the leases. We will be required to restrict investments equal
to 102% of the full amount of the $200.0 million financed
project cost for the Traville lease, or $204.0 million,
upon the payment of the remaining construction period
obligations, and 100% of the full amount of the approximately
$76.0 million financed project cost for the 9800 MCD lease
as collateral for the duration of the leases. In addition, we
are also required to maintain up to a maximum of
$15.0 million in restricted investments with respect to the
process development and manufacturing facility leases. Our
restricted investments for all of these leases aggregated
$280.8 million as of December 31, 2003 compared to
$205.4 million as of December 31, 2002. As of
December 31, 2002, restricted investments also included
approximately $21.6 million that related to the
construction of our large-scale manufacturing facility. As a
result of the lease restructurings in June 2003, we no longer
maintain any restricted investments with respect to this
facility.

In connection with the Traville lease, we must
maintain minimum levels of unrestricted cash, cash equivalents
and marketable securities and certain debt ratios. In connection
with the 9800 MCD lease, we must maintain minimum levels of
unrestricted cash, cash equivalents and marketable securities,
as well as comply with certain dividend restrictions.

Under the Traville and 9800 MCD leases, we have
the option to purchase the properties during and at the end of
the lease terms at an aggregate amount of approximately
$276.0 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. We are contingently liable for the
residual value guarantee associated with the Traville lease and
the 9800 MCD lease of approximately $175.5 million and
$64.6 million, respectively. See Note I of the Notes to the
Consolidated Financial Statements for additional discussion.

We have entered into various equipment leases
with rental payments aggregating $54.3 million over the
lease term which range from five to seven years. We must either
purchase the equipment at the end of the initial term at the
greater of fair market value or 20% of original cost or, in some
cases, extend the term of the lease for an additional year. We
have accounted for these leases as operating leases. Minimum
annual rentals are approximately $9.6 million.

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

41



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##### 



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


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.



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

We do not have operations of a material nature
that are 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 19 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
$19.8 million, or approximately 1.6% of the aggregate fair
value of $1.26 billion, at December 31, 2003. 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, 2003. We
believe that any market change related to our investment
securities held as of December 31, 2003 is not material to
our consolidated financial statements. However, given the
short-term nature of these securities, the general decline in
interest rates will adversely affect the interest earned from
our portfolio as securities mature and are replaced with
securities having a lower interest rate. As of December 31,
2003, the yield on comparable two-year investments was
approximately 1.8%, as compared to our current portfolio yield
of approximately 3.4%.

As of December 31, 2003, the market values
of our equity investments in Transgene, CAT, Corautus Genetics
Inc. (Corautus) and Ciphergen were approximately
$4.6 million, $11.6 million, $7.1 million and
$0.8 million, respectively. Our investments in Transgene,
Corautus 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.

The facility leases we entered into during 2003
and 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 $280.0 million. Together with the requirement
to maintain up to approximately $15.0 million in restricted
investments with respect to our process development and
manufacturing facility leases, our overall level of restricted
investments could reach $295.0 million. 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 Traville lease is based on a
floating interest rate. We can direct the lessor to lock in a
fixed interest rate. As of December 31, 2003, such a fixed
rate for seven years would be approximately 4.2% compared to the
floating rate as of December 31, 2003 of approximately
1.1%. If interest rates increase, our rent obligations would
also increase, which would result in an increase in our
operating expenses.

Changes in interest rates do not affect interest
expense incurred on the Companys Convertible Subordinated
Notes because they bear interest at fixed rates.

42



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##### 



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

During 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 are denominated primarily in euros, we
believe the foreign currency fluctuation risks for 2004 to be
immaterial to our operations as a whole.



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

The information required by this item is set
forth on pages F-1F-32.



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

None.

ITEM 9A.     CONTROLS
AND PROCEDURES

Our management, including our principal executive
and principal financial officers, has evaluated the
effectiveness of our disclosure controls and procedures as of
December 31, 2003. Our disclosure controls and procedures
are designed to provide reasonable assurance that the
information required to be disclosed in this annual report on
Form 10-K has been appropriately recorded, processed,
summarized and reported. Based on that evaluation, our principal
executive and principal financial officers have concluded that
our disclosure controls and procedures are effective at the
reasonable assurance level.

Our management, including our principal executive
and principal financial officers, has evaluated any changes in
our internal control over financial reporting that occurred
during the year ended December 31, 2003, and has concluded
that there was no change that occurred during the year ended
December 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.

43



---



##### 



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 2004 Proxy Statement).

ITEM
11.     EXECUTIVE
COMPENSATION

We incorporate herein by reference the
information concerning executive compensation to be contained in
the 2004 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 2004 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 2004 Proxy Statement.

ITEM
14.     PRINCIPAL ACCOUNTING FEES AND
SERVICES

We incorporate herein by reference the
information concerning certain relationships and related
transactions to be contained in the 2004 Proxy Statement.

44



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##### 



PART IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 15. | 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,
    2003 and 2002                                            |  |        | F-3 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001           |  |        | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002 and 2001 |  |        | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001           |  |        | 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* |  |  | 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).                                                                                                                                                             
|            | 10.2* |  |  | 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).                                                                                                             
|            | 10.3* |  |  | 2000 Stock Incentive Plan (Filed as
    Exhibit A to the Registrants Definitive Proxy
    Statement on Schedule 14A filed April 18, 2001).                                                                                                                                                                                                                 

45



---



##### 



|            |        |  |  |                                                                                                                                                                                                                                                                                                                                               
|----------- | ------ |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  | 
|            |        |  | 
|            | 10.4*  |  |  | 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).                                                                                                                                   
|            | 10.5*  |  |  | Amended and Restated 2000 Employee Stock Purchase
    Plan dated May 21, 2003 (Filed as Exhibit 10.7 to the
    Registrants Form 10-Q file on August 11, 2003).                                                                                                                                                                              
|            | 10.6*  |  |  | 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).                                                                                                 
|            | 10.7*  |  |  | 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).                                                                                                  
|            | 10.8*  |  |  | Amended and Restated Participation Agreement and
    Appendix A to the Amended and Restated Participation
    Agreement between Human Genome Sciences, Inc., Wachovia
    Development Corporation and the other parties named therein
    dated June 30, 2003 (Filed as Exhibit 10.2 to the
    Registrants Form 10-Q filed August 11, 2003).
|            | 10.9*  |  |  | Amended and Restated Lease Agreement between
    Wachovia Development Corporation and Human Genome Sciences, Inc.
    dated June 30, 2003 (Filed as Exhibit 10.3 to the
    Registrants Form 10-Q filed August 11, 2003).                                                                                                                    
|            | 10.10* |  |  | Amended and Restated Agency Agreement between
    Wachovia Development Corporation and Human Genome Sciences, Inc.
    dated June 30, 2003 (Filed as Exhibit 10.4 to the
    Registrants Form 10-Q filed August 11, 2003).                                                                                                                   
|            | 10.11* |  |  | Amended and Restated Security Agreement between
    Wachovia Development Corporation and Wachovia Bank, National
    Association, and accepted and agreed to by Human Genome
    Sciences, Inc., dated June 30, 2003 (Filed as
    Exhibit 10.5 to the Registrants Form 10-Q filed
    August 11, 2003).                                     
|            | 10.12* |  |  | Amended and Restated Assignment of Liquid
    Collateral Agreement between Human Genome Sciences, Inc. and
    Wachovia Development Corporation dated June 30, 2003 (Filed
    as Exhibit 10.6 to the Registrants Form 10-Q
    filed August 11, 2003).                                                                                      
|            | 10.13* |  |  | Omnibus Agreement between Maryland Economic
    Development Corporation, Wells Fargo Bank Northwest, National
    Association, Human Genome Sciences, Inc., Allfirst Bank, a
    division of M&T Bank and the other parties named therein
    dated June 26, 2003.                                                                            
|            | 10.14* |  |  | 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
    and amended by Exhibit 10.15 hereto).                  
|            | 10.15* |  |  | 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).                                                                
|            | 10.16* |  |  | 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 and amended by Exhibit 10.15 hereto).                                                                      
|            | 10.17* |  |  | 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).              
|            | 10.18* |  |  | 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).                                                                  
|            | 12.1   |  |  | Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                           
|            | 21.1   |  |  | Subsidiaries.                                                                                                                                                                                                                                                                                                                                 
|            | 23.1   |  |  | Consent of Ernst & Young LLP,
    Independent Auditors.                                                                                                                                                                                                                                                                                       

46



---



##### 



|            |      |  |  |                                                                 
|----------- | ---- |  |  | ----------------------------------------------------------------
|Exhibit No. |      |  | 
|            |      |  | 
|            | 31.1 |  |  | Rule 13a-14(a) Certification of Principal
    Executive Officer.
|            | 31.2 |  |  | Rule 13a-14(a) Certification of Principal
    Financial Officer.
|            | 32.1 |  |  | Section 1350 Certification of Chief
    Executive Officer.      
|            | 32.2 |  |  | Section 1350 Certification of Chief
    Financial Officer.      



---



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



|    |                    
|--- | -------------------
|(b) | Reports on Form 8-K



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We filed a Current Report on Form 8-K, on
    October 28, 2003, furnishing our financial results for the
    three and nine months ended September 30, 2003.
|
| | We filed a Current Report on Form 8-K, on
    February 10, 2004, furnishing our financial results for the
    year ended December 31, 2003.                 

