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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A



Amendment No. 1



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | -------------------------------------------------------------------------------------



| |  | FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
| |  | -------------------------------------------



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



Commission File Number 0-33489



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ZYMOGENETICS, INC.

(exact name of registrant as specified in its charter)



|Washington                                                    |  | 91-1144498                          
|------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification No.)



1201 Eastlake Avenue
East, Seattle, WA 98102

(Address of principal executive offices)



Registrants telephone number, including area code (206) 442-6600



---



Securities registered pursuant to Section 12(b) of the Act:



None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, no par value



---



Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  x  No ̈



Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.    x



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



The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold as of June 28, 2002 was: $115,558,379.



Common stock outstanding at March 14, 2003: 45,900,680 shares.



DOCUMENTS INCORPORATED BY REFERENCE



|(1) |  | Portions of the Companys definitive Proxy Statement for the annual meeting of shareholders to be held on June 12, 2003, are incorporated by reference in Part III.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Explanatory Note



This Amendment No. 1 to the Annual Report on Form 10-K for ZymoGenetics, Inc. for the fiscal year ended December 31, 2002 is being filed to reflect changes to Note 1,
Stock-based compensation and Note 12, Shareholders equity (deficit), Stock options in Part II Item 8, Notes to Financial Statements. We have discovered an error in the calculation of fair value used to determine stock-based compensation as
required by Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, and accordingly have corrected Note 1 and Note 12. This Amendment No. 1 does not reflect events occurring after the filing of the
original Form 10-K, or modify or update the disclosures therein in any way other than to reflect the amendments described above.



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PART II



Item 8. Financial Statements and
Supplementary Data



|                                                                                                              |  | Page in Form 10-K
|------------------------------------------------------------------------------------------------------------- |  | -----------------
|Report of PricewaterhouseCoopers LLP, Independent Auditors                                                    |  | 4                
|                                                                                                              | 
|Balance Sheets                                                                                                |  | 5                
|                                                                                                              | 
|Statements of Operations                                                                                      |  | 6                
|                                                                                                              | 
|Statement of Changes in Mandatorily Redeemable Convertible Preferred Stock and Shareholders Equity (Deficit) |  | 7                
|                                                                                                              | 
|Statements of Cash Flows                                                                                      |  | 8                
|                                                                                                              | 
|Notes to Financial Statements                                                                                 |  | 9 - 20           



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REPORT OF INDEPENDENT AUDITORS



To the Board of
Directors

and Shareholders of

ZymoGenetics, Inc.



In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in mandatorily redeemable convertible preferred stock and shareholders equity (deficit) and of cash flows present fairly (after the revision described in Notes 1 and 12), in all material respects, the financial
position of ZymoGenetics, Inc. at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the
United States of America. 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 of these statements
in accordance with auditing standards generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.



ZymoGenetics, Inc. is related to a group of affiliated companies and, as disclosed in the financial statements, has extensive transactions and relationships with members of the group.



/s/ PricewaterhouseCoopers LLP

Seattle, Washington

January 31, 2003 except
for the stock-based compensation disclosure in Note 1 and the weighted-average fair value at grant date information in Note 12, as to which the date is June 30, 2003.



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ZYMOGENETICS, INC.

BALANCE SHEETS



|                                                                                                                                                        |  | December 31, |             
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------------
|                                                                                                                                                        |  | 2002         |             
|Assets                                                                                                                                                  |  |              |             
|Current assets                                                                                                                                          |  |              |             
|Cash and cash equivalents                                                                                                                               |  | $            | 55,578,707  
|Short-term investments                                                                                                                                  |  |              | 229,858,985 
|Receivables                                                                                                                                             |  |              |             
|Related party                                                                                                                                           |  |              | 388,655     
|Interest and other receivables                                                                                                                          |  |              | 3,328,028   
|Prepaid expenses and other assets                                                                                                                       |  |              | 2,252,879   
|                                                                                                                                                        |  |              |             
|Total current assets                                                                                                                                    |  |              | 291,407,254 
|                                                                                                                                                        |  |             
|Property and equipment, net                                                                                                                             |  |              | 17,252,932  
|Other assets                                                                                                                                            |  |              | 3,572,806   
|                                                                                                                                                        |  |              |             
|Total assets                                                                                                                                            |  | $            | 312,232,992 
|                                                                                                                                                        |  |              |             
|Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders Equity (Deficit)                                                      |  |              |             
|Current liabilities                                                                                                                                     |  |              |             
|Accounts payable                                                                                                                                        |  | $            | 3,172,193   
|Accrued liabilities                                                                                                                                     |  |              | 5,689,066   
|Deferred gain on sale of assets                                                                                                                         |  |              | 959,860     
|Deferred revenue                                                                                                                                        |  |              | 10,310,064  
|                                                                                                                                                        |  |              |             
|Total current liabilities                                                                                                                               |  |              | 20,131,183  
|                                                                                                                                                        |  |             
|Deferred gain on sale of assets                                                                                                                         |  |              | 13,205,812  
|Deferred revenue                                                                                                                                        |  |              | 6,524,039   
|Other noncurrent liabilities                                                                                                                            |  |              | 3,103,942   
|                                                                                                                                                        |  |             
|Commitments                                                                                                                                             |  |              |             
|                                                                                                                                                        |  |             
|Mandatorily redeemable convertible preferred stock, no par value, 30,000,000 shares authorized                                                          |  |              |             
|Series A, 2,528,000 shares authorized, issued and outstanding at December 31, 2001                                                                      |  |              |            
|Series B, 4,011,768 shares authorized, issued and outstanding at December 31, 2001                                                                      |  |              |            
|Shareholders equity (deficit)                                                                                                                          |  |              |             
|Common stock, no par value, 150,000,000 shares authorized, 45,815,031 and 12,063,600 issued and outstanding at December 31, 2002
and 2001, respectively |  |              | 427,009,984 
|Non-voting common stock, no par value, 30,000,000 shares authorized                                                                                     |  |              |            
|Notes receivable from shareholders                                                                                                                      |  |              | (725,000    
|Deferred stock compensation                                                                                                                             |  |              | (18,290,550 
|Accumulated deficit                                                                                                                                     |  |              | (141,535,635
|Accumulated other comprehensive income                                                                                                                  |  |              | 2,809,217   
|                                                                                                                                                        |  |              |             
|Total shareholders equity (deficit)                                                                                                                    |  |              | 269,268,016 
|                                                                                                                                                        |  |              |             
|Total liabilities, mandatorily redeemable convertible preferred stock and shareholders equity (deficit)                                                |  | $            | 312,232,992 
|                                                                                                                                                        |  |              |             



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



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ZYMOGENETICS, INC.

STATEMENTS OF OPERATIONS



|                                                                                                                            |  | Year ended December 31, |            
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -----------
|                                                                                                                            |  | 2002                    |            
|Revenues                                                                                                                    |  |                         |            
|Royalties                                                                                                                   |  |                         |            
|Related parties                                                                                                             |  | $                       | 4,985,538  
|Other                                                                                                                       |  |                         | 3,009,781  
|Option fee from related party                                                                                               |  |                         | 7,500,000  
|Ig-fusion protein license fee                                                                                               |  |                         | 30,000,000 
|License fees, milestones and other                                                                                          |  |                         | 7,280,065  
|                                                                                                                            |  |                         |            
|Total revenues                                                                                                              |  |                         | 52,775,384 
|                                                                                                                            |  |                         |            
|Operating expenses                                                                                                          |  |                         |            
|Research and development (excludes noncash stock-based compensation expense of $4,542,568 in 2002 and $2,109,246 in
2001)   |  |                         | 66,469,252 
|General and administrative (excludes noncash stock-based compensation expense of $2,645,056 in 2002 and $1,398,106 in
2001) |  |                         | 16,925,391 
|Noncash stock-based compensation expense                                                                                    |  |                         | 7,187,624  
|                                                                                                                            |  |                         |            
|Total operating expenses                                                                                                    |  |                         | 90,582,267 
|                                                                                                                            |  |                         |            
|                                                                                                                            |  |                         |            
|Loss from operations                                                                                                        |  |                         | (37,806,883
|Other income (expense)                                                                                                      |  |                         |            
|Interest income                                                                                                             |  |                         | 6,772,352  
|Interest expense                                                                                                            |  |                         | (8,075     
|Other, net                                                                                                                  |  |                         | 626,528    
|                                                                                                                            |  |                         |            
|Loss before provision for income taxes                                                                                      |  |                         | (30,416,078
|Benefit (provision) for income taxes                                                                                        |  |                         |           
|                                                                                                                            |  |                         |            
|Net loss                                                                                                                    |  |                         | (30,416,078
|Preferred stock dividend and accretion                                                                                      |  |                         | (1,717,865 
|                                                                                                                            |  |                         |            
|Net loss attributable to common shareholders                                                                                |  | $                       | (32,133,943
|                                                                                                                            |  |                         |            
|Net loss per sharebasic and diluted                                                                                        |  | $                       | (0.75      
|                                                                                                                            |  |                         |            
|Weighted-average number of shares used in computing basic and diluted net loss per share                                    |  |                         | 42,578,029 
|                                                                                                                            |  |                         |            



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



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ZYMOGENETICS, INC.

STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND SHAREHOLDERS EQUITY
(DEFICIT)



|                                                                                                                             |  | Mandatorily redeemableconvertible preferred stock |                            |  | Shareholders equity (deficit) |             
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | -------------------------- |  | ------------------------------ | ------------
|                                                                                                                             |  |                                                   | Convertiblepreferred stock |  |                                | Common stock
|                                                                                                                             |  | Shares                                            |                            |  | Amount                         |             
|Balance at January 1, 2000                                                                                                   |  |                                                  |                            |  | $                              |            
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Net loss and comprehensive loss                                                                                              |  |                                                  |                            |  |                                |            
|Conversion from $.01 par value to no par value common stock                                                                  |  |                                                  |                            |  |                                |            
|Conversion of Class A and Class B convertible preferred stock to common stock                                                |  |                                                  |                            |  |                                |            
|Issuance of dividend in form of Series A mandatorily redeemable convertible preferred stock                                  |  | 2,528,000                                         |                            |  |                                | 94,521,920  
|Issuance of Series B mandatorily redeemable convertible preferred stock (net of offering costs of $7,495,290)                |  | 4,011,768                                         |                            |  |                                | 142,504,716 
|Intellectual property purchased from related party (net of deferred taxes of $11,245,499)                                    |  |                                                  |                            |  |                                |            
|Payments received for future royalties from related party (net of income taxes of $31,524,691)                               |  |                                                  |                            |  |                                |            
|Accretion on mandatorily redeemable convertible preferred stock                                                              |  |                                                  |                            |  |                                | 147,918     
|Dividends accrued on mandatorily redeemable convertible preferred stock                                                      |  |                                                  |                            |  |                                | 2,755,617   
|Valuation allowance to reflect realizability of tax benefits related to purchase of intellectual property from related
party |  |                                                  |                            |  |                                |            
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Balance at December 31, 2000                                                                                                 |  | 6,539,768                                         |                            |  |                                | 239,930,171 
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Comprehensive loss:                                                                                                          |  |                                                   |                            |  |                                |             
|Net loss                                                                                                                     |  |                                                  |                            |  |                                |            
|Unrealized gain on short-term investments                                                                                    |  |                                                  |                            |  |                                |            
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Total comprehensive loss                                                                                                     |  |                                                  |                            |  |                                |            
|Common stock issued in connection with stock option exercises                                                                |  |                                                  |                            |  |                                |            
|Common stock issued in connection with stock option exercises for notes receivable                                           |  |                                                  |                            |  |                                |            
|Deferred stock compensation related to stock options:                                                                        |  |                                                   |                            |  |                                |             
|Grants                                                                                                                       |  |                                                  |                            |  |                                |            
|Amortization                                                                                                                 |  |                                                  |                            |  |                                |            
|Accretion on mandatorily redeemable convertible preferred stock                                                              |  |                                                  |                            |  |                                | 1,048,462   
|Dividends accrued on mandatorily redeemable convertible preferred stock                                                      |  |                                                  |                            |  |                                | 19,561,754  
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Balance at December 31, 2001                                                                                                 |  | 6,539,768                                         |                            |  |                                | 260,540,387 
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Comprehensive loss:                                                                                                          |  |                                                   |                            |  |                                |             
|Net loss                                                                                                                     |  |                                                  |                            |  |                                |            
|Unrealized gain on short-term investments, net of reclassification adjustment                                                |  |                                                  |                            |  |                                |            
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Total comprehensive loss                                                                                                     |  |                                                  |                            |  |                                |            
|Common stock issued in connection with stock option exercises                                                                |  |                                                  |                            |  |                                |            
|Deferred stock compensation related to stock options:                                                                        |  |                                                   |                            |  |                                |             
|Grants                                                                                                                       |  |                                                  |                            |  |                                |            
|Forfeitures                                                                                                                  |  |                                                  |                            |  |                                |            
|Amortization                                                                                                                 |  |                                                  |                            |  |                                |            
|Accretion and dividends on mandatorily redeemable convertible preferred stock                                                |  |                                                  |                            |  |                                | 1,717,865   
|Conversion of Series A and B mandatorily redeemable convertible preferred stock                                              |  | (6,539,768                                        | )                          |  |                                | (262,258,252
|Net proceeds from issuance of common stock (net of offering costs of $10,225,794)                                            |  |                                                  |                            |  |                                |            
|                                                                                                                             |  |                                                   |                            |  |                                |             
|Balance at December 31, 2002                                                                                                 |  |                                                  |                            |  | $                              |            
|                                                                                                                             |  |                                                   |                            |  |                                |             



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



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ZYMOGENETICS, INC.

STATEMENTS OF CASH FLOWS



|                                                                                                                            |  | Year ended December 31, |             
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------------
|                                                                                                                            |  | 2002                    |             
|Cash flows from operating activities                                                                                        |  |                         |             
|Net loss                                                                                                                    |  | $                       | (30,416,078 
|Adjustments to reconcile net loss to net cash used in operating activities                                                  |  |                         |             
|Depreciation and amortization                                                                                               |  |                         | 5,508,144   
|Net (gain) loss on disposition of property and equipment                                                                    |  |                         | (44,775     
|Provision for deferred income taxes                                                                                         |  |                         |            
|Income taxes on future royalty payments from related party                                                                  |  |                         |            
|Noncash stock-based compensation                                                                                            |  |                         | 7,187,624   
|Net realized gain on sale of short-term investments                                                                         |  |                         | (581,613    
|Amortization of premium on short-term investments                                                                           |  |                         | 2,448,197   
|Changes in                                                                                                                  |  |                         |             
|Receivables                                                                                                                 |  |                         | 339,052     
|Prepaid expenses and other assets                                                                                           |  |                         | (705,333    
|Accounts payable                                                                                                            |  |                         | (937,188    
|Related party payables                                                                                                      |  |                         |            
|Accrued liabilities                                                                                                         |  |                         | 2,538,846   
|Stock appreciation plan liability, net of cash distributions                                                                |  |                         |            
|Deferred revenue                                                                                                            |  |                         | 2,680,166   
|Other noncurrent liabilities                                                                                                |  |                         | 221,419     
|                                                                                                                            |  |                         |             
|Net cash used in operating activities                                                                                       |  |                         | (11,761,539 
|                                                                                                                            |  |                         |             
|Cash flows from investing activities                                                                                        |  |                         |             
|Purchase of property and equipment                                                                                          |  |                         | (9,942,665  
|Purchase of short-term investments                                                                                          |  |                         | (305,516,569
|Proceeds from sale of property and equipment                                                                                |  |                         | 50,520,130  
|Proceeds from sale and maturity of short-term investments                                                                   |  |                         | 184,613,093 
|                                                                                                                            |  |                         |             
|Net cash used in investing activities                                                                                       |  |                         | (80,326,011 
|                                                                                                                            |  |                         |             
|Cash flows from financing activities                                                                                        |  |                         |             
|Net proceeds from sale of Series B mandatorily redeemable convertible preferred stock (net of offering costs of
$7,495,290) |  |                         |            
|Net proceeds from issuance of common stock                                                                                  |  |                         | 110,676,647 
|Proceeds from exercise of stock options                                                                                     |  |                         | 596,059     
|Purchase of intellectual property from related party                                                                        |  |                         |            
|Proceeds from assignment of patents and other rights to related party                                                       |  |                         |            
|                                                                                                                            |  |                         |             
|Net cash provided by financing activities                                                                                   |  |                         | 111,272,706 
|                                                                                                                            |  |                         |             
|Net increase (decrease) in cash and cash equivalents                                                                        |  |                         | 19,185,156  
|                                                                                                                            |  |                         |             
|Cash and cash equivalents at beginning of period                                                                            |  |                         | 36,393,551  
|                                                                                                                            |  |                         |             
|Cash and cash equivalents at end of period                                                                                  |  | $                       | 55,578,707  
|                                                                                                                            |  |                         |             
|Cash paid to related party during the period for interest                                                                   |  | $                       |            
|                                                                                                                            |  |                         |             
|Cash paid during the period for interest                                                                                    |  | $                       | 8,075       
|                                                                                                                            |  |                         |             
|Cash paid during the period for income taxes                                                                                |  | $                       |            
|                                                                                                                            |  |                         |             
|Noncash financing activities                                                                                                |  |                         |             
|Accretion on Series B mandatorily redeemable convertible preferred stock                                                    |  | $                       | 87,719      
|                                                                                                                            |  |                         |             
|Conversion of Class A and Class B convertible preferred stock to common stock                                               |  | $                       |            
|                                                                                                                            |  |                         |             
|Issuance of dividend in form of Series A mandatorily redeemable convertible preferred stock                                 |  | $                       |            
|                                                                                                                            |  |                         |             
|Dividends accrued on Series A and Series B mandatorily redeemable convertible preferred stock                               |  | $                       | 1,630,146   
|                                                                                                                            |  |                         |             
|Recognition of prepaid offering costs                                                                                       |  | $                       | 902,441     
|                                                                                                                            |  |                         |             
|Deferred gain on sale leaseback transaction                                                                                 |  | $                       | 14,165,672  
|                                                                                                                            |  |                         |             



