10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

ZYMOGENETICS, INC.

(exact name of registrant as specified in its charter)

Washington	91-1144498
(State or other jurisdiction of incorporation 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.

ZYMOGENETICS, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2002

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business	3
Item 2.	Properties	33
Item 3.	Legal Proceedings	33
Item 4.	Submission of Matters to a Vote of Securities Holders	33
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Shareholder Matters	33
Item 6.	Selected Financial Data	34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Qualitative and Quantitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	63
	PART III
Item 10.	Directors and Executive Officers of the Registrant	63
Item 11.	Executive Compensation	63
Item 12.	Security Ownership of Beneficial Owners and Management	63
Item 13.	Relationships and Related Transactions	63
Item 14.	Controls and Procedures	63
	PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	64
	Signatures	67
	Certification	68

PART I

Item 1.    Business

This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Annual Report are forward looking. We use words such as “anticipates,” “believes,” “expects,” “future” and “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. Our actual results could differ significantly from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Factors that could cause or contribute to such differences include those discussed in “Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission.

Overview

We are focused on the discovery, development and commercialization of therapeutic proteins for the treatment of human disease. We have been active in the area of therapeutic proteins for over 20 years, including 12 years as a wholly owned subsidiary of Novo Nordisk A/S, one of the world’s largest producers of therapeutic proteins. We were incorporated in the state of Washington in 1981. In 1988, Novo Nordisk acquired our outstanding capital stock and we became a wholly owned subsidiary. From 1988 to 2000, we were the protein discovery operation for Novo Nordisk in North America. In November 2000, Novo Nordisk effected a significant restructuring. As part of this restructuring, we became an independent company in a transaction that included a $150 million private placement and the reduction of Novo Nordisk’s voting interest to less than 50%.

We have contributed to the discovery or development of five marketed recombinant protein products. These products include recombinant versions of proteins previously made from human or animal sources (Novolin^® (insulin) and GlucaGen^® (glucagon), marketed by Novo Nordisk) and novel proteins that come from our discoveries (NovoSeven^® (Factor VIIa) marketed by Novo Nordisk, Regranex^® (platelet-derived growth factor), marketed by Ortho-McNeil Pharmaceuticals, Inc., a Johnson & Johnson company, and Cleactor^™ (tPA analog), marketed by Eisai Co., Ltd).

Early in our history, we built a core focus on protein chemistry and molecular and cellular biology. More recently, we developed an advanced bioinformatics program that now represents the foundation of our discovery efforts. We were early to recognize the opportunity of genomics and were a pioneer in the use of bioinformatics tools to mine genomic databases. We focus our bioinformatics-based discovery efforts on the relatively small subset of genes that we believe have the highest probability of coding for proteins with therapeutic potential. Specifically, we focus on key protein categories that have known members with proven therapeutic value or potent biological activity. We believe this approach increases our research efficiency and maximizes our chances of commercial success. Based on our analysis of published European patent filings, we believe that we have been one of the most successful companies in the world at discovering and filing patent applications for novel proteins within these categories.

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Our expertise in biology and protein chemistry strengthens our ability to determine the biological function and potential therapeutic utility of our protein candidates early in the discovery process. Determining biological function and therapeutic utility at an early stage improves our prospects of establishing patent priority by enabling us to file detailed patent applications covering both composition of matter and method of use claims. We currently have more than 240 issued or allowed United States patents and over 350 United States patent applications pending.

We have a growing pipeline of potential products that we expect to develop on our own or in collaboration with partners. Our two most advanced internal product candidates, rFactor XIII and rhThrombin, are recombinant versions of proteins that are currently marketed in forms derived from human and cow blood. Our intent is to replace the currently marketed versions, building on our earlier experience with insulin and glucagon. rFactor XIII is a blood-clotting agent for the treatment of bleeding complications following cardiopulmonary bypass surgery, and rhThrombin is a hemostatic agent for the control of bleeding during surgical procedures. We began clinical trials of rFactor XIII in early 2003, and we expect to begin clinical development of rhThrombin in the second half of 2003.

Our other internal product candidates have resulted from our bioinformatics efforts, which in combination with our biology expertise, has yielded proteins with potential medical relevance. Our most advanced bioinformatics-derived product candidates are TACI-Ig and recombinant human interleukin-21 (IL-21). TACI-Ig is a soluble receptor with potential applications for the treatment of autoimmune diseases, which we are developing with Serono S.A., a leading global biotechnology company. IL-21 is a protein with potential applications for the treatment of cancer, which we are developing in North America and which we have licensed to Novo Nordisk for development in the rest of the world. We plan to begin clinical development of TACI-Ig and IL-21 in the second half of 2003 and the first half of 2004, respectively.

Business Strategy

Our long-term objective is to become a fully integrated biopharmaceutical company that commercializes novel therapeutic proteins and other protein-based products derived from our proprietary portfolio of protein candidates. To achieve this objective, we plan to pursue the following key strategies:

• Continue our focused approach to the discovery of therapeutic proteins.    We focus exclusively on therapeutic proteins. We use bioinformatics to identify the relatively small subset of genes that we believe have the highest probability of coding for proteins with therapeutic potential. Specifically, we focus on key protein categories that have members with demonstrated therapeutic potential or medically relevant biological activity. Once we have identified a protein candidate with relevant biological activity, we intend to develop the therapeutic protein directly, or, where appropriate, develop a monoclonal antibody or soluble receptor that targets the protein.

• Pursue comprehensive intellectual property protection.    We intend to establish proprietary product opportunities by establishing patent priority for our gene and protein discoveries at the earliest possible time. Data generated from bioinformatics and exploratory biology enhances our patent applications. Our research teams work closely with our intellectual property department to prepare detailed patent applications on full-length genes and their corresponding proteins at an early stage in the discovery process. We augment initial filings with supporting data as it becomes available.

• Leverage diverse biology expertise.    We utilize a large number of biological assays and experimental systems to identify the biological functions of the genes and proteins we discover. Our comprehensive approach allows us to determine the medical relevance of proteins in a wider range of therapeutic areas.

• Focus initially on lower-risk product candidates.    We intend to mitigate the risk of drug development by concentrating our initial product development efforts on product candidates that have a more favorable risk profile than more recently discovered proteins. Our two most advanced internal product

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development candidates are rFactor XIII and rhThrombin, recombinant versions of proteins intended to replace currently marketed plasma-derived proteins.

• Pursue a diversified commercialization strategy.    Because we expect to generate more product candidates than we have the capacity to develop on our own in the near term, we are pursuing a three-pronged commercialization strategy. We intend to internally develop and commercialize some product candidates where we believe the clinical trials and sales force requirements are manageable. We intend to partner with other companies to co-develop and co-promote product candidates in cases where we do not have access to the infrastructure required for development and commercialization. Finally, we intend to out-license other product candidates and intellectual property that do not fit within our future commercial focus.

• Phased acquisition of manufacturing capabilities.    For our existing development candidates, we intend to use third-party contractors or collaborative partners to manufacture both clinical and commercial product. We expect to begin construction in 2003 of small-scale dedicated GMP manufacturing suites, which we intend to use as a source of clinical product supply beginning in 2004. Over the long term, we intend to acquire larger-scale commercial manufacturing capabilities to allow us to control directly all critical elements of product development and commercialization.

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Products and Product Pipeline

Our track record in the field of therapeutic proteins includes contributions to the discovery or development of five recombinant protein products currently being marketed by Novo Nordisk or other companies. Our current focus is the development of a pipeline of internal product candidates. We also have out-licensed several product candidates outside our areas of interest. The following table summarizes the marketed products and out-licensed product candidates, as well as our most advanced product candidates for internal development or co-development. Any clinical trials involving our product candidates may reveal that those candidates are ineffective or have unacceptable side effects. In addition, the results of preliminary studies are not necessarily indicative of clinical success, and larger and later-stage clinical trials may not produce the same results as earlier-stage trials or studies.

Product/Product Candidate	Indication or Intended Use	Status	Stage of Development
Internal Candidates
rFactor XIII	Major cardiac surgery; congenital Factor XIII deficiency; acquired Factor XIII deficiencies	Internal development	Phase 1
rhThrombin	Surgical & critical care hemostat; surgical sealant	Internal development	Pre-IND
TACI-Ig	Systemic lupus erythematosus; other autoimmune diseases	Co-development with Serono S.A.	Pre-IND
IL-21	Cancer; viral infections	Internal development in North America; Novo Nordisk outside North America	Pre-IND
Marketed Products
Novolin® and NovoRapid® (Insulin)	Diabetes	Out-licensed to Novo Nordisk	Marketed
NovoSeven® (Factor VIIa)	Hemophilia	Out-licensed to Novo Nordisk	Marketed
Regranex® (Platelet-derived Growth Factor)	Wound healing	Out-licensed to Johnson & Johnson	Marketed
GlucaGen® (Glucagon)	Hypoglycemia; gastrointestinal motility inhibition	Out-licensed to Novo Nordisk	Marketed
Cleactor™ (tPA Analog)	Myocardial infarction	Out-licensed to Eisai Co., Ltd.	Marketed
Licensed Products
Platelet-derived Growth Factor	Periodontal disease	Out-licensed to BioMimetic Pharmaceuticals, Inc.	Pivotal
	Bone repair	Out-licensed to BioMimetic Pharmaceuticals, Inc.	Pre-development
Platelet-derived Growth Factor Receptor Antibody	Cancer	Out-licensed to Celltech Group plc	Phase 2

In the table above, Phase 1 refers to clinical trials designed primarily to determine safety and toxicology in human beings; Phase 2 refers to clinical trials in a limited patient population to evaluate preliminary efficacy, dosing and side effects; Pivotal refers to clinical trials in a broad patient population with the intention of

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generating statistical evidence of efficacy and safety to support product approval. Pre-IND refers to the stage in which we have completed pre-development activities, have generated a commercial hypothesis for the product candidate and have begun the process leading to the filing of an investigational new drug application and the initiation of Phase 1 clinical trials; and pre-development refers to the stage in which confirmatory animal studies of the product candidate are being conducted in support of a medical hypothesis and protein manufacturing processes are being evaluated and developed.

Currently Marketed Products

We have participated in the discovery or development of five recombinant protein products marketed by other companies.

• Novolin^® and NovoRapid^® (insulin), recombinant human insulin products marketed by Novo Nordisk worldwide for the treatment of diabetes. In collaboration with Novo Nordisk, we developed a process for the production of recombinant human insulin in yeast that is used by Novo Nordisk.

• NovoSeven^® (Factor VIIa), a protein involved in the generation of blood clots, marketed worldwide by Novo Nordisk for the treatment of hemophilia patients. We cloned the gene that codes for human Factor VII and developed a process for the production of activated recombinant human Factor VII, or Factor VIIa, which led to the establishment of the manufacturing process that Novo Nordisk currently uses to produce this protein.

• Regranex^® (platelet-derived growth factor), a growth factor marketed by Ortho-McNeil Pharmaceuticals, Inc., a Johnson & Johnson company, for the treatment of non-healing diabetic ulcers. We cloned the gene that codes for platelet-derived growth factor and demonstrated the importance of this protein in stimulating wound healing.

• GlucaGen^® (glucagon), a protein marketed by Novo Nordisk, Bedford Laboratories and Eisai Co., Ltd. for use as an aid for gastrointestinal motility inhibition and for the treatment of severe hypoglycemia in diabetic patients treated with insulin. In collaboration with Novo Nordisk, we developed a process for the production of this protein that is currently used by Novo Nordisk in the manufacture of GlucaGen.

• Cleactor^™ (tPA analog), a modified form of the protein tissue plasminogen activator, marketed in Japan by Eisai for the treatment of myocardial infarction, or heart attacks. In collaboration with Eisai, we developed this modified protein, which has enhanced properties that allow it to be given as a single injection.

We derive royalties on all of these products except for NovoSeven and NovoRapid, for which we received a one-time payment to satisfy future royalty obligations.

Internal Product Candidates

We are developing several product candidates to treat a variety of serious diseases and medical conditions. We intend to develop and commercialize these product candidates on our own or in collaboration with other biotechnology or pharmaceutical companies.

rFactor XIII.    Factor XIII functions by crosslinking fibrin molecules to each other and to other proteins in a newly formed blood clot, adding significant stability to the clot and protecting it from degradation by other proteins in circulation. Congenital Factor XIII deficiency, an inherited disorder, is a rare condition afflicting only a few hundred patients worldwide. These patients have a tendency to experience severe spontaneous bleeding and problems with tissue repair. Acquired Factor XIII deficiency, a transient drop in Factor XIII levels, is much more common. It is thought to be a major cause of bleeding and failure to heal after surgeries and clinical procedures of many types, including cardiopulmonary bypass surgery. Acquired Factor XIII deficiency has also been reported in diseases, such as graft versus host disease of the gut following stem cell transplant and inflammatory bowel disease.

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Human plasma-derived Factor XIII is produced by Aventis Behring GmbH and is marketed as Fibrogammin^® P in Japan, Germany, Austria and South Africa. However, Fibrogammin^® P is not approved for use in the United States and many European countries. Clinical studies have shown that normal levels of Factor XIII activity can be restored in patients with a congenital or acquired deficiency by intravenous administration of plasma-derived Factor XIII. Our market research indicates that physicians in some countries are currently using plasma-derived Factor XIII not only for the treatment of congenital Factor XIII deficiency, but for other medical conditions associated with acquired Factor XIII deficiency. According to industry statistics and our own analysis, current annual sales of plasma-derived Factor XIII in the few countries in which it is sold are estimated at less than $50 million.

In patients undergoing cardiopulmonary bypass surgery, there is significant illness and death associated with post-operative bleeding. Multiple transfusions with plasma and other blood products are often used to compensate for blood loss, but there are adverse health risks and costs associated with these transfusions. In some cases, surgeries must be redone, at significant cost and risk to the patient, to address uncontrolled bleeding. Studies have indicated that levels of Factor XIII activity significantly decrease after cardiopulmonary bypass surgery. Published studies involving a small number of patients demonstrated that administration of human plasma-derived Factor XIII after cardiopulmonary bypass surgery led to a 35% decrease in chest tube drain volume compared to a control group, suggesting that Factor XIII treatment may reduce the need for blood transfusions in these patients.

We believe that there are several important advantages to a recombinant human form of Factor XIII. Such a product would alleviate concerns over viral contamination associated with plasma-derived products and could decrease or eliminate the potential immune reactions associated with plasma-derived products, while helping to ensure a continuous and cost-effective product supply. A recombinant human form of Factor XIII could also reduce or eliminate the need for transfusions of plasma or other blood products in the treatment of Factor XIII deficiency.

We believe that rFactor XIII represents not only an effective replacement product for the existing plasma-derived product, but also an opportunity for addressing a potentially significant untapped market. Although sales of plasma-derived Factor XIII have been relatively low to date, approval of a recombinant human form of Factor XIII in existing markets, as well as the introduction of a recombinant product in the United States and major European countries, could facilitate significant expansion of the market and sales of Factor XIII. Recombinant protein replacement products have been successfully developed for Factor VIII and Factor IX, which are other blood-clotting factors.

Cardiopulmonary bypass surgery will be the first major indication pursued in our rFactor XIII clinical development program. There are an estimated one million major cardiac surgical procedures performed annually involving cardiopulmonary bypass surgery. We have identified a number of other potential clinical indications for rFactor XIII development, including replacement therapy for congenital Factor XIII deficiency and treatment of acquired Factor XIII deficiency such as in graft versus host disease of the gut following stem cell transplant and inflammatory bowel disease. We believe that we can benefit from the information currently available regarding the dosing and efficacy of plasma-derived Factor XIII in the design of our clinical development program. The use of this information may result in lower product development risks for rFactor XIII than with other recombinant human protein products that are not being developed as replacement products.

rFactor XIII is manufactured in yeast cells. The initial supply of rFactor XIII product for use in clinical testing has been manufactured for us by Avecia Limited. We filed an IND with the Food and Drug Administration, or FDA, in September 2002, and we began Phase 1 clinical trials in both congenitally deficient patients and healthy subjects in early 2003.

rhThrombin.    Thrombin is a specific blood-clotting enzyme that converts fibrinogen to fibrin. Fibrin is the primary protein contained in newly formed blood clots. Thrombin also promotes clot formation by activating Factor XIII, which crosslinks the fibrin molecules and strengthens the newly forming clot. In addition, thrombin stimulates platelet aggregation and acts as a potent cell activator.

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Profuse bleeding is a serious complication of major surgeries. Surgeons try to limit bleeding during surgery to control blood loss, limit the use of transfused blood products and maintain visibility in the operating field. Thrombin is widely used to stop diffuse bleeding occurring during surgical procedures, either as a stand-alone hemostat or as a component of other hemostatic products, such as tissue sealants. All currently marketed thrombin products are derived from pooled human or bovine plasma. Plasma-derived thrombin products available today are provided in spray formulation for topical application directly on wounds, and as a freeze-dried powder, which is dissolved and absorbed onto a gel sponge for application to wounds. Plasma-derived thrombin is also being used as a hemostatic component in new vascular sealing devices, wound dressings and fibrin glues or sealants.

We believe that there are several important advantages to a recombinant human form of thrombin. As with Factor XIII, a recombinant human form of thrombin would alleviate concerns of viral contamination of plasma derived products. It would also alleviate concerns associated with products of bovine origin, including the potential risk of contamination with the pathogen that causes the human form of “mad cow” disease. In addition, there is a risk of allergic reaction in patients sensitive to products of bovine origin. Some patients develop antibodies to bovine plasma-derived thrombin or to Factor V, a contaminant of the bovine plasma-derived product. Anti-Factor V antibodies can cross-react with human Factor V, creating a condition that is particularly difficult to manage and is potentially fatal in patients who develop severe bleeding conditions. Use of bovine plasma-derived thrombin in patients with antibodies to bovine clotting factors may result in abnormal clotting time, post-operative complications, clotting disorders and the resulting higher treatment costs.

We intend to develop rhThrombin as a replacement product for the currently marketed human and bovine plasma-derived thrombin products. Current sales of plasma-derived thrombin as a stand-alone product are estimated at $100 million annually in the United States and $150 million annually worldwide. It is estimated that plasma-derived thrombin is used in more than 500,000 surgical procedures annually in the United States. As with plasma-derived thrombin, rhThrombin would be used in the clinical setting to control bleeding. Primary applications would include a wide range of surgeries, trauma and burn injuries. We believe the market for rhThrombin could be further expanded by providing it to other companies for inclusion in a variety of surgical hemostats, fibrin sealants and vascular sealing devices.

We have developed a patent-protected method we believe will enable us to cost-effectively manufacture rhThrombin in a two-step process. First, prethrombin is produced in mammalian cells, and then using an enzyme activation step, prethrombin is converted to rhThrombin. Currently, we are producing prethrombin internally, and a third-party manufacturer is performing the activation and purifying the resulting rhThrombin. We expect to have product for clinical use available later this year and to begin clinical development of rhThrombin in the second half of 2003.

TACI-Ig.    TACI is a member of the tumor necrosis factor receptor family of proteins. TACI-Ig is a soluble form of the TACI receptor that binds to two ligands, BLyS and APRIL, that are implicated in mounting B-cell mediated immune responses. When over-produced in transgenic animals, BLyS has been shown to lead to the development of autoimmune disease with symptoms resembling systemic lupus erythematosus. The aim of treatment with TACI-Ig is to neutralize the overactivity of these immune-stimulating ligands to prevent the activation of B cells and thus the production of harmful autoantibodies, which are antibodies to one’s own cells.

We believe that TACI-Ig could represent a less toxic and more specific immunosuppressive agent than current therapies for the treatment of autoimmune diseases and other diseases for which the suppression of B-cell function and a decrease in autoantibody levels could have therapeutic benefit. Such diseases include systemic lupus erythematosus, rheumatoid arthritis, myasthenia gravis, multiple sclerosis and asthma. In an animal model of systemic lupus erythematosus, TACI-Ig has been shown to specifically inhibit the development of mature B cells and the development of antigen-induced antibody production. It has also been shown to inhibit the development of proteinuria, an indicator of kidney malfunction, and to prolong survival of the animals. In a

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collagen-induced model of rheumatoid arthritis, TACI-Ig has been shown to inhibit the incidence of disease. Taken together, these data indicate that TACI-Ig acts by inhibiting the production of mature B cells and decreasing autoantibody levels.

Based on positive data from animal models, systemic lupus erythematosus is a probable clinical indication for TACI-Ig. The cause of this disease remains unknown, but there is substantial evidence suggesting that B-cell hyperactivity resulting in the secretion of autoantibodies is fundamental to its development. Although estimates on prevalence vary widely, there are believed to be over 300,000 patients treated for systemic lupus erythematosus in the United States, a disease which primarily affects women. No new FDA-approved treatments for systemic lupus erythematosus have been introduced in the last 40 years. Current therapies, including immunosuppressives and corticosteroids, are not very effective and may have severe side effects. We believe that patients with severe systemic lupus erythematosus would be candidates for treatment with TACI-Ig.

In addition, rheumatoid arthritis appears to be a promising potential clinical indication for TACI-Ig. Rheumatoid arthritis is one of the most prevalent chronic inflammatory diseases, afflicting an estimated 1% of the world population, including over five million patients in North America, Europe and Japan. Although the underlying cause of rheumatoid arthritis is unknown, considerable data indicate a major role of B cells in this disease. Rheumatoid arthritis has been an attractive therapeutic area for drug development because of its large market size. As a consequence, a very large number of drugs are currently being developed. However, we believe that few of these product candidates target B cells specifically. Thus, TACI-Ig represents a novel mode of treatment that could alleviate the symptoms of rheumatoid arthritis associated with pathogenic B cells. Moreover, the specificity and mode of action of TACI-Ig strengthens its potential as an add-on therapy to existing drugs.

In August 2001, we entered into a collaborative development and marketing agreement with Serono relating to TACI-Ig. Under our agreement, we will develop TACI-Ig jointly with Serono pursuant to a worldwide development plan. Serono has manufactured clinical grade materials in quantities adequate to supply initial clinical trials. Toxicology and pharmacology studies are underway in appropriate animal species, and we expect to begin clinical development in the second half of 2003.

IL-21.    We discovered IL-21 and its receptor through our bioinformatics efforts. IL-21 is a protein belonging to a family of cytokines that modify the function of cells in the immune system. IL-21 shares both structural and genetic sequence similarity with interleukin-2 (IL-2), a cytokine approved as a therapy for malignant melanoma and renal cell carcinoma. We have shown that IL-21 regulates the proliferation and functional activity of several populations of immune cells, including cytotoxic T cells (CTL) and natural killer (NK) cells, both of which are thought to be critical in eliminating malignant or virally infected cells from the body. Preclinical studies have indicated that IL-21 is an effective therapy in a number of animal models of cancer.

In an animal model of metastatic melanoma, IL-21 exhibited a high rate of tumor suppression. Animals in this model develop aggressive metastases to the lung, which can be readily measured. Treatment with IL-21 led to a significant reduction in the number of lung metastases relative to controls. IL-21 also was found to have potent inhibitory activity in other animal models of cancer. These models demonstrated that the in vivo effects of IL-21 were mediated through the activation of CTLs and NK cells, which led to rejection of the tumors in the animal models.

In clinical practice, IL-2 is an effective therapy in approximately 5-8% of patients with malignant melanoma. Accompanying this low level of efficacy is a significant side effect profile that profoundly limits the utility of IL-2 in treating disease. These side effects can be so severe that many patients stop the therapy before completion of the treatment program. Therefore, it has been a high priority to assess the possible side effects of IL-21.

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To assess the safety profile of IL-21, studies were conducted in mouse models to evaluate IL-21 in two aspects of known IL-2 toxicity: vascular leakage and the release of inflammatory cytokines. In both areas, IL-21 exhibited a favorable toxicity profile compared to that observed with IL-2 treatment in these models. There was no increase in inflammatory cytokines in the blood stream with IL-21 treatment, and the levels of vascular leakage were significantly lower than that observed using IL-2. Additionally, mice receiving IL-21 appeared normal and healthy.