47



---



##### 



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 12, 2004

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 12, 2004
|                                                          
|/s/ Craig A. Rosen, Ph.D.Craig A. Rosen, Ph.D.             |  | President, Research and Development and Director                                                      |  | March 12, 2004
|                                                          
|/s/ Steven C. MayerSteven C. Mayer                         |  | Executive Vice President and Chief Financial
    Officer (principal financial and accounting officer) |  | March 12, 2004
|                                                          
|/s/ Betsy S. AtkinsBetsy S. Atkins                         |  | Director                                                                                              |  | March 12, 2004
|                                                          
|/s/ Richard J. DanzigRichard J. Danzig                     |  | Director                                                                                              |  | March 12, 2004
|                                                          
|/s/ Jürgen Drews, M.D.Jürgen Drews, M.D.                   |  | Director                                                                                              |  | March 12, 2004
|                                                          
|/s/ Kathryn E. FalbergKathryn E. Falberg                   |  | Director                                                                                              |  | March 12, 2004
|                                                          
|/s/ Richard C. HolbrookeRichard C. Holbrooke               |  | Director                                                                                              |  | March 12, 2004
|                                                          
|/s/ Argeris N. Karabelas, Ph.D.Argeris N. Karabelas, Ph.D. |  | Director                                                                                              |  | March 12, 2004
|                                                          
|/s/ Augustine LawlorAugustine Lawlor                       |  | Director                                                                                              |  | March 12, 2004
|                                                          
|/s/ Max Link, Ph.D.Max Link, Ph.D.                         |  | Director                                                                                              |  | March 12, 2004

48



---



##### 



|                                                               |  |          |  |               
|-------------------------------------------------------------- |  | -------- |  | --------------
|Signature                                                      |  | Title    |  | Date          
|                                                               |  |          |  |               
|/s/ Laura DAndrea Tyson, Ph.D.Laura DAndrea Tyson, Ph.D.     |  | Director |  | March 12, 2004
|                                                              
|/s/ James Barnes Wyngaarden, M.D.James Barnes Wyngaarden, M.D. |  | Director |  | March 12, 2004
|                                                              
|/s/ William D. YoungWilliam D. Young                           |  | Director |  | March 12, 2004

49



---



##### 



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                         |  |        |     | 
|-------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                                                                         |  | Page   |    
|                                                                                                         |  | Number |    
|                                                                                                         |  |        |    
|Report of Ernst & Young LLP, Independent
    Auditors                                                    |  |        | F-2 | 
|Consolidated Balance Sheets at December 31,
    2003 and 2002                                            |  |        | F-3 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001           |  |        | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002 and 2001 |  |        | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001           |  |        | 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, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2003. 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, 2003 and 2002, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

McLean, Virginia 
 February 2, 2004

F-2



---



##### 



HUMAN GENOME SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                     |                                                                                                                                                                |                                            |         |           |           |  |         |           |           | 
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | --------- | --------- |  | ------- | --------- | --------- | 
|                                                                                     |                                                                                                                                                                |                                           
|                                                                                     |                                                                                                                                                                | December 31,                               |        
|                                                                                     |                                                                                                                                                                |                                            |        
|                                                                                     |                                                                                                                                                                | 2003                                       |         |           | 2002      | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                |                                           
|                                                                                     |                                                                                                                                                                | (dollars in thousands, except              |        
|                                                                                     |                                                                                                                                                                | share and per share amounts)               |        
|Assets                                                                               |                                                                                                                                                                |                                            |         |           |           |  |         |          
|Current assets:                                                                      |                                                                                                                                                                |                                            |         |           |           |  |         |          
|                                                                                     | Cash and cash equivalents                                                                                                                                      |                                            | $       | 33,269    |           |  | $       | 25,205    |          
|                                                                                     | Short-term investments                                                                                                                                         |                                            |         | 948,413   |           |  |         | 1,261,183 |          
|                                                                                     | Prepaid expenses and other current assets                                                                                                                      |                                            |         | 6,297     |           |  |         | 10,528    |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total current assets                       |         |           | 987,979   |  |         |           | 1,296,916 | 
|Long-term investments                                                                |                                                                                                                                                                |                                            | 24,055  |           |           |  | 15,071  |          
|Property, plant and equipment (net of accumulated
    depreciation and amortization) |                                                                                                                                                                |                                            | 154,717 |           |           |  | 126,437 |          
|Restricted investments                                                               |                                                                                                                                                                |                                            | 280,776 |           |           |  | 205,352 |          
|Other assets                                                                         |                                                                                                                                                                |                                            | 18,677  |           |           |  | 18,411  |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | TOTAL ASSETS                               |         | $         | 1,466,204 |  |         | $         | 1,662,187 | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|Liabilities and Stockholders
    Equity                                             |                                                                                                                                                                |                                            |         |           |           |  |         |          
|Current liabilities:                                                                 |                                                                                                                                                                |                                            |         |           |           |  |         |          
|                                                                                     | Current portion of long-term debt                                                                                                                              |                                            | $       |          |           |  | $       | 448       |          
|                                                                                     | Current portion of capital lease obligation                                                                                                                    |                                            |         | 338       |           |  |         | 241       |          
|                                                                                     | Accounts payable and accrued expenses                                                                                                                          |                                            |         | 32,121    |           |  |         | 34,570    |          
|                                                                                     | Accrued payroll and related taxes                                                                                                                              |                                            |         | 9,060     |           |  |         | 7,911     |          
|                                                                                     | Deferred revenues                                                                                                                                              |                                            |         | 2,568     |           |  |         | 2,568     |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total current liabilities                  |         |           | 44,087    |  |         |           | 45,738    | 
|Long-term debt, net of current portion                                               |                                                                                                                                                                |                                            | 503,020 |           |           |  | 503,020 |          
|Capital lease obligation, net of current portion                                     |                                                                                                                                                                |                                            | 644     |           |           |  | 261     |          
|Deferred revenues                                                                    |                                                                                                                                                                |                                            | 7,703   |           |           |  | 10,271  |          
|Other liabilities                                                                    |                                                                                                                                                                |                                            | 7,417   |           |           |  | 2,344   |          
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total liabilities                          |         |           | 562,871   |  |         |           | 561,634   | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|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 129,433,448
    and 128,850,551 at December 31, 2003 and 2002, respectively |                                            |         | 1,294     |           |  |         | 1,289     |          
|                                                                                     | Additional paid-in capital                                                                                                                                     |                                            |         | 1,762,191 |           |  |         | 1,757,685 |          
|                                                                                     | Unearned portion of compensatory stock options                                                                                                                 |                                            |         |          |           |  |         | (229      | )        
|                                                                                     | Accumulated other comprehensive income (loss)                                                                                                                  |                                            |         | 26,719    |           |  |         | 43,355    |          
|                                                                                     | Retained deficit                                                                                                                                               |                                            |         | (886,871  | )         |  |         | (701,547  | )        
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | Total stockholders equity                 |         |           | 903,333   |  |         |           | 1,100,553 | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 
|                                                                                     |                                                                                                                                                                | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |         | $         | 1,466,204 |  |         | $         | 1,662,187 | 
|                                                                                     |                                                                                                                                                                |                                            |         |           |           | 

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,                                    |                               
|                                                                           |                            |                                                            |                               
|                                                                           |                            | 2003                                                       |                                |        | 2002    |         |             | 2001   |        
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|                                                                           |                            |                                                           
|                                                                           |                            | (dollars in thousands, except share and per share amounts) |                               
|Revenue  research and development
    collaborative contracts             |                            | $                                                          | 8,168                          |        |         | $       | 3,568       |        |         | $       | 12,818      |       
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|Costs and expenses:                                                        |                            |                                                            |                                |        |         |         |             |        |         |         |             |       
|                                                                           | Research and development:  |                                                            |                                |        |         |         |             |        |         |         |             |        |        
|                                                                           |                            | Direct expenditures                                        |                                |        | 191,483 |         |             |        | 191,162 |         |             |        | 146,276 |        
|                                                                           |                            | Charge for construction design changes                     |                                |        |        |         |             |        | 14,238  |         |             |        |        |        
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|                                                                           |                            |                                                            | Total research and development |        |         | 191,483 |             |        |         | 205,400 |             |        |         | 146,276 | 
|                                                                           | General and administrative |                                                            |                                | 43,608 |         |         |             | 44,175 |         |         |             | 38,714 |        
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|                                                                           |                            |                                                            | Total costs and expenses       |        |         | 235,091 |             |        |         | 249,575 |             |        |         | 184,990 | 
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|Income (loss) from operations                                              |                            |                                                            | (226,923                       | )      |         |         | (246,007    | )      |         |         | (172,172    | )     
|Investment income                                                          |                            |                                                            | 64,297                         |        |         |         | 82,195      |        |         |         | 105,866     |       
|Interest expense                                                           |                            |                                                            | (22,698                        | )      |         |         | (23,746     | )      |         |         | (24,638     | )     
|Charge for impaired investments                                            |                            |                                                            |                               |        |         |         | (32,158     | )      |         |         | (22,314     | )     
|Debt conversion expenses                                                   |                            |                                                            |                               |        |         |         |            |        |         |         | (3,894      | )     
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|Income (loss) before taxes                                                 |                            |                                                            | (185,324                       | )      |         |         | (219,716    | )      |         |         | (117,152    | )     
|Provision for income taxes                                                 |                            |                                                            |                               |        |         |         |            |        |         |         |            |       
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|Net income (loss)                                                          |                            | $                                                          | (185,324                       | )      |         | $       | (219,716    | )      |         | $       | (117,152    | )     
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|Basic and diluted net income (loss) per share                              |                            | $                                                          | (1.44                          | )      |         | $       | (1.71       | )      |         | $       | (0.92       | )     
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        
|Weighted average shares of common stock
    outstanding, basic and diluted |                            |                                                            | 129,112,670                    |        |         |         | 128,591,153 |        |         |         | 126,990,788 |       
|                                                                           |                            |                                                            |                                |        |         |         |             |        |        