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



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ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS



|1. |  | Organization and summary of significant accounting policies
|-- |  | -----------------------------------------------------------



Nature of operations



ZymoGenetics, Inc. (the Company) was incorporated in the state of Washington in June 1981 and operated independently until it was acquired in August 1988
by Novo Nordisk North America, a wholly owned subsidiary of Novo Nordisk A/S (Novo Nordisk). Effective November 9, 2000, the Company became independent from Novo Nordisk upon completion of a private placement of Series B mandatorily redeemable
convertible preferred stock with an investor consortium. On February 1, 2002, the Company completed an initial public offering of common stock, at which time all Series A and B mandatorily redeemable convertible preferred stock held by Novo Nordisk
was converted to common stock. As of December 31, 2002, Novo Nordisks ownership percentage was 47.50%.



As an independent biopharmaceutical company, the Company is focused on the discovery and development of protein therapeutics for the prevention or
treatment of significant human diseases. The Company has generated a broad pipeline of proprietary product candidates and intends to commercialize them through internal development, collaborations with biopharmaceutical partners or out-licensing of
patents.



Over the next several years the Company will need to
seek additional funding through public or private financings, including equity financings, and through other arrangements, including collaborative arrangements. Poor financial results, unanticipated expenses or unanticipated opportunities that
require financial commitments could give rise to additional financing requirements. However, financing may be unavailable when required or may not be available on acceptable terms.



Cash and cash equivalents



The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash
equivalents.



Short-term investments



Marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of shareholders equity (deficit). Interest on securities classified as available-for-sale is included in interest
income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses are included in other income. The cost of
securities sold is based on the specific identification method.



Fair value
of financial instruments



The carrying values of cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values due to their relative short maturities.



Property and equipment



Property and equipment are stated at cost. Additions, betterments and improvements are capitalized and depreciated. When assets are retired or otherwise
disposed of, the cost of the assets and related depreciation is eliminated from the accounts and any resulting gain or loss is reflected in the results of operations. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets, which includes five years for furniture and lab equipment, ten years for pilot plant equipment and 40 years for buildings. Expenditures for repairs and maintenance are charged to expense as incurred.



Leasehold improvements are amortized evenly over either their estimated
useful lives or the term of the lease, whichever is shorter. At December 31, 2002, the Company amortized its leasehold improvements over ten and fifteen year periods.



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Impairment of long-lived assets



The Company periodically determines whether any property and equipment have been impaired. While the Companys current
operating and cash flow losses are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets carrying value, and accordingly, the Company has not recognized any
impairment losses through December 31, 2002.



Patents and licensing
agreements



It is the Companys practice to seek
patent protection on processes and products in various countries. All patent related costs are expensed as incurred, as recoverability of such expenditures is uncertain.



Revenue recognition



Revenues from royalties are received from related and third parties for sales of products that include technology developed by the Company. Revenues are
recognized when due and amounts are considered collectible.



Revenues from license fees, option fees and up-front payments, which are received in connection with other rights or services that represent continuing obligations of the Company, are recognized systematically over the period that the fees
or payments are earned. Revenues from milestone payments representing completion of separate and substantive earnings processes are recognized when the milestone is achieved and amounts are due and payable.



In December 2002, the Company signed an agreement granting Amgen, Inc.,
Immunex Corporation and Wyeth a license to the Companys Ig-fusion protein patents. As a result of this agreement, the Company, Immunex and Amgen have terminated the patent infringement lawsuit filed by the Company in March 2002 against Immunex
Corporation (now owned by Amgen). The Company received a one-time lump sum payment, which was recorded as license fee revenue in 2002.



Research and development costs



Research and development costs are expensed as incurred.



Income taxes



The Company records a provision for income taxes in accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income
Taxes (SFAS 109), which utilizes the liability method of accounting for income taxes. Deferred tax assets or liabilities are recorded for all temporary differences between financial and tax reporting. Deferred tax expense (benefit) results from
the net change during the period of the deferred tax assets and liabilities. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be recovered.



Through November 9, 2000, the Company was included in the consolidated
federal income tax return of Novo Nordisk. A provision for income taxes was made in accordance with a tax sharing agreement between the Company and Novo Nordisk that requires a separate company basis, allocating taxes to each party as if
it were a separate taxpayer. Subsequent to November 9, 2000, the Company files its income tax return as a stand-alone taxpayer.



Stock-based compensation



As permitted by the provisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock Based Compensation (SFAS 123), the
Company has elected to follow Accounting Principles Board No. 25,Accounting for Stock Issued to Employees (APB 25), in accounting for its employee stock option grants and apply the disclosure-only provisions of SFAS 123 with respect to its
stock option plan. Under APB 25, compensation expense is based on the excess, if any, of the estimated fair value of the Companys stock at the date of grant over the exercise price of the option. Deferred compensation is being amortized over
the vesting period of the underlying individual options, using the straight-line method.



10



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##### Table of Contents

The following table illustrates the effect on net income and earnings per share as if the fair value
based method had been applied to all outstanding and unvested awards for each of the years ended December 31:



|                                                          |  | 2002                                                                            |             |   | 2001       |   |             | 2000 |           
|--------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----------- | - | ---------- | - | ----------- | ---- | ----------
|Net loss attributable to common shareholders, as reported |  | $                                                                               | (32,133,943 | ) |            | $ | (57,489,524 | )    |           
|Add:                                                      |  | stock-based compensation included in reported net loss                          |             |   | 7,187,624  |   |             |      | 3,507,352 
|Deduct:                                                   |  | total stock-based compensation expense determined under the fair value method * |             |   | (9,890,626 | ) |             |      | (4,503,190
|                                                          |  |                                                                                 |             |   |            |   |             |      |           
|Net loss attributable to common shareholders, pro forma * |  | $                                                                               | (34,836,945 | ) |            | $ | (58,485,362 | )    |           
|                                                          |  |                                                                                 |             |   |            |   |             |      |           
|Basic and diluted net loss per share, as reported         |  | $                                                                               | (0.75       | ) |            | $ | (4.85       | )    |           
|                                                          |  |                                                                                 |             |   |            |   |             |      |           
|Basic and diluted net loss per share, pro forma *         |  | $                                                                               | (0.82       | ) |            | $ | (4.94       | )    |           
|                                                          |  |                                                                                 |             |   |            |   |             |      |           



|* |  | These amounts have been adjusted to reflect a correction in the minimum value used to calculate pro forma stock-based compensation expense determined under the fair value method.
The adjustment resulted in an increase to total stock-based compensation expense determined under the minimum value method of $7,745,673, $3,537,631 and $110,237 ($0.18, $0.30 and $0.01 net loss per share, pro forma) for the years ending December
31, 2002 and 2001 and 2000, respectively. Only the pro forma per share amounts were adjusted; the amounts reported above for basic and diluted net loss per share are unchanged.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other comprehensive loss



Comprehensive loss is comprised of net loss and unrealized gains and losses
on short-term investments.



Use of estimates



The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities; disclosure of contingent assets and liabilities at the date of the financial statements; and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Loss per share



Basic and diluted net loss per share are computed based on net loss available to common shareholders and the weighted-average number of common shares
outstanding during the applicable period. Common stock equivalents are excluded from the computation of diluted net loss per share because they are antidilutive. Shares subject to repurchase have been excluded from the denominator for both the basic
and diluted computations.