We intend to pursue malignant melanoma and renal cell carcinoma, the two approved indications for IL-2, as initial indications for IL-21. There are 100,000 new cases of melanoma per year worldwide with approximately 50% of the cases occurring in North America. Melanoma is the cause of 8,000 deaths per year in North America and has become one of the leading cancers in women between the ages of 25-34. There are approximately 100,000 new cases of renal cell carcinoma per year worldwide with 36,000 new cases in North America. Renal cell carcinoma results in approximately 12,000 deaths per year in North America. There is a demonstrated need for new and improved therapies for both types of cancer. Subject to the outcome of the initial clinical studies, we intend to expand the IL-21 clinical program into additional cancer indications and, potentially, into the treatment of viral diseases.

Novo Nordisk has licensed the rights to IL-21 outside North America and we have retained all rights within North America. In December 2002, we entered into a collaborative preclinical development agreement with Novo Nordisk. Under our agreement, we will share all costs of the IL-21 preclinical development program with Novo Nordisk through the filing of an investigational new drug application in the U.S., which is currently planned for the first half of 2004.

Discovery and Development Process

We have developed a fully integrated therapeutic protein discovery and development program that draws upon a broad range of skills and technologies, including DNA sequencing, bioinformatics, molecular and cellular biology, animal biology, protein chemistry, intellectual property protection, pharmacology, medical and regulatory affairs, drug formulation, manufacturing and strategic market research. We believe that this comprehensive program gives us a competitive advantage over many other biotechnology companies. While many of these companies were founded on the use of high-throughput DNA sequencing and bioinformatics to identify gene sequences of interest, we built our bioinformatics capabilities on top of our pre-existing strengths in molecular biology, protein chemistry and animal biology. As a result, we have been successful in characterizing important biological properties of our lead product candidates.

Bioinformatics

We have focused our discovery efforts on identifying the relatively small subset of genes that we believe have the highest probability of coding for proteins with therapeutic potential. We have defined what we consider to be the key protein categories according to structural similarity, sequence similarity and functional activity. These categories have known members with demonstrated therapeutic potential or potent biological activity, and most recombinant human proteins currently marketed as drugs are members of these categories. We believe that newly discovered proteins within these categories are likely to have important novel biological activity, and therefore may have potential as therapeutic products.

The foundation of our bioinformatics platform is our DNA sequence databases of millions of EST sequence entries and billions of nucleotide sequences derived from genomic sequences. In 1995, we became the first subscriber to gain direct in-house access to and analyze Incyte Genomics’ LifeSeq database of ESTs. Since that time, we have built our internal sequence database from a number of sources, including:

• private databases, including Incyte Genomics’ LifeSeq database;

• public EST and DNA sequences;

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• our own internal EST sequences, where we have eliminated transcripts of highly expressed genes to concentrate on sequences of rarely-expressed genes; and

• genomic sequences published daily by the Human Genome Project.

To discover novel gene sequences within the sequence databases, we have developed sensitive proprietary search algorithms based on protein motifs, which can include sequence homologies and predicted protein structure similarities. We have developed sophisticated threading algorithms that allow us to use distant and apparently unrelated elements in sequences to identify pre-defined three-dimensional structures contained within certain key protein categories. These algorithms are tailored to the specific category of proteins under consideration, as the optimal search strategy for novel gene sequences depends on characteristics unique to each protein category.

Exploratory Biology

We use a diverse set of tools to identify the biological functions of the genes and proteins we discover. Throughout our exploratory biology effort, we use a variety of in-house approaches, including physiological screens of mice in which the gene of interest has either been genetically over-expressed from birth, otherwise known as transgenic mice, or temporarily over-expressed in adult mice using an adenovirus containing the gene. We also conduct screens of mice in which the gene of interest has been eliminated from birth, otherwise known as knockout mice. In addition, we conduct analyses of disease models using a variety of laboratory tests, or assays, to detect changes in behavior, physiology and biochemistry. We also use hundreds of in-house assays to investigate biological activities of our novel proteins. To obtain additional information, our scientists either adapt or create in vivo laboratory models that mimic human diseases to determine the cause of disease and response to treatment. For certain ligands, we can also apply laboratory techniques to clone the receptors for the ligand present in a tissue or cell. In addition to providing a marker for tissues that should respond to the protein, the receptors themselves can have therapeutic potential. We also rely on an external network of collaborators to investigate biology and conduct additional tests that we do not perform in-house.

Within our exploratory biology operation, there are several stages of activity through which we identify a protein’s function, determine whether the protein plays a role in disease and determine whether it has commercial potential. A protein begins in the exploratory stage, in which experiments are performed to support the development of a biological hypothesis as to the protein’s function. Once a biological hypothesis is developed, the protein moves to the validation stage, in which more extensive experiments are performed to confirm the biological hypothesis for the protein and to establish a medical hypothesis. A medical hypothesis involves the identification of specific diseases or conditions for which we believe the protein would have therapeutic importance. In cases where a protein demonstrates beneficial biological effects, it becomes a product candidate. Where a protein has been found to have detrimental effects, we attempt to generate a monoclonal antibody or soluble receptor to inhibit the activity of the protein. In those cases, a resulting monoclonal antibody or soluble receptor becomes the product candidate. Once a product candidate is identified, it moves to the pre-development stage, at which time it is tested in specific animal models of diseases. At the pre-development stage, we not only learn which diseases or conditions show promise for treatment, but also obtain information about dosing and systemic effects of the product candidate. Assuming positive results, both in terms of efficacy and toxicology, we may develop a commercial hypothesis for the product candidate. A commercial hypothesis requires the identification of a market opportunity and a preliminary determination that it will be economically feasible to manufacture the product candidate and administer it to patients.

Collaborative Relationships

Novo Nordisk Option Agreement

As part of our separation from Novo Nordisk, we granted Novo Nordisk options to license certain rights to potential therapeutic proteins pursuant to an option agreement. Under this agreement, we retain exclusive rights

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to these proteins in North America, and Novo Nordisk may obtain exclusive rights in the rest of the world. However, Novo Nordisk has the option to obtain exclusive worldwide rights to any licensed protein that acts to generate, expand or prevent the death of insulin-producing beta cells, which are involved in diabetes, a core business focus of Novo Nordisk. The option agreement also provides that:

• over a four-year period beginning November 10, 2000, Novo Nordisk will pay us a fee of $7.5 million per year for the option rights under the agreement;

• during this four-year period, Novo Nordisk may, for specified license payments, license up to the greater of eight proteins or 25% of all proteins discovered by us after August 25, 1995 and for which a hypothesis as to medical utility is generated, except for beta-cell-related proteins, of which Novo Nordisk may license an unlimited number; and

• Novo Nordisk may extend the option agreement for two years, during which time it is required to pay us a fee of $7.5 million per year for the right to license four additional proteins.

Under the option agreement, we must promptly disclose to Novo Nordisk each protein for which we develop a hypothesis as to medical utility, together with information known to us about the protein, such as gene sequence and similarity, exploratory data and relevant patent filings. Novo Nordisk then has 60 days to decide on three possible courses of action:

• exercise one of its options to license the protein;

• decline to exercise one of its options, thereby foregoing any and all future rights to the protein; or

• extend its option on the particular protein by paying a $500,000 extension fee and agreeing to pay half of our research and development costs to advance the protein to the status of a preclinical lead.

Upon the exercise of an option by Novo Nordisk, we will negotiate an exclusive license agreement to commercialize the protein containing certain predetermined terms, including up-front payments, milestone payments and royalty terms. The option agreement provides that up-front and milestone payments for each non-beta-cell-related protein licensed may total up to approximately $20 million, regardless of the point at which the protein is licensed. Up-front and milestone payments for beta-cell proteins licensed may total up to approximately $28 million. Royalty rates are lowest if an option to license a protein is exercised at the medical utility hypothesis stage and will increase substantially each time the option is extended. Royalty obligations end on the expiration date of the last-to-expire patent on the licensed protein or, if the product is not based on a patented protein, 12 years from the date of the first sale of the product. Royalty obligations may be reduced if Novo Nordisk is required to license third-party patented technology to utilize the licensed protein or if a generic product that is identical to a patented product achieves certain levels of market share.

If Novo Nordisk extends its option on a protein, then when the protein reaches the status of a preclinical lead meeting certain criteria, Novo Nordisk may exercise the option, extend the option or decline to exercise the option, in which case it forgoes any and all future rights to the protein. If Novo Nordisk elects to extend the option at the preclinical lead stage, it must pay us a $1.0 million extension fee and agree to pay two-thirds of our research and development costs to advance the protein through the completion of Phase 2 clinical trials. Upon completion of Phase 2 clinical trials, Novo Nordisk has one final opportunity to license the protein.

If, at any of Novo Nordisk’s decision points, we decide that we do not wish to move forward in the development of a particular protein, then we have the right to terminate our participation in the development of the protein. In that case Novo Nordisk has the right to continue the research and development on its own, and maintains its right to license the protein under the option agreement.

To date, Novo Nordisk has exercised options to license IL-21, IL-20 and IL-20 receptor pursuant to this agreement.

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In December 2002, we announced that we had signed a collaborative agreement with Novo Nordisk for the preclinical development of IL-21. Under the terms of the agreement, ZymoGenetics and Novo Nordisk will collaborate on all research and development activities leading up to the filing of an IND in the United States. Novo Nordisk will reimburse us for a portion of our costs incurred prior to the agreement, and the two companies will equally share all costs of the program going forward. In total, we could receive up to $11 million in payment or services under the agreement.

Serono S.A.

In August 2001, we entered into a collaborative development and marketing agreement with Ares Trading S.A., a wholly owned subsidiary of Serono S.A., focused on two preclinical product candidates derived from our discovery research. These two candidates are based on cellular receptors, designated TACI and BCMA, that are involved in the regulation of the human immune system. During the term of the agreement, we and Serono will work together exclusively to develop biopharmaceutical products based on the two receptors for the treatment of autoimmune diseases such as systemic lupus erythematosus and rheumatoid arthritis.

We will share research and development expenses worldwide with the exception of Japan, where Serono will cover all expenses. The research and development activities will be governed by a steering committee made up of representatives of both companies. Serono will be responsible for manufacturing all products for both clinical trials and commercial sale. We retain an option to co-promote the sale of products with Serono in North America, which we can exercise provided that we fund our share of the research and development expenses and meet certain sales force and marketing requirements. If we exercise the co-promotion option, we will share commercialization expenses and profits in North America equally with Serono and Serono will have exclusive rights to market and sell products in the rest of the world, for which we will be entitled to receive royalties. In the event of certain changes in control of our company, we could lose our right to co-promote products in North America.

Either company may terminate its co-funding and co-development obligations upon 90 days notice until the start of Phase 2 clinical trials, after which time 180 days notice is required. If we were to terminate our co-development and co-funding obligations, Serono would take control of all research and development, we would forgo our co-promotion rights in North America, we would be entitled to receive royalties on any product sales in North America in lieu of sharing in the profits from the sale of products and Serono would continue to be obligated to make any milestone payments. If Serono were to terminate its co-development and co-funding obligations, all rights in any products would revert to us, and we could take control and fund all costs of the research and development, subject to negotiation of commercially reasonable financial consideration to be paid to Serono. Furthermore, if clinical trials had begun prior to Serono’s termination, Serono would be obligated to manufacture product for use in clinical testing for up to one year from the termination date.

We granted Serono an exclusive license to our intellectual property relating to TACI, BCMA and certain other related technologies to make, use, have made, sell, offer to sell and import products based on TACI and BCMA. Serono is required to pay royalties on sales, which may vary based on annual sales volume and the degree of patent protection provided by the licensed intellectual property. Royalty payments may be reduced if Serono is required to license additional intellectual property from one or more third parties in order to commercialize a product or, in certain circumstances, if a product suffers from competition. Royalty obligations under the agreement continue on a country-by-country basis until the date on which no valid patent claims relating to a product exist or, if the product is not covered by a valid patent claim, 15 years from the date of first sale of the product.

The term of the agreement began on August 30, 2001 and will continue for so long as a TACI or BCMA product is the subject of an active development project or there is an obligation to pay royalties under the agreement. The agreement provides for an initial fee and milestone payments to be paid by Serono in connection with the development and approval of products, up to an aggregate of $52.5 million.

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Out-licensed Product Candidates

We have contributed to the discovery and development of two product candidates that we have out-licensed to third parties in return for milestone payments and royalties.

• Platelet-derived growth factor, a growth factor that stimulates the growth of a variety of cell types. We have out-licensed this growth factor to BioMimetic Pharmaceuticals, Inc. (BMPI), originally for the treatment of periodontal disease and bone defects of the head and face, and more recently for the treatment of all other bone defects. BMPI has initiated a pivotal study of platelet-derived growth factor in periodontal disease.

• Platelet-derived growth factor receptor antibody, an antibody that blocks the binding of platelet-derived growth factor to its beta receptor, which we have out-licensed to Celltech Group plc. Celltech has designated the product candidate CDP 860, and initiated Phase 2 clinical trials of CDP 860 in 2002 for the treatment of cancer.

Other Collaborations

We recognize external collaborations as an important aspect of our success in analyzing and characterizing protein function. Where possible, we establish collaborations with experts in the field who have a depth of knowledge on a select protein, protein category or disease state that is related to the understanding of our gene and protein discoveries. These collaborations serve to accelerate the rate at which we can assess the biological functions of proteins and confirm medical hypotheses. In addition, throughout our history, we have collaborated actively with the University of Washington, a leading biomedical research institution, to explore the biological function of proteins. The University’s significant resources and expertise, together with its geographic proximity to us, have made it a valuable partner on a number of our projects.

Manufacturing

Currently, we have internal capabilities to manufacture products at up to 100-liter scale using various production systems, including yeast, E. coli and mammalian cells. Generally, we have used these facilities for process development and the manufacture of product for preclinical studies supporting our research and development programs. Recently, we converted certain of these facilities for the manufacture of prethrombin in compliance with GMP regulations. We intend to begin construction in 2003 of expanded laboratory facilities that will include additional small-scale GMP manufacturing suites to be used to supply product for toxicology studies and clinical trials. Until these dedicated suites are available in 2004, we intend to utilize third-party contract manufacturers or to rely on co-development partners for the manufacture of clinical-grade product.

For rFactor XIII, which is made in yeast, large-scale manufacturing of preclinical and clinical grade product is being performed by Avecia Limited. We have made arrangements with Pentapharm for the conversion of internally produced prethrombin to rhThrombin. We are in the process of identifying a contract manufacturing organization for the production of rhThrombin at commercial scale. Serono will manufacture TACI-Ig, which is made in mammalian cells, under the terms of our collaborative development and marketing agreement. IL-21 is manufactured in E. coli; we intend to use Avecia Limited as our contract manufacturer for the initial production runs of IL-21.

Some of the inventions licensed to us were initially developed at universities or other not-for-profit institutions with funding support from an agency of the United States government. In accordance with federal law, we or our licensees may be required to manufacture products covered by patents in those inventions in the United States, unless we can obtain a waiver from the government on the basis that such domestic manufacture is not commercially feasible.

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Commercialization

We have developed the following three-pronged strategy for the development and commercialization of our product candidates:

Internal development.    We intend to independently develop products for North America that we believe can be successfully developed with our current infrastructure, as well as additions made to our infrastructure over the next few years. To qualify for internal development, product candidates must satisfy a number of criteria. Formulation, development and manufacturing of these products must initially be feasible through the use of contract providers. The anticipated clinical trials must be of a reasonable size and with fairly well defined endpoints and guidelines. Finally, the clinical indication and target market must be accessible with a relatively small sales force. We believe that certain of our product candidates, including rFactor XIII, rhThrombin and IL-21, meet these criteria.

Co-development.    We intend to develop certain product candidates jointly with other companies. In these arrangements, we would expect to pay a share of the research and development costs, retain rights to co-promote or co-market the potential products, and share in the profits from selling the potential products. Our criteria for selecting product candidates for co-development include our level of internal expertise related to the field, manufacturing requirements, clinical trial size and complexity, target market size and investment considerations. If we determine that it is worthwhile to invest our capital in a development program for a product candidate, but we do not believe that we can internally meet the development requirements, we will seek a co-development partner. TACI-Ig meets the criteria for co-development, and we have entered into a collaborative development and marketing agreement with Serono to co-develop this product candidate.

Out-licensing.    We intend to derive value from other product candidates through out-licensing to other biotechnology or pharmaceutical companies. From out-licensing transactions, we would expect to earn up-front license fees, milestone payments and royalties on sales. We would expect no ongoing participation, financial or otherwise, in development activities of these licensed products. We expect to out-license product candidates that do not fit within our future commercial focus, and to out-license rights to non-therapeutic applications of our discoveries, such as diagnostics.

Patents and Proprietary Rights

We intend to seek appropriate patent protection for our proprietary technologies by filing patent applications in the United States. We have more than 240 issued or allowed United States patents, and over 350 pending United States patent applications. When appropriate, we also seek foreign patent protection and to date have more than 500 issued or allowed foreign patents.

Our success will depend in large part on our ability to:

• obtain patent and other proprietary protection for the genes and proteins we discover;

• enforce and defend patents once obtained;

• operate without infringing the patents and proprietary rights of third parties; and

• preserve our trade secrets.

Our patents and patent applications are directed to composition of matter, methods of use and enabling technologies. Although we believe our patents and patent applications provide a competitive advantage, the patent protection available for genes and therapeutic protein-based products is highly uncertain and involves complex legal and factual questions. No clear policy has emerged regarding the breadth of patents in this area. There have been, and continue to be, intensive discussions concerning the scope of patent protection for partial gene sequences, full-length genes and their corresponding proteins. Also, there is substantial uncertainty regarding patent protection for genes without known function or correlation with specific diseases. Social and

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political opposition to patents on genes may lead to narrower patent protection for genes and their corresponding proteins. Patent protection relating to genes and therapeutic protein-based products is also subject to a great deal of uncertainty outside the United States, and patent laws are currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries may result in our inability to obtain patents covering the genes or proteins we discover or to enforce patents that have been issued to us, and may allow others to use our discoveries to develop and commercialize therapeutic protein-based products.

We apply for patents covering our discoveries and technologies as we deem appropriate. However, we may fail to apply for patents on important discoveries or technologies in a timely fashion or at all. Also, our pending patent applications may not result in the issuance of any patents. These applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related discoveries or technologies we may want to commercialize. In addition, because patent applications in the United States historically have been maintained in secrecy until a patent issues, other parties may have filed patent applications on genes or their corresponding proteins before we filed applications covering the same genes or proteins, and we may not be the first to discover these genes or proteins. Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice the claimed inventions.

Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any therapeutic or commercial value. Also, issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented product candidates. Some companies are currently attempting to develop therapeutic protein-based products substantially equivalent to products patented by other parties by altering the amino acid sequence within the therapeutic protein-based product and declaring the altered product a new product. It may be easier to develop substantially equivalent versions of therapeutic protein-based products such as monoclonal antibodies and soluble receptors than it is to develop substantially equivalent versions of the proteins with which they interact because there is often more than one antibody or receptor that has the same therapeutic effect. Consequently, any existing or future patents we have that cover monoclonal antibodies or soluble receptors may not provide any meaningful protection against competitors. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope. For example, other parties may discover uses for genes or proteins different from the uses covered in our patents, and these other uses may be separately patentable. If another party holds a patent on the use of a gene or protein, then even if we hold the patent covering the composition of matter of the gene or protein itself, that other party could prevent us from selling any product directed to such use. Also, other parties may have patents covering the composition of matter of genes or proteins for which we have patents covering only methods of use of these genes or proteins. Furthermore, the patents we hold relating to recombinant human proteins, such as our patents covering rFactor XIII or rhThrombin, may not prevent competitors from developing, manufacturing or selling other versions of these proteins. Moreover, although we hold patents relating to the manufacture of recombinant human thrombin, we have no composition of matter patent protection covering thrombin. Accordingly, we may not be able to prevent other parties from commercializing competing forms of recombinant human thrombin.

Third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability of our patents. The issuance of a patent is not conclusive as to its validity or enforceability. Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations.  In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of these discoveries or technologies. Also, as a result of such determinations we may be enjoined from pursuing research, development or commercialization of potential products or may be required to obtain licenses, if

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available, to the third-party patents or to develop or obtain alternative technology. Responding to challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns. In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts.

In addition, third parties may independently develop intellectual property similar to our patented intellectual property, which could result in, among other things, interference proceedings in the United States Patent and Trademark Office to determine priority of invention. An interference proceeding is an administrative proceeding to determine which party was first to invent the contested subject matter. Our product candidate rFactor XIII is currently the subject of an interference proceeding with Aventis Behring. Although we recently obtained a license to Aventis Behring’s Factor XIII patents for the development of rFactor XIII, other product candidates may in the future be the subject of similar proceedings.

Third parties may claim that our potential products or related technologies infringe their patents. Patent litigation is very common in the biopharmaceutical industry, and the risk of infringement claims is likely to increase as the industry expands and as other companies obtain more patents and increase their efforts to discover genes through automated means and to develop proteins. Any patent infringement claims that might be brought against us may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be nonexclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease some of our business operations as a result of patent infringement claims.

In addition to our patented intellectual property, we also rely on unpatented technology, trade secrets and confidential information, including our genetic sequence database and our bioinformatics algorithms. Our policy is to require our employees, consultants and advisors to execute a confidentiality and proprietary information agreement before beginning their employment, consulting or advisory relationship with us. These agreements generally provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of the individual’s relationship with us except in limited circumstances. These agreements also generally provide that we shall own all inventions conceived by the individual in the course of rendering services to us. The agreements may not provide effective protection of our technology or confidential information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.

As part of our business strategy, we work with third parties in our research and development activities. Accordingly, disputes may arise about inventorship and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensors, scientific collaborators and consultants. In addition, other parties may circumvent any proprietary protection we do have. These parties may independently develop equivalent technologies or independently gain access to and disclose substantially equivalent information, and confidentially agreements and material transfer agreements we have entered into with them may not provide us with effective protection.

Government Regulation

Regulation by government authorities in the United States, Europe, Japan and other countries is a significant consideration in our ongoing research and product development activities and in the manufacture and marketing of our potential products. The FDA and comparable regulatory bodies in other countries currently regulate therapeutic proteins and related pharmaceutical products as biologics. Biologics are subject to extensive pre- and

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post-market regulation by the FDA, including regulations that govern the collection, testing, manufacture, safety, efficacy, potency, labeling, storage, record keeping, advertising, promotion, sale and distribution of the products. The time required for completing testing and obtaining approvals of our product candidates is uncertain but will take several years. Any delay in testing may hinder product development. In addition, we may encounter delays in product development or rejections of product applications due to changes in FDA or foreign regulatory policies during the period of product development and testing. Failure to comply with regulatory requirements may subject us to, among other things, civil penalties and criminal prosecution; restrictions on product development and production; suspension, delay or withdrawal of approvals; and the seizure or recall of products. The lengthy process of obtaining regulatory approvals and ensuring compliance with appropriate statutes and regulations requires the expenditure of substantial resources. Any delay or failure by us or our corporate partners to obtain regulatory approvals could adversely affect our ability to commercialize product candidates, receive royalty payments and generate sales revenue.

The nature and extent of the governmental pre-market review process for our potential products will vary, depending on the regulatory categorization of particular products. The necessary steps before a new biological product may be marketed in the United States ordinarily include:

• preclinical laboratory and animal tests;

• compliance with product manufacturing requirements including, but not limited to, current GMP regulations;

• submission to the FDA of an investigational new drug application, which must become effective before clinical trials may commence;

• completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use;

• submission to the FDA of a biologics license application; and

• FDA review and approval of the biologics license application prior to any commercial sale or shipment of the product.

Preclinical tests include laboratory evaluation of the product, as well as animal studies to assess the potential safety concerns and efficacy of the product. Preclinical tests must be conducted by laboratories that comply with current Good Laboratory Practices regulations. The results of preclinical tests, together with extensive manufacturing information, analytical data and proposed clinical trial protocols, are submitted to the FDA as part of an investigational new drug application, which must become effective before the initiation of clinical trials. The investigational new drug application will automatically become effective 30 days after receipt by the FDA unless the FDA indicates prior to the end of such 30-day period that the proposed protocol raises concerns that must be resolved to the satisfaction of the FDA before the trials may proceed. If the FDA raises any concerns regarding a proposed protocol, it is possible that these concerns will not be resolved in a timely fashion, if at all. In addition, the FDA may impose a clinical hold on a proposed or ongoing clinical trial if, for example, safety concerns arise, in which case the trial cannot commence or recommence without FDA authorization under terms sanctioned by the agency.