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)

|                                                                                                                           |                                       |              |             |   |            |            |       |              |       |   |               |   |  |          |      |   |           |   |        |         |   |   |          |          |   |   |           |          |  
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------ | ----------- | - | ---------- | ---------- | ----- | ------------ | ----- | - | ------------- | - |  | -------- | ---- | - | --------- | - | ------ | ------- | - | - | -------- | -------- | - | - | --------- | -------- | -
|                                                                                                                           |                                       |              |             |   |            |            |       | Unearned     |       |   | Accumulated   |   |  |          |      |  
|                                                                                                                           |                                       |              |             |   |            | Portion of |       |              | Other |   |               |   |  |         
|                                                                                                                           |                                       | Common Stock |             |   | Additional |            |       | Compensatory |       |   | Comprehensive |   |  | Retained |      |   |          
|                                                                                                                           |                                       |              |             |   | Paid-In    |            |       | Stock        |       |   | Income        |   |  | Earnings |      |   |          
|                                                                                                                           |                                       | Shares       |             |   | Amount     |            |       | Capital      |       |   | Options       |   |  | (Loss)   |      |   | (Deficit) |   |        | Total   |  
|                                                                                                                           |                                       |              |             |   |            |            |       |              |       |   |               |   |  |          |      |   |           |   |        |         |  
|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 |         
|                                                                                                                          
|Comprehensive income (loss):                                                                                               |                                       |              |             |   |            |            |       |              |       |   |               |   |  |          |      |   |           |   |        |         |   |   |          |          |   |   |           |         
|                                                                                                                           | Net loss                              |              |             |  |            |            |       |             |       |   |               |  |  |          |      |  |           |   |        |        |   |   |          | (185,324 | ) |   |           | (185,324 | )
|                                                                                                                           | Unrealized gain (loss) on investments |              |             |  |            |            |       |             |       |   |               |  |  |          |      |  |           |   |        | (16,636 | ) |   |          |         |   |   |           | (16,636  | )
|                                                                                                                           | Cumulative translation adjustment     |              |             |  |            |            |       |             |       |   |               |  |  |          |      |  |           |   |        |        |   |   |          |         |   |   |           |         |  
|                                                                                                                           |                                       |              |             |   |            |            |       |              |       |   |               |   |  |          |      |   |           |   |        |         |  
|Comprehensive income (loss)                                                                                                |                                       |              |             |   |            |            |       |              |       |   |               |   |  |          |      |   |           |   |        |         |   |   |          |          |   |   | (201,960  | )       
|Exercises of 485,534 and 97,363 options relating
    to employee stock option and stock purchase plans, respectively       |                                       |              | 582,897     |   |            |            | 5     |              |       |   | 4,506         |   |  |          |     |   |           |   |       |         |   |   |         |          |   |   | 4,511     |         
|Compensatory stock options issued                                                                                          |                                       |              |            |   |            |            |      |              |       |   |              |   |  |          |     |   |           |   |       |         |   |   |         |          |   |   |          |         
|Compensatory stock options earned                                                                                          |                                       |              |            |   |            |            |      |              |       |   |              |   |  |          | 229  |   |           |   |       |         |   |   |         |          |   |   | 229       |         
|                                                                                                                           |                                       |              |             |   |            |            |       |              |       |   |               |   |  |          |      |   |           |   |        |         |  
|Balance  December 31, 2003                                                                                                |                                       |              | 129,433,448 |   |            | $          | 1,294 |              |       | $ | 1,762,191     |   |  | $        |     |   |           | $ | 26,719 |         |   | $ | (886,871 | )        |   | $ | 903,333   |         
|                                                                                                                           |                                       |              |             |   |            |            |       |              |       |   |               |   |  |          |      |   |           |   |        |         |  

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,                                                  |                                          
|                                                                 |                                                                                                            |                                                                          |                                          
|                                                                 |                                                                                                            | 2003                                                                     |                                           |          | 2002     |         |         | 2001     |         
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|                                                                 |                                                                                                            |                                                                         
|                                                                 |                                                                                                            | (dollars in thousands)                                                   |                                          
|Cash flows from operating
    activities:                        |                                                                                                            |                                                                          |                                           |          |          |         |         |          |          |        |          |           
|                                                                 | Net income (loss)                                                                                          |                                                                          | $                                         | (185,324 | )        |         | $       | (219,716 | )        |        | $        | (117,152   | )       
|                                                                 | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                          |                                           |          |          |         |         |          |          |        |          |            |         
|                                                                 |                                                                                                            | Accrued interest on short-term and restricted
    investments            |                                           |          | 7,088    |         |         |          | 12,050   |        |          |            | 1,016    |        
|                                                                 |                                                                                                            | Depreciation and amortization                                            |                                           |          | 22,477   |         |         |          | 18,837   |        |          |            | 13,237   |        
|                                                                 |                                                                                                            | Loss due to disposal and write-down of property,
    plant and equipment |                                           |          | 456      |         |         |          | 214      |        |          |            | 382      |        
|                                                                 |                                                                                                            | Compensation expense related to stock options                            |                                           |          | 229      |         |         |          | 265      |        |          |            | 225      |        
|                                                                 |                                                                                                            | 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    |        
|                                                                 |                                                                                                            | Gain on sale of investments                                              |                                           |          | (9,424   | )       |         |          | (7,253   | )      |          |            | (6,469   | )      
|                                                                 |                                                                                                            | Changes in operating assets and liabilities:                             |                                           |          |          |         |         |          |          |        |          |            |          |        
|                                                                 |                                                                                                            |                                                                          | Prepaid expenses and other current assets |          |          | 4,132   |         |          |          | (281   | )        |            |          | 4,450   |  
|                                                                 |                                                                                                            |                                                                          | Other assets                              |          |          | 1,558   |         |          |          | 5,948  |          |            |          | 3,034   |  
|                                                                 |                                                                                                            |                                                                          | Accounts payable and accrued expenses     |          |          | (10,333 | )       |          |          | (2,097 | )        |            |          | 5,866   |  
|                                                                 |                                                                                                            |                                                                          | Accrued payroll and related taxes         |          |          | 1,149   |         |          |          | 2,311  |          |            |          | 1,780   |  
|                                                                 |                                                                                                            |                                                                          | Deferred revenues                         |          |          | (2,568  | )       |          |          | (2,568 | )        |            |          | (11,818 | )
|                                                                 |                                                                                                            |                                                                          | Other liabilities                         |          |          | (644    | )       |          |          | 373    |          |            |          | (369    | )
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|                                                                 |                                                                                                            | Net cash provided by (used in) operating
    activities                  |                                           |          | (171,204 | )       |         |          | (145,521 | )      |          |            | (79,629  | )      
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|Cash flows from investing
    activities:                        |                                                                                                            |                                                                          |                                           |          |          |         |         |          |          |        |          |           
|                                                                 | Capital expenditures  property, plant
    and equipment                                                   |                                                                          |                                           | (67,801  | )        |         |         | (58,704  | )        |        |          | (64,110    | )       
|                                                                 | Proceeds from sale of property, plant and
    equipment                                                    |                                                                          |                                           | 29,157   |          |         |         |         |          |        |          |           |         
|                                                                 | Purchase of investments                                                                                    |                                                                          |                                           | (702,894 | )        |         |         | (548,018 | )        |        |          | (1,315,776 | )       
|                                                                 | Proceeds from sale and maturities of investments                                                           |                                                                          |                                           | 993,195  |          |         |         | 744,139  |          |        |          | 1,162,335  |         
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|                                                                 |                                                                                                            | Net cash provided by (used in) investing
    activities                  |                                           |          | 251,657  |         |         |          | 137,417  |        |          |            | (217,551 | )      
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|Cash flows from financing
    activities:                        |                                                                                                            |                                                                          |                                           |          |          |         |         |          |          |        |          |           
|                                                                 | Proceeds from sale of restricted investments                                                               |                                                                          |                                           | 22,247   |          |         |         |         |          |        |          |           |         
|                                                                 | Restricted investments                                                                                     |                                                                          |                                           | (98,488  | )        |         |         | (58,581  | )        |        |          | (129,394   | )       
|                                                                 | Proceeds from issuance of common stock                                                                     |                                                                          |                                           | 4,511    |          |         |         | 4,256    |          |        |          | 22,394     |         
|                                                                 | Repayment of long-term debt                                                                                |                                                                          |                                           | (448     | )        |         |         | (444     | )        |        |          | (1,368     | )       
|                                                                 | Payments on capital lease                                                                                  |                                                                          |                                           | (211     | )        |         |         | (241     | )        |        |          |           |         
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|                                                                 |                                                                                                            | Net cash provided by (used in) financing
    activities                  |                                           |          | (72,389  | )       |         |          | (55,010  | )      |          |            | (108,368 | )      
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                                            |                                                                          |                                          |          |          |         |        |          |          |        |         |           
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                                            |                                                                          | 8,064                                     |          |          |         | (63,114 | )        |          |        | (405,548 | )         
|Cash and cash equivalents  beginning
    of year                |                                                                                                            |                                                                          | 25,205                                    |          |          |         | 88,319  |          |          |        | 493,867  |           
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|Cash and cash equivalents  end of
    year                      |                                                                                                            | $                                                                        | 33,269                                    |          |          | $       | 25,205  |          |          | $      | 88,319   |           
|                                                                 |                                                                                                            |                                                                          |                                           |          |          |         |         |          |         
|Supplemental disclosures of cash flow information:               |                                                                                                            |                                                                          |                                           |          |          |         |         |          |          |        |          |           
|                                                                 | Cash paid during the year for:                                                                             |                                                                          |                                           |          |          |         |         |          |          |        |          |            |         
|                                                                 |                                                                                                            |                                                                          | Interest                                  |          | $        | 21,486  |         |          | $        | 21,574 |          |            | $        | 22,795  |  
|                                                                 |                                                                                                            |                                                                          | Income taxes                              |          | $        |        |         |          | $        |       |          |            | $        | 75      |  

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 November 2003, the Company terminated an
existing capital lease for computer equipment with a remaining
obligation and net book value of $269 and $254, respectively.
Principal payments of $211 and $241 were made for 2003 and 2002,
respectively.

In December 2003, the Company entered into a
capital lease for computer equipment with an aggregate value of
$982, with thirty-six monthly payments of $29 of principal and
interest. No principal payments were made during 2003.

In February 2003, the Company tendered its equity
interest in Vascular Genetics, Inc. (VGI), a
privately-held company, in exchange for approximately an 18%
equity interest in Corautus Genetics Inc.
(Corautus), a publicly-traded company that resulted
from the merger of VGI and GenStar Therapeutics Corporation. As
of the date of this exchange, the Company had no carrying value
in its equity interest in VGI. Immediately following this
transaction, the market value of the Companys investment
in Corautus was approximately $5,659.

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.

In 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.

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 a mid-stage development
biopharmaceutical company with a significant product pipeline
derived from proprietary genomic technology. The Companys
goal is to build a global biopharmaceutical company that
discovers, develops, manufactures and markets gene-based protein
and antibody drugs to treat and cure disease. The success of the
Companys drug discovery efforts derives from its expertise
in genomics, the systematic collection and understanding of
human genes and their functions. The Company focuses its
internal product development efforts on novel human protein and
antibody drugs discovered through genomics-based research, and
on new long-acting versions of existing protein drugs created
using our albumin fusion technology. The Company uses
collaborations for the development of other protein and antibody
drugs, gene therapy products, small molecule drugs, and
diagnostic products discovered using its genomics-based
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, which operates primarily in the
United States, 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. Such
estimates are based on historical experience and on various
other assumptions that the Company believes to be reasonable
under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.