The following table presents the
calculation of basic and diluted net loss per share for years ended December 31:



|                                                                               |  | 2002 |             |   | 2001 |   |             | 2000 | 
|------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- | 
|Net loss attributable to common shareholders                                   |  | $    | (32,133,943 | ) |      | $ | (57,489,524 | )    | 
|                                                                               |  |      |             |   |      |   |             |      | 
|Weighted-average shares used in computing basic and diluted net loss per share |  |      | 42,578,029  |   |      |   | 11,846,093  |      | 
|                                                                               |  |      |             |   |      |   |             |      | 
|Net loss per sharebasic and diluted                                           |  | $    | (0.75       | ) |      | $ | (4.85       | )    | 
|                                                                               |  |      |             |   |      |   |             |      | 
|Antidilutive securities not included in net loss per share calculation         |  |      |             |   |      |   |             |      | 
|Mandatorily redeemable convertible preferred stock (as if converted)           |  |      |            |   |      |   | 23,543,159  |      | 
|Options to purchase common stock                                               |  |      | 8,267,397   |   |      |   | 7,307,092   |      | 
|Shares subject to repurchase                                                   |  |      | 6,750       |   |      |   | 87,750      |      | 
|                                                                               |  |      |             |   |      |   |             |      | 
|                                                                               |  |      | 8,274,147   |   |      |   | 30,938,001  |      | 
|                                                                               |  |      |             |   |      |   |             |      | 



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Recent accounting pronouncements



In 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations (SFAS 143), which establishes
requirements for the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is effective for fiscal years beginning after June 15, 2002,
with earlier application encouraged. The Company is currently assessing the impact of SFAS 143 on its financial statements and will adopt the standard the first quarter of fiscal 2003.



In 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment to FASB Statement No. 13, and Technical Corrections (SFAS 145). SFAS 145 eliminates the requirement in Statement of Financial Accounting Standards No. 4, (SFAS 4) that gains and losses from the extinguishments of debt be aggregated and
classified as extraordinary items, net of the related income tax. The rescission of SFAS 4 is effective for fiscal years beginning after May 15, 2002. The Company does not expect that the rescission of SFAS 4 will have a material impact on its
results of operations, cash flows or financial condition.



In
July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 requires the recognition of such costs when they are incurred rather than at
the date of a commitment to an exit or disposal plan. The provisions of SFAS 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Adoption of this statement is not expected to have a material impact
on the Companys results of operations and financial condition.



In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative consensus on EITF Issue No. 00-21, Revenue Arrangements With Multiple Deliverables(EITF 00-21), which provides guidance on the timing and method of
revenue recognition for sales agreements that include delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently
assessing the impact of EITF 00-21 on its financial statements and will adopt the new guidance prospectively beginning in the first quarter of 2004.



In December 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 expands on the accounting guidance of FASB No. 5, 57 and 107 and incorporates without change the provisions of FASB Interpretation No. 34. FIN 45 provides guidance for the initial recognition
and measurement, applicable prospectively to all guarantees issued or modified after December 31, 2002, and disclosure requirements effective for financial statements of interim and annual reporting periods ending after December 15, 2002. The
Companys December 2002 financial statements include the disclosures required by FIN 45. Adoption of this interpretation is not expected to have a material impact on the Companys results of operations, cash flows or financial condition.



In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based CompensationTransition and Disclosurean Amendment of FASB Statement No. 123 (SFAS 148). This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement requires that companies having a year-end after December 15, 2002 follow the prescribed format and
provide the additional disclosures in their annual reports. The Companys financial statements include the disclosures required by SFAS 148.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have (i) the characteristics of a controlling financial interest or (ii) sufficient at-risk equity. FIN 46 applies to
a broad range of unconsolidated investee entities (e.g. joint ventures, partnerships and cost basis investments) and, effective for financial statements issued after January 31, 2003, adds certain disclosure requirements. The Company is currently
assessing the effect of the adoption of FIN 46 on its financial position and results of operations.



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##### Table of Contents

|2. |  | Short-term investments
|-- |  | ----------------------



Short-term investments consisted of the following at:



|                                      |  | December 31, 2002
|------------------------------------- |  | -----------------
|                                      |  | AmortizedCost    
|Type of security:                     |  |                  
|Commercial paper and money market     |  | $                
|Corporate debt securities             |  |                  
|Asset-backed securities               |  |                  
|U.S. government and agency securities |  |                  
|Foreign government securities         |  |                  
|                                      |  |                  
|                                      |  | $                
|                                      |  |                  



|                                      |  | December 31, 2001
|------------------------------------- |  | -----------------
|                                      |  | AmortizedCost    
|Type of security:                     |  |                  
|Commercial paper and money market     |  | $                
|Corporate debt securities             |  |                  
|Asset-backed securities               |  |                  
|U.S. government and agency securities |  |                  
|                                      |  |                  
|                                      |  | $                
|                                      |  |                  



The following table
summarizes contractual maturity information for the securities at:



|                   |  | EstimatedFair Value |             | AmortizedCost
|------------------ |  | ------------------- | ----------- | -------------
|December 31, 2002: |  |                     |             |              
|Maturity date:     |  |                     |             |              
|Less than one year |  | $                   | 100,821,898 |              
|Due in 1-3 years   |  |                     | 129,037,087 |              
|                   |  |                     |             |              
|                   |  | $                   | 229,858,985 |              
|                   |  |                     |             |              



|                   |  | EstimatedFair Value |             | AmortizedCost
|------------------ |  | ------------------- | ----------- | -------------
|December 31, 2001: |  |                     |             |              
|Maturity date:     |  |                     |             |              
|Less than one year |  | $                   | 22,040,421  |              
|Due in 1-3 years   |  |                     | 88,642,971  |              
|                   |  |                     |             |              
|                   |  | $                   | 110,683,392 |              
|                   |  |                     |             |              



Realized gains were
$863,000 and $132,000 for the years ended December 31, 2002 and 2001, respectively. Realized losses were $281,000 and $37,000 for the years ended December 31, 2002 and 2001, respectively. Reclassification adjustments reflected in other comprehensive
income for net realized gains and losses were $595,000 for the year ended December 31, 2002.



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##### Table of Contents

|3. |  | Property and equipment
|-- |  | ----------------------



Property and equipment consisted of the following at December 31:



|                                                |  | 2002 |             |   | 2001 |  
|----------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Land and buildings                              |  | $    | 4,443,983   |   |      | $
|Leasehold improvements                          |  |      | 6,248,220   |   |      |  
|Furniture and equipment                         |  |      | 39,590,449  |   |      |  
|Construction in progress                        |  |      | 1,463,016   |   |      |  
|                                                |  |      |             |   |      |  
|                                                |  |      | 51,745,668  |   |      |  
|Less: Accumulated depreciation and amortization |  |      | (34,492,736 | ) |      |  
|                                                |  |      |             |   |      |  
|                                                |  | $    | 17,252,932  |   |      | $
|                                                |  |      |             |   |      |  



|4. |  | Accrued liabilities
|-- |  | -------------------



Accrued liabilities consisted of the following at December 31:



|                       |  | 2002 |           | 2001
|---------------------- |  | ---- | --------- | ----
|Vacation pay           |  | $    | 2,021,754 |     
|Incentive compensation |  |      | 171,539   |     
|Contract services      |  |      | 2,756,170 |     
|City and state taxes   |  |      | 255,376   |     
|Severance payments     |  |      | 73,189    |     
|Other                  |  |      | 411,038   |     
|                       |  |      |           |     
|                       |  | $    | 5,689,066 |     
|                       |  |      |           |     



|5. |  | Transactions and accounts with related parties
|-- |  | ----------------------------------------------



Novo Nordisk has been granted an option to obtain an exclusive license to an unlimited number of proteins discovered after August 1995 that modulate
insulin producing beta cells and for up to the greater of eight or 25% of the Companys protein candidates other than those related to beta cells over a period of four years beginning November 10, 2000. In return, the Company is entitled to
receive four annual payments of $7.5 million, the first of which was received in November 2000. The option payments are being recognized ratably over the term of the agreement. Novo Nordisk may elect to extend the agreement for a period of two
additional years, with the right to license up to four more protein candidates in return for continuing the $7.5 million annual payments to the Company. Upon exercise of an option by Novo Nordisk, the Company will receive an up-front license fee,
the amount of which is dependent on the stage of the product candidate licensed. Additionally, Novo Nordisk will be obligated to make payments upon the achievement of predefined development milestones and to pay royalties on sales of resulting
products.