Clinical trials involve the administration of the product to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with current Good Clinical Practices regulations under protocols that detail the objectives of the trial, inclusion and exclusion criteria, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Protocols for each phase of the clinical trials are submitted to the FDA as part of the investigational new drug application. Further, each clinical trial must be reviewed and approved by an independent institutional review board at each institution. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possibility of liability of the institution conducting the trial. An institutional review board may require changes in a protocol, and the submission of an investigational new drug application does not guarantee that a trial will be initiated or completed.

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Clinical trials generally are conducted in three sequential phases that may overlap. In Phase 1, the initial product is administered to healthy human subjects or patients, or both, to assess safety, metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase 2 usually involves trials in a limited patient population to evaluate the efficacy of the potential product for specific, targeted indications, to determine dosage tolerance and optimum dosage, and to further identify possible adverse reactions and safety risks. If a compound appears to be effective and to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to evaluate further clinical efficacy in comparison to standard therapies, generally within a broader patient population at geographically dispersed clinical sites. Phase 3 protocols are reviewed with the FDA to establish endpoints and data handling parameters. Phase 1, Phase 2 or Phase 3 testing may not be completed successfully within any specific period of time, if at all, with respect to any of our potential products. Furthermore, we, an institutional review board, the FDA or other regulatory bodies may suspend a clinical trial at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of pharmaceutical development, preclinical trials and clinical trials are submitted to the FDA in the form of a biologics license application for approval of the manufacture, marketing and commercial shipment of the biological product. The biologics license application also must contain extensive manufacturing information, and each manufacturing facility must be inspected and approved by the FDA before the biologics license application will be approved. The testing and approval process is likely to require substantial time, effort and resources, and necessary approvals may not be granted on a timely basis, if at all. The FDA may deny a biologics license application if applicable regulatory criteria are not satisfied. The FDA may also require additional testing or information, or require post-market testing and surveillance to monitor the safety or efficacy of the product. In addition, after marketing approval is granted, the FDA may require post-marketing clinical trials, which typically entail extensive patient monitoring and may result in restricted marketing of an approved product for an extended period of time.

Some of our product candidates may qualify as orphan drugs under the Orphan Drug Act of 1983. This act generally provides incentives to manufacturers to undertake development and marketing of products to treat relatively rare diseases or those diseases that affect fewer than 200,000 persons annually in the United States. A drug that receives orphan drug designation by the FDA and is the first product to receive FDA marketing approval for its product claim is entitled to various advantages, including a seven-year exclusive marketing period in the United States for that product claim. However, any drug that is considered by the FDA to be different from or clinically superior to a particular orphan drug, including any orphan drug of ours that has been so designated by the FDA, will not be precluded from sale in the United States during the seven-year exclusive marketing period. It is possible that none of our product candidates will be designated as an orphan drug by the FDA or, if so designated, will have a positive effect on our revenues.

To manufacture our potential products, a domestic or foreign drug manufacturing facility must be registered with the FDA as a manufacturing establishment, must submit to periodic inspection by the FDA and must comply with current GMP regulations. In addition, the FDA imposes a number of complex regulations on entities that advertise and promote biologics, including, among others, standards and regulations for direct-to-consumer advertising, off-label promotions, industry-sponsored scientific and educational activities, and promotional activities involving the Internet. The FDA has very broad enforcement authority under the Federal Food, Drug and Cosmetic Act, and failure to abide by these regulations can result in penalties, including the issuance of a warning letter directing us to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and civil and criminal penalties.

Whether or not FDA approval has been obtained, approval of a product by comparable foreign regulatory authorities is necessary prior to the commencement of marketing of a product in those countries. The approval procedures vary among countries and can involve additional testing. The time required to obtain approval may differ from that required for FDA approval. Although there are some centralized procedures for filings in the European Union countries, in general each country has its own procedures and requirements, and compliance

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with these procedures and requirements may be expensive and time-consuming. Accordingly, there may be substantial delays in obtaining required approvals from foreign regulatory authorities after the relevant applications are filed, if we ultimately receive any approvals at all.

We are also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals, and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our work. Government regulations that might result from future legislation or administrative action, including additions or changes to environmental laws, may materially affect our business operations and revenues.

Competition

We are in a race to identify, establish uses for and patent as many genes and their corresponding proteins as possible and to commercialize the products we develop from these genes and proteins. We face competition from other entities using sophisticated bioinformatics technologies to discover genes, including Genentech, Inc., Human Genome Sciences, Inc., Curagen, Inc. and Amgen Inc. We also face competition from entities using more traditional methods to discover genes related to particular diseases, including other large biotechnology and pharmaceutical companies. We expect that competition in our field will continue to be intense.

Research to identify genes is also being conducted by various institutes and government-financed entities in the United States and in foreign countries, including France, Germany, Japan and the United Kingdom, as well as by numerous smaller laboratories associated with universities or other not-for-profit entities. In addition, a number of pharmaceutical and biotechnology companies and government-financed programs are engaged or have announced their intention to engage in areas of research similar to or competitive with our focus on gene discovery, and other entities are likely to enter the field.

We believe the principal competitive factors affecting our markets are rights to develop and commercialize therapeutic protein-based products, including appropriate patent and proprietary rights; safety and effectiveness of therapeutic protein-based products; the timing and scope of regulatory approvals; the cost and availability of these products; the availability of appropriate third-party reimbursement programs; and the availability of alternative therapeutic products or treatments. Although we believe that we are well positioned to compete adequately with respect to these factors in the future, our future success is currently difficult to predict because we are an early stage company; nearly all of our internal product candidates are in preclinical development and have yet to undergo clinical trials. Also, although we believe that our bioinformatics technologies and exploratory biology capabilities provide us with a competitive advantage, any of the companies or other entities we compete with may discover and establish a patent position in one or more genes or proteins that we have identified and designated or considered designating as a product candidate. In addition, any potential products based on genes or proteins we identify will face competition both from companies developing gene- or protein-based products and from companies developing other forms of treatment for diseases that may be caused by, or related to, the genes or proteins we identify. Furthermore, our potential products, if approved and commercialized, may compete against well-established existing therapeutic protein-based products, many of which may be currently reimbursed by government health administration authorities, private health insurers and health maintenance organizations. Also, health care professionals and consumers may prefer existing or newly developed products to any product we develop.

Employees

As of December 31, 2002, we had 364 full-time employees, 82 of whom hold degrees at the doctoral level. Currently, we have approximately 246 employees dedicated to research and development. Each of our employees has signed a confidentiality agreement, and no employees are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.

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Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price

Our bioinformatics-based discovery strategy is unproven, and we do not know whether we will be able to discover any genes or proteins of commercial value.

We do not know whether our bioinformatics-based therapeutic protein discovery strategy will yield commercially valuable products because we are in the early stages of development. For most of our corporate existence, we relied on exploratory biology to study particular diseases and medical conditions and to find potential treatments. We shifted our emphasis to bioinformatics-based discovery relatively recently. Bioinformatics is the use of high-powered computers, software and analytical tools to interpret DNA sequence data and to assist in identifying those genes and proteins that are likely to play a meaningful role in human health. We use bioinformatics to discover genes and their corresponding proteins in genomic databases, with the goal of developing therapeutic protein-based products based on these discoveries. We have not begun clinical trials of any product candidates discovered through our bioinformatics-based efforts, and we are not aware of any other company that has successfully commercialized products derived from bioinformatics-based research. Our bioinformatics-based strategy may not result in the successful development or commercialization of any products.

The availability of novel human genomic data continues to decrease, which affects our ability to discover entirely novel therapeutic proteins.

We have relied on the generation of new genomic data for the discovery of novel genes and proteins. Because the flow of genomic data has slowed, it has become increasingly difficult for us to discover novel genes through the analysis of this data. This decrease in the rate of generation of novel sequence data will impair our ability to discover entirely novel therapeutic proteins, and we will need to continue to develop approaches to find difficult-to-recognize proteins in order to discover novel proteins. We will also need to continue to develop approaches to establish the functions of proteins to find the therapeutic protein candidates.

We may not be able to develop commercially viable products from the key protein categories on which we focus.

We may not be able to discover any new therapeutic proteins of commercial value in the key therapeutic protein categories we target in our discovery and development efforts. Prior successes of other companies in commercializing protein-based products derived from these categories provide no indication that we will be able to discover any therapeutic proteins within these categories beyond those that we have already discovered. Also, we may not be able to successfully commercialize any novel therapeutic proteins we have discovered or may discover in the future. In addition, some of the protein categories we concentrate on have not yielded any successful therapeutic protein products or late-stage clinical trial candidates. Discovery and development efforts we expend on these categories may prove ineffective and may detract from our efforts to discover and develop therapeutic proteins within those categories that have shown more promise. Also, by focusing on specific categories of proteins, we may overlook other therapeutic proteins not contained in these categories that ultimately will be successfully commercialized by others. In addition, other classes of drugs may prove to have superior therapeutic benefits or be easier and more cost-effective to produce than therapeutic proteins.

Our patent applications may not result in issued patents, and our competitors may commercialize the discoveries we attempt to patent.

Our pending patent applications covering genes and their corresponding proteins may not result in the issuance of any patents. These applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related therapeutic protein-based product candidates we may want to commercialize. In addition, other parties have filed or may file patent applications that cover genes, proteins or related discoveries or technologies similar or identical to those covered in our patent applications. Because patent applications in the United States historically have been

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maintained in secrecy until a patent issues, other parties may have filed patent applications on genes or their corresponding proteins before we filed applications covering the same genes or proteins, and we may not be the first to discover these genes or proteins. Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice the claimed inventions.

Third parties may infringe our patents or challenge their validity or enforceability.

Third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability of our patents. The issuance of a patent is not conclusive as to its validity or enforceability. Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of our intellectual property. Also, as a result of such determinations, we may be enjoined from commercializing potential products or may be required to obtain licenses, if available, to third-party patents or develop or obtain alternative technology. In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts.

Furthermore, third parties may independently develop intellectual property similar to our patented intellectual property, which could result in, among other things, interference proceedings in the United States Patent and Trademark Office to determine priority of discovery or invention. Interference proceedings could result in the loss of or significant limitations on patent protection for our discoveries or technologies. Responding to interference proceedings or other challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns.

We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our potential products.

Third parties may claim that our potential products or related technologies infringe their patents. Patent litigation is very common in the biopharmaceutical industry, and the risk of infringement claims is likely to increase as the industry expands and as other companies obtain more patents and increase their efforts to discover genes through automated means and to develop proteins. Any patent infringement claims or similar legal impediments that might be brought against us may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be non-exclusive, and therefore our competitors may obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

Issued patents may not provide us with any competitive advantage or provide meaningful protection against competitors.

Issued patents may not provide us with any competitive advantage. Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any value. In addition, issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented product candidates. Some companies are currently attempting to develop therapeutic protein-based products substantially equivalent to products patented by other parties by altering the amino acid sequence within the therapeutic protein-based product and declaring the altered product a new product. It may be easier to

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develop substantially equivalent versions of therapeutic protein-based products such as monoclonal antibodies and soluble receptors than it is to develop substantially equivalent versions of the proteins with which they interact because there is often more than one antibody or receptor that has the same therapeutic effect. Consequently, any existing or future patents we have that cover monoclonal antibodies or soluble receptors may not provide any meaningful protection against competitors. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope. For example, other parties may discover uses for genes or proteins different from the uses covered in our patents, and these other uses may be separately patentable. If another party holds a patent on the use of a gene or protein, then even if we hold the patent covering the composition of matter of the gene or protein itself, that other party could prevent us from selling any product directed to such use. Also, other parties may have patents covering the composition of matter of genes or proteins for which we have patents covering only methods of use of these genes or proteins. Furthermore, the patents we hold relating to recombinant human proteins, such as our patents covering rFactor XIII or rhThrombin, may not prevent competitors from developing, manufacturing or selling other versions of these proteins. Moreover, although we hold patents relating to the manufacture of recombinant human thrombin, we have no composition of matter patent protection covering thrombin. Accordingly, we may not be able to prevent other parties from commercializing competing forms of recombinant human thrombin.

The patent field relating to therapeutic protein-based products is subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize products based on proteins that we discovered.

The patent protection available for genes and therapeutic protein-based products is highly uncertain and involves complex legal and factual questions that determine who has the right to develop a particular product. No clear policy has emerged regarding the breadth of patents in this area. There have been, and continue to be, intensive discussions concerning the scope of patent protection for partial gene sequences, full-length genes and their corresponding proteins. Social and political opposition to patents on genes may lead to narrower patent protection for genes and their corresponding proteins. Patent protection relating to genes and therapeutic protein-based products is also subject to a great deal of uncertainty outside the United States, and patent laws are currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries may result in our inability to obtain patents covering the genes or proteins we discover or to enforce patents that have been issued to us, and may allow others to use our discoveries to develop and commercialize therapeutic protein-based products.

We expect to incur significant expenses in applying for patent protection and prosecuting our patent applications.

We may fail to secure meaningful patent protection relating to any of our existing or future product candidates, discoveries or technologies despite the expenditure of considerable resources. Our success depends significantly on the establishment of patent protection for the genes, proteins and related technologies we discover or invent. Consequently, we intend to continue our substantial efforts in applying for patent protection and prosecuting pending and future patent applications. These efforts have historically required the expenditure of considerable time and money, and we expect that they will continue to require significant expenditures. If future changes in United States or foreign patent laws complicate or hinder our efforts to obtain patent protection, the costs associated with patent prosecution may increase significantly.

We may be unable to protect our proprietary technology and information.

In addition to our patented intellectual property, we also rely on unpatented technology, trade secrets and confidential information. We may not be able to effectively protect our rights to this technology or information. Other parties may independently develop equivalent technologies or independently gain access to and disclose substantially equivalent information. Disputes may arise about inventorship and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensees, scientific and academic collaborators and consultants. In addition, confidentiality agreements

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and material transfer agreements we have entered into with these parties and with employees and advisors may not provide effective protection of our technology or information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.

We have limited experience in developing products.

We have not yet developed or commercialized any products on our own. Our contributions to the discovery or development of certain therapeutic proteins currently on the market do not indicate that we will be able to successfully develop products alone. Our work relating to these marketed products did not include clinical trials, manufacturing, marketing or other late-stage development or commercialization activities. We have limited experience with product development activities and may not be successful in developing or commercializing any products.

Any failure or delay in commencing or completing clinical trials for product candidates could severely harm our business.

The successful commercialization of any product candidates will depend on regulatory approval in each market in which we, our collaborators or our licensees intend to market the product candidates. Each of our product candidates must undergo extensive preclinical studies and clinical trials as a condition to regulatory approval. Preclinical studies and clinical trials are time-consuming and expensive and together take several years to complete, and to date we have not completed any clinical trials on our own. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

• our inability or the inability of our collaborators or licensees to manufacture or obtain from third parties materials sufficient for use in preclinical studies and clinical trials;

• delays in patient enrollment and variability in the number and types of patients available for clinical trials;

• difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

• poor effectiveness of product candidates during the clinical trials;

• unforeseen safety issues or side effects; and

• governmental or regulatory delays.

It is possible that none of our product candidates, whether developed on our own, with collaborators or by licensees, will enter or complete clinical trials in any of the markets in which we, our collaborators or licensees intend to sell those product candidates. Accordingly, we, our collaborators or licensees may not receive the regulatory approvals needed to market our product candidates in any markets. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for our product candidates could severely harm our business.

Clinical trials may fail to demonstrate the safety and effectiveness of our product candidates, which could prevent or significantly delay their regulatory approval.

Clinical trials involving our product candidates may reveal that those candidates are ineffective, are unacceptably toxic or have other unacceptable side effects. In addition, data obtained from tests are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. Likewise, the results of preliminary studies do not predict clinical success, and larger and later-stage clinical trials may not produce the same results as earlier-stage trials. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. For example, in 1998, Amgen Inc. halted Phase 3 clinical trials in the United States relating to our product candidate Thrombopoietin in the treatment of chemotherapy-induced thrombocytopenia after reports of the development of neutralizing antibodies in both cancer patients and volunteer donors in platelet donation trials. In addition, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts for these product

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candidates. For example, in 2001, Celltech Group plc discontinued development of platelet-derived growth factor receptor antibody, a product candidate that Celltech licensed from us and designated as CDP 860, for the treatment of restenosis. Celltech concluded that the Phase 2 clinical trial results did not justify further development of CDP 860 as a restenosis therapy.

We may be unable to satisfy the rigorous government regulations relating to the development and commercialization of our product candidates.

Any failure to receive the regulatory approvals necessary to commercialize our product candidates could severely harm our business. Our product candidates are subject to extensive and rigorous government regulation. The FDA regulates, among other things, the collection, testing, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, advertising, promotion, sale and distribution of therapeutic products. If our potential products are marketed abroad, they will also be subject to extensive regulation by foreign governments. None of our product candidates has been approved for sale in the United States or any foreign market, and we have only limited experience in filing and pursuing applications necessary to gain regulatory approvals.

The regulatory review and approval process, which includes preclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish the product candidate’s safety and effectiveness. The approval process typically takes many years to complete and may involve ongoing requirements for post-marketing studies. Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn. In addition, government regulation may result in:

• prohibitions or significant delays in the marketing of potential products;

• discontinuation of marketing of potential products; and

• limitations of the indicated uses for which potential products may be marketed.

If we fail to comply with the laws and regulations pertaining to our business, we may be subject to sanctions, including the temporary or permanent suspension of operations, product recalls, marketing restrictions and civil and criminal penalties.

Our plan to use collaborations to leverage our capabilities may not be successful.

As part of our business strategy, we have entered into collaboration arrangements with strategic partners to develop product candidates and will continue to evaluate similar opportunities. For our collaboration efforts to be successful, we must identify partners whose competencies complement ours. We must also successfully enter into collaboration agreements with them on terms attractive to us and integrate and coordinate their resources and capabilities with our own. We may be unsuccessful in entering into collaboration agreements with acceptable partners or negotiating favorable terms in these agreements. Also, we may be unsuccessful in integrating the resources or capabilities of these collaborators. In addition, our collaborators may prove difficult to work with or less skilled than we originally expected. If we are unsuccessful in our collaborative efforts, our ability to develop and market product candidates could be severely limited.

We may not be able to generate any revenue from product candidates developed by collaborators or licensees if they are unable to successfully develop those candidates.

We may be unable to derive any value from product candidates developed by collaborators or licensees. Our ability to generate revenues from existing or future collaborations and license arrangements is subject to numerous risks, including:

• the possibility that our collaborators or licensees lack sufficient financial, technical or other capabilities to develop these product candidates;

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• the length of time that it takes for our collaborators or licensees to achieve various clinical development and regulatory approval milestones;

• the inability of collaborators or licensees to successfully address any regulatory or technical challenges they may encounter; and

• the possibility that these product candidates may not be effective or may prove to have undesirable side effects, unacceptable toxicities or other characteristics that preclude regulatory approval or prevent or limit commercial use.

Novo Nordisk has substantial rights to license proteins we discover, which may limit our ability to pursue other collaboration or licensing arrangements or benefit from our discoveries.

As part of our separation from Novo Nordisk, we granted Novo Nordisk options to license certain rights to several of our potential therapeutic proteins under an option agreement. Although we generally retain North American rights to the proteins licensed by Novo Nordisk pursuant to this agreement, Novo Nordisk has rights to these proteins in the rest of the world. In addition, under this agreement Novo Nordisk has worldwide rights, including rights in North America, to any licensed proteins that act to generate, expand or prevent the death of insulin-producing beta cells. Novo Nordisk has already exercised options to license three proteins, and it may license other proteins in the future pursuant to this agreement. Our agreement with Novo Nordisk may:

• preclude or delay opportunities to seek other collaborators for our product candidates, due to the fact that we cannot explore other collaboration opportunities relating to proteins subject to the agreement until after Novo Nordisk has decided not to exercise an option with respect to the protein, which decision Novo Nordisk may withhold until well into the product development cycle;

• limit the financial benefits we may derive from product candidates by allowing Novo Nordisk to license proteins in exchange for predetermined payments and royalties and with predetermined cost-sharing arrangements, which payments and royalty rates may be less than, and which cost-sharing arrangements may be less favorable to us than, terms we might otherwise obtain in collaborative or licensing arrangements with other parties;

• result in Novo Nordisk licensing proteins with the most therapeutic and commercial potential, leaving us with fewer or less desirable product candidates to develop on our own or with other potential collaborators; and

• prevent us from collaborating with or licensing a product candidate to another company that, by virtue of its particular skills and capabilities, may be a more desirable collaborator or licensing partner for that particular product candidate than Novo Nordisk.

Because we currently do not have the capability to manufacture materials for clinical trials or for commercial sale, we will have to rely on third parties to manufacture our potential products, and we may be unable to obtain required quantities in a timely manner or on acceptable terms, if at all.

We currently do not have the manufacturing facilities necessary to produce materials for clinical trials or commercial sale, and we have only limited capabilities to produce materials for preclinical studies. We intend to rely on collaborators and third-party contract manufacturers to produce the quantities of drug materials needed for preclinical studies, clinical trials and commercialization of our potential products. We will have to rely on these manufacturers to deliver materials on a timely basis and to comply with regulatory requirements, including current GMP regulations enforced by the FDA through its facilities inspection program. These manufacturers may not be able to meet our needs with respect to timing, quantity or quality of materials, and may fail to satisfy applicable regulatory requirements with respect to the manufacturing of these materials. If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we encounter delays in the delivery of materials from, or difficulties in our relationships with, manufacturers, our preclinical studies and clinical

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trials may be delayed. Delays in preclinical studies could postpone the filing of investigational new drug applications or the initiation of clinical trials, and delays in clinical trials could postpone the subsequent submission of product candidates for regulatory approval and market introduction.

We may not be successful in developing internal manufacturing capabilities or complying with applicable manufacturing regulations.

We may be unable to establish the internal manufacturing capabilities necessary to develop our potential products. Therapeutic proteins are often more difficult and expensive to manufacture than other classes of drugs, and the manufacture of therapeutic proteins may not be commercially feasible. Also, we will be required to adhere to rigorous GMP regulations in the manufacture of therapeutic proteins. Assuming we successfully complete construction of our planned small-scale GMP manufacturing suites, we will need to hire and train employees to staff them. These initial manufacturing suites will not provide us with the capability to produce drug materials for commercial sale. To develop this capability we would need to acquire larger manufacturing facilities. If any of our future facilities cannot pass a pre-approval plant inspection, the FDA pre-market approval of our product candidates may not be granted. In complying with these regulations and any applicable foreign regulatory requirements, we will be obligated to expend time, money and effort in production, record keeping and quality control to assure that our potential products meet applicable specifications and other requirements. Any failure to comply with these requirements may subject us to regulatory sanctions and delay or interrupt our development and commercialization efforts.

In addition, some of the inventions licensed to us were initially developed at universities or other not-for-profit institutions with funding support from an agency of the United States government. In accordance with federal law, we or our licensees may be required to manufacture products covered by patents in those inventions in the United States, unless we can obtain a waiver from the government on the basis that such domestic manufacture is not commercially feasible. We have not attempted to secure any such waivers from the government, and do not know if they would be available if sought. If we are not able to obtain such waivers on a timely basis, we might be forced to seek manufacturing arrangements at higher prices, or on otherwise less favorable terms, than might be available to us in the absence of this domestic manufacturing requirement.

Because we will depend on third parties to conduct laboratory tests and clinical trials, we may encounter delays in or lose some control over our efforts to develop product candidates.

We will rely on third parties to design and conduct laboratory tests and clinical trials for us. If we are unable to obtain these services on acceptable terms, we may not be able to complete our product development efforts in a timely manner. Also, because we will rely on third parties for laboratory tests and clinical trials, we may lose some control over these activities or be unable to manage them appropriately, or may become too dependent on these parties. These third parties may not complete the tests or trials on schedule or when we request, and the tests or trials may be methodologically flawed or otherwise defective. Any delays or difficulties associated with third-party laboratory tests or clinical trials may delay the development of our product candidates.

Because we currently have no sales or marketing capabilities, we may be unable to successfully commercialize our potential products.

We currently have no direct sales capabilities or marketing capabilities. We expect that in the future we will rely on collaborators or other third parties to market any products that we may develop. These third parties may not be successful in marketing our potential products, and we will have little or no control over their marketing efforts. In addition, we may co-promote our potential products or retain marketing rights in North America to these products. If we decide to market products directly, we will need to incur significant additional expenses and commit significant additional management resources to develop effective sales and marketing capabilities. We may not be able to establish these capabilities despite these additional expenditures. In addition, co-promotion or other marketing arrangements with third parties to commercialize potential products could significantly limit the revenues we derive from these products.