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 and Long-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 and
long-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 C,
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.

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)


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 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. The Company currently has no
investments for which it accounts under the equity method of
accounting.

Impairment of Investments Other than
Temporary

Periodically, the Company evaluates 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
Securitiesand Emerging Issues Task Force No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. This evaluation consists
of a review of several factors, including but not limited to the
length of time and extent that a security has been in an
unrealized loss position, the existence of an event that would
impair the issuers future earnings potential, the near
term prospects for recovery of the market value of a security
and the intent and ability of the Company to hold the security
until the market value recovers. If the Company determines that
such an impairment exists, the Company will recognize a charge
in the consolidated statement of operations equal to the amount
of such impairment.

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                               
|Computer equipment and software |  | 3 - 5 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 certain other accrued liabilities reflected in the
consolidated balance sheets at December 31, 2003 and 2002
approximate their respective fair values. The fair value of the
Companys investments is based on quoted market prices. See
Note C, 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 H, Long-Term Debt, for additional discussion.

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

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 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 J,
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, |         
|                                                                                                                                                    |                                 |                         |         
|                                                                                                                                                    |                                 | 2003                    |          |       | 2002 |   |          | 2001  |  
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|Net income (loss), as reported                                                                                                                      |                                 | $                       | (185,324 | )     |      | $ | (219,716 | )     |   | $ | (117,152 | )    
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                                 |                         | (109,152 | )     |      |   | (118,897 | )     |   |   | (125,688 | )    
|Add: Stock-based non-employee compensation
    included in net income (loss)                                                                        |                                 |                         | 229      |       |      |   | 266      |       |   |   | 225      |      
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|Pro forma net income (loss)                                                                                                                         |                                 | $                       | (294,247 | )     |      | $ | (338,347 | )     |   | $ | (242,615 | )    
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|Net income (loss) per share:                                                                                                                        |                                 |                         |          |       |      |   |          |       |   |   |          |      
|                                                                                                                                                    | Basic and diluted  as reported |                         | $        | (1.44 | )    |   | $        | (1.71 | ) |   | $        | (0.92 | )
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  
|                                                                                                                                                    | Basic and diluted  pro forma   |                         | $        | (2.28 | )    |   | $        | (2.63 | ) |   | $        | (1.91 | )
|                                                                                                                                                    |                                 |                         |          |       |      |   |          |       |  

For the years ended December 31, 2003, 2002
and 2001, diluted net income (loss) per share is the same as
basic net income (loss) per share as the inclusion of
outstanding stock options and convertible debt would be
antidilutive.

The effect of applying SFAS No. 123 on 2003,
2002 and 2001 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 license fees, research payments, additional payments
and milestone payments. License fees, research payments, and
additional payments are recognized in full if no continuing
obligation exists on the part of the Company. Revenue associated
with performance milestones is recognized based upon the
achievement of the milestones, as defined in the respective
agreements. Revenue from non-refundable, upfront license fees
where the Company has a continuing

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)




Revenue Recognition (continued)


obligation is recognized ratably over the term of
the continuing obligation. 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 $191,483, $191,162 and $146,276 for 2003, 2002
and 2001, respectively.

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.

Capitalization of Interest

Interest costs associated with the construction
of significant facilities are capitalized as part of the cost of
the facilities using the Companys weighted-average
borrowing rate. Capitalized interest costs were $1,025 for 2003.
There were no capitalized interest costs for 2002 and 2001.

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 and restricted
securities, and on the Companys long-term investments in
Transgene, S.A. (Transgene), Cambridge Antibody
Technology (CAT), Corautus Genetics Inc.
(Corautus) and Ciphergen Biosystems, Inc.
(Ciphergen), along with the activity for the
Companys cumulative translation adjustment to be included
in other comprehensive income. For 2003, the Company had no
material currency translation adjustment.

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)


Comprehensive income (loss) included
unrealized gains (losses) on the following:

|                                                                  |                              |                         |         |         |      |   |         |         |   |   |         |         |  
|----------------------------------------------------------------- | ---------------------------- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                  |                              |                        
|                                                                  |                              | Unrealized Gain (Loss)  |        
|                                                                  |                              | Year Ended December 31, |        
|                                                                  |                              |                         |        
|                                                                  |                              | 2003                    |         |         | 2002 |   |         | 2001    |  
|                                                                  |                              |                         |         |         |      |   |         |         |  
|Available-for-sale short-term investments                         |                              | $                       | (17,161 | )       |      | $ | 13,264  |         |   | $ | 34,373  |        
|Transgene                                                         |                              |                         | 1,630   |         |      |   | (443    | )       |   |   | (9,032  | )      
|CAT                                                               |                              |                         | 200     |         |      |   | (27,333 | )       |   |   | (39,352 | )      
|Ciphergen                                                         |                              |                         | 1,802   |         |      |   | (978    | )       |   |   | (1,129  | )      
|Corautus                                                          |                              |                         | 7,133   |         |      |   |        |         |   |   |        |        
|Available-for-sale restricted investments                         |                              |                         | (434    | )       |      |   | 1,817   |         |   |   | 3,182   |        
|                                                                  |                              |                         |         |         |      |   |         |         |  
|                                                                  | Subtotal                     |                         |         | (6,830  | )    |   |         | (13,673 | ) |   |         | (11,958 | )
|Reclassification adjustments for (gains) realized
    in net loss |                              |                         | (9,806  | )       |      |   | (7,200  | )       |   |   | (6,476  | )      
|Impairment charge relating to investment in CAT                   |                              |                         |        |         |      |   | 32,158  |         |   |   |        |        
|Impairment charge relating to investment in
    Transgene         |                              |                         |        |         |      |   |        |         |   |   | 22,314  |        
|                                                                  |                              |                         |         |         |      |   |         |         |  
|                                                                  | Total unrealized gain (loss) |                         | $       | (16,636 | )    |   | $       | 11,285  |   |   | $       | 3,880   |  
|                                                                  |                              |                         |         |         |      |   |         |         |  

The effect of income taxes on items in
comprehensive income is $0 for all periods presented.

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 believed 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, 2003, the Companys investment in CAT had
a market value of $11,607 and an unrealized loss of $1,472.

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 December 31, 2003, the
Companys investment in Transgene had a market value of
$4,552 and an unrealized gain of $1,187.

In February 2003, the Company tendered its equity
interest in Vascular Genetics, Inc. (VGI), a
privately-held company, in exchange for approximately an 18%
equity interest in Corautus, a publicly-traded company that
resulted from the merger of VGI and GenStar Therapeutics
Corporation. As of the date of this exchange, the Company had no
carrying value in its equity interest in VGI. Immediately
following this transaction, the market value of the
Companys investment in Corautus was approximately $5,659.
As a result, the Company recorded an unrealized gain equal to
the market value for this long-term investment as of the date of
this exchange. The Company is adjusting this unrealized gain to
reflect changes in market value in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and
Equity Securities.

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)


Related Parties

The Company is a related party to Corautus as a
result of its 18% equity interest as of December 31, 2003
and was a related party to VGI in 2002 and 2001 and Transgene
during part of 2001. During 2003 the Company had no related
party transactions, other than the Corautus equity exchange,
described herein.

Recent Accounting Pronouncements

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 adoption of EITF 00-21 did not
have a material effect on its financial condition, results of
operations or liquidity.

In December 2003, the Financial Accounting
Standards Board (FASB) revised the June 2003
issuance of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51(FIN 46). FIN 46,
as revised, 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.
FIN 46, as originally issued and as revised, requires the
consolidation of certain variable interest entities in which the
total equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated
financial support provided by any parties, including equity
holders, or if certain other conditions are met. FIN 46, as
revised, is effective for fiscal periods beginning after
December 31, 2003. As a result of the requirements set
forth in the initial release of FIN 46, the Company
restructured certain of its leases in order to comply with these
requirements. See Note I, Commitments and Other Matters,
for additional discussion.

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 prior period balances have been
reclassified to conform to 2003 presentation.

F-13



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE C) 
Investments

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

|                           |                                   |                   |         |           |            |   |        |            |  |   |            |        |   |   |         |           | 
|-------------------------- | --------------------------------- | ----------------- | ------- | --------- | ---------- | - | ------ | ---------- |  | - | ---------- | ------ | - | - | ------- | --------- | 
|                           |                                   |                  
|                           |                                   | December 31, 2003 |        
|                           |                                   |                   |        
|                           |                                   |                   |         | Gross     |            |   | Gross  |            |  |  
|                           |                                   | Amortized         |         |           | Unrealized |   |        | Unrealized |  |   |           
|Available for Sale         |                                   | Cost              |         |           | Gains      |   |        | Losses     |  |   | Fair Value |       
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       
|U.S. Treasury and agencies |                                   | $                 | 315,090 |           |            | $ | 4,528  |            |  | $ | (473       | )      |   | $ | 319,145 |          
|Corporate debt securities  |                                   |                   | 618,132 |           |            |   | 11,993 |            |  |   | (857       | )      |   |   | 629,268 |          
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       
|                           | Subtotal  Short-term investments |                   |         | 933,222   |            |   |        | 16,521     |  |   |            | (1,330 | ) |   |         | 948,413   | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       
|Investment in Transgene    |                                   |                   | 3,365   |           |            |   | 1,187  |            |  |   |           |        |   |   | 4,552   |          
|Investment in CAT          |                                   |                   | 13,079  |           |            |   |       |            |  |   | (1,472     | )      |   |   | 11,607  |          
|Investment in Ciphergen    |                                   |                   | 311     |           |            |   | 452    |            |  |   |           |        |   |   | 763     |          
|Investment in Corautus     |                                   |                   |        |           |            |   | 7,133  |            |  |   |           |        |   |   | 7,133   |          
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       
|                           | Subtotal  Long-term investments  |                   |         | 16,755    |            |   |        | 8,772      |  |   |            | (1,472 | ) |   |         | 24,055    | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       
|Cash and cash equivalents  |                                   |                   | 8,907   |           |            |   |       |            |  |   |           |        |   |   | 8,907   |          
|U.S. Treasury and agencies |                                   |                   | 110,982 |           |            |   | 1,612  |            |  |   | (96        | )      |   |   | 112,498 |          
|Corporate debt securities  |                                   |                   | 156,659 |           |            |   | 2,948  |            |  |   | (236       | )      |   |   | 159,371 |          
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       
|                           | Subtotal  Restricted investments |                   |         | 276,548   |            |   |        | 4,560      |  |   |            | (332   | ) |   |         | 280,776   | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       
|                           | Total                             |                   | $       | 1,226,525 |            |   | $      | 29,853     |  |   | $          | (3,134 | ) |   | $       | 1,253,244 | 
|                           |                                   |                   |         |           |            |   |        |            |  |   |            |       

|                           |                                   |                   |         |           |            |   |        |            |  |   |            |        |   |   |         |           | 
|-------------------------- | --------------------------------- | ----------------- | ------- | --------- | ---------- | - | ------ | ---------- |  | - | ---------- | ------ | - | - | ------- | --------- | 
|                           |                                   |                  
|                           |                                   | December 31, 2002 |        
|                           |                                   |                   |        
|                           |                                   |                   |         | Gross     |            |   | Gross  |            |  |  
|                           |                                   | Amortized         |         |           | Unrealized |   |        | Unrealized |  |   |           
|Available for Sale         |                                   | Cost              |         |           | Gains      |   |        | Losses     |  |   | Fair 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-14