During 2000, Novo Nordisk paid approximately $90.1
million to the Company, $76.4 million of which was in return for assignment of all rights and obligations with respect to NovoSeven (Factor VII) and $13.7 million for the grant of a perpetual license to the technology relating to analogues of human
insulin, including the technology underlying Novo Nordisks product, NovoRapid. Also, the Company paid $35.7 million to Novo Nordisk to purchase its rights outside the United States to the Companys portfolio of patents, patent
applications and related intellectual property that had been developed pursuant to the research and development agreement described above. Concurrently, Novo Nordisk contributed to the Company the rights to this intellectual property in the United
States. Because these transactions were consummated when the Company was controlled by Novo Nordisk, they were recorded as capital transactions. On August 4, 2000, the Company entered into a loan in the amount of $35.7 million with Novo Nordisk to
fund the purchase of the intellectual property described above. The loan accrued interest of 6.94% per annum and, together with the principal, was paid in full on October 13, 2000. Various other loans were arranged with Novo Nordisk with annual
interest rates ranging from 6.82% to 6.87% and with full repayment occurring within seven days of origination. There were no loan obligations due to Novo Nordisk as of December 31, 2002 or 2001.



14



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##### Table of Contents

The Company earns royalties on several products marketed and sold by Novo Nordisk, including Novolin
(recombinant insulin) and GlucaGen (recombinant glucagon). Royalties are based on contracts predating the Companys acquisition by Novo Nordisk. Minimum royalties were collected through 1999; however, an analysis completed in 2000 showed
additional royalties due the Company for Novolin and GlucaGen of approximately $12.1 million and $3.1 million, respectively. These amounts plus an interest charge of approximately $2.3 million were recorded in 2000 when collectability was assured,
and the amounts were fixed and determinable. Including the aforementioned royalty amounts, the Company earned total royalties from Novo Nordisk of approximately $5.0 million, $5.2 million and $29.3 million for the years ended December 31, 2002, 2001
and 2000, respectively. All amounts related to royalty agreements are settled quarterly.



During 2000, the Company entered into a cross-license agreement with Novo Nordisk which provides non-exclusive licenses to each party to conduct research using the other partys intellectual property relating to
Kunitz domains and Kunitz proteins. In addition, the Company has entered into other cross-licensing agreements with Novo Nordisk relating to certain other technologies.



On February 1, 2002, the Company completed its initial public offering. Upon the completion of the initial public offering
each share of Series A and Series B mandatorily redeemable convertible preferred stock held by Novo Nordisk, converted to 3.6 shares of non-voting and voting common stock, respectively. Effective June 24, 2002, all shares of non-voting common stock
were converted into the same number of shares of voting common stock.



In December 2002, the Company completed a collaborative agreement with Novo Nordisk for the preclinical development of Interleukin 21. Under the terms of the agreement, the Company and Novo Nordisk will collaborate on all research and
development activities leading up to the filing of an Investigational New Drug application (IND) in the United States. Upon signing, Novo Nordisk paid $4.0 million to the Company as reimbursement of a portion of the Companys costs incurred
prior to the agreement. This amount has been deferred and will be recognized as revenue ratably over the estimated period leading to the IND filing. Novo Nordisk also agreed to pay the Company up to $7.0 million for its 50% share of Interleukin 21
development costs incurred from the date of the agreement through the filing of the IND. This amount will be recorded as an offset to development costs.



Amounts receivable from Novo Nordisk and related entities were approximately $389,000 and $449,000 at December 31, 2002 and 2001, respectively.



|6. |  | Novo Nordisk stock appreciation rights
|-- |  | --------------------------------------



In 1988, the Company adopted a plan providing that officers and other key employees be granted rights to the appreciation in the market value of a stated
number of shares of common stock of Novo Nordisk listed on the New York Stock Exchange. The rights became exercisable over three- and five-year periods and had a life of ten years. The exercise price of the rights ranged from 85% to 90% of Novo
Nordisks common stock price on the date of the grant. Expenses were charged or credited for the aggregate appreciation or depreciation of the rights during each reporting period. Changes in the value of outstanding rights resulted in
compensation expense of approximately $1.5 million for the year ended December 31, 2000. All rights under this plan were fulfilled as of December 31, 2000.



|7. |  | Retirement plans
|-- |  | ----------------



Defined contribution



The Company has established a 401(k) retirement plan covering substantially all of its employees. The plan provides for matching and discretionary contributions by the Company. Such contributions were approximately $2.1 million, $1.7
million and $1.6 million for the years ended December 31, 2002, 2001 and 2000, respectively.



Deferred compensation plan



The Company has a Deferred Compensation Plan (DCP) for key employees. Eligible plan participants are designated by the Companys board of directors. The DCP allows participants to defer up to 15% of their annual compensation and up to
100% of any bonus. The DCP provides for discretionary contributions by the Company; such contributions were $96,000 for the year ended December 31, 2000. There were no such contributions in 2002 and 2001. At December 31, 2002 and 2001, approximately
$2.7 million and $2.9 million, respectively, was deferred under the DCP and was recorded both as a noncurrent asset and a noncurrent liability.



15



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##### Table of Contents

|8. |  | Income taxes
|-- |  | ------------



At December 31, 2002, the Company had net operating loss carryforwards of approximately $52.5 million, a research and development tax credit carryforward
of $15.0 million, a rehabilitation tax credit carryforward of $1.5 million and alternative minimum tax credit carryforwards of $1.2 million. The carryforwards are available to offset future tax liabilities. The net operating losses, research and
development tax credit and rehabilitation tax credit will expire in the years 2008 to 2022. The alternative minimum tax credit will carry forward indefinitely. The Company completed an initial public offering on February 1, 2002 and pursuant to the
provisions of Internal Revenue Code Section 382 the offering may qualify as a change in ownership. Accordingly, a portion of the net operating loss carryforwards may be limited.



Components of income tax expense (benefit) were as follows for the years ended December 31:



|         |  | 2002 |   | 2001 |   |         | 2000 | 
|-------- |  | ---- | - | ---- | - | ------- | ---- | 
|Current  |  | $    |  |      | $ | (89,606 | )    | 
|Deferred |  |      |  |      |   |        |      | 
|         |  |      |   |      |   |         |      | 
|         |  | $    |  |      | $ | (89,606 | )    | 
|         |  |      |   |      |   |         |      | 



Deferred tax assets
and liabilities arise from temporary differences between financial and tax reporting. The Company has provided a valuation allowance at December 31, 2002 and 2001 to offset the excess of deferred tax assets over the deferred tax liabilities, due to
the Companys status as a stand-alone taxpayer and the uncertainty of realizing the benefits of the net deferred tax asset. Deferred tax and liabilities were as follows for the years ended December 31:



|                                                  |  | 2002 |             |   | 2001 |  
|------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Deferred tax assets:                              |  |      |             |   |      |  
|Net operating loss carryforwards                  |  | $    | 18,382,000  |   |      | $
|Research and development tax credit carryforwards |  |      | 14,953,000  |   |      |  
|Alternative minimum tax credit carryforwards      |  |      | 1,242,000   |   |      |  
|Rehabilitation tax credit carryforwards           |  |      | 1,507,000   |   |      |  
|Intellectual property purchased from Novo Nordisk |  |      | 8,747,000   |   |      |  
|Deferred gain on sale of assets                   |  |      | 4,958,000   |   |      |  
|Other                                             |  |      | 6,180,000   |   |      |  
|                                                  |  |      |             |   |      |  
|                                                  |  |      | 55,969,000  |   |      |  
|Deferred tax liabilities:                         |  |      |             |   |      |  
|Deferred revenue                                  |  |      | (3,938,000  | ) |      |  
|                                                  |  |      |             |   |      |  
|                                                  |  |      | 52,031,000  |   |      |  
|Less: Valuation allowance                         |  |      | (52,031,000 | ) |      |  
|                                                  |  |      |             |   |      |  
|Net deferred tax asset                            |  | $    |            |   |      | $
|                                                  |  |      |             |   |      |  



On October 20, 2000,
the Company entered into a tax sharing agreement with Novo Nordisk. The agreement states that all research and development tax credit carryforwards generated by the Company prior to November 9, 2000 used by the Company to generate a tax benefit in
future periods shall be reimbursed to Novo Nordisk. The total amount paid shall not exceed $12 million.