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Environmental and health and safety laws may result in liabilities, expenses and restrictions on our operations.

State and federal laws regarding environmental protection, hazardous substances and human health and safety may adversely affect our business. The use of hazardous substances in our operations exposes us to the risk of accidental releases. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines. Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations. In addition, the site where our principal headquarters and facilities are located has been listed as a contaminated property by the State of Washington due to its previous use by the City of Seattle as an electricity generating plant. The City of Seattle has agreed to defend us against and indemnify us for any claims that arise from this pre-existing contamination, except to the extent that we caused the claim through our negligence or intentional fault, or to the extent that we contributed to the contamination that is the subject of the claim, caused an increase in the clean-up costs or failed to comply with our obligations under our agreement with the City of Seattle. This indemnity may be insufficient and we may be subject to environmental liabilities or be prohibited from using or occupying some or all of the property as a result of environmental claims.

We anticipate incurring additional losses and may not achieve profitability.

As of December 31, 2002, we had an accumulated deficit of $141.5 million. We expect to continue to incur increasing losses over the next several years, and we may never become profitable. We are in the early stages of development as an independent company, and it will be a number of years, if ever, before we generate any revenues from our own product sales. Our revenues from existing collaborative and licensing arrangements are insufficient to cover our operating expenses, and we may never generate revenues from these or any future arrangements sufficient to cover these expenses. In addition, we will continue to incur substantial expenses relating to our discovery and development efforts. We anticipate that these expenses will increase as we focus on the laboratory tests and clinical trials required to obtain the regulatory approvals necessary for the sale of any products. The development of our product candidates will require significant further research, development, testing and regulatory approvals. We may not be able to complete such development or succeed in developing products that will generate revenues in excess of the costs of development.

Our operating results are subject to fluctuations that may cause our stock price to decline.

Our operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenues are unpredictable and may fluctuate due to the timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements, including our option agreement with Novo Nordisk. In addition, our expenses may fluctuate from quarter to quarter due to the timing of expenses, including payments owed by us under collaborative or licensing arrangements. We believe that period-to-period comparisons of our past operating results are not good indicators of our future performance and should not be relied on to predict our future operating results. For example, for periods prior to 2000, most of our revenues represented payments received from Novo Nordisk for research and development activities we conducted on their behalf. This arrangement terminated in 2000 in connection with our separation from Novo Nordisk. It is possible that in the future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts or investors, causing the market price of our common stock to decline.

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

Our business does not currently generate the cash needed to finance our operations. We anticipate that we will continue to expend substantial funds on our discovery and development programs. We expect that these expenditures will increase significantly over the next several years as we hire additional employees, expand our preclinical development activities and begin internal clinical trials. We will need to seek additional funding

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through public or private financings, including equity financings, and through other arrangements, including collaborative and licensing arrangements. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect. However, financing may be unavailable when we need it or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders will be diluted, and these securities may have rights superior to those of our common stock. If we are unable to raise additional funds when we need them, we may be required to delay, scale back or eliminate expenditures for some of our discovery or development programs. We may also be required to grant rights to third parties to develop and market product candidates that we would prefer to develop and market internally, and such rights may be granted on terms that are not favorable to us. If we were required to grant such rights, the ultimate value of these product candidates to us would be reduced.

Negative public opinion and increased regulatory scrutiny of genetic and clinical research may limit our ability to conduct our business.

Ethical, social and legal concerns about genetic and clinical research could result in additional regulations restricting or prohibiting some of our activities or the activities of our suppliers and collaborators. In recent years, federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating the biotechnology industry. More restrictive regulations could delay preclinical studies or future clinical trials, or prevent us from obtaining regulatory approvals or commercializing any products. In addition, animal rights activists may protest our use of animals in research and development and may attempt to disrupt our operations, which could cause us to incur significant expenses and distract our management’s attention from other business concerns.

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

We may be unable to compete successfully against our current or future competitors. We expect that competition in our field will continue to be intense. We face competition from other entities using sophisticated bioinformatics technologies to discover genes, including Genentech, Inc., Human Genome Sciences, Inc., Curagen, Inc. and Amgen, Inc. We also face competition from entities using more traditional methods to discover genes related to particular diseases, including other large biotechnology and pharmaceutical companies. In addition, we face competition from other parties that conduct research to identify genes and conduct human genome research similar to or competing with our focus on gene discovery, including biotechnology and pharmaceutical companies; privately or publicly financed research institutes or programs, such as those sponsored by the United States government and the governments of France, Germany, Japan and the United Kingdom; and laboratories associated with universities or other not-for-profit organizations. Furthermore, our potential products, if approved and commercialized, may compete against well-established existing therapeutic protein-based products, many of which may be currently reimbursed by government health administration authorities, private health insurers and health maintenance organizations. Also, health care professionals and consumers may prefer existing or newly developed products to any product we develop.

Many of our existing and potential competitors have substantially greater research and product development capabilities and financial, scientific, marketing and human resources than we do. As a result, these competitors may:

• succeed in identifying genes or proteins, or developing therapeutic protein-based products, earlier than we do;

• obtain approvals for products from the FDA or other regulatory agencies more rapidly than we do;

• obtain patents that block or otherwise inhibit our ability to develop and commercialize our product candidates;

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• develop treatments or cures that are safer or more effective than those we propose to develop;

• devote greater resources to marketing or selling their products;

• introduce or adapt more quickly to new technologies or scientific advances, which could render our bioinformatics technologies obsolete;

• introduce products that make the continued development of our potential products uneconomical;

• withstand price competition more successfully than we can;

• more effectively negotiate third-party collaborative or licensing arrangements; and

• take advantage of acquisition or other opportunities more readily than we can.

The failure to attract or retain key management or other personnel could decrease our ability to discover, develop and commercialize potential products.

We depend on our senior executive officers as well as key scientific and other personnel. Only a few of our key personnel are bound by employment agreements, and those with employment agreements are bound only for a limited period of time. Further, we have not purchased key-person life insurance policies for any of our executive officers or key personnel. Competition for scientists and other qualified employees is intense among pharmaceutical and biotechnology companies, and the loss of qualified employees, or an inability to attract, retain and motivate the additional highly skilled employees required for the expansion of our activities, could hinder our ability to discover, develop and commercialize potential products.

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

In recent years, officials have made numerous proposals to change the health care system in the United States. These proposals include measures that would limit or prohibit payments for certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control. Government and other third-party payors increasingly have attempted to contain health care costs by limiting both coverage and the level of reimbursement of newly approved health care products. They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted marketing approval. Governments may adopt future legislative proposals and federal, state or private payors for health care goods and services may take further action to limit payments for health care products and services. In addition, in certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. Any of these factors could limit our ability to successfully commercialize our potential products.

We may be required to defend lawsuits or pay damages in connection with the alleged or actual harm caused by our product candidates.

We face an inherent business risk of exposure to product liability claims in the event that the use of our product candidates is alleged to have resulted in harm to others. This risk exists in clinical trials as well as in commercial distribution. In addition, the pharmaceutical and biotechnology industries in general have been subject to significant medical malpractice litigation. We may incur significant expenses if product liability or malpractice lawsuits against us are successful. Although we maintain product liability insurance, our coverage may not be adequate to cover such claims.

Our stock price may be volatile.

The market price of our common stock may fluctuate significantly in response to many factors beyond our control, including:

• changes in the recommendations of securities analysts or changes in their financial estimates of our operating results;

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• failures in meeting performance expectations of securities analysts or investors;

• fluctuations in the valuations of companies perceived by securities analysts or investors to be comparable to us; and

• share price and volume fluctuations attributable to inconsistent trading volume levels of our shares.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In particular, there have been high levels of volatility in the market prices of securities of biotechnology companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Certain of our shareholders have significant control of our management and affairs, which they could exercise against other shareholders’ best interests.

Novo Nordisk, together with Warburg, Pincus Equity Partners, L.P. and entities affiliated with Apax Partners, Inc., beneficially own an aggregate of approximately 70% of our outstanding common stock. In addition, Novo Nordisk and Warburg, Pincus Equity Partners have rights to designate director nominees to our board of directors. These shareholders, acting together, have the ability to control our management and affairs and matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, these shareholders, acting together, have the ability to cause a change in control, as well as to delay or prevent a change in control. They may also discourage a potential acquirer from making a tender offer or otherwise attempting to effect a change in control, even if such a change in control would benefit our other shareholders.

Provisions in our charter documents could prevent or frustrate any attempts to replace our current management by shareholders.

Our articles of incorporation and bylaws contain provisions, such as undesignated preferred stock and prohibitions on cumulative voting in the election of directors, which could make it more difficult for a third party to acquire us without the consent of our board of directors. Also, our articles of incorporation provide for a staggered board, removal of directors only for cause and certain requirements for calling special shareholder meetings. In addition, our bylaws require advance notice of shareholder proposals and nominations and to impose restrictions on the persons who may call special shareholder meetings. These provisions may have the effect of preventing or hindering any attempts by our shareholders to replace our current management.

Website Access to Our SEC Reports

Our Internet address is www.zymogenetics.com. We make our periodic SEC reports (Form 10-Q and Form 10-K), current reports (Form 8-K) and amendments to these reports available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.

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Item 2.    Properties

We are headquartered in Seattle, Washington, where we lease two buildings containing approximately 160,000 square feet. In 2003, construction is expected to begin on an expansion of one of these buildings that will add approximately 45,000 square feet of additional laboratory and office space. We own land adjacent to one of the existing buildings on which we originally intended to construct a pilot manufacturing plant. We are holding this land for potential expansion in the future. In addition, we have leased approximately 15,000 square feet of space in a nearby office building. We believe that our existing facilities, together with available, planned and potential expansion space, will be adequate to fulfill our needs for the foreseeable future.

Item 3.    Legal Proceedings

None.

Item 4.    Submission Of Matters To A Vote Of Security Holders

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

PART II

Item 5.    Market for Registrant’s Common Equity and Related Shareholder Matters

Our common stock began trading on the Nasdaq Stock Market under the symbol ZGEN on February 1, 2002. As of March 14, 2003, we had approximately 80 shareholders of record. We have never paid cash dividends and do not anticipate paying them in the foreseeable future.

The following table sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of our common stock as quoted on the Nasdaq Stock Market for the year 2002:

	High		Low
1st Quarter (from February 1, 2002)	$	12.05	$	8.70
2nd Quarter		12.94		7.05
3rd Quarter		8.78		5.37
4th Quarter		10.64		6.16

On January 31, 2002, the U.S. Securities and Exchange Commission (the Commission) declared effective our Registration Statement on Form S-1 (Registration No. 333-69190) as filed with the Commission in connection with our initial public offering of common stock, without par value. Net proceeds of approximately $110 million have been invested in short-term, investment-grade, interest bearing instruments.

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Item 6.    Selected Financial Data

The following selected financial data should be read in conjunction with the financial statements and notes to the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Form 10-K. The selected Statements of Operations and Balance Sheet data for, and as of the years ended December 31, 2002, 2001 and 2000 have been derived from our audited financial statements appearing elsewhere in this Form 10-K. The selected Statements of Operations and Balance Sheet data for, and as of the years ended December 31, 1999 and 1998 have been derived from our audited financial statements that are not included in this Form 10-K. Historical results are not necessarily indicative of future results.

	Years Ended December 31,
	2002			2001			2000			1999			1998
	(in thousands, except per share data)
Statement of Operations Data:
Revenues	$	52,775		$	17,828		$	32,464		$	69,675		$	66,744
Operating expenses:
Research and development(1)		66,469			48,052			49,337			48,415			49,886
General and administrative(2)		16,925			10,475			12,069			9,550			9,339
Noncash stock-based compensation expense		7,188			3,507			—			—			—
Total operating expenses		90,582			62,034			61,406			57,965			59,225
Income (loss) from operations		(37,807	)		(44,206	)		(28,942	)		11,710			7,519
Other income (expense):
Interest income		6,772			7,152			5,417			274			29
Interest expense		(8	)		(13	)		(848	)		(56	)		(485	)
Other, net		627			98			(111	)		(52	)		(72	)
Income (loss) before provision for income taxes		(30,416	)		(36,969	)		(24,484	)		11,876			6,991
Benefit (provision) for income taxes		—			90			(5,893	)		(2,454	)		(1,273	)
Net income (loss)		(30,416	)		(36,879	)		(30,377	)		9,422			5,718
Preferred stock dividend and accretion		(1,718	)		(20,610	)		(2,903	)		—			—
Net income (loss) attributable to common shareholders	$	(32,134	)	$	(57,489	)	$	(33,280	)	$	9,422		$	5,718
Basic net income (loss) per share	$	(0.75	)	$	(4.85	)	$	(3.38	)	$	1.11		$	0.68
Diluted net income (loss) per share	$	(0.75	)	$	(4.85	)	$	(3.38	)	$	0.80		$	0.48
Weighted-average shares used in computing basic net income (loss) per share		42,578			11,846			9,846			8,455			8,455
Weighted-average shares used in computing diluted net income (loss) per share		42,578			11,846			9,846			11,793			11,793
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	285,438		$	147,077		$	172,976		$	19,648		$	5,738
Working capital		271,276			138,493			166,245			19,504			12,566
Total assets		312,233			205,435			228,637			91,914			83,473
Mandatorily redeemable convertible preferred stock		—			260,540			239,930			—			—
Total shareholders’ equity (deficit)		269,268			(79,402	)		(27,269	)		77,687			68,265

(1) The years ended December 31, 2002 and 2001 exclude noncash stock-based compensation expense of $4,543 and $2,109, respectively.

(2) The years ended December 31, 2002 and 2001 exclude noncash stock-based compensation expense of $2,645 and $1,398, respectively.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic protein-based products for the treatment of human disease. We have been involved in the discovery and development of therapeutic protein-based products for over 20 years, including 12 years as a wholly owned

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subsidiary of Novo Nordisk, a Danish pharmaceutical company. During this time, we contributed to the discovery or development of five products currently marketed by other companies. In August 1988, we were acquired by and became a wholly owned subsidiary of Novo Nordisk. From the date of our acquisition through December 31, 1999, we earned the majority of our revenues by conducting research and development activities for Novo Nordisk. We were paid at a rate of 110% of our research and development costs incurred in connection with all projects performed on behalf of Novo Nordisk pursuant to a funding agreement. We had net income of $5.7 million in 1998 and $9.4 million in 1999.

In anticipation of our separation from Novo Nordisk pursuant to a planned restructuring by Novo Nordisk, the funding agreement was terminated effective January 1, 2000. Also effective January 1, 2000, Novo Nordisk contributed to us the rights inside the United States to certain intellectual property, including patents on products on which we currently generate royalty revenues. Concurrently, we purchased the rights outside the United States to this intellectual property from Novo Nordisk, paying them $35.7 million in October 2000. In addition, in September 2000, we assigned to Novo Nordisk patents and other rights relating to Factor VII, including NovoSeven, and insulin analogues, including NovoRapid, for a one-time payment of $90.1 million, which was recorded as a capital contribution. As a result of this transaction, effective September 2000 we no longer receive royalties on sales of Factor VII and insulin analogues.

In November 2000, Novo Nordisk effected the restructuring. As part of the restructuring, we became an independent company in a transaction that included a $150.0 million private placement of our Series B preferred stock and the reduction of Novo Nordisk’s ownership to approximately 62% of our outstanding capital stock and less than 50% of our outstanding voting stock. At the same time, we granted Novo Nordisk an option to license certain rights to potential therapeutic proteins pursuant to an option agreement, including rights to a defined number of proteins outside of North America over a period of four years in return for option fees of $7.5 million per year. Novo Nordisk may elect to extend the option agreement for an additional two years in return for continuing option fees of $7.5 million per year. For each exercise of an option by Novo Nordisk, we will receive a license fee, the amount of which depends on the development stage of the protein licensed. We are entitled to additional amounts upon the achievement of predefined milestones. In addition, we will earn royalties on sales of any resulting products. To date, Novo Nordisk has exercised options to license three proteins pursuant to this agreement.

In February 2002, we completed our initial public offering. Upon the completion of the initial public offering, each share of Series A and B preferred stock held by Novo Nordisk and other investors converted into 3.6 shares of non-voting and voting common stock, respectively. In June 2002, all shares of non-voting common stock were converted into the same number of shares of voting common stock. As of December 31, 2002, Novo Nordisk’s ownership percentage was 47.5%.

After termination of the funding agreement with Novo Nordisk, we incurred net losses of $30.4 million, $36.9 million and $30.4 million for the years ended December 31, 2000, 2001 and 2002, respectively. As of December 31, 2002, we had an accumulated deficit of $141.5 million. The accumulated deficit resulted from the net losses and certain capital transactions with Novo Nordisk. We expect our net losses to increase in the future as we continue to expand our product development activities, including clinical trials, and build additional infrastructure.

Our current revenue sources are limited, and we do not generate any direct revenues from product sales. We earn royalties on sales of products by several licensees, including Novo Nordisk. For the year ended December 31, 2002, revenues from royalties were $8.0 million. In the near term, we expect our revenues to consist primarily of product royalties, the option fees from Novo Nordisk and revenues generated under existing collaborative agreements with Novo Nordisk and Serono S.A. As of December 31, 2002 we had deferred revenues aggregating $16.8 million, of which $10.3 million are expected to be recognized in 2003. Additionally, we may generate revenues from the establishment of new collaborative research and development arrangements and license agreements. Ultimately, we intend to derive revenues from commercial product sales. Because a

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substantial portion of our revenues for the foreseeable future will depend on the establishment of new agreements and the achievement of development-related milestones, our results of operations could vary substantially from year to year.

We recognized revenues from our funding agreement with Novo Nordisk when costs were incurred on Novo Nordisk-related projects. We recognize revenues from royalties when amounts are due and considered collectible. We recognize revenues from license fees, option fees and up-front payments in connection with other rights or services that represent continuing obligations systematically over the period that the fees or payments are earned. We recognize revenues from milestone payments representing completion of separate and substantive earnings processes when the milestone is achieved and amounts are due and payable. These amounts are dependent on the completion of development-related milestones, which may not be achieved.

Our operating expenses consist of research and development expenses, general and administrative expenses and noncash stock-based compensation expense. Research and development expenses have been our most significant expenses to date and consist primarily of salaries and benefit expenses, costs of consumables, facility costs and contracted services. General and administrative expenses consist primarily of salaries and benefit expenses, professional fees and other corporate costs. We expect our research and development and general and administrative expenses to increase in the foreseeable future as we continue to expand our product development activities. We expect that a large percentage of our research and development expenses in 2003 will be incurred in support of our internal product development programs for rFactor XIII, rhThrombin, TACI-Ig and IL-21. It is not unusual for the clinical development of these types of products to take five years or more to complete, and to cost well over $100 million per product candidate. The time and cost of completing the clinical development of these product candidates will depend on a number of factors, including the disease or medical condition to be treated, clinical trial design and endpoints, availability of patients to participate in trials and the relative efficacy of the product versus treatments already approved. Due to these many uncertainties, we are unable to estimate the length of time or the costs that will be required to complete the development of these product candidates.

Under our Amended and Restated 2000 Stock Incentive Plan, stock options were granted in 2000 with exercise prices equal to the estimated fair value of the common stock at the date of grant. In 2001 and early 2002, prior to the completion of our initial public offering, stock options were granted to employees and directors at exercise prices below the estimated fair value of the common stock on the date of grant. As a result, we recorded total deferred stock-based compensation of $29.0 million through December 31, 2002. Deferred stock-based compensation is being amortized to expense over the vesting periods of the underlying options, generally four years, using the straight-line method. We amortized noncash stock-based compensation expense of $3.5 million in 2001, $7.2 million in 2002, and expect to amortize $7.2 million in 2003, $7.2 million in 2004 and $3.9 million in 2005. The amount of noncash stock-based compensation expense expected to be recorded in future periods may decrease if unvested options for which deferred stock-based compensation has been recorded are subsequently cancelled. Although we have no intention of doing so, the amount could increase if future options are granted with exercise prices below the estimated fair value of the common stock on the date of the grant.

Other income (expense) consists primarily of interest income and interest expense. Interest income is generated primarily from investment of our cash reserves. In addition, we earned $2.3 million in interest from Novo Nordisk on a royalty payment received in March 2000. Interest expense relates generally to periodic short-term borrowings from Novo Nordisk, all of which occurred and were repaid in full prior to our separation from Novo Nordisk in November 2000. As a result of the sale leaseback transaction completed in October 2002, we recorded a deferred gain of $14.4 million, which will be recognized as other income on a straight-line basis over the 15-year initial lease term.

Benefit (provision) for income taxes consists of income taxes computed at federal statutory rates less applicable credits. Subsequent to November 10, 2000, we have provided full valuation allowances for net deferred tax assets. As of December 31, 2002, we had net operating loss carryforwards of $52.5 million, research and development tax credit carryforwards of $15.0 million, a rehabilitation tax credit carryforward of $1.5

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million, and alternative minimum tax credit carryforwards of $1.2 million. These credits will expire during the period from 2008 through 2022. On October 20, 2000, we entered into a tax sharing agreement related to our separation from Novo Nordisk. This agreement requires that all research and development credit carryforwards generated prior to November 10, 2000 that we use to generate a tax benefit in future periods be reimbursed to Novo Nordisk, provided that the total reimbursement will not exceed $12.0 million. Due to the uncertainty regarding the ultimate utilization of these tax benefits, a valuation allowance has been recorded for the entire amount of the related net deferred tax assets.

As a result of our separation from Novo Nordisk in November 2000, and the subsequent evolving nature of our business, we believe that certain period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied on as an indication of future performance.

Results of Operations

Years Ended December 31, 2002 and 2001

Revenues.    Revenues increased by $35.0 million, from $17.8 million in 2001 to $52.8 million in 2002. This increase was due primarily to a one-time license fee payment of $30.0 million received in December 2002, which resulted from the granting of a license to our Ig-fusion protein patents. As a result of the agreement, the patent infringement lawsuit filed by us in March 2002 against Immunex Corporation (now owned by Amgen) was terminated by all parties. The revenue increase was also due to increased revenues from licensing arrangements and milestone payments based on the achievement of development-related milestones. These increases were partially offset by a decrease in product royalties in 2002.

Research and development expenses.    Research and development expenses, exclusive of noncash stock-based compensation expense of $2.1 million in 2001 and $4.5 million in 2002, increased by $18.4 million, from $48.1 million in 2001 to $66.5 million in 2002. A significant portion of the increase was due to increased expenses for contract manufacturing to support the development of two of our lead internal product candidates, rFactor XIII and rhThrombin. Additionally, an increase in personnel, primarily in areas supporting product development, resulted in an increase in salaries and related costs. We anticipate that research and development expenses, particularly with respect to clinical trials, will increase in the foreseeable future as we continue to advance our internal development programs. Annual rent expense of $6.6 million resulting from the sale leaseback transaction, of which the majority will be classified as research and development expense, will also contribute to future increases.

General and administrative expenses.    General and administrative expenses, exclusive of noncash stock-based compensation expense of $1.4 million in 2001 and $2.6 million in 2002, increased by $6.4 million from $10.5 million in 2001 to $16.9 million in 2002. The increase reflects added administrative personnel, resulting in an increase in salaries and related costs; an increase in legal costs associated with the recently settled lawsuit with Amgen; and increased expenses related to our operation as a public company. Additionally, our decision to postpone construction of a dedicated pilot manufacturing facility resulted in the write-off of design and engineering costs totaling $1.6 million in 2002.

Noncash stock-based compensation expense.    Noncash stock-based compensation expense increased by $3.7 million from $3.5 million in 2001 to $7.2 million in 2002. The increase resulted from the granting of options during the second half of 2001 and the beginning of 2002 with estimated fair values exceeding the exercise prices of the options.

Other income (expense).    Other income (expense) increased by $0.2 million from $7.2 million in 2001 to $7.4 million in 2002. The increase resulted from recognition of $0.2 million of gain on the sale leaseback transaction. Although our average cash invested in 2002 was greater than in the comparable period in 2001, the average interest rate earned on our investments in 2002 was lower than the average interest rate in 2001.