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




(NOTE C)  Investments
(continued)


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. Following the impairment
charge, the fair value of this investment declined an additional
$1,672 by December 31, 2002. As of December 31, 2003,
the Companys investment in CAT was in an unrealized loss
position for more than twelve months. Because the fair value of
this investment increased during 2003, the Company does not
believe that the unrealized loss is other-than-temporary and has
not reduced further the carrying value of the investment. 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.

The Companys restricted investments with
respect to leases relating to existing or recently completed
facilities and other leases for the existing process development
and manufacturing facility will reach approximately $295,000. In
addition, as described in Note H, Long-Term Debt, the Company
had pledged as of December 31, 2003 and 2002, $651 and
$646, respectively, in connection with a 1994 loan agreement. At
December 31, 2003 and 2002, the Company had pledged
$280,776 and $205,352, respectively, in connection with all of
these leases, which is classified as Restricted investments on
the consolidated balance sheets. As of December 31, 2002,
restricted investments also included approximately $21,636 that
related to the construction of the Companys large-scale
manufacturing facility. As a result of the lease restructurings
in June 2003, the Company no longer maintains any restricted
investments with respect to the large-scale manufacturing
facility. See Note I, Commitments and Other Matters, for
additional discussion.

The following table summarizes maturities of the
Companys short-term and restricted investment securities
at December 31, 2003:

|                           |       |             |         |         |             |   |         |           |  |   |         |         |  |   |         |         | 
|-------------------------- | ----- | ----------- | ------- | ------- | ----------- | - | ------- | --------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                           |       |             |         |        
|                           |       | Short-term  |         |         | Restricted  |  
|                           |       | Investments |         |         | Investments |  
|                           |       |             |         |         |             |  
|                           |       | Amortized   |         |         | Fair        |   |         | Amortized |  |   | Fair    |        
|                           |       | Cost        |         |         | Value       |   |         | Cost      |  |   | Value   |        
|                           |       |             |         |         |             |   |         |           |  |   |         |        
|Less than one year         |       | $           | 164,272 |         |             | $ | 167,363 |           |  | $ | 73,758  |         |  | $ | 74,663  |        
|Due in one to two years    |       |             | 629,132 |         |             |   | 639,009 |           |  |   | 158,225 |         |  |   | 160,807 |        
|Due in three to five years |       |             | 127,878 |         |             |   | 129,842 |           |  |   | 42,664  |         |  |   | 43,369  |        
|Due after five years       |       |             | 11,940  |         |             |   | 12,199  |           |  |   | 1,901   |         |  |   | 1,937   |        
|                           |       |             |         |         |             |   |         |           |  |   |         |        
|                           | Total |             | $       | 933,222 |             |   | $       | 948,413   |  |   | $       | 276,548 |  |   | $       | 280,776 | 
|                           |       |             |         |         |             |   |         |           |  |   |         |        

The Companys short-term investments include
mortgage-backed securities with an aggregate cost of $158,096
and an aggregate fair value of $158,973 at December 31,
2003. The Companys restricted investments include
mortgage-backed securities with an aggregate cost of $44,025 and
an aggregate fair value of $44,185 at December 31, 2003.
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.

F-15



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




(NOTE C)  Investments
(continued)


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

|                |  |                         |         |   |      |   |         |      |  |   |         |  
|--------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                |  |                        
|                |  | Year Ended December 31, |        
|                |  |                         |        
|                |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|                |  |                         |         |   |      |   |         |      | 
|Gross proceeds  |  | $                       | 814,492 |   |      | $ | 483,061 |      |  | $ | 709,975 |  
|Realized gains  |  | $                       | 11,338  |   |      | $ | 7,782   |      |  | $ | 6,622   |  
|Realized losses |  | $                       | (1,532  | ) |      | $ | (582    | )    |  | $ | (146    | )

Realized gains and losses relate to the
Companys short-term, restricted and long-term investments
and are included in investment income in the consolidated
statement of operations. In 2003, the Company sold 148,233
shares of common stock of Ciphergen for gross proceeds of $1,780
and realized a gain of $1,091. As of December 31, 2003, the
Company adjusted the investment of the remaining shares to the
current market value of $763 with an offsetting credit of $452
to accumulated other comprehensive income within the
stockholders equity section of the balance sheet. The cost
of the securities sold is based on the specific identification
method.

(NOTE D)  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 each of
2003, 2002 and 2001, the Company received $1,000 from GSK in
connection with development milestones met by GSK during the
year.

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,

F-16



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




(NOTE D)  Collaboration
Agreements (continued)




Other Collaboration Agreements in the SB Field
(continued)


Takeda discontinued development of one product
and exercised its option to develop and commercialize a second
product in Japan. Takeda had two options remaining as of
December 31, 2003.

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 recognized
revenue of $9,250 in license fees and additional payments during
2001 related to the Additional Collaboration Partner Agreements.
In 2000, the Company implemented SAB 101, which impacted the
Companys revenues pertaining to these agreements for 2001.

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 research programs
involving 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 and Other License Agreements
Outside of the SB Field

In July 1995 the Company entered into a
collaboration and license agreement with MedImmune, Inc.
(MedImmune), which was amended in March and December
1997. In 2000, the Company received and recognized a $1,000
license fee in connection with this agreement. In 2003, the
Company received a $100 clinical development milestone payment
from MedImmune relating to the initiation of clinical trials of
a vaccine.

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. In 2003,
Pfizer Corporation (Pfizer) (which acquired
Pharmacia & Upjohn) and the Company amended the Pharmacia
agreement. The Company received and recognized in full the
license fee paid as a result of the amendment. The Company
received no other payments and did not recognize any revenues in
2003, 2002 or 2001 pursuant to the other agreements.

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 ten 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

F-17



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




(NOTE D)  Collaboration
Agreements (continued)




Collaborative and Other License Agreements
Outside of the SB Field (continued)


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.
Deferred revenue remaining for Transgene was $10,271 and $12,839
as of December 31, 2003 and 2002, respectively. The Company
recognized $2,568 as revenue in each of 2003, 2002 and 2001.

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 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 drug
candidates for development and commercialization. The Company
has the right to use ABXs proprietary technology to
generate fully human antibody drug candidates. During 2003, the
Company exercised its option to develop a fully human antibody
and paid $100 to ABX in accordance with the terms of this
agreement. 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 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. During
2003, the Company paid CAT an aggregate of $1,000 relating to
two clinical milestones reached pursuant to this agreement.

F-18



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE D)  Collaboration
Agreements (continued)

Collaborative and Other License Agreements
Outside of the SB Field (continued)

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 $7,400 and
$8,600 as of December 31, 2003 and 2002, 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 required 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
which had been fully amortized as of December 31, 2002. The
Company paid $1,000 in support payments during 2002. The Company
paid $210 for Dyaxs research services that concluded
during the first quarter of 2003.

In August 2003, the Company entered into an
agreement with Genentech which granted Genentech an exclusive,
worldwide patent rights to develop and commercialize therapeutic
biologic products for human use based on a human gene discovered
by the Company. In 2003, the Company received a non-refundable
license fee related to this agreement.

In October 2003, the Company entered into a
license agreement with diaDexus, Inc. (diaDexus).
The agreement provides the Company with the right to use certain
intellectual property rights in diagnostic product inventions.
The Company paid diaDexus $350 during 2003. During 2003,
diaDexus obtained FDA approval to begin marketing a diagnostic
aid which was discovered through the use of the Companys
technology. The Company is entitled to receive royalties on
sales of the diagnostic aid.

The Companys other ongoing technology
collaborations and agreements as of December 31, 2003 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 2003, 2002 and 2001, the Company paid an
aggregate of $1,577, $2,753 and $942, respectively, for research
services to certain of the above collaborators. 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 2003, 2002 or 2001.

F-19



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE E)  Property, Plant and
Equipment

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

|                                                |  |              |         |   |      |   |         |  
|----------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                |  |             
|                                                |  | December 31, |        
|                                                |  |              |        
|                                                |  | 2003         |         |   | 2002 |  
|                                                |  |              |         |   |      |  
|Laboratory equipment                            |  | $            | 56,670  |   |      | $ | 56,980  |  
|Leasehold improvements                          |  |              | 39,216  |   |      |   | 49,118  |  
|Computer equipment and software                 |  |              | 24,610  |   |      |   | 21,382  |  
|Land and improvements                           |  |              | 22,492  |   |      |   |        |  
|Furniture and office equipment                  |  |              | 3,833   |   |      |   | 4,123   |  
|Construction in progress                        |  |              | 64,391  |   |      |   | 49,365  |  
|                                                |  |              |         |   |      |  
|                                                |  |              | 211,212 |   |      |   | 180,968 |  
|Less: accumulated depreciation and amortization |  |              | (56,495 | ) |      |   | (54,531 | )
|                                                |  |              |         |   |      |  
|                                                |  | $            | 154,717 |   |      | $ | 126,437 |  
|                                                |  |              |         |   |      |  

The Company entered into a capital lease for
computer equipment in 2001. This capital lease was terminated in
November 2003 and a new capital lease was entered into in
December 2003. The new capital lease is included in the Computer
equipment and software amount above, at a cost of $982 and
accumulated amortization of $27 as of December 31, 2003.
Amortization expense for this equipment is included in
depreciation and amortization within the consolidated statements
of cash flows.