Realization of the deferred tax asset associated with intellectual property purchased from Novo Nordisk will be reflected as increases in
shareholders equity and will not be reflected as tax benefits in the statement of operations.



16



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##### Table of Contents

The reconciliation between the Companys effective tax rate and the income tax rate is as follows
for the years ended

December 31:



|                                     |  | 2002 |    |  | 2001 |    |  | 2000 |   
|------------------------------------ |  | ---- | -- |  | ---- | -- |  | ---- | --
|Federal income tax rate              |  | (35  | )% |  | (35  | )% |  | (35  | )%
|Research and development tax credits |  | (7   | )  |  | (6   | )  |  |     |   
|Valuation allowance                  |  | 34   |    |  | 39   |    |  | 62   |   
|Other                                |  | 8    |    |  | 2    |    |  | (3   | ) 
|                                     |  |      |    |  |      |    |  |      |   
|Effective tax rate                   |  | 0    | %  |  | 0    | %  |  | 24   | % 
|                                     |  |      |    |  |      |    |  |      |   



|9. |  | Commitments
|-- |  | -----------



The Company leases certain office and laboratory space, some of which has been subleased to a third party.



In November 2001, the Company entered into a lease agreement for additional
office space. The lease began on February 1, 2002. The lease term is 10 years with options to renew for up to two additional terms of five years each. Annual lease payments will range from $0.4 million to $0.5 million. The lease also provides the
Company a right of first refusal through February 1, 2004 to lease additional space in the building.



In October 2002, the Company completed a sale and leaseback transaction involving its headquarter buildings located in Seattle, Washington. The three
buildings were sold for a total purchase price of $52.3 million. Net proceeds from this transaction amounted to $50.5 million, and a gain of $14.4 million has been deferred and will be recognized ratably over the lease term. Simultaneously, the
Company agreed to lease the buildings from the purchaser for a period of 15 years, subject to four five-year renewal options. The Company has provided the lessor a security deposit in the form of pledged securities equal to two months base rent. The
Company has accounted for this transaction as a sale and leaseback in accordance with the criteria of SFAS 98. The lease of the building has been classified as an operating lease in accordance with SFAS 13. The initial rental payment of $5.1 million
per year will increase by 3.5% each year during the term. The Company will recognize rent expense of $6.6 million per year, which is the average annual rent over the initial lease term. Rent for the renewal terms will be the greater of fair market
value or 90% of the rent for the last year prior to renewal. The Company has retained an option to expand one of the leased buildings. Planning is underway to pursue this option in 2003. If this expansion project is pursued, it is expected to cost
approximately $26 million, including all related equipment costs. The purchaser has agreed to finance a substantial portion of these costs, in return for increased rent payments. To date, no material financial commitments have been made related to
the facility expansion.



Future minimum rental payments under
noncancelable operating leases with initial or remaining terms in excess of one year are as follows:



|Year ending December 31,           |  |   |            
|---------------------------------- |  | - | -----------
|2003                               |  | $ | 5,860,235  
|2004                               |  |   | 5,909,817  
|2005                               |  |   | 6,114,653  
|2006                               |  |   | 6,311,868  
|2007                               |  |   | 6,544,573  
|Thereafter                         |  |   | 72,516,449 
|                                   |  |   |            
|                                   |  |   | 103,257,595
|Less: Future sublease income       |  |   | (120,969   
|                                   |  |   |            
|Net future minimum rental payments |  | $ | 103,136,626
|                                   |  |   |            



In addition to the
above minimum rental payments, the Company may be obligated to lease additional office space. In such a case, the minimum rental payments under that lease could range from approximately $368,000 to $476,000 per year beginning February 2004 and
ending January 2012.



Gross rental expense for the years ended
December 31, 2002, 2001, and 2000 was approximately $4.2 million, $1.9 million and $1.8 million, respectively. Cash received under the sublease agreements for the subleased office space was approximately $2.0 million, $2.0 million and $1.8 million
for the years ended December 31, 2002, 2001, and 2000 respectively.



Certain key employees have employment agreements with the Company providing certain severance benefits.



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##### Table of Contents

|10. |  | Serono S.A. agreement
|--- |  | ---------------------



In August 2001, the Company entered into a collaborative development and marketing agreement with Ares Trading S.A. (Serono), a wholly owned subsidiary of
Serono S.A. Under the agreement, the Company will collaborate with Serono to develop biopharmaceutical products based on two receptors, TACI and BCMA. Additionally, the Company could receive license fee and milestone payments of up to an aggregate
of $52.5 million in connection with the development and approval of products. The Company will share research and development expenses worldwide, with the exception of Japan, where Serono will cover all expenses. The Company retains an option to
co-promote products with Serono in North America while Serono will have exclusive rights to market products in the remainder of the world, for which the Company will receive royalties. The Company will have the option of discontinuing funding of
research and development and commercialization costs, and forgoing its right to co-promote products in North America. If the Company chooses to discontinue funding, Serono would have exclusive marketing rights in North America, and the Company would
receive a royalty on any sales in North America in lieu of sharing in the net sales, commercialization expenses and profits from the products. Serono will be responsible for manufacturing all products for both clinical trials and commercial sale.
The Company has received a $7.5 million payment from Serono in 2001, which is being amortized over the estimated term of the development program, approximately nine years.



|11. |  | Mandatorily redeemable convertible preferred stock
|--- |  | --------------------------------------------------



In November 2000, the Company issued 4,011,768 shares of Series B mandatorily redeemable convertible preferred stock to a group of investors at a price
per share of $37.39, which provided proceeds to the Company of approximately $142.5 million, net of offering costs of approximately $7.5 million. In the same period, the Company declared a dividend on the outstanding common stock owned by Novo
Nordisk, issuing 2,528,000 shares of Series A mandatorily redeemable convertible preferred stock. The holders of both Series A and B shares were entitled to receive a cumulative dividend of 8% per annum on the then current liquidation value. Each
share of preferred stock was convertible into 3.6 shares of common stock.



On February 1, 2002, the Company completed its initial public offering, which resulted in the conversion of each share of Series A and Series B mandatorily redeemable convertible preferred stock to 3.6 shares of
non-voting and voting common stock, respectively. Effective June 24, 2002, all outstanding shares of non-voting common stock were converted into the same number of shares of voting common stock.



|12. |  | Shareholders equity (deficit)
|--- |  | ------------------------------



The Companys authorized capital stock consists of 150,000,000 shares of no par value voting common stock, 30,000,000 shares of no par value
non-voting common stock and 30,000,000 shares of no par value preferred stock. On January 9, 2002, the Company effected a 3.6-for-1 stock split of its common stock in the form of a stock dividend. All common stock share and per share amounts in the
financial statements have been adjusted retroactively to reflect the stock split.



Common stock



At December 31, 2001, 23,543,159
shares of authorized common stock were reserved for issuance upon conversion of preferred stock. On February 1, 2002, the Company sold 10,000,000 shares of common stock in an initial public offering. Upon the completion of the initial public
offering the 4,011,768 shares of Series B mandatorily redeemable convertible preferred stock converted to 14,442,359 shares of voting common stock, and the 2,528,000 shares of Series A mandatorily redeemable convertible preferred stock converted to
9,100,800 shares of non-voting common stock. Effective June 24, 2002, all shares of non-voting common stock were converted into the same number of shares of voting common stock.



18



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##### Table of Contents

Stock options



In March 2000, the Company adopted the 2000 Stock Incentive Plan (the 2000 Plan). Upon completion of the Companys initial public offering, in
February 2002, the 2000 Plan was suspended and the 2001 Stock Incentive Plan (the 2001 Plan) became effective. Both plans provide for the issuance of incentive stock options and nonqualified stock options to employees, directors, consultants and
other independent contractors who provide services to the Company. The Companys board of directors is responsible for administration of the Plans and determines the term of each option, exercise price and the vesting terms. Options generally
vest over a four-year period and expire ten years from the date of grant. The 2001 Plan provides for an annual increase effective the first day of each year equal to the least of (i) 2,700,000 shares; (ii) 5% of the outstanding common stock as of
the end of the Companys preceding fiscal year; and (iii) a lesser amount as determined by the Board of Directors. The first annual increase under the 2001 Plan occurred upon completion of the Companys initial public offering. Any shares
from the 2000 Plan that are not actually issued shall continue to be available for issuance under the 2001 Plan. The Company has reserved a total of 9,423,180 shares of common stock for issuance under the Plan, of which 646,784 are available for
future grant at December 31, 2002. Certain board members were granted options to purchase 144,000 shares that are immediately exercisable. Options to purchase 93,464 shares have been granted to certain board members in 2002 that are exercisable as
of the one-year anniversary from the grant date.