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Benefit (provision) for income taxes.    The income tax benefit in 2001 of $0.1 million represents the final payment according to the tax sharing agreement we entered into with Novo Nordisk prior to our separation. No additional income tax benefit was recognized in either 2001 or 2002 due to the uncertainty of realization.

Years Ended December 31, 2001 and 2000

Revenues.    Revenues decreased by $14.7 million, from $32.5 million in 2000 to $17.8 million in 2001. This decrease was attributable to a one-time royalty payment of $15.2 million from Novo Nordisk received in March 2000, which was recorded as revenue in the first quarter of 2000 when the amount was determined and collectibility was probable. Additionally, $5.0 million of NovoSeven royalties were earned in 2000 prior to the assignment of our related rights to Novo Nordisk. These decreases were partially offset by an increase in the amount of option fee revenues earned under our agreement with Novo Nordisk.

Research and development expenses.    Research and development expenses, exclusive of noncash stock-based compensation expense of $2.1 million in 2001, decreased by $1.2 million, from $49.3 million in 2000 to $48.1 million in 2001. This decrease was due primarily to reduced expenses related to discovery research collaborations and database subscriptions. We also introduced cost awareness programs related to consumables, resulting in decreases in spending. The decrease was partially offset by an increase in costs associated with patenting activities and the addition of employees devoted to research and development.

General and administrative expenses.    General and administrative expenses, exclusive of noncash stock-based compensation expense of $1.4 million in 2001, decreased by $1.6 million from $12.1 million in 2000 to $10.5 million in 2001. This decrease was due primarily to changes in the value of outstanding Novo Nordisk stock appreciation rights previously granted to administrative personnel, which resulted in a decrease in compensation expense of $1.1 million. As of December 31, 2000, all of these rights had been exercised and none remained outstanding. The decrease was also due to the termination of fees associated with administrative services provided by Novo Nordisk and a reduction in state and city taxes.

Noncash stock-based compensation expense.    Noncash stock-based compensation expense was $3.5 million in 2001; none was recorded in 2000. The 2001 expense resulted from the granting of stock options in 2001 with estimated fair values exceeding the exercise prices of the options.

Other income (expense).    Other income (expense) increased by $2.8 million from $4.4 million in 2000 to $7.2 million in 2001. This increase was due primarily to an increase in interest income from $5.4 million in 2000 to $7.2 million in 2001. The increase in interest income resulted from higher average balances of cash and cash equivalents and short-term investments in 2001, reflecting the net proceeds of $142.5 million from the private equity financing completed in November 2000. The increase in other income was also due to a decrease in interest expense of $0.8 million. We incurred this interest on various loans from Novo Nordisk, which were fully repaid by the end of 2000.

Benefit (provision) for income taxes.    The income tax provision in 2000 was $5.9 million, which reflects a valuation allowance for our cumulative net deferred tax assets partially offset by the benefit from our net operating loss for the period from January 1, 2000 through November 9, 2000, the date of separation from Novo Nordisk. The income tax benefit in 2001 of $0.1 million represents the final payment according to the tax sharing agreement we entered into with Novo Nordisk prior to our separation. No additional income tax benefit was recognized in 2001 due to the uncertainty of realization.

Liquidity and Capital Resources

Over the three years ended December 31, 2002, our operations were funded by:

• proceeds of $90.1 million from the assignment to Novo Nordisk of patents and other rights relating to NovoSeven and NovoRapid;

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• net proceeds of $142.5 million from our November 2000 private equity financing;

• net proceeds of $110.7 million from our initial public offering in February 2002;

• net proceeds of $50.5 million from the sale and leaseback transaction completed in October 2002;

• revenues earned from royalties, option fees, license fees and milestone payments; and

• investment income.

As of December 31, 2002, we had cash, cash equivalents and short-term investments of $285.4 million, which increased from $147.1 million as of December 31, 2001. Our cash reserves are held in a variety of investment-grade, fixed-income securities, including corporate bonds, commercial paper and money market instruments.

Net cash used in operating activities was $38.0 million in 2000, $18.9 million in 2001 and $11.8 million in 2002. Net cash used in operating activities in 2000 was higher than our net loss of $30.4 million due to an income tax payment of $31.5 million to Novo Nordisk partially offset by non-cash reconciling items related to a deferred tax valuation allowance, depreciation and amortization expense, and changes in operating assets and liabilities. Cash used in operating activities for each of the years 2001 and 2002 was less than our net loss due to non-cash items, such as depreciation and amortization and stock-based compensation expense, and revenues received but deferred to future periods. We expect to continue the trend of using cash to fund our operating activities in the future. This use of cash is expected to increase over time as we expand our research and development activities and move product candidates into and through clinical trials.

Net cash used in investing activities was $5.6 million in 2000, $117.7 million in 2001 and $80.3 million in 2002. Net cash used in investing activities in 2000 consisted primarily of capital expenditures. Net cash used in investing activities in 2001 included $109.6 million for purchases of short-term investments, net of proceeds from sales and maturities, and $8.1 million for capital expenditures. Net cash used in investing activities in 2002 included $120.9 million for purchases of short-term investments, net of proceeds from sales and maturities, and $9.9 million for capital expenditures, partially offset by the receipt of $50.5 million of net proceeds from the completion of the sale leaseback transaction, which is described below. In October 2002, pursuant to an earlier commitment, we purchased the final parcel of land originally intended for the construction of a pilot manufacturing facility. Earlier in 2002 we decided to defer the construction of this facility to an undetermined date in the future. The acquired land is being held for future expansion.

Cash provided by financing activities was $196.9 million in 2000, $28,000 in 2001 and $111.3 million in 2002. Financing activities in 2000 included the receipt of net proceeds of $142.5 million from the private equity financing completed in November 2000 and the receipt of $90.1 million for the assignment to Novo Nordisk of patents and other rights relating to Factor VII and insulin analogues, offset by a payment of $35.7 million to Novo Nordisk to purchase rights to certain intellectual property. Financing activities in 2002 included the net proceeds of $110.7 million from the completion of our initial public offering and $0.6 million of net proceeds from the exercise of stock options.

On October 4, 2002, we completed a sale and leaseback transaction involving our headquarter buildings located in Seattle, Washington. The three buildings were sold for a total purchase price of $52.3 million. Simultaneously, we agreed to lease the buildings from the purchaser for a period of 15 years, subject to four five-year renewal options. Net proceeds from this transaction amounted to $50.5 million and a gain on the sale of $14.4 million will be deferred and will be recognized ratably over the initial lease term. The initial rental payment of $5.1 million per year will increase by 3.5% each year during the initial term. We will recognize rent expense of $6.6 million per year, which is the average annual rent over the initial lease term. We have 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, we expect the project to cost approximately $26 million, including all related equipment costs. The purchaser has agreed to finance a substantial portion of these costs. To date, we have made no material financial commitments related to the facility expansion.

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We expect to incur substantial costs as we continue to expand our research and development programs, particularly as we move product candidates into clinical trials. We expect these expenditures to increase over the next several years. Our plans include the internal development of selected product candidates and the co-development of product candidates with collaborators where we would assume a percentage of the overall product development costs. We believe that our existing cash resources, including the net proceeds of $50.5 million from the sale leaseback transaction completed in October 2002, will provide sufficient funding to support our operations for at least the next three years. If we are successful in completing additional collaborative development transactions, which would generate both revenues and cost reductions, we believe that our cash resources will fund our programs for at least four years. If, at any time, our prospects for financing these programs decline, we may decide to reduce our ongoing investment in our development programs. We could reduce our investment by discontinuing our funding under existing co-development arrangements, establishing new co-development arrangements for other product candidates to provide additional funding sources or out-licensing product candidates that we might otherwise develop internally. Additionally, we could consider delaying or discontinuing development of product candidates to reduce the level of our related expenditures.

Our long-term capital requirements and the adequacy of our available funds will depend on several factors, many of which may not be in our control, including:

• the costs involved in filing, prosecuting, enforcing and defending patent claims;

• the results of research and development programs;

• cash flows under existing and potential future arrangements with licensees, collaborators and other parties; and

• the costs associated with the expansion of our facilities.

Over the next several years we 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 sooner than we expect. However, financing may be unavailable when we need it or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders would be reduced, and these securities could have rights superior to those of our common stock. If we are unable to raise additional funds when we need them, we could be required to delay, scale back or eliminate expenditures for some of our development programs or expansion plans, or grant rights to third parties to develop and market product candidates that we would prefer to develop and market internally, with license terms that are not favorable to us.

Contractual Obligations

We are contractually obligated to make payments as follows:

	Payments Due by Period
Contractual Obligations	Total		1 Year		2-3 Years		4-5 Years		After 5 Years
	(Amounts in thousands)
Operating leases	$	103,257	$	5,860	$	12,024	$	12,856	$	72,517

Operating lease terms range from one to fifteen years with certain renewal provisions at our option.

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Critical Accounting Policies

Our critical accounting policies are as follows:

Revenue Recognition

To date, our revenue has been generated primarily from three different sources: option fees, product royalties and license and milestone fees.

Option fees—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 our protein candidates other than those related to beta cells over a period of four years beginning November 10, 2000. In return, we are entitled to receive four annual payments of $7.5 million, the first of which was received in November 2000. 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 to pay us the $7.5 million annual payments. Upon exercise of an option by Novo Nordisk, we 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. Each of the $7.5 million option payments is being recognized ratably over the twelve months following receipt.

Product royalties—We earn royalties on several products marketed and sold by Novo Nordisk and other companies. Royalty reports are received within 30 to 60 days after the end of each quarter. We record estimates at the end of each quarter based on historical sales information. Adjustments are made in the following quarter reflecting the difference between our estimate and actual reported royalties.

License and milestone fees—We enter into various licensing agreements that generate up-front payments with subsequent milestone payments earned based on the completion of development milestones. We exercise our best judgment in determining the period over which we have continuing commitments to perform under the agreements. Revenue is recognized on a straight-line basis over this period, which has ranged in duration from six months to ten years. For certain license agreements, which require no performance on our part, license fee revenue has been recognized immediately upon execution of the agreement. Revenue from milestone payments is recognized when the milestone is achieved and amounts are due and payable.

Stock based compensation

As permitted by the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), we have elected to follow Accounting Principles Board No. 25, Accounting for Stock Issued to Employees (APB 25), in accounting for employee stock option grants and apply the disclosure-only provisions of SFAS 123 to account for our stock option plans. Under APB 25, compensation expense is based on the excess, if any, of the estimated fair value of our stock at the date of grant over the exercise price of the option. We exercised our judgment in determining the fair value of our stock with share prices varying from $9.09 to $15.11 for options granted during 2001 through January 2002. Deferred compensation is amortized over the vesting period of the individual options, using the straight-line method.

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. We are currently assessing the impact of SFAS 143 on our financial statements and will adopt the standard the first quarter of fiscal 2003.

41

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. We do not expect that the rescission of SFAS 4 will have a material impact on our 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 our 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 (EITF 00-21), Revenue Arrangements With Multiple Deliverables, 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. We are currently assessing the impact of EITF 00-21 on our 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 SFAS 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. Our December 2002 financial statements include the disclosures required by FIN 45. Adoption of this interpretation is not expected to have a material impact on our 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 No. 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. Our 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. We are currently assessing the impact of FIN 46 on our financial statements.

42

Item 7A.    Qualitative and Quantitative Disclosures About Market Risk

Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because the majority of our investments are in short-term debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our portfolio of cash, cash equivalents and short-term and restricted investments in a variety of interest-bearing instruments, including United States government and agency securities, high-grade United States corporate bonds, asset-backed securities, commercial paper and money market funds. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency exposure, nor do we hold derivative financial instruments.

Item 8.    Financial Statements and Supplementary Data

	Page in Form 10-K
Report of PricewaterhouseCoopers LLP, Independent Accountants	44
Balance Sheets	45
Statements of Operations	46
Statement of Changes in Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Equity	47
Statements of Cash Flows	48
Notes to Financial Statements	49-62

43

REPORT OF INDEPENDENT ACCOUNTANTS

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, 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

44

ZYMOGENETICS, INC.

BALANCE SHEETS

	December 31,
	2002			2001
Assets
Current assets
Cash and cash equivalents	$	55,578,707		$	36,393,551
Short-term investments		229,858,985			110,683,392
Receivables
Related party		388,655			449,314
Interest and other receivables		3,328,028			3,606,421
Prepaid expenses and other assets		2,252,879			2,291,270
Total current assets		291,407,254			153,423,948
Property and equipment, net		17,252,932			49,128,094
Other assets		3,572,806			2,882,522
Total assets	$	312,232,992		$	205,434,564
Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Equity (Deficit)
Current liabilities
Accounts payable	$	3,172,193		$	4,109,382
Accrued liabilities		5,689,066			3,150,220
Deferred gain on sale of assets		959,860			—
Deferred revenue		10,310,064			7,671,521
Total current liabilities		20,131,183			14,931,123
Deferred gain on sale of assets		13,205,812			—
Deferred revenue		6,524,039			6,482,416
Other noncurrent liabilities		3,103,942			2,882,522
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		—			103,148,879
Series B, 4,011,768 shares authorized, issued and outstanding at December 31, 2001		—			157,391,508
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			55,855,870
Non-voting common stock, no par value, 30,000,000 shares authorized		—			—
Notes receivable from shareholders		(725,000	)		(725,000	)
Deferred stock compensation		(18,290,550	)		(25,234,712	)
Accumulated deficit		(141,535,635	)		(111,119,557	)
Accumulated other comprehensive income		2,809,217			1,821,515
Total shareholders’ equity (deficit)		269,268,016			(79,401,884	)
Total liabilities, mandatorily redeemable convertible preferred stock and shareholders’ equity (deficit)	$	312,232,992		$	205,434,564

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

45

ZYMOGENETICS, INC.

STATEMENTS OF OPERATIONS

	Year ended December 31,
	2002			2001			2000
Revenues
Royalties
Related parties	$	4,985,538		$	5,151,347		$	29,310,940
Other		3,009,781			3,962,881			2,111,640
Option fee from related party		7,500,000			7,500,000			1,041,667
Ig-fusion protein license fee		30,000,000			—			—
License fees, milestones and other		7,280,065			1,213,870			—
Total revenues		52,775,384			17,828,098			32,464,247
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			48,051,456			49,336,648
General and administrative (excludes noncash stock-based compensation expense of $2,645,056 in 2002 and $1,398,106 in 2001)		16,925,391			10,474,904			12,069,226
Noncash stock-based compensation expense		7,187,624			3,507,352			—
Total operating expenses		90,582,267			62,033,712			61,405,874
Loss from operations		(37,806,883	)		(44,205,614	)		(28,941,627	)
Other income (expense)
Interest income		6,772,352			7,152,351			5,417,089
Interest expense		(8,075	)		(13,489	)		(848,040	)
Other, net		626,528			97,838			(111,080	)
Loss before provision for income taxes		(30,416,078	)		(36,968,914	)		(24,483,658	)
Benefit (provision) for income taxes		—			89,606			(5,893,402	)
Net loss		(30,416,078	)		(36,879,308	)		(30,377,060	)
Preferred stock dividend and accretion		(1,717,865	)		(20,610,216	)		(2,903,535	)
Net loss attributable to common shareholders	$	(32,133,943	)	$	(57,489,524	)	$	(33,280,595	)
Net loss per share—basic and diluted	$	(0.75	)	$	(4.85	)	$	(3.38	)
Weighted-average number of shares used in computing basic and diluted net loss per share		42,578,029			11,846,093			9,845,870

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

46

ZYMOGENETICS, INC.

STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND SHAREHOLDERS’ EQUITY (DEFICIT)

						Shareholders’ equity (deficit)
	Mandatorily redeemable convertible preferred stock					Convertible preferred stock					Common stock				Additional paid-in capital			Notes receivable from shareholders			Deferred stock compensation			Accumulated earnings (deficit)			Accumulated other comprehensive income		Total
	Shares		Amount			Shares		Amount			Shares	Amount
Balance at January 1, 2000	—		$	—		926,976		$	9,270		8,455,406	$	84,554		$	49,780,733		$	—		$	—		$	27,812,875		$	—	$	77,687,432
Net loss and comprehensive loss	—			—		—			—		—		—			—			—			—			(30,377,060	)		—		(30,377,060	)
Conversion from $.01 par value to no par value common stock	—			—		—			—		—		49,780,733			(49,780,733	)		—			—			—			—		—
Conversion of Class A and Class B convertible preferred stock to common stock	—			—		(926,976	)		(9,270	)	3,337,114		9,270			—			—			—			—			—		—
Issuance of dividend in form of Series A mandatorily redeemable convertible preferred stock	2,528,000			94,521,920		—			—		—		—			—			—			—			(94,521,920	)		—		(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)	—			—		—			—		—		—			—			—			—			(24,454,501	)		—		(24,454,501	)
Payments received for future royalties from related party (net of income taxes of $31,524,691)	—			—		—			—		—		—			—			—			—			58,545,855			—		58,545,855
Accretion on mandatorily redeemable convertible preferred stock	—			147,918		—			—		—		(147,918	)		—			—			—			—			—		(147,918	)
Dividends accrued on mandatorily redeemable convertible preferred stock	—			2,755,617		—			—		—		(2,755,617	)		—			—			—			—			—		(2,755,617	)
Valuation allowance to reflect reliability of tax benefits related to purchase of intellectual property from related party	—			—		—			—		—		—			—			—			—			(11,245,499	)		—		(11,245,499	)
Balance at December 31, 2000	6,539,768			239,930,171		—			—		11,792,520		46,971,022			—			—			—			(74,240,250	)		—		(27,269,228	)
Comprehensive loss:
Net loss	—			—		—			—		—		—			—			—			—			(36,879,307	)		—		(36,879,307	)
Unrealized gain on short-term investments	—			—		—			—		—		—			—			—			—			—			1,821,515		1,821,515
Total comprehensive loss	—			—		—			—		—		—			—			—			—			—			—		(35,057,792	)
Common stock issued in connection with stock option exercises	—			—		—			—		10,080		28,000			—			—			—			—			—		28,000
Common stock issued in connection with stock option exercises for notes receivable	—			—		—			—		261,000		725,000			—			(725,000	)		—			—			—		—
Deferred stock compensation related to stock options:
Grants	—			—		—			—		—		28,742,064			—			—			(28,742,064	)		—			—		—
Amortization	—			—		—			—		—		—			—			—			3,507,352			—			—		3,507,352
Accretion on mandatorily redeemable convertible preferred stock	—			1,048,462		—			—		—		(1,048,462	)		—			—			—			—			—		(1,048,462	)
Dividends accrued on mandatorily redeemable convertible preferred stock	—			19,561,754		—			—		—		(19,561,754	)		—			—			—			—			—		(19,561,754	)
Balance at December 31, 2001	6,539,768			260,540,387		—			—		12,063,600		55,855,870			—			(725,000	)		(25,234,712	)		(111,119,557	)		1,821,515		(79,401,884	)
Comprehensive loss:
Net loss	—			—		—			—		—		—			—			—			—			(30,416,078	)		—		(30,416,078	)
Unrealized gain on short-term investments, net of reclassification adjustment	—			—		—			—		—		—			—			—			—			—			987,702		987,702
Total comprehensive loss	—			—		—			—		—		—			—			—			—			—			—		(29,428,376	)
Common stock issued in connection with stock option exercises	—			—		—			—		208,272		596,059			—			—			—			—			—		596,059
Deferred stock compensation related to stock options:
Grants	—			—		—			—		—		483,390			—			—			(483,390	)		—			—		—
Forfeitures	—			—		—			—		—		(239,928	)		—			—			239,928			—			—		—
Amortization	—			—		—			—		—		—			—			—			7,187,624			—			—		7,187,624
Accretion and dividends on mandatorily redeemable convertible preferred stock	—			1,717,865		—			—		—		(1,717,865	)		—			—			—			—			—		(1,717,865	)
Conversion of Series A and B mandatorily redeemable convertible preferred stock	(6,539,768	)		(262,258,252	)	—			—		23,543,159		262,258,252			—			—			—			—			—		262,258,252
Net proceeds from issuance of common stock (net of offering costs of $10,225,794)	—			—		—			—		10,000,000		109,774,206			—			—			—			—			—		109,774,206
Balance at December 31, 2002	—		$	—		—		$	—		45,815,031	$	427,009,984		$	—		$	(725,000	)	$	(18,290,550	)	$	(141,535,635	)	$	2,809,217	$	269,268,016

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

47

ZYMOGENETICS, INC.

STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2002			2001			2000
Cash flows from operating activities
Net loss	$	(30,416,078	)	$	(36,879,307	)	$	(30,377,060	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		5,508,144			5,404,635			5,689,451
Net (gain) loss on disposition of property and equipment		(44,775	)		77			111,080
Provision for deferred income taxes		—			—			13,731,405
Income taxes on future royalty payments from related party		—			—			(31,524,691	)
Noncash stock-based compensation		7,187,624			3,507,352			—
Net realized gain on sale of short-term investments		(581,613	)		(94,748	)		—
Amortization of premium on short-term investments		2,448,197			786,834			—
Changes in
Receivables		339,052			380,588			2,850,238
Prepaid expenses and other assets		(705,333	)		(365,751	)		(220,556	)
Accounts payable		(937,188	)		2,148,826			521,860
Related party payables		—			(278,975	)		(4,281,414	)
Accrued liabilities		2,538,846			(995,546	)		1,731,110
Stock appreciation plan liability, net of cash distributions		—			—			(3,712,369	)
Deferred revenue		2,680,166			7,695,604			6,458,333
Other noncurrent liabilities		221,419			(249,846	)		1,032,166
Net cash used in operating activities		(11,761,539	)		(18,940,257	)		(37,990,447	)
Cash flows from investing activities
Purchase of property and equipment		(9,942,665	)		(8,181,492	)		(5,617,038	)
Purchase of short-term investments		(305,516,569	)		(207,700,172	)		—
Proceeds from sale of property and equipment		50,520,130			64,780			60,789
Proceeds from sale and maturity of short-term investments		184,613,093			98,146,209			—
Net cash used in investing activities		(80,326,011	)		(117,670,675	)		(5,556,249	)
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)		—			—			142,504,716
Net proceeds from issuance of common stock		110,676,647			—			—
Proceeds from exercise of stock options		596,059			28,000			—
Purchase of intellectual property from related party		—			—			(35,700,000	)
Proceeds from assignment of patents and other rights to related party		—			—			90,070,546
Net cash provided by financing activities		111,272,706			28,000			196,875,262
Net increase (decrease) in cash and cash equivalents		19,185,156			(136,582,932	)		153,328,566
Cash and cash equivalents at beginning of period		36,393,551			172,976,483			19,647,917
Cash and cash equivalents at end of period	$	55,578,707		$	36,393,551		$	172,976,483
Cash paid to related party during the period for interest	$	—		$	—		$	844,629
Cash paid during the period for interest	$	8,075		$	13,489		$	3,411
Cash paid during the period for income taxes	$	—		$	—		$	29,196,276
Noncash financing activities
Accretion on Series B mandatorily redeemable convertible preferred stock	$	87,719		$	1,048,462		$	147,918
Conversion of Class A and Class B convertible preferred stock to common stock	$	—		$	—		$	9,270
Issuance of dividend in form of Series A mandatorily redeemable convertible preferred stock	$	—		$	—		$	94,521,920
Dividends accrued on Series A and Series B mandatorily redeemable convertible preferred stock	$	1,630,146		$	19,561,754		$	2,755,617
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.

48

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.

49

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

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

50

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

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	)	$	(33,280,595	)
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		(2,144,953	)		(965,558	)		(359,473	)
Net loss attributable to common shareholders, pro forma	$	(27,091,272	)	$	(54,947,729	)	$	(33,640,068	)
Basic and diluted net loss per share, as reported	$	(0.75	)	$	(4.85	)	$	(3.38	)
Basic and diluted net loss per share, pro forma	$	(0.64	)	$	(4.64	)	$	(3.42	)

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.

51

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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	)	$	(33,280,595	)
Weighted-average shares used in computing basic and diluted net loss per share		42,578,029			11,846,093			9,845,870
Net loss per share—basic and diluted	$	(0.75	)	$	(4.85	)	$	(3.38	)
Antidilutive securities not included in net loss per share calculation
Mandatorily redeemable convertible preferred stock (as if converted)		—			23,543,159			23,543,159
Options to purchase common stock		8,267,397			7,307,092			4,311,000
Shares subject to repurchase		6,750			87,750			—
		8,274,147			30,938,001			27,854,159

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.