Included in Construction in progress is $46,972
and $2,012 as of December 31, 2003 and 2002, respectively,
relating to the Companys construction of a large-scale
manufacturing facility. The Company expects to complete this
facility by 2005 at a total cost of approximately $233,400.

(NOTE F)  Other
Assets

Other assets are comprised of the following:

|                                                                                                                                       |  |              |        |  |      |   |        | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                                                                                                                                       |  |             
|                                                                                                                                       |  | December 31, |       
|                                                                                                                                       |  |              |       
|                                                                                                                                       |  | 2003         |        |  | 2002 |  
|                                                                                                                                       |  |              |        |  |      |  
|Prepaid services                                                                                                                       |  | $            | 7,511  |  |      | $ | 9,044  | 
|Deferred financing costs, net of accumulated
    amortization of $8,625 and $6,400, as of December 31, 2003
    and 2002, respectively |  |              | 6,954  |  |      |   | 9,179  | 
|Deferred charge for residual value guarantee                                                                                           |  |              | 4,063  |  |      |   |       | 
|All other assets                                                                                                                       |  |              | 149    |  |      |   | 188    | 
|                                                                                                                                       |  |              |        |  |      |  
|                                                                                                                                       |  | $            | 18,677 |  |      | $ | 18,411 | 
|                                                                                                                                       |  |              |        |  |      |  

See Note D, Collaboration Agreements, for
discussion of prepaid services and license fees relating to CAT.
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 $111
and $444 as of December 31, 2003 and 2002, respectively.

Deferred financing costs were incurred in
connection with the Companys convertible subordinated debt
offerings during 2000 and 1999. Debt issuance costs for the
$503,020 of Notes outstanding amounted to approximately $15,579,
representing primarily underwriting fees of approximately 3% of
the gross amount of

F-20



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE F)  Other Assets
(continued)

notes, and are being amortized on a straight-line
basis which approximates an effective interest method over the
life of the Notes. 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 H,
Long-Term Debt, for additional discussion of the Companys
convertible subordinated debt.

In accordance with the provisions of Financial
Accounting Standards Board Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others(FIN 45), during the second quarter of
2003 the Company recorded the estimated fair market value of the
maximum residual value guarantee of the lease of one of its
facilities (Traville). See Note I, Commitments
and Other Matters for additional discussion. The Company
estimated the fair market value of the guarantee as
approximately $4,380 and is amortizing this amount on a
straight-line basis over the term of the lease. As of
December 31, 2003, the unamortized amount of approximately
$4,063 was recorded within Other assets and Other liabilities on
the Companys consolidated balance sheet.

(NOTE G)  Accounts Payable and
Accrued Expenses

Accounts payable and accrued expenses are
comprised of the following:

|                      |  |              |        |  |      |   |        | 
|--------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                      |  |             
|                      |  | December 31, |       
|                      |  |              |       
|                      |  | 2003         |        |  | 2002 |  
|                      |  |              |        |  |      |  
|Fixed asset purchases |  | $            | 12,128 |  |      | $ | 15,616 | 
|Accrued interest      |  |              | 7,529  |  |      |   | 7,444  | 
|Accrued expenses      |  |              | 6,582  |  |      |   | 6,281  | 
|Professional fees     |  |              | 5,882  |  |      |   | 5,229  | 
|                      |  |              |        |  |      |  
|                      |  | $            | 32,121 |  |      | $ | 34,570 | 
|                      |  |              |        |  |      |  

(NOTE H)  Long-Term
Debt

The components of long-term debt are as follows:

|                                     |  |                     |       |  |            |               |      |   |         |      |  |   |         | 
|------------------------------------ |  | ------------------- | ----- |  | ---------- | ------------- | ---- | - | ------- | ---- |  | - | ------- | 
|                                     |  |                     |       |  |            |              
|                                     |  |                     |       |  |            | December 31,  |     
|                                     |  | December 31,        |       |  |            |               |      |  
|Debt                                 |  | 2003 Interest Rates |       |  | Maturities |               | 2003 |   |         | 2002 | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 
|MIDFA                                |  |                     |      |  |            | December 2003 |      | $ |        |      |  | $ | 448     | 
|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 | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 
|                                     |  |                     |       |  |            |               |      |   | 503,020 |      |  |   | 503,468 | 
|Less current portion                 |  |                     |       |  |            |               |      |   |        |      |  |   | 448     | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 
|                                     |  |                     |       |  |            |               |      | $ | 503,020 |      |  | $ | 503,020 | 
|                                     |  |                     |       |  |            |               |      |   |         |      | 

F-21



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE H)  Long-Term Debt
(continued)

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

| |  |  |      |  |  |  |  |     |         |  |  |  |  | 
| |  |  | ---- |  |  |  |  | --- | ------- |  |  |  |  | 
| |  |  | 2004 |  |  |  |  | $   |        |  |  |  |  | 
| |  |  | 2005 |  |  |  |  |     |        |  |  |  |  | 
| |  |  | 2006 |  |  |  |  |     | 3,120   |  |  |  |  | 
| |  |  | 2007 |  |  |  |  |     | 499,900 |  |  |  |  | 
| |  |  | 2008 |  |  |  |  |  $ | 503,020 |  |  |  |  | 
| |  |  |      |  |  |  |  |     |         |  | 

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

|                                     |  |              |         |  |       |   |         |          |  |   |         |  |  |   |         | 
|------------------------------------ |  | ------------ | ------- |  | ----- | - | ------- | -------- |  | - | ------- |  |  | - | ------- | 
|                                     |  |             
|                                     |  | December 31, |        
|                                     |  |              |        
|                                     |  |              |         | 
|                                     |  | 2003         |         |  | 2002  |  
|                                     |  |              |         |  |       |  
|                                     |  | Carrying     |         |  | Fair  |   |         | Carrying |  |   | Fair    | 
|                                     |  | Amount       |         |  | Value |   |         | Amount   |  |   | Value   | 
|                                     |  |              |         |  |       |   |         |          |  |   |         | 
|MIDFA                                |  | $            |        |  |       | $ |        |          |  | $ | 448     |  |  | $ | 434     | 
|5.5% Convertible Subordinated Notes  |  |              | 3,120   |  |       |   | 3,404   |          |  |   | 3,120   |  |  |   | 2,266   | 
|5.0% Convertible Subordinated Notes  |  |              | 199,900 |  |       |   | 189,048 |          |  |   | 199,900 |  |  |   | 144,978 | 
|3.75% Convertible Subordinated Notes |  |              | 300,000 |  |       |   | 272,840 |          |  |   | 300,000 |  |  |   | 195,844 | 
|Capital lease obligation             |  |              | 982     |  |       |   | 924     |          |  |   | 502     |  |  |   | 481     | 
|                                     |  |              |         |  |       |   |         |          |  |   |         | 
|                                     |  | $            | 504,002 |  |       | $ | 466,216 |          |  | $ | 503,970 |  |  | $ | 344,003 | 
|                                     |  |              |         |  |       |   |         |          |  |   |         | 

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 was
required to make annual payments of $444 commencing December
1995 plus interest at a variable rate of interest (1.35% at
December 31, 2002), to the trustee on behalf of the
bondholders which is equal to the interest and principal
requirements on the bonds. The variable rate was 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 entered into an indenture
with the Trustee whereby the Trustee obtained an irrevocable
letter of credit on behalf of the bondholders.

Required monthly principal payments of $37 plus
interest were deposited into a bond fund. The interest was
disbursed monthly to the bondholders. Principal was repaid to
the bondholders at the rate of $444 annually with the final
payment of $448 paid on December 1, 2003. The Company
deposited approximately $450, $460 and $502 of principal and
interest into the bond fund during the years ended
December 31, 2003, 2002 and 2001, 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 expired on
December 15, 2003. Concurrently, the Company entered into a
Collateral Pledge Agreement with the bank. The Company was
required to maintain 43% of the outstanding principal amount of
the Bonds (50% was required under certain circumstances) with
the bank as Collateral for the Letter of Credit. Pursuant to the
Collateral Pledge Agreement at December 31, 2003 and 2002,
the Company had $651 and $646, respectively, on deposit with the
bank, which is included in Restricted investments in the
consolidated balance sheets. The

F-22



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




(NOTE H)  Long-Term Debt
(continued)


collateral will be released in 2004 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 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 $72 and $56 had been amortized as
of December 31, 2003 and 2002, respectively.

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 $8,553 and $6,344 had been
amortized as of December 31, 2003 and 2002, respectively.

F-23



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE I)  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 and
cancellation options. Minimum annual rentals are as follows:

|                                            |  |           |         |  |         |   |       | 
|------------------------------------------- |  | --------- | ------- |  | ------- | - | ----- | 
|                                            |  | Operating |         |  | Capital |  
|Year Ending December 31,                    |  | Leases    |         |  | Lease   |  
|                                            |  |           |         |  |         |  
|2004                                        |  | $         | 24,300  |  |         | $ | 383   | 
|2005                                        |  |           | 24,425  |  |         |   | 353   | 
|2006                                        |  |           | 23,447  |  |         |   | 324   | 
|2007                                        |  |           | 22,873  |  |         |   |      | 
|2008                                        |  |           | 20,344  |  |         |   |      | 
|2009 and thereafter                         |  |           | 66,752  |  |         |   |      | 
|                                            |  |           |         |  |         |  
|                                            |  | $         | 182,141 |  |         |   | 1,060 | 
|                                            |  |           |         |  |         |  
|Less imputed interest                       |  |           |         |  |         |   | 78    | 
|                                            |  |           |         |  |         |  
|Present value of minimum lease payments     |  |           |         |  |         |   | 982   | 
|Less current portion                        |  |           |         |  |         |   | 338   | 
|                                            |  |           |         |  |         |  
|Long-term portion of minimum lease payments |  |           |         |  |         | $ | 644   | 
|                                            |  |           |         |  |         |  

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
$12,238 and $11,897 as of December 31, 2003 and 2002,
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.