A summary of
stock option activity under the Plan is presented below:



|                           |  | Options   |   |  | Weighted-Average Exercise Price |      | Weighted-Average Fair Value at Grant Date *
|-------------------------- |  | --------- | - |  | ------------------------------- | ---- | -------------------------------------------
|Balance, January 1, 2000   |  |          |   |  | $                               |     |                                            
|Granted                    |  | 4,331,520 |   |  |                                 | 2.78 |                                            
|Exercised                  |  |          |   |  |                                 |     |                                            
|Canceled                   |  | (20,520   | ) |  |                                 | 2.78 |                                            
|                           |  |           |   |  |                                 |      |                                            
|Balance, December 31, 2000 |  | 4,311,000 |   |  | $                               | 2.78 |                                            
|                           |  |           |  
|Granted                    |  | 3,629,066 |   |  | $                               | 3.94 |                                            
|Exercised                  |  | (271,080  | ) |  |                                 | 2.78 |                                            
|Canceled                   |  | (361,894  | ) |  |                                 | 3.03 |                                            
|                           |  |           |   |  |                                 |      |                                            
|Balance, December 31, 2001 |  | 7,307,092 |   |  | $                               | 3.35 |                                            
|                           |  |           |  
|Granted                    |  | 1,241,410 |   |  | $                               | 8.34 |                                            
|Exercised                  |  | (208,272  | ) |  |                                 | 2.86 |                                            
|Canceled                   |  | (72,833   | ) |  |                                 | 3.73 |                                            
|                           |  |           |   |  |                                 |      |                                            
|Balance, December 31, 2002 |  | 8,267,397 |   |  | $                               | 4.10 |                                            
|                           |  |           |   |  |                                 |      |                                            



The exercise price of
options granted in 2000 was equal to the estimated fair value of the Companys shares at the date of grant. The exercise prices of options granted during 2001 and through January 9, 2002 were less than the fair value of the Companys
shares at the date of grant. The exercise prices of options granted for the remainder of 2002 were equal to the fair value of the Companys shares at the date of grant.



|* |  | These amounts have been adjusted to reflect increases in the amounts of weighted-average fair value at grant date from those previously reported. The increases for the years ended
December 31, 2000, 2001 and 2002 are $.06, $8.29 and $.45, respectively.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|               |  |                                  |  | Options outstanding |  | Options exercisable                                   
|-------------- |  | -------------------------------- |  | ------------------- |  | ------------------------------------------------------
|Exercise Price |  | Weighted-average exercise prices |  | Number of options   |  | Weighted-average remaining contractual life (in years)
|$              |  | 2.77  $ 3.77                    |  | $2.78               |  | 4,658,035                                             
|               |  | 3.78     6.78                   |  | 4.51                |  | 2,453,572                                             
|               |  | 6.79     9.79                   |  | 7.73                |  | 871,790                                               
|               |  | 9.80   11.80                    |  | 11.21               |  | 284,000                                               
|               |  |                                  |  |                     |  |                                                       
|               |  |                                  |  | 4.10                |  | 8,267,397                                             
|               |  |                                  |  |                     |  |                                                       



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##### Table of Contents

The weighted average fair values were determined based on the Black-Scholes option-pricing model with the
following assumptions:



|                                |  | 2002    |   |  | 2001    |   |  | 2000    |  
|------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|Expected dividend yield         |  | 0       | % |  | 0       | % |  | 0       | %
|Expected stock price volatility |  | 70      | % |  | 0       | % |  | 0       | %
|Risk-free interest rate         |  | 3.85    | % |  | 4.48    | % |  | 5.58    | %
|Expected life of options        |  | 5 years |   |  | 5 years |   |  | 5 years |  



For options granted
prior to September 10, 2001, the fair value of each option is estimated on the date of grant using the minimum value method allowable for nonpublic companies with the weighted-average assumptions shown in the table above. For options granted
subsequent to September 10, 2001, volatility was assumed to be 70%.



On September 14, 2001, the Company made loans to certain executives totaling $725,000, pursuant to promissory notes in connection with the purchase of shares of common stock upon the exercise of non-qualified stock options by the
executives. The loans bear interest at a rate equal to the applicable federal rate. This interest is nonrefundable and nonprepayable. All outstanding principal on the notes is payable on the three-year anniversary of the notes, with accrued interest
payable annually on each anniversary of the notes. Each of these notes is collateralized by a pledge of the shares of common stock issued in connection with the extension of the loan. Each of the executives personal liability is limited to 50%
of the original principal amount of the note and 100% of the accrued interest and costs, including attorneys fees, due under the note.



13. Quarterly Financial Results (unaudited)



Operating results for each quarter of 2002 and 2001 are summarized as follows (in thousands):



|                                                      |  | Q1 |         |   | Q2 |   |         | Q3 |  |   | Q4      |  
|----------------------------------------------------- |  | -- | ------- | - | -- | - | ------- | -- |  | - | ------- | -
|Year ended December 31, 2002:                         |  |    |         |   |    |   |         |    |  |   |         |  
|Revenue                                               |  | $  | 5,799   |   |    | $ | 6,960   |    |  | $ | 5,925   |  
|Net income (loss)                                     |  | $  | (11,803 | ) |    | $ | (15,132 | )  |  | $ | (14,466 | )
|Net income (loss) attributable to common shareholders |  | $  | (13,521 | ) |    | $ | (15,132 | )  |  | $ | (14,466 | )
|Net income (loss) per common share:                   |  |    |         |   |    |   |         |    |  |   |         |  
|Basic                                                 |  | $  | (0.41   | ) |    | $ | (0.33   | )  |  | $ | (0.32   | )
|Diluted                                               |  | $  | (0.41   | ) |    | $ | (0.33   | )  |  | $ | (0.32   | )
|                                                      |  |    |         |  
|Year ended December 31, 2001:                         |  |    |         |   |    |   |         |    |  |   |         |  
|Revenue                                               |  | $  | 5,092   |   |    | $ | 3,458   |    |  | $ | 4,346   |  
|Net loss                                              |  | $  | (6,230  | ) |    | $ | (9,666  | )  |  | $ | (9,726  | )
|Net loss attributable to common shareholders          |  | $  | (11,382 | ) |    | $ | (14,818 | )  |  | $ | (14,879 | )
|Net loss per common share:                            |  |    |         |   |    |   |         |    |  |   |         |  
|Basic                                                 |  | $  | (0.97   | ) |    | $ | (1.26   | )  |  | $ | (1.26   | )
|Diluted                                               |  | $  | (0.97   | ) |    | $ | (1.26   | )  |  | $ | (1.26   | )



20



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##### Table of Contents

PART IV



Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K



(a) The following documents are filed as part of this Form 10-K:



3. Exhibits



|Exhibit No. |  | Description                                                                                                                                                                                 |  |    
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|            |  |                                                                                                                                                                                            
|3.1         |  | Amended and Restated Articles of Incorporation of ZymoGenetics, Inc.                                                                                                                        |  | (A)
|            |  |                                                                                                                                                                                            
|3.2         |  | Amendment to Amended and Restated Articles of Incorporation of ZymoGenetics, Inc.                                                                                                           |  | (D)
|            |  |                                                                                                                                                                                            
|3.3         |  | Amended and Restated Bylaws.                                                                                                                                                                |  | (A)
|            |  |                                                                                                                                                                                            
|9.1         |  | Voting Agreement, dated October 20, 2000, by and between Warburg, Pincus Equity Partners, L.P. and Ernesto
Bertarelli.                                                                      |  | (A)
|            |  |                                                                                                                                                                                            
|9.2         |  | Agreement and Waiver of Co-Sale Rights, dated July 16, 2001, by and among ZymoGenetics, Inc., the holders of Series B Preferred
Stock listed on the signature pages thereto and Serono B.V. |  | (A)
|            |  |                                                                                                                                                                                            
|9.3         |  | Share Transfer and Voting Agreement, dated January 2, 2001, by and between Warburg, Pincus Equity Partners, L.P. and Mount
Everest Advisors, L.L.C. and acknowledged by ZymoGenetics, Inc.  |  | (A)
|            |  |                                                                                                                                                                                            
|10.2        |  | Employment Agreement, dated March 21, 2001, between ZymoGenetics, Inc. and Jan K. Öhrström.                                                                                                 |  | (A)
|            |  |                                                                                                                                                                                            
|10.3        |  | Employment Agreement, dated March 23, 2001, between ZymoGenetics, Inc. and Patrick J. OHara.                                                                                               |  | (A)
|            |  |                                                                                                                                                                                            
|10.4        |  | Employment Agreement, dated April 23, 2001, between ZymoGenetics, Inc. and Frank D. Collins.                                                                                                |  | (A)
|            |  |                                                                                                                                                                                            
|10.5        |  | Employment Agreement, dated April 30, 2001, between ZymoGenetics, Inc. and James A. Johnson.                                                                                                |  | (E)
|            |  |                                                                                                                                                                                            
|10.6        |  | Employment Agreement, dated January 2, 2002, between ZymoGenetics, Inc. and Mark D. Young.                                                                                                  |  | (A)
|            |  |                                                                                                                                                                                            
|10.7        |  | Employment Agreement, dated January 28, 2002, between ZymoGenetics, Inc. and Robert S. Whitehead                                                                                            |  | (B)
|            |  |                                                                                                                                                                                            
|10.8        |  | Employment Agreement, dated February 12, 2002, between ZymoGenetics, Inc. and Suzanne Shema.                                                                                                |  | (B)
|            |  |                                                                                                                                                                                            
|10.9        |  | Amended and Restated 2000 Stock Incentive Plan.                                                                                                                                             |  | (A)
|            |  |                                                                                                                                                                                            
|10.10       |  | 2001 Stock Incentive Plan.                                                                                                                                                                  |  | (A)
|            |  |                                                                                                                                                                                            
|10.11       |  | Stock Option Grant Program for Nonemployee Directors under the ZymoGenetics 2001 Stock Incentive Plan.                                                                                      |  | (E)



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##### Table of Contents

|      |   | 
|----- | - | 
|10.12 |   | 
|      |   | 
|10.13 |   | 
|      |   | 
|10.14 |   | 
|      |   | 
|10.15 |   | 
|      |   | 
|10.16 |   | 
|      |   | 
|10.17 |   | 
|      |   | 
|10.18 |   | 
|      |   | 
|10.19 |   | 
|      |   | 
|10.20 |   | 
|      |   | 
|10.21 |   | 
|      |   | 
|10.22 |   | 
|      |   | 
|10.23 |   | 
|      |   | 
|10.24 |   | 
|      |   | 
|10.25 |   | 
|      |   | 
|10.26 |   | 
|      |   | 
|10.27 |   | 
|      |   | 
|10.28 |   | 
|      |   | 
|10.29 |   | 
|      |   | 
|10.30 | * | 
|      |   | 
|10.31 |   | 



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##### Table of Contents

|      |  |                                                                                                                                                                                                               
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.32 |  | Shareholders Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo Nordisk Pharmaceuticals, Inc. and the
investors listed on Schedule A thereto, effective as of November 10, 2000.              
|      |  |                                                                                                                                                                                                               
|10.33 |  | First Amendment to Shareholders Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo Nordisk
Pharmaceuticals, Inc. and the investors listed on Schedule A thereto, dated as of February 4, 2002.
|      |  |                                                                                                                                                                                                               
|10.34 |  | Investors Rights Agreement by and among ZymoGenetics, Inc., Novo Nordisk Pharmaceuticals, Inc. and the persons listed on
Schedule A thereto, effective as of November 10, 2000.                              
|      |  |                                                                                                                                                                                                               
|10.35 |  | Tax Sharing Agreement, effective October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk of North America,
Inc.                                                                                         
|      |  |                                                                                                                                                                                                               
|10.36 |  | Office Lease Agreement, dated November 9, 2001, between ZymoGenetics, Inc. and 1144 Eastlake LLC.                                                                                                             
|      |  |                                                                                                                                                                                                               
|10.37 |  | Office Lease Agreement, dated October 4, 2002, between ZymoGenetics, Inc. and ARE-1201/1208 Eastlake Avenue,
LLC.                                                                                             
|      |  |                                                                                                                                                                                                               
|10.38 |  | Office Lease Agreement, dated October 4, 2002, between ZymoGenetics, Inc. and ARE-1208 Eastlake Avenue, LLC.                                                                                                  
|      |  |                                                                                                                                                                                                               
|23.1  |  | Consent of PricewaterhouseCoopers LLP, independent auditors.                                                                                                                                                  
|      |  |                                                                                                                                                                                                               
|99.1  |  | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        

---

|* |  | Portions of these exhibits have been omitted based on a request for confidential treatment from the Securities and Exchange Commission. The omitted portions of these exhibits have
been filed separately with the SEC.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(A) |  | Incorporated by reference to designated exhibit included with ZymoGenetics Registration Statement on Form S-1 (No. 333-69190) filed on September 10, 2001, as amended.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) |  | Incorporated by reference to designated exhibit included with ZymoGenetics Annual Report on Form 10-K for the year ended December 31, 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(C) |  | Incorporated by reference to designated exhibit included with ZymoGenetics Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|(D) |  | Incorporated by reference to designated exhibit included with ZymoGenetics Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



|(E) |  | Previously filed with ZymoGenetics Annual Report on Form 10-K for the year ended December 31, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES



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



|ZYMOGENETICS, INC.  |  |  |  |    
|------------------- |  |  |  | ---
|                    |  |  | 
|Date: July 17, 2003 |  |  |  | By:
|                    |  |  |  |    



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 Company and in the capacities and on the dates indicated.



|Signature                                        |  | Title                                                                                                     |  | Date         
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | -------------
|                                                 |  |                                                                                                          
|/s/    BRUCE L.A.
CARTERBruce L.A. Carter, Ph.D. |  | President, Chief Executive Officer and Director (Principal Executive Officer)                             |  | July 17, 2003
|                                                 |  |                                                                                                          
|/s/    JAMES A.
JOHNSONJames A. Johnson          |  | Senior Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer) |  | July 17, 2003
|                                                 |  |                                                                                                          
|GEORGE B. RATHMANN*George B. Rathmann, Ph.D.     |  | Chairman of the Board of Directors                                                                        |  | July 17, 2003
|                                                 |  |                                                                                                          
|DAVID I. HIRSH*David I. Hirsh, Ph.D.             |  | Director                                                                                                  |  | July 17, 2003
|                                                 |  |                                                                                                          
|JONATHAN S. LEFF*Jonathan S. Leff                |  | Director                                                                                                  |  | July 17, 2003
|                                                 |  |                                                                                                          
|KURT ANKER NIELSEN*Kurt Anker Nielsen            |  | Director                                                                                                  |  | July 17, 2003
|                                                 |  |                                                                                                          
|EDWARD E. PENHOET*Edward E. Penhoet, Ph.D.       |  | Director                                                                                                  |  | July 17, 2003
|                                                 |  |                                                                                                          
|LORI F. RAFIELD*Lori F. Rafield, Ph.D.           |  | Director                                                                                                  |  | July 17, 2003
|                                                 |  |                                                                                                          
|LARS REBIEN SØRENSEN*Lars Rebien Sørensen        |  | Director                                                                                                  |  | July 17, 2003
|                                                 |  |                                                                                                           | 
|*By                                              |  | /s/    JAMES A.
JOHNSONJames A. Johnson, Attorney-in-Fact                                                 |  |              



24



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##### Table of Contents

CERTIFICATIONS



I, Bruce L.A. Carter, certify that:



1. I have reviewed this annual report on Form 10-K, as amended, of ZymoGenetics, Inc. (the Company);



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



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



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



a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this annual report is being prepared;



b) evaluated the effectiveness of the Companys disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and



c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



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



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Companys ability to record, process, summarize and report financial data and have identified for the Companys
auditors any material weaknesses in internal controls; and



b) any fraud,
whether or not material, that involves management or other employees who have a significant role in the Companys internal controls; and



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



|                    |  |  | 
|------------------- |  |  | 
|Date: July 17, 2003 |  |  | 
|                    |  |  | 



25



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##### Table of Contents

I, James A. Johnson, certify that:



1. I have reviewed this annual report on Form 10-K, as amended, of ZymoGenetics, Inc. (the Company);



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



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



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



a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this annual report is being prepared;



b) evaluated the effectiveness of the Companys disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and



c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



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



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Companys ability to record, process, summarize and report financial data and have identified for the Companys
auditors any material weaknesses in internal controls; and



b) any fraud,
whether or not material, that involves management or other employees who have a significant role in the Companys internal controls; and



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



|                    |  |  | 
|------------------- |  |  | 
|Date: July 17, 2003 |  |  | 
|                    |  |  | 



26