52

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

2.    Short-term investments

Short-term investments consisted of the following at:

	December 31, 2002
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
Type of security:
Commercial paper and money market	$	4,660,089	$	—	$	—		$	4,660,089
Corporate debt securities		55,625,685		908,468		(470	)		56,533,683
Asset-backed securities		48,332,210		370,805		(4,144	)		48,698,871
U.S. government and agency securities		113,545,537		1,450,080		—			114,995,617
Foreign government securities		4,886,246		84,479		—			4,970,725
	$	227,049,767	$	2,813,832	$	(4,614	)	$	229,858,985

53

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

	December 31, 2001
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
Type of security:
Commercial paper and money market	$	1,473,989	$	—	$	—		$	1,473,989
Corporate debt securities		48,647,341		953,566		(11,597	)		49,589,310
Asset-backed securities		24,810,834		288,079		(5,772	)		25,093,141
U.S. government and agency securities		33,929,713		625,743		(28,504	)		34,526,952
	$	108,861,877	$	1,867,388	$	(45,873	)	$	110,683,392

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

	Estimated Fair Value		Amortized Cost
December 31, 2002:
Maturity date:
Less than one year	$	100,821,898	$	99,923,568
Due in 1-3 years		129,037,087		127,126,199
	$	229,858,985	$	227,049,767
December 31, 2001:
Maturity date:
Less than one year	$	22,040,421	$	21,808,678
Due in 1-3 years		88,642,971		87,053,199
	$	110,683,392	$	108,861,877

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.

3.    Property and equipment

Property and equipment consisted of the following at December 31:

	2002			2001
Land and buildings	$	4,443,983		$	49,344,651
Leasehold improvements		6,248,220			5,737,412
Furniture and equipment		39,590,449			36,830,103
Construction in progress		1,463,016			710,248
		51,745,668			92,622,414
Less: Accumulated depreciation and amortization		(34,492,736	)		(43,494,320	)
	$	17,252,932		$	49,128,094

54

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

4.    Accrued liabilities

Accrued liabilities consisted of the following at December 31:

	2002		2001
Vacation pay	$	2,021,754	$	1,737,960
Incentive compensation		171,539		134,668
Contract services		2,756,170		744,573
City and state taxes		255,376		25,280
Severance payments		73,189		179,167
Other		411,038		328,572
	$	5,689,066	$	3,150,220

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.

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 collectibility was assured, and the amounts were fixed and determinable.

55

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

56

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

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	)	$	(7,838,003	)
Deferred		—		—			13,731,405
	$	—	$	(89,606	)	$	5,893,402

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		$	15,305,000
Research and development tax credit carryforwards		14,953,000			12,868,000
Alternative minimum tax credit carryforwards		1,242,000			1,242,000
Rehabilitation tax credit carryforwards		1,507,000			1,507,000
Intellectual property purchased from Novo Nordisk		8,747,000			9,996,000
Deferred gain on sale of assets		4,958,000			—
Other		6,180,000			3,343,000
		55,969,000			44,261,000
Deferred tax liabilities:
Deferred revenue		(3,938,000	)		(2,625,000	)
		52,031,000			41,636,000
Less: Valuation allowance		(52,031,000	)		(41,636,000	)
Net deferred tax asset	$	—		$	—

57

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

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.

58

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

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.

59

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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.

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 676,431 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.

60

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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	$	.68
Exercised	—			—
Canceled	(20,520	)		2.78
Balance, December 31, 2000	4,311,000		$	2.78
Granted	3,629,066		$	3.94	$	.79
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	$	5.05
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.

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)	Number of options	Weighted-average exercise prices
$2.77 – $  3.77	$2.78	4,658,035	7.6	3,111,465	$2.78
$3.78 – $  6.78	4.51	2,453,572	8.6	737,411	4.46
$6.79 – $  9.79	7.73	871,790	9.5	—	—
$9.80 – $11.80	11.21	284,000	7.9	—	—
	4.10	8,267,397	8.1	3,848,876	3.10

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%.

61

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

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		$	34,092
Net income (loss)		(11,803	)		(15,132	)		(14,466	)		10,985
Net income (loss) attributable to common shareholders		(13,521	)		(15,132	)		(14,466	)		10,985
Net income (loss) per common share:
Basic		(0.41	)		(0.33	)		(0.32	)		0.24
Diluted		(0.41	)		(0.33	)		(0.32	)		0.23
Year ended December 31, 2001:
Revenue	$	5,092		$	3,458		$	4,346		$	4,932
Net loss		(6,230	)		(9,666	)		(9,726	)		(11,257	)
Net loss attributable to common shareholders		(11,382	)		(14,818	)		(14,879	)		(16,410	)
Net loss per common share:
Basic		(0.97	)		(1.26	)		(1.26	)		(1.37	)
Diluted		(0.97	)		(1.26	)		(1.26	)		(1.37	)

62

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

PART III

Item 10.    Directors and Executive Officers of the Registrant

(a)    The information required by this item with respect to our directors is incorporated by reference to the section captioned “Election of Directors” in the proxy statement for our annual meeting of shareholders to be held on June 12, 2003. We will file the proxy statement within 120 days of December 31, 2002, our fiscal year end.

(b)    The information required by this item with respect to our executive officers is incorporated by reference to the section captioned “Executive Officers” in the proxy statement for our annual meeting of shareholders to be held on June 12, 2003.

It has been recently announced that Robert S. Whitehead, our Senior Vice President and Chief Business Officer, will leave the Company effective June 30, 2003 to pursue other opportunities.

Item 11.    Executive Compensation

The information required by this item with respect to executive compensation is incorporated by reference to the section captioned “Executive Compensation” in the proxy statement for our annual meeting of shareholders to be held on June 12, 2003.

Item 12.    Security Ownership of Beneficial Owners and Management

The information required by this item with respect to beneficial ownership is incorporated by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the proxy statement for our annual meeting of shareholders to be held on June 12, 2003.

The following table provides information regarding our equity compensation plans at December 31, 2002.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans(1)
Equity compensation plans approved by security holders	8,267,397	$	4.10	676,431
Equity compensation plans not approved by security holders	—		—	—
Total	8,267,397	$	4.10	676,431

(1) Does not include 2,290,752 shares remaining available for issuance under the 2001 Plan on January 1, 2003 pursuant to a provision of the 2001 Plan that 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.

Item 13.    Relationships and Related Transactions

The information required by this item is incorporated by reference from the section labeled “Certain Transactions” in the proxy statement for our annual meeting of shareholders to be held on June 12, 2003.

Item 14.    Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of this report, have concluded that, as of such date our disclosure controls and procedures were effective. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

63

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:

1. Financial Statements.    The following financial statements are contained in Item 8 of this report:

	Page in Form 10-K
Report of PricewaterhouseCoopers LLP, Independent Accountants	45
Balance Sheets	46
Statements of Operations	47
Statement of Changes in Mandatorily Redeemable Convertible Preferred Stock and Shareholders’ Equity	48
Statements of Cash Flows	49
Notes to Financial Statements	50-63

2. Financial Statement Schedules

All financial statement schedules have been omitted because the required information is either included in the financial statements or the notes thereto or is not applicable.

3. Exhibits

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation of ZymoGenetics, Inc.	(A)
3.2	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.
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)

64

Exhibit No.		Description
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.
10.12		Deferred Compensation Plan for Key Employees.	(A)
10.13		Form of Promissory Note, dated September 14, 2001, between ZymoGenetics, Inc. and the executive officers listed on Schedule A thereto.	(A)
10.14		Form of Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and the executive officers listed on Schedule A thereto.	(A)
10.15		Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and Bruce L.A Carter.	(A)
10.16	*	Insulin Agreement, dated August 6, 1982, between ZymoGenetics, Inc. and Novo Industri A/S.	(A)
10.17	*	Letter Agreement, dated March 13, 1987, between ZymoGenetics, Inc. and Novo Industri A/S.	(A)
10.18	*	Amended and Restated Human Glucagon, Analogues of Human Glucagon, Analogues of Human Insulin Letter Agreement, dated September 28, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.19	*	License Agreement for Analogues of Human Insulin, dated September 28, 2000, between the registrant and Novo Nordisk Health Care AG.	(A)
10.20	*	License Agreement, dated February 23, 1989, between ZymoGenetics, Inc. and the University of Washington.	(A)
10.21	*	License Agreement, dated January 18, 1994, including Amendment No. 1, dated January 1, 1997, and Amendment No. 2, dated June 5, 2000, between and among ZymoGenetics, Inc., Novo Nordisk A/S, Johnson & Johnson and Chiron Corporation.	(A)
10.22	*	Royalty Agreement pertaining to the January 18, 1994 Agreement Relating to Platelet Derived Growth Factor, dated January 1, 2000, between ZymoGenetics, Inc. and Novo Nordisk.	(A)
10.23	*	License Agreement, dated December 31, 1998, as amended on February 4, 1999 and October 23, 2000, between ZymoGenetics, Inc. and St. Jude Children’s Research Hospital.	(A)
10.24	*	Option and License Agreement, effective November 10, 2000, as amended effective as of June 16, 2000 and October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.25	*	Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S, Enzyme Business.	(A	)
10.26	*	Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A	)
10.27	*	Kunitz Protein Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A	)
10.28	*	Collaborative Development and Marketing Agreement, effective August 30, 2001, by and between ZymoGenetics, Inc. and Ares Trading S.A.	(A	)
10.29	*	Collaborative Agreement for IL-21, dated December 14, 2002, between ZymoGenetics, Inc. and Novo Nordisk A/S.

65

Exhibit No.		Description
10.30	*	Exclusive Patent License Agreement, effective December 18, 2002, between ZymoGenetics, Inc. and Aventis Behring GmbH.
10.31		Series B Preferred Stock Purchase Agreement, dated October 20, 2000, by and among ZymoGenetics, Inc., Novo Nordisk A/S and the other investors listed on Exhibit A thereto.	(A	)
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.	(A	)
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.	(C	)
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.	(A	)
10.35		Tax Sharing Agreement, effective October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk of North America, Inc.	(A	)
10.36		Office Lease Agreement, dated November 9, 2001, between ZymoGenetics, Inc. and 1144 Eastlake LLC.	(A	)
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 accountants.
99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification 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.

(b) Reports on Form 8-K

On October 18, 2002, the Company filed a Current Report on Form 8-K to report the completion of a sale and leaseback transaction involving the Company’s headquarter buildings and the issuance of a press release announcing the transaction.

66

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: March 25, 2003	By:	/s/    BRUCE L.A. CARTER
	Bruce L.A. Carter, Ph.D. President and Chief Executive Officer

Each person whose individual signature appears below hereby authorizes and appoints Bruce L.A. Carter and James A. Johnson, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.

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. CARTER, PH.D. Bruce L.A. Carter, Ph.D.	President, Chief Executive Officer and Director (Principal Executive Officer)	March 25, 2003
/S/    JAMES A. JOHNSON James A. Johnson	Senior Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer)	March 25, 2003
/S/    GEORGE B. RATHMANN, PH.D. George B. Rathmann, Ph.D.	Chairman of the Board of Directors	March 25, 2003
/S/    DAVID I. HIRSH, PH.D. David I. Hirsh, Ph.D.	Director	March 25, 2003
/S/    JONATHAN S. LEFF Jonathan S. Leff	Director	March 25, 2003
/S/    KURT ANKER NIELSEN Kurt Anker Nielsen	Director	March 25, 2003
/S/    EDWARD E. PENHOET, PH.D. Edward E. Penhoet, Ph.D.	Director	March 25, 2003
/S/    LORI F. RAFIELD, PH.D. Lori F. Rafield, Ph.D.	Director	March 25, 2003
/S/    LARS REBIEN SøRENSEN Lars Rebien Sørensen	Director	March 25, 2003

67

CERTIFICATIONS

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

1. I have reviewed this annual report on Form 10-K 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: March 25, 2003

/S/    BRUCE L.A. CARTER

Bruce L.A. Carter

President and Chief Executive Officer

68

I, James A. Johnson, certify that:

1. I have reviewed this annual report on Form 10-K 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: March 25, 2003

/S/    JAMES A. JOHNSON

James A. Johnson

Senior Vice President and Chief Financial Officer

69

EXHIBIT INDEX

Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation of ZymoGenetics, Inc.	(A)
3.2		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.
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.
10.12		Deferred Compensation Plan for Key Employees.	(A)
10.13		Form of Promissory Note, dated September 14, 2001, between ZymoGenetics, Inc. and the executive officers listed on Schedule A thereto.	(A)
10.14		Form of Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and the executive officers listed on Schedule A thereto.	(A)
10.15		Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and Bruce L.A Carter.	(A)
10.16	*	Insulin Agreement, dated August 6, 1982, between ZymoGenetics, Inc. and Novo Industri A/S.	(A)
10.17	*	Letter Agreement, dated March 13, 1987, between ZymoGenetics, Inc. and Novo Industri A/S.	(A)
10.18	*	Amended and Restated Human Glucagon, Analogues of Human Glucagon, Analogues of Human Insulin Letter Agreement, dated September 28, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)

Exhibit No.		Description
10.19	*	License Agreement for Analogues of Human Insulin, dated September 28, 2000, between the registrant and Novo Nordisk Health Care AG.	(A)
10.20	*	License Agreement, dated February 23, 1989, between ZymoGenetics, Inc. and the University of Washington.	(A)
10.21	*	License Agreement, dated January 18, 1994, including Amendment No. 1, dated January 1, 1997, and Amendment No. 2, dated June 5, 2000, between and among ZymoGenetics, Inc., Novo Nordisk A/S, Johnson & Johnson and Chiron Corporation.	(A)
10.22	*	Royalty Agreement pertaining to the January 18, 1994 Agreement Relating to Platelet Derived Growth Factor, dated January 1, 2000, between ZymoGenetics, Inc. and Novo Nordisk.	(A)
10.23	*	License Agreement, dated December 31, 1998, as amended on February 4, 1999 and October 23, 2000, between ZymoGenetics, Inc. and St. Jude Children’s Research Hospital.	(A)
10.24	*	Option and License Agreement, effective November 10, 2000, as amended effective as of June 16, 2000 and October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.25	*	Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S, Enzyme Business.	(A)
10.26	*	Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.27	*	Kunitz Protein Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.28	*	Collaborative Development and Marketing Agreement, effective August 30, 2001, by and between ZymoGenetics, Inc. and Ares Trading S.A.	(A)
10.29	*	Collaborative Agreement for IL-21, dated December 14, 2002, between ZymoGenetics, Inc. and Novo Nordisk A/S.
10.30	*	Exclusive Patent License Agreement, effective December 18, 2002, between ZymoGenetics, Inc. and Aventis Behring GmbH.
10.31		Series B Preferred Stock Purchase Agreement, dated October 20, 2000, by and among ZymoGenetics, Inc., Novo Nordisk A/S and the other investors listed on Exhibit A thereto.	(A)
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.	(A)
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.	(C)
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.	(A)
10.35		Tax Sharing Agreement, effective October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk of North America, Inc.	(A)
10.36		Office Lease Agreement, dated November 9, 2001, between ZymoGenetics, Inc. and 1144 Eastlake LLC.	(A)
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 accountants.

Exhibit No.	Description
99.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certification 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.

EX-10.5

                                                                    Exhibit 10.5

                              EMPLOYMENT AGREEMENT

     This AGREEMENT, effective April 30, 2001, is between ZymoGenetics, Inc., a
Washington corporation ("Company") and James A. Johnson ("Executive").

     1.   Employment. Company will employ Executive and Executive will accept
employment as Senior Vice President, Chief Financial Officer, of the Company.
Executive accepts employment upon the terms and conditions contained in this
Agreement and for the period (hereinafter called the "Term of Employment")
specified in Section 3 below.

     2.   Duties. Executive shall, during the Term of Employment, serve the
Company under the direction of the President of the Company. Executive shall
perform the duties of his position faithfully, diligently and competently and to
the best of his ability, and shall devote his full business time to his
employment. Executive shall perform such other duties as are assigned to him by
the President or the Board of Directors of the Company. Executive shall not
engage in any other business activity (except the management of personal
investments which in the aggregate do not interfere with the performance of
Executive's duties) without first obtaining the written consent of Company, such
consent not to be unreasonably withheld.

     3.   Term of Employment; Termination.

     Executive's Term of Employment shall be two years from the date of this
Agreement, unless extended or earlier terminated as provided below.

     (a)  Termination or Extension of Term of Employment By Company

     The Company shall employ Executive, for a period commencing on the date
hereof and terminating as follows:

          (i)  Two years from the date hereof, if at least thirty (30) days
prior to such date either the Company or Executive has, at its election,
notified the other in writing that this Agreement shall terminate on such date.
If notice of termination is not given, this Agreement shall be deemed to extend
from year to year. It can then be terminated by written notice at least thirty
(30) days prior to the annual renewal date.

          (ii) With or without "Cause" (as defined below), Company may terminate
the employment of Executive at any time upon giving "Notice of Termination" (as
defined below).



     (b)  By Executive

     Executive may terminate his employment at any time, for any reason, upon
giving Notice of Termination.

     (c)  Automatic Termination

     This Agreement and Executive's employment hereunder shall terminate
automatically upon the death or total disability of Executive. The term "total
disability" as used herein shall mean Executive's inability to perform the
duties set forth in paragraph 1 hereof for a period or periods aggregating
ninety (90) calendar days in any 12-month period as a result of physical or
mental illness, loss of legal capacity or any other cause beyond Executive's
control, unless Executive is granted a leave of absence by the Board of
Directors of Company. Executive and Company hereby acknowledge that Executive's
ability to perform the duties specified in paragraph 2 hereof is of the essence
of this Agreement. Termination hereunder shall be deemed to be effective (a) at
the end of the calendar month in which Executive's death occurs or (b)
immediately upon a determination by the Board of Directors of Company of
Executive's total disability, as defined herein.

     (d)  Notice

     The term "Notice of Termination" shall mean at least thirty (30) days'
written notice of termination, by either party, of Executive's employment,
during which period Executive's employment and performance of services will
continue; provided, however, that Company may, upon notice to Executive and
without reducing Executive's compensation during such period, excuse Executive
from any or all of his duties during such period. Such a reduction in duties
shall not constitute "good reason" for voluntary termination so as to trigger
termination payments in accordance with subparagraph 4.2. The effective date of
the termination (the "Termination Date") of Executive's employment hiseunder
shall be the date on which such 30-day period expires.

     4.   Termination Payments

     In the event of termination of the employment of Executive, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this paragraph 4:

     4.1  Termination by Company

     (a)  Upon termination by Company, Company shall pay Executive any unpaid
annual base salary which has accrued for services already performed as of the
Termination Date, plus any accrued, but unused, vacation.

                                       -2-



     (b)  If Company terminates Executive's employment without Cause, as defined
below, Executive shall be entitled to receive termination payments equal to
twelve (12) months annual base salary and Company payments for Executive's
medical and dental insurance coverage under COBRA for a period of twelve (12)
months from the date of termination. The termination payments shall be
calculated according to Executive's base salary as of the date of Notice of
Termination and the termination payments will be paid semi-monthly in equal
parts in accordance with the same time schedule that Company or a "Successor
Company" (as defined in the Stock Option Agreement and incorporated by reference
herein) makes its customary payroll. Company or a Successor Company may deduct
customary withholdings including social security, federal and state income
taxes, and state disability insurance from these severance payments; however,
any and all such obligations shall be Executive's responsibility. Company will
issue and file appropriate Form 1099 or similar tax documents in connection with
any termination payments. The termination payments described in this paragraph
are expressly contingent upon Executive's full compliance with the terms of his
Employee Inventions and Proprietary Information Agreement with Company (the
"Inventions Agreement"), a copy of which is attached hereto. In the event
Executive were to materially breach this Inventions Agreement, his right to any
termination payments under this paragraph shall be extinguished, Company (and
any Successor Company) shall cease payments, and Executive shall immediately
return to Company or to any Successor Company any severance payments already
made. If Executive is terminated by either Company or any Successor Company for
Cause, Executive shall not be entitled to receive any of the foregoing benefits,
other than those set forth in clause (a) above.

     4.2  Termination by Executive

     In the case of the termination of Executive's employment by Executive for
"good reason," as defined below, Executive shall be entitled to the termination
payments as set forth in clauses 4.1(a) and (b). In the case of termination of
Executive's employment by Executive for any other reason, Executive shall not be
entitled to any termination payments or accelerated vesting benefit, other than
as set forth in clause 4.1(a), above.

     4.3  Termination as a Result of Death or Total Disability

     In the event of termination of Executive's employment pursuant to
subparagraph 3(c), Executive or his estate shall be paid the compensation set
forth in clause 4.1(a) and shall not be entitled to any of the benefits under
clauses 4.1(b).

                                      -3-



     4.4  "Good Reason"

     "Good reason" shall mean the occurrence of any of the following events,
without the consent of the Executive:

     a) a demotion or other material reduction in the nature or status of
        Executive's responsibilities; provided, however, that a change in the
        person or office to which Executive reports, without a corresponding
        reduction in duties, status and responsibilities, shall not constitute
        "good reason;"

     b) a non-voluntary reduction in the Executive's annual base salary;

     c) requirement by a Successor Company that the Executive relocate his
        principal place of employment to a location that is more than 50 miles
        from the principal place of employment where Executive was employed; or

     d) the failure of Company to obtain a satisfactory agreement from any
        Successor Company to assume and perform the obligations under this
        Agreement.

     4.5  Cause

     Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" shall include, without limitation, the occurrence of one
or more of the following events:

     a) willful misconduct, insubordination, or dishonesty in the performance of
        Executive's duties or other knowing and material violation of Company's
        or a Successor Company's policies and procedures in effect from time to
        time which results in a material adverse effect on Company or a
        Successor Company;

     b) willful actions (or intentional failures to act) in bad faith by
        Executive with respect to Company or a Successor Company that materially
        impair Company's or a Successor Company's business, goodwill or
        reputation;

     c) conviction of Executive of a felony involving an act of dishonesty,
        moral turpitude, deceit or fraud, or the commission of acts that could
        reasonably be expected to result in such a conviction; or

     d) any material violation by Executive of Executive's Inventions Agreement
        with Company.

                                       -4-



     5.   Compensation and Fringe Benefits.

     (a)  The Company shall, during the Term of Employment, pay to the Executive
as compensation for the performance of his duties and obligations a salary of
$240,000 per annum. This compensation is subject to annual review and
adjustment, as appropriate in the judgment of the Company. The compensation
payable pursuant to this Section 5(a) shall be payable in equal semi-monthly
installments on the last day of each such pay period.

     (b) The Executive shall be enrolled and participate in any retirement,
group insurance and other fringe benefit plans and arrangements which are
applicable to the similarly situated personnel of the Company and in effect from
time to time, if the Executive is eligible therefor, in each case in accordance
with and subject to the provisions thereof.

     (c)  Stock Options

          (i)   Executive has been granted a ten-year stock option under the
Company's Amended and Restated 2000 Stock Incentive Plan, dated August 23, 2000,
which allows Executive to purchase 80,000 shares of the Company's common stock.

          (ii)  Executive shall be eligible to receive future periodic (i.e.,
non bonus-related) grants under the Company's stock incentive programs.

     (d)  Executive will also receive the following executive perquisites for
the duration of this contract:

          (i)   Company-paid term life insurance policy in the amount of
$200,000; and

          (ii)  Company-paid use of either a laptop computer or personal
computer, to be upgraded bi-annually at the time this contract is renewed; and

          (iii) Company-paid annual executive health physical, to be
administered by a physician selected by the Company; and

          (iv)  Company-paid expenses for a residential phone and cellular
phone.

     (e)  Upon the effective date of the Company's initial public offering,
Executive shall earn a bonus, before taxes, of $50,000, to be paid by the
Company as soon as practicable after such effective date. If Executive remains
continuously and regularly employed with the Company (i.e., his employment has
not been terminated, whether voluntarily or involuntarily) through the period
ending one year from the

                                       -5-



effective date of the Company's initial public offering, the Company shall pay
Executive an additional bonus, before taxes, of $50,000, within ten (10) days
after the end of such period.

     6.   Expenses. All travel and other reasonable expenses incident to the
rendering of service by the Executive hereunder will be paid by the Company. If
such expenses are paid in the first instance by the Executive, the Company will
reimburse him upon presentation of proper expense accounts. Reimbursement
requests, along with supporting documentation, should be submitted within sixty
(60) days of incurring the expense.