The Company leases all of its research and
development and administrative facilities. The Companys
primary research and development and administrative facility,
located on the Traville site in Rockville, Maryland, is owned by
Wachovia Development Corporation (WDC). In June
2003, the Company adopted Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable
Interest Entities(FIN 46).In order to
comply with the requirements of FIN 46, the Company restructured
the lease relating to the Traville site in June 2003 and entered
into an approximately seven year operating lease (the
Traville lease) with WDC. WDC, a wholly-owned
subsidiary of Wachovia Corporation, is primarily engaged in real
estate finance, development and leasing activities. The total
financed cost of the Traville lease facility is $200,000. As of
December 31, 2003, the total financed cost of the Traville
facility relative to WDCs total direct real estate
investments and net real estate lease investments was below the
level requiring consolidation of WDC into the Companys
consolidated financial statements. The construction of the
research and development and administrative facility was
substantially completed by November 2003, at which time the rent
obligations under the Traville lease commenced. The
Companys rent obligation will approximate the
lessors debt service

F-24



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




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




Leases (continued)


costs plus a return on the lessors equity
investment. The Companys rent obligation under the
Traville lease is floating and is based primarily on short-term
commercial paper, but the lessor can lock in a fixed interest
rate at any time at the Companys request. The floating
rate was approximately 1.1% as of December 31, 2003.

In addition, the Company leases a research
facility, located at 9800 Medical Center Drive (the 9800
MCD lease), as a result of a seven-year lease entered into
in October 2001 with a trust controlled by third parties
established solely for that purpose. As a result of a lease
restructuring in June 2003, the trust was eliminated and the
Company continues to operate under this same lease, which was
assigned to the owner of the facility. The total financed cost
of the facility covered under the 9800 MCD lease is $76,000. The
Companys rent obligation began in 2001 and will
approximate the lessors debt service costs. As of
December 31, 2003, the lessor had fixed the interest rate
on the total financed cost at a weighted-average interest rate
of approximately 4.3%.

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, 2003. Over the life of these leases, an
aggregate rent obligation of approximately $42,639 has been
included in the Companys total operating lease commitment.

The Companys restricted investments with
respect to the Traville lease, the 9800 MCD lease and other
leases for the existing process development and manufacturing
facility will reach approximately $295,000, which will serve as
collateral for the duration of the leases. The Company will be
required to restrict investments equal to 102% of the full
amount of the $200,000 financed project cost for the Traville
lease, or $204,000, with the payment of the remaining
construction period obligations, and 100% of the full amount of
the $76,000 financed project cost for the 9800 MCD lease. In
addition, the Company is also required to maintain up to a
maximum of $15,000 in restricted investments with respect to the
process development and manufacturing facility leases. The
Companys restricted investments were $280,776 and $205,352
as of December 31, 2003 and December 31, 2002,
respectively. As of December 31, 2002, restricted
investments also included approximately $21,636 that related to
the construction of the Companys large-scale manufacturing
facility. As a result of the lease restructurings in June 2003,
the Company no longer maintains any restricted investments with
respect to this facility.

Under the Traville and 9800 MCD 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 $276,000.
Alternatively, the Company can cause the properties to be sold
to third parties.

With respect to the Traville lease, the Company
has a residual value guarantee of 87.75% 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. Because the lessor is responsible for servicing and
repaying the debt financings to various parties, the Company has
made the residual value guarantee to the lessor. In the event
the lessor defaults to the lender, 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, 2003, the Companys residual value
guarantee for the Traville lease had reached the full maximum
amount of $175,500.

With respect to the 9800 MCD lease, the Company
has a residual value guarantee of 85% 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.
Because the lessor is responsible for servicing and repaying the
debt financings to various parties, the Company has made the
residual value guarantee to the lessor. In the event the lessor
defaults to the lender, the Company has the right to cure the
default or exercise its option to acquire the property. At any

F-25



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




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




Leases (continued)


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, 2003, the Companys
residual value guarantee for the 9800 MCD lease had reached the
full maximum amount of $64,600.

In connection with the Traville lease, the
Company must maintain minimum levels of unrestricted cash, cash
equivalents and marketable securities and certain debt ratios.
In connection with the 9800 MCD lease, the Company must maintain
minimum levels of unrestricted cash, cash equivalents and
marketable securities, as well as comply with certain dividend
restrictions.

In accordance with the provisions of Financial
Accounting Standards Board Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others(FIN 45), the Company recorded the
estimated fair market value of the maximum residual value
guarantee of the Traville lease during the second quarter of
2003. The Company estimated the fair market value of the
guarantee as approximately $4,380 and is amortizing this amount
on a straight-line basis over the term of the lease. As of
December 31, 2003, the unamortized amount of approximately
$4,063 was recorded within Other assets and Other liabilities on
the Companys consolidated balance sheet.

There are no recourse provisions under either the
Traville or 9800 MCD leases 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 current
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.

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 $4,067 and $2,900 at December 31, 2003 and 2002,
respectively.

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

The Company has entered into various
sale-leaseback transactions resulting in equipment leases with
rental payments aggregating $54,315, including $31,396 relating
to 2003 leases, with terms ranging from five to seven years. The
Company must either purchase the equipment at the end of the
initial term at the greater of fair market value or 20% of
original cost or, in some cases, extend the term of the lease
for an additional year. The Company has accounted for these
leases as operating leases. Minimum annual rentals are
approximately $9,553.

Rent expense aggregated $20,446, $18,232 and
$14,713 for the years ended December 31, 2003, 2002 and
2001, respectively.

Capital Expenditures

At December 31, 2003 and 2002, the Company
had commitments for capital expenditures, consisting primarily
of manufacturing space and equipment, of approximately $51,227
and $10,134, respectively. Included in commitments for capital
expenditures is $45,004 as of December 31, 2003 relating to
the Companys construction of a large-scale manufacturing
facility.

F-26



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


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

401(k) Plan

The Company has adopted a 401(k) pension plan
available to eligible full-time employees. The Company made
contributions of $1,256, $1,089 and $857 to the plan for the
years ended December 31, 2003, 2002 and 2001, respectively.

(NOTE J)  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 2003, 2002 and 2001, this limit was equal to five
percent of the outstanding common stock as of the end of the
preceding fiscal year. Shares that were available for a given
year but not subject to awards granted in that year were carried
forward (Carryover Shares) to the following year. In
2002, five percent of the outstanding common stock as of
December 31, 2001, or 6,413,920 shares, were reserved for
issuance under the 2000 Plan. In 2003, five percent of the
outstanding common stock as of December 31, 2002, or
6,442,527 shares, were additionally reserved for issuance under
the 2000 Plan. 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.

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, 2003, the total authorized number of shares
under all plans was 53,227,896. 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 0, 188,150 and
10,000 shares of common stock to non-employees during the years
ended December 31, 2003, 2002 and 2001, respectively. The
fair value of these options has been amortized to expense over
the service period.

Option transactions during 2003, 2002 and 2001
are summarized as follows:

|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       |  |            |   |  |   |       | 
|---------------------------------- |  | ----------------------- | ---------- | --------- | ----- | - | ----- | ------ | --------- |  | ---------- | - |  | --------- | ----- |  | ----- |  | ---------- | - |  | - | ----- | 
|                                   |  |                        
|                                   |  | Year Ended December 31, |           
|                                   |  |                         |           
|                                   |  |                         |            |           |       |  
|                                   |  | 2003                    |            |           | 2002  |   |       | 2001   |          
|                                   |  |                         |            |           |       |   |       |        |          
|                                   |  |                         |            | Weighted- |       |   |       |        | Weighted- |  |            |   |  | Weighted- |      
|                                   |  |                         |            | Average   |       |   |       |        | Average   |  |            |   |  | Average   |      
|                                   |  |                         |            | Exercise  |       |   |       |        | Exercise  |  |            |   |  | Exercise  |      
|                                   |  | Shares                  |            |           | Price |   |       | Shares |           |  | Price      |   |  | Shares    |       |  | Price | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 
|Outstanding at beginning of year   |  |                         | 28,307,139 |           |       | $ | 31.03 |        |           |  | 24,700,767 |   |  | $         | 35.63 |  |       |  | 21,503,182 |   |  | $ | 31.49 | 
|Options granted                    |  |                         | 6,010,898  |           |       |   | 12.47 |        |           |  | 5,816,516  |   |  |           | 13.13 |  |       |  | 6,751,719  |   |  |   | 44.06 | 
|Options exercised                  |  |                         | (485,534   | )         |       |   | 7.74  |        |           |  | (495,207   | ) |  |           | 7.14  |  |       |  | (2,284,752 | ) |  |   | 9.50  | 
|Options canceled or expired        |  |                         | (3,063,164 | )         |       |   | 35.66 |        |           |  | (1,714,937 | ) |  |           | 43.43 |  |       |  | (1,269,382 | ) |  |   | 56.81 | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 
|Outstanding at end of year         |  |                         | 30,769,339 |           |       |   | 27.31 |        |           |  | 28,307,139 |   |  |           | 31.03 |  |       |  | 24,700,767 |   |  |   | 35.63 | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 
|Options exercisable at end of year |  |                         | 17,488,816 |           |       |   | 30.90 |        |           |  | 13,829,582 |   |  |           | 30.09 |  |       |  | 9,223,400  |   |  |   | 24.67 | 
|                                   |  |                         |            |           |       |   |       |        |           |  |            |   |  |           |       |  |       | 

F-27



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




(NOTE J)  Stockholders
Equity (continued)




Stock Option and Employee Stock Purchase Plans
(continued)