     7.   Non-competition.

     (a)  Upon termination of Executive's employment with the Company for any
reason, and for a period of twelve (12) consecutive months after leaving his
employment with the Company, Executive will not directly or indirectly work or
otherwise engage in research, manufacture, sale or distribution of any product,
method or matter:

          (i)   For any business, whose commercial efforts are in competition
with the products manufactured or marketed by the Company during Executive's
employment with the Company or under research or development by the Company
during Executive's employment with the Company (and on which the Company has
expended at least $1,000,000); or

          (ii)  For any research institution whose research efforts pertain to
the same products manufactured or marketed by the Company during Executive's
employment with the Company or under research or development by the Company
during Executive's employment with the Company (and on which the Company has
expended at least $1,000,000), unless the Executive is not involved in any
manner in the design, conduct or supervision of such research efforts, or unless
such research is being conducted solely for scientific and not for commercial
purposes. The executive shall be deemed to be connected with a business if such
business is carried on by partnership in which he is a general or limited
partner, consultant or employee, or a corporation or association of which he is
a shareholder, officer, director, employee, member, consultant or agent;
provided, that nothing herein shall prevent the purchase or ownership by the
Executive of shares of less than 1% of the outstanding shares in a publicly or
privately held corporation.

                                      -6-



     Said twelve (12) months' period shall commence on the day on which the
Executive actually leaves his employment with the Company, even if this date is
prior to the expiration of any given notice of termination.

     (b)  The Company's Board of Directors may, at its own discretion, by
express or written consent, release the Executive from the restriction in
paragraph 6(a).

     (c)  For a period of one (1) year after the employment of the Executive is
terminated for any reason, Executive will not directly or indirectly, either for
Executive's account or as representative or agent for any other person, firm,
corporation or entity, solicit the services of, or entice away, any executive of
the Company, or the executive of any company affiliated with the Company.

     (d)  In the event that Executive during said period described in paragraph
6(a) violates any of the Executive's obligations towards the Company, including
but not limited to the Executive accepting a position with a competing
enterprise or Executive violating terms of paragraph 6(c), payment of Severance
or Salary Continuation shall cease automatically without notice, regardless of
whether the Company takes legal action or otherwise tries to enforce its rights.
The Company reserves all rights it may have under contract or law to relief or
damages in addition to termination of the above-described payments.

     8.   Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company and the Executive and their respective heirs, legal or
personal representatives, successors and assigns.

     9.   Rights of Assignment or Delegation. This Agreement is personal to the
Executive and shall not be assignable. Company may assign its rights hereunder
to (a) any corporation resulting from any merger, consolidation, or other
reorganization to which Company is a party or (b) any corporation, partnership,
association, or other person to which Company may transfer all or substantially
all of the assets in business of Company existing at such time. All the terms
and provisions of this Agreement shall be binding upon and shall inure to the
benefit and be enforceable by the parties hereto and their respective successors
and permitted assigns.

     10.  Waiver. No delay or failure by any party in exercising, protecting or
enforcing any of its rights, titles, interests, or remedies hereunder and no
course of dealing or performance with respect thereto, shall constitute a
waiver. The express waiver by a party of any right, title, interest, or remedy
in a particular instance or circumstance shall not constitute a waiver in any
other instance or circumstance. All rights and remedies shall be cumulative and
not exclusive or any rights or remedies.

                                       -7-



     11.  Arbitration. Any controversies or claims arising out of or relating to
this Agreement shall be finally and fully settled by arbitration in the City of
Seattle, Washington in accordance with the Employment Arbitration Rules of the
American Arbitration Association then in effect (the "AAA Rules"), conducted by
one arbitrator, mutually agreed upon by Company and Executive or chosen in
accordance with the AAA Rules, except the parties thereto shall have any right
to discovery that would be permitted by the Federal Rules of Civil Procedure for
a period of 90 days following the commencement of such arbitration and the
arbitrator shall resolve any dispute which arises in connection with such
discovery. The prevailing parties shall be entitled to costs, expenses,
reasonable attorneys' fees, and judgment upon the award rendered by the
arbitrator. The award may be entered in any court having jurisdiction.

     12.  Amendments in Writing. No amendment, modification, waiver, termination
or discharge of any provision of this Agreement, nor consent to any departure by
either party, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified, waived, terminated, or discharged and assigned by Company
and Executive. Each such amendment, modification, waiver, termination, or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted, or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in agreement in writing and signed
by Company and Executive.

     13.  Notices. Any notice required or desired to be given hereunder shall be
in writing and shall be deemed sufficiently given when delivered or when mailed
by first class certified or registered mail, postage prepaid, to the party for
whom intended at the following address:

     To the Company:

                Dr. Bruce L. A. Carter
                CEO and President
                ZymoGenetics, Inc.
                1201 Eastlake Avenue East
                Seattle, WA 98102

     To the Executive:

                James A. Johnson
                Senior Vice President, Chief Financial Officer
                8503 Inverness Drive N.E.
                Seattle, WA 98115

or to such other address, as to either party, as such party shall from time to
time designate by like notice to the other.

                                       -8-



     14.  Entire Agreement. This Agreement will, upon the commencement of the
Term of Employment, supersede all prior agreements between the Executive and the
Company, except the Employee Inventions and Proprietary Information Agreement
dated February 1, 2001, and any such prior agreements and the terms and
conditions thereof shall hereafter be null, void and of no effect.

     15.  Governing Law. This Agreement is made under and shall be governed by
and construed in accordance with the internal laws of the State of Washington.

     16.  Severability. If any provision of this Agreement shall be held
invalid, illegal or unenforceable in any jurisdiction, for any reason, including
without limitation, the duration of such provision, it's geographical scope or
the extent of the activities prohibited or required by it, then, to the full
extent permitted by law (a) all other provisions hereof shall remain in full
force and effect and such jurisdiction shall be liberally construed in order to
carry out the intent of the parties as nearly as may be possible, (b) such
invalidity, illegality, or unenforcability shall not effect the validity,
legality or enforceability of any other provision, and (c) any court or
arbitrator having jurisdiction there over shall have the power to reform such
provision to the extent necessary for such provision to be enforceable under
applicable law.

     17.  Multiple Copies. This Agreement may be executed in two or more
counterparts of like tenor and effect, each of which shall be deemed an original
but all of which together shall constitute one and the same instrument.

                                    ZYMOGENETICS, INC.

                                    By: /s/ Bruce L.a. Carter
                                        --------------------------------------
                                    Dr. Bruce L. A. Carter, President and CEO

                                    EXECUTIVE:

                                     /s/ James A. Johnson
                                    ------------------------------------------
                                    James A. Johnson

                                       -9-

EX-10.11

                                                                   Exhibit 10.11

                              AMENDED AND RESTATED
                           STOCK OPTION GRANT PROGRAM
                                       FOR
                         NONEMPLOYEE DIRECTORS UNDER THE
                     ZYMOGENETICS 2001 STOCK INCENTIVE PLAN

     The following provisions set forth the terms of the stock option grant
program (the "Program") for nonemployee directors of ZymoGenetics, Inc. (the
"Company") under the Company's 2001 Stock Incentive Plan (the "Plan"). The
following terms are intended to supplement, not alter or change, the provisions
of the Plan, and in the event of any inconsistency between the terms contained
herein and in the Plan, the Plan shall govern. All capitalized terms that are
not defined herein shall be as defined in the Plan.

     1. Eligibility

     Each director of the Company who is not otherwise an employee of the
Company or any Related Company (an "Eligible Director") shall be eligible to
receive grants under the Plan, as discussed below.

     2. Initial Grants

     (a) Each Eligible Director who is first elected or appointed to the Board
after the closing date of an underwritten initial public offering of the
Company's Common Stock (the "IPO"), other than an Eligible Director elected or
appointed pursuant to Section 4.3 of the Shareholders' Agreement dated as of
November 10, 2000 among the Company and certain investors, shall automatically
be granted as of the date of such initial election or appointment a Nonqualified
Stock Option to purchase that number of shares of Common Stock calculated by
dividing $250,000 by the Common Stock's Fair Market Value on the Grant Date (the
"Initial Grant").

     (b) Initial Grants shall vest and become exercisable at the next annual
meeting of shareholders (the "Annual Meeting"), assuming continued service on
the Board for such period; provided, however, that with respect to any Initial
Grant made within five months before an Annual Meeting, the Option shall not
become vested and exercisable until the second Annual Meeting after the date of
such Initial Grant.



     3. Annual Grants

     (a) Commencing with the first Annual Meeting following the closing of the
Company's initial public offering and immediately following each year's Annual
Meeting thereafter, each Eligible Director shall automatically receive a
Nonqualified Stock Option to purchase that number of shares of Common Stock
calculated by dividing $100,000 by the Common Stock's Fair Market Value on the
Grant Date (each, an "Annual Grant"); provided that any Eligible Director who
received an Initial Grant within five months before an Annual Meeting shall not
receive an Annual Grant until immediately following the second Annual Meeting
after the date of such Initial Grant.

     (b) Such Annual Grants shall fully vest and become exercisable on the next
Annual Meeting, assuming continued service on the Board for such period.

     4. Option Exercise Price

     The exercise price of an Option shall be the Fair Market Value of the
Common Stock on the Grant Date.

     5. Manner of Option Exercise

     An Option shall be exercised by giving the required notice to the Company,
stating the number of shares of Common Stock with respect to which the Option is
being exercised, accompanied by payment in full for such Common Stock, which
payment may be in whole or in part (a) in cash or check, (b) in shares of Common
Stock, owned by the Eligible Director for at least six months (or any shorter
period necessary to avoid a charge to the Company's earnings for financial
reporting purposes) having a Fair Market Value on the day prior to the exercise
date equal to the aggregate Option exercise price, or (c) if and so long as the
Common Stock is registered under the Exchange Act, by delivery of a properly
executed exercise notice, together with irrevocable instructions to a broker, to
properly deliver to the Company the amount of sale or loan proceeds to pay the
exercise price, all in accordance with the regulations of the Federal Reserve
Board.

     6. Term of Options

     Each Option shall expire ten years from the Grant Date thereof, but shall
be subject to earlier termination as follows:

     (a) In the event that an Eligible Director ceases to be a director of the
Company for any reason other than the death of the Eligible Director, the
unvested portion of any Option granted to such Eligible Director shall terminate
immediately and the vested portion of the Option may be exercised by the
Eligible Director only within one year after the date he or she ceases to be a
director of the Company or prior to the date on which the Option expires by its
terms, whichever is earlier.

     (b) In the event of the death of an Eligible Director, the unvested portion
of any Option granted to such Eligible Director shall automatically become fully
vested and exercisable. The Option may be exercised only within one year after
the date of death of the Eligible Director or prior to the date on which the
Option expires by its terms, whichever is earlier, by the personal
representative of the Eligible Director's estate, the person(s) to whom the
Eligible Director's rights under the Option have passed by will or the
applicable laws of descent and distribution or the beneficiary designated
pursuant to Section 11 of the Plan.

     7. Company Transactions

     In the event of any Company Transaction, other than a Related Party
Transaction, each Initial and Annual Grant that is at the time outstanding shall
automatically accelerate so that each such grant shall, immediately prior to the
specified effective date for the Company Transaction, become fully vested and
exercisable. Such Options shall terminate and no longer be exercisable to the
extent that they are not exercised prior to the Company Transaction.



     8. Amendment

     The Board may amend the provisions contained herein in such respects as it
deems advisable. Any such amendment shall not, without the consent of the
Eligible Director, impair or diminish any rights of an Eligible Director or any
rights of the Company under an Option.

     Provisions of the Plan (including any amendments) that were not discussed
above, to the extent applicable to Eligible Directors shall continue to govern
the terms and conditions of Options granted to Eligible Directors.

     9. Effective Date

     The Program shall become effective on the closing of the Company's IPO.



     Amended and Restated September 20, 2002

EX-10.29

                                                                   EXHIBIT 10.29

Confidential Treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designed as ****. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.

                       Collaborative Agreement for IL-21

This Collaborative Agreement ("Agreement") is effective as of December 14, 2002
(the "Effective Date"), and is entered into by and between ZymoGenetics, Inc., a
Washington corporation having a principal place of business at 1201 Eastlake
Avenue East, Seattle, Washington 98102 ("ZGI") and Novo Nordisk A/S, a Danish
corporation having a principal place of business at Novo Alle, DK-2880,
Bagsvaerd, Denmark ("NN").

         WHEREAS, ZGI and NN are parties to a certain License Agreement for
IL-21 effective as of August 21, 2001;

         WHEREAS, ZGI has generated data, intellectual property, and other
information subsequent to August 21, 2001 that relates to the research and
development of IL-21 Protein;

         WHEREAS, NN is interested in obtaining access and rights pertaining to
ZGI's data, intellectual property, and other information generated subsequent to
August 21, 2001 that relates to the research and development of IL-21 Protein,
pursuant to the terms of this Agreement;

         WHEREAS, ZGI is willing to grant NN access and rights to ZGI's data,
intellectual property, and other information generated subsequent to August 21,
2001 that relates to the research and development of IL-21 Protein, pursuant to
the terms of this Agreement;

         WHEREAS, the parties are interested in sharing costs and collaborating
on research and development necessary to move the IL-21 Protein toward IND;

NOW THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:






                                   ARTICLE 1
                                  Definitions

SECTION 1.1. Other Definitions.  Unless otherwise defined herein, any word used
herein as a defined word is capitalized and shall have the meaning set forth in
the License Agreement for IL-21.

SECTION 1.2. Guide to Definitions set forth in the License Agreement for IL-21.
For the convenience of the parties and as a guide, some of the words defined in
the License Agreement for IL-21 used herein are as follows:

- --------------------------------------------------------------------------------
Word:                                    Section of License Agreement for IL-21:
- --------------------------------------------------------------------------------
"IL-21 Embodiment"                       SECTION 1.6
- --------------------------------------------------------------------------------
"IL-21 Protein"                          SECTION 1.8
- --------------------------------------------------------------------------------
"IND"                                    SECTION 1.12
- --------------------------------------------------------------------------------
"Net Sales"                              SECTION 1.14
- --------------------------------------------------------------------------------
"North America" or "NA"                  SECTION 1.15
- --------------------------------------------------------------------------------
"Rest of World" or "RoW"                 SECTION 1.22
- --------------------------------------------------------------------------------
"Valid Claim"                            SECTION 1.24
- --------------------------------------------------------------------------------

SECTION 1.3. Additional Definitions. Additional words defined in this Agreement
are defined in SECTIONS 1.4 through 1.12 below that are intended for
clarification of the subject matter of this Agreement only and in no way
constitute amendments to the License Agreement for IL-21.

SECTION 1.4. "Affiliate" means: any company, joint venture partnership, or other
business entity which controls, is controlled by, or is under common control of
the designated party; provided, however, that NN shall not be deemed to control
ZGI and neither NN nor ZGI shall be deemed to be an Affiliate of the other or
any subsidiary or other business entity that the other party controls. A
business entity shall be deemed to control another business entity if it
possesses, directly or indirectly, the power to order or cause the direction,
management and policies of such other business entity, whether through the
ownership of voting securities, by contract or otherwise.

SECTION 1.5. "IL-21 Program" means: all research, preclinical, process
development and manufacturing activities that are necessary or desirable for
ZGI's filing of an IND with the US FDA for the IL-21 Protein and that take place
between January 1, 2003 and ZGI's filing of such IND (or such earlier date that
the IL-21 Program is terminated pursuant to SECTION 3.1(c), 8.2, 8.3, 8.4, 8.5
or 8.6). The key activities for the IL-21 Program established by ZGI are
summarized in Exhibit A. Promptly after execution and delivery of this
Agreement, the Joint Project Team will create a detailed joint work plan,
approved by the Joint Steering Committee, containing activities with agreed
deliverables, budget, and time lines up to the filing of such IND, that may be
amended from time to time by mutual agreement in writing between the parties.



SECTION 1.6. "IL-21 Program Inventions" means: any invention or discovery,
whether or not patentable, conceived or reduced to practice by either party or
its Affiliates, alone or jointly with others including NN or ZGI, in the course
of and during the IL-21 Program that relate to, and arise from work related to,
the IL-21 Protein, or the product based on the IL-21 Protein.

SECTION 1.7. "IL-21 Program Know-How" means: all inventions, discoveries,
know-how, methodologies, technology, tangible materials (including nucleic
acids, peptides, vectors, proteins and the like) that a party or its Affiliates
created or generated in the course of and during the IL-21 Program that relate
to, and arise from work related to, the IL-21 Protein, or the product based on
the IL-21 Protein.

SECTION 1.8. "IL-21 Program Patent Rights" means: all patents (including,
without limitations, all substitutions, extensions, registrations,
confirmations, reissues, reexaminations, renewals, supplementary protection
certificates and the like) and patent applications (including, without
limitations, any continuations, continuations in part or divisions and any
provisional applications) that (a) claim an IL-21 Program Invention, (b) have a
date of conception of the invention on or after January 1, 2003 and prior to
completion of the IL-21 Program and (c) are owned or controlled by a party or
its Affiliates.

SECTION 1.9. "Joint IL-21 Program Patent Rights" means: all IL-21 Program Patent
Rights arising or resulting from inventive work by one or more employees from
both parties (or their Affiliates), as to which the employees would be inventors
under the patent laws of the United States. Pursuant to SECTION 4.1, the parties
have equal, undivided ownership interests in Joint IL-21 Program Patent Rights.

SECTION 1.10. "License Agreement for IL-21" means the License Agreement for
IL-21 effective as of August 21, 2001, in which ZGI and NN are parties.

SECTION 1.11. "Respective Territory" means:  RoW with respect to NN and NA with
respect to ZGI.

SECTION 1.12. "Updated IL-21 Related IP" means:  all Updated IL-21 Related
Patents and all Updated IL-21 Related Know-How.

SECTION 1.13. "Updated IL-21 Related Know-How" means: all inventions,
discoveries, know-how, methodologies, technology, tangible materials (including
nucleic acids, peptides, vectors, proteins, and the like) that: (a) pertain to
at least one IL-21 Embodiment; (b) were invented, discovered, developed or
otherwise generated by or for ZGI; and (c) are owned and controlled by ZGI as of
January 1, 2003. For the avoidance of doubt, Updated IL-21 Related Know-How
shall not include: (i) know-how which at the time of disclosure is in the public
domain; (ii) know-how which, prior to the disclosure from ZGI to NN, was in NN's
possession; and (iii) know-how developed independently by NN without any use of
any confidential ZGI know-how or confidential ZGI patent rights whatsoever.

SECTION 1.14. "Updated IL-21 Related Patents" means: (a) the patents and patent
applications set forth in Appendix 2 of the License Agreement for IL-21 and
patents and patent applications



in RoW with a date of conception of the invention prior to January 1, 2003 owned
or controlled by ZGI that claim at least one IL-21 Embodiment, or claim a method
of making, manufacture or using at least one IL-21 Embodiment, or claim a
process or formulation including mixtures comprising at least one IL-21
Embodiment; (b) all divisional or continuation (in whole or in part)
applications of the applications described in (a); (c) all patents issuing from
the applications described in (a) and (b); and (d) all extensions, supplemental
protection certificates (including any form of patent term extensions),
reissues, reexaminations, substitutions or renewals of the patents described in
(c).

SECTION 1.15. "Updated IL-21 Know-How Product" means: a product in final dosage
form that is not an Updated IL-21 Patent Product but that was developed through
use of any Updated IL-21 Related Patent or Updated IL-21 Related Know-How, or
which otherwise incorporates or embodies Updated IL-21 Related Know-How.
Notwithstanding the foregoing, an "SM Embodiment", which is further defined as
any small molecule that is a chemical entity that does not have a polypeptide
backbone, where an Updated IL-21 Related Patent or Updated IL-21 Related
Know-How, including the IL-21 Protein, was used as a tool in the discovery,
research or development of such chemical entity, shall be an Updated IL-21
Know-How Product in accordance with this Agreement, regardless of whether or not
it would otherwise be an Updated IL-21 Patent Product in accordance with SECTION
1.16 of this Agreement.

SECTION 1.16. "Updated IL-21 Patent Product" means: a product in final dosage
form the making, using, importation, exportation, offer for sale, or sale of
which would infringe, in the absence of the license granted under this
Agreement, any unexpired Valid Claim of an Updated IL-21 Related Patent.

SECTION 1.17. "Updated IL-21 Product" means: either an Updated IL-21 Know-How
Product or an Updated IL-21 Patent Product.

SECTION 1.18. "US FDA" means: the United States Food and Drug Administration.


                                    ARTICLE 2
  License and Reimbursement for ZGI Costs incurred since August 21, 2001, the
    Effective Date of the License Agreement for IL-21, until January 1, 2003

SECTION 2.1.  NN's Reimbursement of ZGI's costs. In accordance with the terms of
this Agreement, NN shall reimburse **** of ZGI's total costs incurred from the
Effective Date of the License Agreement for IL-21 until January 1, 2003, in the
undertaking of the research program for the IL-21 Protein. These total costs are
currently estimated by ZGI to be US$****. One half of the percentage amount
reimbursed by NN is contingent on ZGI satisfying four demonstration obligations
as set forth in SECTION 2.3.

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.



SECTION 2.2. Method of Payment. At the discretion of NN, NN shall reimburse ****
of ZGI's estimated total costs as described under SECTION 2.1 either in full
within three (3) business days after execution and delivery of this Agreement,
or in two installments as follows: a first installment of at least one-half of
the total estimated amount within three (3) business days after execution and
delivery of this Agreement; and a second installment of the remaining amount
within thirty (30) days after receipt of ZGI's documentation showing ZGI has
satisfied the demonstration obligations in SECTION 2.3. One half of the total
amount to be reimbursed by NN is contingent on ZGI satisfying four demonstration
obligations as set forth in SECTION 2.3; NN shall complete a due diligence
review of ZGI's documentation within thirty (30) days after receipt of ZGI's
documentation provided in satisfaction of the four demonstration obligations as
set forth in SECTION 2.3. If the four demonstration obligations in SECTION 2.3
are not satisfied by ZGI, the following shall occur: (a) within thirty (30) days
after NN's receipt of ZGI's documentation, NN must notify ZGI that ZGI has not
satisfied the demonstration obligations; (b) in the event NN pays in full upon
signing of this Agreement or the first installment is greater than one-half of
the total payment, then ZGI will be required to refund to NN the amount of the
payment received that is greater than one-half of the total payment within ten
(10) days after receipt of written notification by NN that ZGI has not satisfied
the demonstration obligations. By January 17, 2003, ZGI shall provide NN a
statement of its actual costs for the time period covered by SECTION 2.1 and any
adjusting payments shall be made between the parties by January 31, 2003 based
on the amounts previously paid by NN or to be paid by NN pursuant to SECTIONS
2.1 and 2.2. Notwithstanding the foregoing, NN shall not be required to pay ZGI
an amount in excess of **** of the estimated total costs of US$**** .

SECTION 2.3. Demonstration obligations. In accordance with the terms of this
Agreement, ZGI shall provide NN with documentation for the following four items:

a.       ****.

b.       ****

c.       ****

d.       ****

SECTION 2.4.  Meeting to Exchange Information.  Promptly after execution and
delivery of this Agreement, a mutually agreed upon meeting will be held to
exchange documentation, data and information between the parties that are
required to advance the IL-21 project toward IND. ZGI

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.



shall disclose data and critical information generated or obtained by ZGI from
Effective Date of the License Agreement for IL-21 through the date four (4)
weeks prior to such meeting. ZGI will provide documentation including full
disclosure of all information within forty-five (45) days after the date of the
meeting. If this meeting is not held within thirty (30) days after the execution
and delivery of this Agreement, ZGI shall then, in any event, promptly transfer
all information and documentation described in this SECTION 2.4 to NN.