The following table summarizes information about
stock options outstanding at December 31, 2003:

|                        |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |            |  |  |   |       | 
|----------------------- |  | ------------------- | ---------- | --------- | ------------------- |  | --------- | -------- |  | - | ----------- | --------- |  | -------- | ---------- |  |  | - | ----- | 
|                        |  |                     |            |          
|                        |  | 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 $10.91         |  |                     | 8,569,331  |           |                     |  | 5.9       |          |  | $ | 8.26        |           |  |          | 5,911,842  |  |  | $ | 7.83  | 
|$10.92 to $21.82        |  |                     | 8,144,124  |           |                     |  | 8.7       |          |  |   | 14.09       |           |  |          | 1,514,304  |  |  |   | 16.91 | 
|$21.83 to $32.74        |  |                     | 4,094,388  |           |                     |  | 5.4       |          |  |   | 27.45       |           |  |          | 3,456,422  |  |  |   | 27.41 | 
|$32.75 to $43.65        |  |                     | 3,784,936  |           |                     |  | 7.6       |          |  |   | 38.52       |           |  |          | 2,053,140  |  |  |   | 38.51 | 
|$43.66 to $65.47        |  |                     | 1,405,516  |           |                     |  | 7.2       |          |  |   | 50.49       |           |  |          | 942,917    |  |  |   | 50.67 | 
|$65.48 to $109.13       |  |                     | 4,771,044  |           |                     |  | 6.8       |          |  |   | 68.27       |           |  |          | 3,610,191  |  |  |   | 68.42 | 
|                        |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |           
|                        |  |                     | 30,769,339 |           |                     |  | 7.0       |          |  |   | 27.31       |           |  |          | 17,488,816 |  |  |   | 30.90 | 
|                        |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |           

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 306,756 and 404,119
shares as of December 31, 2003 and 2002, respectively.
Common stock issued under this plan totaled 97,363 and 76,937 in
2003 and 2002, 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 2003, 2002 and 2001 is estimated as
$9.09, $9.77 and $31.26 per share, respectively. The
weighted-average fair value of the employee stock purchase plan
rights granted during 2003 and 2002 is estimated as $3.38 and
$11.45 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,
|               |                              |                        
|               |                              | 2003                    |            | 2002  |           | 2001 
|               |                              |                         |            |       |           |      
|Expected life: |                              |                         |            |       |           |      
|               | Stock options                |                         | 6.75 years |       | 7.0 years |       | 6.0 years
|               | Employee stock purchase plan |                         | 1.0 year   |       | 1.0 year  |       | 1.0 year 
|Interest rate  |                              | 3.95%                   |            | 4.02% |           | 4.49%
|Volatility     |                              | 78%                     |            | 79%   |           | 79%  
|Dividend yield |                              | 0%                      |            | 0%    |           | 0%   

Options available for future grant were
10,480,284 at December 31, 2003.

F-28



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE K)  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 L)  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, |        
|                                                                   |  |                         |        
|                                                                   |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|                                                                   |  |                         |         |   |      |   |         |      | 
|Federal income tax provision at 34%                                |  | $                       | (63,010 | ) |      | $ | (74,703 | )    |  | $ | (39,832 | )
|State taxes, net of federal tax benefit                            |  |                         | (8,551  | ) |      |   | (10,023 | )    |  |   | (5,412  | )
|Tax credits, principally for research and
    development          |  |                         | (6,751  | ) |      |   | (6,852  | )    |  |   | (6,552  | )
|Stock option deduction for which no book benefit
    is available  |  |                         | (667    | ) |      |   | (1,303  | )    |  |   | (32,794 | )
|Debt conversion expenses for which no tax benefit
    is available |  |                         |        |   |      |   |        |      |  |   | 1,504   |  
|Other                                                              |  |                         | 81      |   |      |   | 99      |      |  |   | 100     |  
|Increase in valuation allowance on deferred tax
    asset          |  |                         | 78,898  |   |      |   | 92,782  |      |  |   | 82,986  |  
|                                                                   |  |                         |         |   |      |   |         |      | 
|                                                                   |  | $                       |        |   |      | $ |        |      |  | $ |        |  
|                                                                   |  |                         |         |   |      |   |         |      | 

F-29



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




(NOTE L)  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   |       |        | Asset/(Liability) |  
|                  |                                                                 |         |       |        |                   |  
|December 31, 2003 |                                                                 |         |       |        |                   |   |         |         
|                  | Net operating loss carryforward                                 |         | $     |       |                   |   | $       | 330,468  |  
|                  | Research and development and other tax credit
    carryforwards |         |       |       |                   |   |         | 34,021   |  
|                  | Loss on impaired investments                                    |         |       |       |                   |   |         | 21,037   |  
|                  | Net unrealized gains on investments                             |         |       |       |                   |   |         | (10,319  | )
|                  | Deferred revenue                                                |         |       | 992    |                   |   |         | 2,975    |  
|                  | Depreciation                                                    |         |       |       |                   |   |         | 4,717    |  
|                  | Reserves and accruals                                           |         |       | 2,271  |                   |   |         | 2,430    |  
|                  | Other                                                           |         |       |       |                   |   |         | 491      |  
|                  |                                                                 |         |       |        |                   |  
|                  |                                                                 |         | 3,263 |        |                   |   | 385,820 |         
|                  | Less valuation allowance                                        |         |       | (3,263 | )                 |   |         | (385,820 | )
|                  |                                                                 |         |       |        |                   |  
|                  |                                                                 | $       |      |        |                   | $ |        |         
|                  |                                                                 |         |       |        |                   |  

|                  |                                                                 |         |       |        |                   |   |         |          |  
|----------------- | --------------------------------------------------------------- | ------- | ----- | ------ | ----------------- | - | ------- | -------- | -
|                  |                                                                 | Current |       |        | Long-Term         |  
|                  |                                                                 | Asset   |       |        | Asset/(Liability) |  
|                  |                                                                 |         |       |        |                   |  
|December 31, 2002 |                                                                 |         |       |        |                   |   |         |         
|                  | Net operating loss carryforward                                 |         | $     |       |                   |   | $       | 254,076  |  
|                  | Research and development and other tax credit
    carryforwards |         |       |       |                   |   |         | 27,270   |  
|                  | Loss on impaired investments                                    |         |       |       |                   |   |         | 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 | )
|                  |                                                                 |         |       |        |                   |  
|                  |                                                                 | $       |      |        |                   | $ |        |         
|                  |                                                                 |         |       |        |                   |  

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-30



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE L)  Income Taxes
(continued)

Provision for income taxes is comprised of the
following:

|         |               |                         |   |      |  |      |   |   |  |   |   |   | 
|-------- | ------------- | ----------------------- | - | ---- |  | ---- | - | - |  | - | - | - | 
|         |               |                        
|         |               | Year Ended December 31,
|         |               |                        
|         |               | 2003                    |   | 2002 |  | 2001
|         |               |                         |   |      |  |     
|Current: |               |                         |   |      |  |      |   |   |  |   |   |  
|         | Federal       |                         | $ |     |  |      | $ |  |  |   | $ |  | 
|         | State         |                         |   |     |  |      |   |  |  |   |   |  | 
|         | Foreign taxes |                         |   |     |  |      |   |  |  |   |   |  | 
|Deferred |               |                         |  |      |  |      |  |   |  |   |  |  
|         |               |                         |   |      |  |      |   |   | 
|         |               | $                       |  |      |  | $    |  |   |  | $ |  |  
|         |               |                         |   |      |  |      |   |   | 

The Company has available tax credit
carryforwards of approximately $34,021 which expire, if unused,
from the year 2008 through the year 2023. The Company has net
operating loss (NOL) carryforwards for federal
income tax purposes of approximately $855,692 expire, if unused,
from the year 2010 through the year 2023. The Companys
ability to utilize these NOLs may be limited under Internal
Revenue Code Section 382. The tax benefit of approximately
$237,567 of NOLs related to stock options will be credited to
equity when the benefit is realized through utilization of the
NOL carryforwards.

(NOTE M)  Net Loss Per
Share

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

|                                                                                   |  |                         |             |   |      |   |             |      |  |   |             |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                   |  |                        
|                                                                                   |  | Year Ended December 31, |            
|                                                                                   |  |                         |            
|                                                                                   |  | 2003                    |             |   | 2002 |   |             | 2001 | 
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Numerator:                                                                         |  |                         |             |   |      |   |             |      |  |   |             |  
|Net loss                                                                           |  | $                       | (185,324    | ) |      | $ | (219,716    | )    |  | $ | (117,152    | )
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Denominator:                                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|Denominator for basic and diluted earnings per
    share  weighted-average shares |  |                         | 129,112,670 |   |      |   | 128,591,153 |      |  |   | 126,990,788 |  
|                                                                                   |  |                         |             |   |      |   |             |      | 
|Net loss per share, basic and diluted:                                             |  |                         |             |   |      |   |             |      |  |   |             |  
|Net loss per share                                                                 |  | $                       | (1.44       | ) |      | $ | (1.71       | )    |  | $ | (0.92       | )
|                                                                                   |  |                         |             |   |      |   |             |      | 

Common stock shares issued in connection with the
Companys Employee Stock Purchase Plan and Employee Stock
Option Plan are included in the Companys weighted average
share balance based upon the issuance of the related shares.

For the years ended December 31, 2003, 2002
and 2001, diluted net income (loss) per share is the same as
basic net income (loss) per share as the inclusion of
outstanding stock options and convertible debt would be
antidilutive.

F-31



---



##### 



HUMAN GENOME SCIENCES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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


(NOTE N)  Quarterly Financial
Information (unaudited)

Quarterly financial information for 2003 and 2002
is presented in the following tables:

|                                                           |  |         |         |   |         |   |         |         |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------- | ------- | - | ------- | - | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                           |  | 1st     |         |   | 2nd     |   |         | 3rd     |  |   | 4th     |  
|                                                           |  | Quarter |         |   | Quarter |   |         | Quarter |  |   | Quarter |  
|                                                           |  |         |         |   |         |   |         |         |  |   |         |  
|2003                                                       |  |         |         |   |         |   |         |         |  |   |         |   |  |   |         |  
|Revenue                                                    |  | $       | 1,642   |   |         | $ | 642     |         |  | $ | 1,242   |   |  | $ | 4,642   |  
|Income (loss) from operations                              |  |         | (54,316 | ) |         |   | (56,810 | )       |  |   | (57,895 | ) |  |   | (57,902 | )
|Net income (loss)                                          |  |         | (41,315 | ) |         |   | (47,394 | )       |  |   | (47,688 | ) |  |   | (48,927 | )
|Net income (loss) per share, basic and
    diluted         |  |         | (0.32   | ) |         |   | (0.37   | )       |  |   | (0.37   | ) |  |   | (0.38   | )
|                                                          
|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   | )



|    |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                     

F-32