SECTION 2.5. Amendments to License Agreement for IL-21. Only upon payment to ZGI
of the full amount due from NN pursuant to SECTIONS 2.1 and 2.2 (including the
one-half amount that is due upon, or becomes nonrefundable upon, satisfaction of
the demonstration obligations set forth in SECTION 2.3), the parties shall
promptly prepare and execute an amendment to incorporate Updated IL-21 Related
Know-How and Updated IL-21 Related Patents into the License Agreement for IL-21.
Amendments to the License Agreement for IL-21 shall include:

(a) amending the definition of IL-21 Related Know-How (SECTION 1.10(c) therein),
to incorporate all inventions, discoveries, know-how, methodologies, technology,
tangible materials (including nucleic acids, peptides, vectors, proteins, and
the like) that: (a) pertain to at least one IL-21 Embodiment; (b) were invented,
discovered, developed or otherwise generated by or for ZGI; and (c) are owned
and controlled by ZGI as of January 1, 2003;

(b) amending the definition of IL-21 Related Patents (SECTION 1.11(a) therein,
and including a new Appendix 3 to supplement the patents and patent applications
listed in Appendix 2 "IL-21 Related Patents"), to incorporate patent and patent
applications with a date of conception of the invention prior to January 1, 2003
owned or controlled by ZGI that claim at least one IL-21 Embodiment, or claim a
method of making, manufacture or using at least one IL-21 Embodiment, or claim a
process or formulation including mixtures comprising at least one IL-21
Embodiment;

(c) amending the article related to Royalties (SECTION 5.1 therein) to
incorporate that royalties payable by NN shall be calculated using a single
royalty rate of ****regardless of the level of Net Sales for all Updated IL-21
Patent Products;

(d) amending the article related to the representations, warranties and
covenants of ZGI to include an additional SECTION 10.2(i) stating that Appendix
3 identifies all Updated IL-21 Related Patents in the RoW that are owned or
controlled by ZGI as of January 1, 2003 and that claim: (i) ****; (ii) ****;
(iii) ****; or (iv) ****

(e) any amendments necessary to conform the License Agreement for IL-21 with
(a), (b), (c), or (d) above.

 **** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.



                                    ARTICLE 3
       Sharing of Costs after January 1, 2003 until ZGI's filing of an IND

SECTION 3.1. Cost Sharing. Subject to the terms of this Agreement, the parties
agree to a sharing of costs for the IL-21 Program that are incurred after
January 1, 2003 until the date of ZGI's filing of an IND pursuant to the IL-21
Program, in accordance with the following provisions:

       (a) The percentage split of such costs shall be **** activities involved
           with the IL-21 Program through ZGI's filing of an IND pursuant to the
           IL-21 Program, except as otherwise provided below;

       (b) The parties will review and agree to the IL-21 Program in support of
           ZGI's IND submission and include in this IL-21 Program activities
           solely required to make such a submission compliant with EMEA/MHW
           regulations for an equivalent submission by NN, so long as the
           inclusion of additional activities does not delay the US IL-21
           Program and the added costs are borne by NN. Reciprocally, costs for
           IL-21 Program activities incurred by ZGI solely required to support
           US FDA regulations are borne by ZGI;

       (c) Except for activities outlined in SECTION 3.1(b) above, the IL-21
           Program will be based on an agreed fixed budget currently set at
           ****. This fixed budget shall not be exceeded without the prior
           written consent of both parties. The IL-21 Program will terminate
           once costs exceed the fixed budget, unless the parties, within thirty
           (30) days of notice of such exceeded costs, otherwise agree to extend
           the fixed budget.

       (d) The parties agree that a major part of the activities of this IL-21
           Program will be undertaken by ZGI, but activities that can be
           undertaken by NN as part of this IL-21 Program and in accordance with
           agreed deliverables, budget, and time lines will be transferred to NN
           for execution. The costs incurred by NN for such transferred
           activities are shared and reimbursed in the same way that ZGI's costs
           are shared and reimbursed using, if available, the projected costs by
           ZGI or the costs incurred by NN using the same cost calculation
           principles as ZGI.

       (e) Activities that are a part of the IL-21 Program involving ZGI's IND
           submission pursuant to the IL-21 Program are included under this
           Agreement. However, the parties may agree upon additional activities
           that could be started or performed in this period that are not
           included in the IL-21 Program necessary for ZGI's IND submission
           pursuant to the IL-21 Program. It is anticipated that a contemplated
           joint development program will govern such additional activities.

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.



SECTION 3.2. Reimbursement for Costs. The reimbursement by NN for costs incurred
by ZGI described in SECTION 3.1 shall be made quarterly. ZGI shall invoice NN
quarterly, and NN shall pay each invoice within thirty (30) days after receipt
of the quarterly invoice from ZGI.

SECTION 3.3. Governance of Collaboration after January 1, 2003 until filing of
an IND. NN and ZGI shall establish the following in collaboration under this
Agreement:

      (a) Joint Steering Committee. The parties shall form a Joint Steering
          Committee consisting of three (3) members from each company. The Joint
          Steering Committee will be responsible for overseeing a joint work
          plan under the IL-21 Program. The Joint Steering Committee will also
          resolve any disputes, and create a mechanism for resolving project
          delays and approving changes. ZGI will have the tie-breaking vote
          until an IND pursuant to the IL-21 Program is filed by ZGI.

      (b) Joint Project Team. ZGI and NN shall each create their own project
          group with a designated project manager. Additionally, members of
          these groups will constitute a Joint Project Team with co-leadership
          by the two project managers. The Joint Project Team shall be governed
          by the Joint Steering Committee and will have reporting requirements
          as determined by the Joint Steering Committee. The project managers
          will serve as a primary contact, coordinate activities under the joint
          work plan under the IL-21 Program, and will oversee the tasks
          designated to their project group by the Joint Steering Committee.

      (c) Quarterly Meetings. The Joint Steering Committee and selected members
          of the Joint Project Team shall each at minimum hold quarterly
          meetings in person. In addition, the Joint Project Team shall at
          minimum hold monthly meetings in person or by videoconference, or
          teleconference in those months where there is no quarterly meeting.
          Copies of all written materials presented or discussed at such
          meetings shall be exchanged prior to such meetings between project
          managers. If it is impossible to exchange newly generated data prior
          to such meetings, such data may be exchanged promptly thereafter. The
          project managers shall keep accurate meeting minutes, with this
          responsibility alternating between the parties.

                                   ARTICLE 4
 Rights to Intellectual Property Discovered In Performance of the IL-21 Program

SECTION 4.1. Ownership of Intellectual Property. Any and all intellectual
property created, generated or developed by or on behalf of a party or its
Affiliates in the course of performance of the IL-21 Program shall vest in and
be owned and controlled to the extent possible by such party or its Affiliates,
subject to any licenses granted under this Agreement. It is the intention of the
parties that each party shall have an equal, undivided interest in all Joint
IL-21 Program Patent Rights and all IL-21 Program Inventions for which Joint
IL-21 Program Patent Rights may be sought.



SECTION 4.2. Cross License. Each party hereby grants the other party an
exclusive, royalty-free, fully paid up license (including the right to
sublicense) under the IL-21 Program Patent Rights (including the Joint IL-21
Program Patent Rights) and IL-21 Program Know-How that it or its Affiliates owns
or controls to make, have made, conduct research, develop (including clinical
development), use, sample, promote, manufacture, market, sell, offer to sell,
have sold, distribute, import and export products based on IL-21 Embodiments in
the Respective Territory of the other party; provided, however, that the
foregoing license shall be non-exclusive with respect to products based on IL-21
Program Know-How after IL-21 Program Patent Rights (including the Joint IL-21
Program Patent Rights) expire and shall become non-exclusive in the event the
License Agreement for IL-21 terminates prior to expiration. Each party hereby
grants the other party a non-exclusive, royalty-free, fully paid up, worldwide
license (including the right to sublicense subject to approval by the granting
party which shall not be unreasonably withheld) under the IL-21 Program Patent
Rights and IL-21 Program Know-How that it or its Affiliates owns or controls to
make, have made, conduct research, develop (including clinical development),
use, sample, promote, manufacture, market, sell, offer to sell, have sold,
distribute, import and export products that are not based on any IL-21
Embodiments; provided that the right to sublicense Joint IL-21 Program Patent
Rights shall not require the consent of either party. The parties agree to
execute any documents necessary to give effect to the foregoing, if required by
applicable law.

SECTION 4.3. Patent Prosecution. Each party shall promptly disclose to the other
party the conception or reduction to practice of IL-21 Program Inventions for
which IL-21 Program Patent Rights (including Joint IL-21 Program Patent Rights)
may be sought. Each party shall be solely responsible, at its discretion, for
the filing and prosecution of any and all patent applications that it owns or
controls that are included in the IL-21 Program Patent Rights (including
opposition and interference proceedings) and for the maintenance of any patents
issuing thereon; provided, however, that ZGI shall be the party designated to
control the filing, prosecution, issuance and maintenance of all Joint IL-21
Program Patent Rights. Each responsible party shall be responsible for all costs
associated with such filings, prosecutions and maintenance and, at its sole
discretion, the jurisdictions in which patents may be sought; however, a party
shall promptly reimburse the other party for the costs associated with any Joint
IL-21 Program Patent Rights in its Respective Territory. With respect to IL-21
Program Patent Rights, each party shall deliver to the other party copies of
each new patent application that it files and all material documents sent to or
received from patent offices. The other party shall have a right to review and
comment on the nature and text of each document and the responsible party shall
consider in good faith any comments from the other party regarding steps that
might be taken to strengthen the patents and patents applications, provided that
all final decisions regarding the filing and prosecution of patents and patent
applications shall be within the sole discretion of the responsible party.

SECTION 4.4. Abandonment of IL-21 Program Patent Rights. With respect to the
IL-21 Program Patent Rights, if a party elects not to prosecute or maintain any
patents or patent applications in the other party's Respective Territory, the
responsible party shall provide the other party with a written notice of such
election, in which case, the other party may assume responsibility for
prosecuting or maintaining such patents or patent applications at its expense
and in the name of the responsible party. Upon requests of the other party and
at no out-of-pocket expense to the responsible party, the responsible party
shall render such reasonable



assistance, execute any documents and do such other acts as may be reasonably
necessary in connection with such prosecution or maintenance.

SECTION 4.6. Cooperation. In any legal proceeding conducted under this SECTION
4, each party agrees, without charge, to render such reasonable assistance,
execute any documents and do such other acts as may be reasonably necessary in
such legal action as the other party may reasonably request.

SECTION 4.7. Know-How Disclosure. In addition to the disclosure of IL-21 Program
Inventions and IL-21 Program Patent Rights pursuant to Section 4.3, each party
shall disclose to the other party other information and data developed under the
IL-21 Program that constitutes IL-21 Program Know-How.

SECTION 4.8. Affiliates and sublicensees. Each party shall require its
Affiliates, licensees/sublicensees to comply with this ARTICLE 4.

                                  ARTICLE 5
                        Intent to Enter Further Agreement

SECTION 5.1. Intent to Enter Further Agreement. As of the Effective Date of this
Agreement and unless the IL-21 Program is terminated early, the parties intend
to negotiate a further agreement that may include further clinical and
non-clinical development towards NDA filing, as well as NN's responsibility for
production of the IL-21 Protein for late clinical and non-clinical development,
and commercialization of the IL-21 Protein. The terms of such agreement are yet
to be determined and will be negotiated in good faith between the parties.

                                    ARTICLE 6
                                 Confidentiality

SECTION 6.1. Confidential Information. For the purposes of this Agreement,
"Confidential Information" shall include all proprietary information and
materials, patentable or otherwise, of a party that is disclosed by or on behalf
of such disclosing party to the receiving party, such as DNA sequences, amino
acid sequences, vectors, cells, substances, formulations, techniques,
methodology, equipment, data, reports, know-how, assay results, preclinical
studies and clinical trials and the results thereof, patent positioning and
business plans, including any negative developments.

SECTION 6.2. Confidentiality Obligation. Except as otherwise authorized under
this Agreement, during the term of this Agreement and for a period of three (3)
years thereafter, each party shall maintain as secret and confidential all
Confidential Information obtained from the other party pursuant to this
Agreement or prior to and in contemplation of this Agreement, and all other
Confidential Information that it may acquire from the other in the course of
this Agreement. Each party shall respect the other party's proprietary rights in
such Confidential Information, use the same exclusively for the purposes of this
Agreement, and disclose the same only to those of its representatives to whom
and to the extent that such disclosure is reasonably



necessary for the purposes of this Agreement. The obligations under this SECTION
6.2 shall survive the termination of this Agreement.

SECTION 6.3. Release from Confidentiality Obligation. Notwithstanding the
foregoing provision, a party shall be permitted to disclose any Confidential
Information of the other party to its patent practitioners or any patent office
in any country, as is reasonably required for filing or prosecuting any patent
application permitted to be filed by it hereunder. Furthermore, the obligations
of SECTION 6.2 shall not apply to Confidential Information that:

             (a) was properly in the possession of the receiving party, without
any restriction on use or disclosure, prior to receipt from the disclosing
party, and such possession can be demonstrated by competent evidence of the
receiving party;

             (b) is in the public domain by public use, publication, general
knowledge or the like, or after disclosure hereunder becomes general or public
knowledge through no fault of the receiving party;

             (c) is properly obtained by the receiving party from a third party
not under a confidentiality obligation;

             (d) is independently developed by or on behalf of the receiving
party without the assistance of the confidential information of the disclosing
party; or

             (e) is required to be disclosed by order of any court or
governmental or regulatory authority after notification to the disclosing party
of the necessity to allow the disclosing party to seek protection for the
disclosing party's confidential information from such court or governmental or
regulatory authority.

                                    ARTICLE 7
                                 Indemnification

SECTION 7.1. Indemnification by NN. NN will indemnify, hold harmless and defend
ZGI, and its directors, officers, employees, and agents (Collectively, the "ZGI
Indemnitees") against all actions, suits, claims, demands and prosecutions
(hereinafter a "Claim") that may be brought or instituted, and all judgments,
damages, liabilities, costs and expenses resulting directly therefrom, arising
out of the performance by NN under this Agreement and exercise of its license
rights under this Agreement. NN's indemnification obligations under this SECTION
will arise only if ZGI (i) notifies NN promptly after it becomes aware of a
Claim; (ii) permits NN to control the defense and settlement, at NN's expense,
of any such Claim; and (iii) does not settle any such Claim without the prior
written approval and consent of NN, which consent shall not be unreasonably
withheld.

SECTION 7.2. Indemnification by ZGI. ZGI will indemnify, hold harmless and
defend NN, and its directors, officers, employees, and agents (Collectively, the
"NN Indemnitees") against all actions, suits, claims, demands and prosecutions
(hereinafter a "Claim") that may be brought or instituted, and all judgments,
damages, liabilities, costs and expenses resulting directly



therefrom, arising out of the performance by ZGI under this Agreement and
exercise of its license rights under this Agreement. ZGI's indemnification
obligations under this SECTION will arise only if NN (i) notifies ZGI promptly
after it becomes aware of a Claim; (ii) permits ZGI to control the defense and
settlement, at ZGI's expense, of any such Claim; and (iii) does not settle any
such Claim without the prior written approval and consent of ZGI, which consent
shall not be unreasonably withheld.

                                    ARTICLE 8
                              Term and Termination

SECTION 8.1. Term and Expiration. This Agreement shall come into force on the
Effective Date. Unless terminated earlier, this Agreement shall expire on the
date on which ZGI files an IND pursuant to the IL-21 Program or until the last
to expire of any IL-21 Program Patent Right, whichever is longest. Upon
expiration or termination certain rights and obligations shall survive as
defined in SECTION 8.8 below.

SECTION 8.2. Non-Viability. Each party shall have the right to terminate the
IL-21 Program, which shall automatically terminate the licenses that the
terminating party received from the other party under ARTICLE 4, upon three (3)
months prior written notice to the other party with an explanation contained
therein if, in the reasonable opinion of their respective senior management, the
commercialization of IL-21 Protein must be terminated for safety or efficacy
reasons based on one or more substantial safety or efficacy studies. In such
event, each party shall be obligated to pay to the other party all obligations
that are accrued under this Agreement prior to termination. In addition, the
IL-21 Program Patent Rights of the terminating party shall be assigned to the
non-terminating party unless termination under this SECTION 8.2 is mutually
agreed upon by the parties. Termination under this SECTION 8.2 shall not release
either party from any obligations accrued prior thereto.

SECTION 8.3. Insolvency. Each party shall have the right to terminate the IL-21
Program, which shall automatically terminate the licenses that the terminating
party granted to the other party under ARTICLE 4, after written notice to the
other party (a) if the other party is declared insolvent or bankrupt by a court
of competent jurisdiction, (b) if a voluntary or involuntary petition in
bankruptcy is filed in any court of competent jurisdiction against the other
party and such petition remains undismissed, undischarged or unbonded for a
period of ninety (90) days after the filing thereof, or (c) if the other party
shall make or execute an assignment for the benefit of creditors generally, have
a receiver, administrator or an equivalent official appointed with respect to
its properties or undertakings, enter into any liquidation or become insolvent.
Termination under this SECTION 8.3 shall not release either party from any
obligations accrued prior thereto.

SECTION 8.4. Breach. Each party shall have the right to terminate this Agreement
after written notice to the other party in the event the other party is in
material breach of this Agreement (including action or inaction resulting in
unreasonable delay of the IL-21 Program, or failure to timely pay any amounts
due hereunder), unless the other party cures such breach within sixty (60) days
(or ten (10) days in the case of the failure to pay any amount due) after the
date of



notice; provided, however, that any termination shall not release either party
from any obligations accrued prior thereto.

SECTION 8.5. Mutual Agreement. The parties shall have the right to terminate
this Agreement upon mutual agreement in writing, provided, however, that any
termination shall not release either party from any obligations accrued prior
thereto.

SECTION 8.6. Termination of the IL-21 Program. Each Party shall have the right
to terminate the IL-21 Program without affecting any other rights and
obligations under this Agreement, if ZGI for whatever reason has not filed an
IND within two (2) years after the Effective Date. The IL-21 Program also
terminates as provided in SECTIONS 3.1(c), 8.2, and 8.3. Termination of the
IL-21 Program pursuant to SECTIONS 3.1(c), 8.4, 8.5, and 8.6 shall not terminate
the licenses granted or received under ARTICLE 4. Termination of the IL-21
Program under SECTIONS 3.1(c), 8.2, 8.3, 8.4, 8.5 and 8.6 shall not release
either party from any obligations accrued prior thereto, including the
obligation to provide information and documentation generated prior to such
termination and any final reports based on such information and documentation.

SECTION 8.7. Automatic Termination of the Agreement. This Agreement shall
automatically terminate if NN fails to pay to ZGI when due (or within 10 days
after written notice of past due) the full amount due from NN pursuant to
SECTIONS 2.1 and 2.2 (including the one-half amount that is due upon, or becomes
nonrefundable upon, satisfaction of the demonstration obligations set forth in
SECTION 2.3); provided, however, that any termination shall not release either
party from any obligations accrued prior thereto. Furthermore, this Agreement
shall automatically terminate if the IL-21 Program terminates pursuant to this
Agreement. Termination under this SECTION 8.7 shall not release either party
from any obligations accrued prior thereto.

SECTION 8.8. Effect of Expiration or Termination. Expiration or termination of
this Agreement shall not relieve the parties of any obligations accruing prior
to such expiration or termination. In addition to any provision that expressly
provides for its survival, any accrued obligations and the provisions of
ARTICLES 1, 4 (as modified by this ARTICLE 8), 6, 7 and 10 and SECTIONS 3.2
(i.e., costs through termination), 8.9, 9.3 and 9.4 shall survive the expiration
or termination of this Agreement. Expiration or termination shall not affect any
party's ability to seek any other remedies available at law.

SECTION 8.9. Return of Technical Information. Upon termination but not
expiration of this Agreement prior to payment by NN to ZGI of the full amount
due pursuant to SECTIONS 2.1 and 2.2, NN shall cause all materials containing
any Confidential Information of ZGI conveyed to NN pursuant to ARTICLE 2 to be
promptly delivered to ZGI. Upon termination but not expiration of this Agreement
during the IL-21 Program due to a party's (the "Defaulting Party's") failure to
reimburse the other party for its costs pursuant to SECTIONS 3.1 and 3.2, the
Defaulting Party shall cause all materials containing any of the other party's
IL-21 Program Patent Rights and IL-21 Program Know-How to be promptly delivered
to the other party, and the Defaulting Party's license rights thereto under
SECTION 4.2 shall be terminated. Upon termination of the IL-21 Program under
SECTION 8.2 or 8.3, the party losing its license rights under ARTICLE 4 shall
cause all materials containing any of the other party's IL-21 Program



Patent Rights and IL-21 Program Know-How, except for Joint IL-21 Program Patent
Rights, to be promptly delivered to the other party.

                                    ARTICLE 9
                         Representations and Warranties

SECTION 9.1. Representations, Warranties and Covenants of NN. NN represents and
warrants to and covenants with ZGI that:

             (a) NN is a corporation duly organized, validly existing and in
corporate good standing under the laws of Denmark; and

             (b) NN has the corporate and legal right, title, authority and
power to enter into this Agreement; and

             (c) NN has taken all necessary action to authorize the execution,
delivery and performance of this Agreement; and

             (d) upon the execution and delivery of this Agreement, this
Agreement shall constitute a valid and binding obligation of NN, enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law);
and

             (e) the performance of its obligations under this Agreement will
not conflict with or result in a breach of any agreements, contracts or other
arrangements to which it is a party; and

             (f) NN will not during the term of this Agreement enter into any
agreements, contracts or other arrangements that would prevent NN from meeting
its obligations or adversely impact ZGI's rights under this Agreement;
and

             (g) NN will comply with all applicable laws, regulations and
guidelines in connection with the exercise of NN's license rights under this
Agreement, including but not limited to all applicable product safety, product
testing, product labeling, package marking and product advertising laws and
regulations and the regulations of any relevant nations concerning any export or
other transfer of technology, services or products.

SECTION 9.2. Representations, Warranties and Covenants of ZGI. ZGI represents
and warrants to and covenants with NN that:

             (a) ZGI is a corporation duly organized, validly existing and in
corporate good standing under the laws of the state of Washington; and

             (b) ZGI has the corporate and legal right, title, authority and
power to enter into this Agreement; and



             (c) ZGI has taken all necessary action to authorize the execution,
delivery and performance of this Agreement; and

             (d) upon the execution and delivery of this Agreement, this
Agreement shall constitute a valid and binding obligation of ZGI enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or, at law);
and

             (e) the performance of its obligations under this Agreement will
not conflict with or result in a breach of any agreements, contracts or other
arrangements to which it is a party; and

             (f) ZGI will not after the Effective Date enter into any
agreements, contracts or other arrangements that would prevent ZGI from meeting
its obligations or adversely impact NN's rights under this Agreement;

             (g) ZGI will comply with all applicable laws, regulations and
guidelines in connection with the performance of ZGI's obligations under this
Agreement.

SECTION 9.3. Warranty Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ZGI'S RESEARCH AND
DEVELOPMENT PROGRAM PRIOR TO JANUARY 1, 2003 (INCLUDING THE DEMONSTRATION
OBLIGATIONS DESCRIBED IN SECTION 2.3), THE IL-21 PROGRAM, IL-21 PROGRAM PATENT
RIGHTS, IL-21 PROGRAM KNOW-HOW, IL-21 EMBODIMENTS, PRODUCTS, UPDATED IL-21
RELATED PATENTS, UPDATED IL-21 RELATED KNOW-HOW OR OTHER SUBJECT MATTER OF THIS
AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, NON-INFRINGEMENT AND PATENTABILITY WITH RESPECT TO ANY AND
ALL OF THE FOREGOING.

SECTION 9.4. Limited Liability. EXCEPT IN THE CASE OF GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT, NEITHER NN NOR ZGI WILL BE LIABLE WITH RESPECT TO ANY MATTER
ARISING UNDER THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY FOR ANY PUNITIVE OR EXEMPLARY DAMAGES.



                                   ARTICLE 10
                                  Miscellaneous

SECTION 10.1. Assignment. This Agreement may not be assigned by either party
without prior written consent of the other party, except to a successor or a
purchaser of all or substantially all of the party's assets and business or to
an Affiliate; provided, however, that in the event of an assignment by NN to an
Affiliate, the Affiliate's rights under this Agreement shall terminate once it
ceases being an "Affiliate" of NN (however, its rights may be reassigned back to
NN at the time it ceases being an "Affiliate" of NN). If, as a result of any
assignment of any rights or interest in this Agreement by NN, any payment by or
on behalf of NN to ZGI is subject to an increased level of tax withholding than
would have been the case under this Agreement with payments by NN from Denmark
and ZGI cannot use any related tax credit as an offset against its obligation to
pay United States federal income tax in the year in which the withholding is
effected, NN shall pay ZGI an amount such that, after deduction of any amount
required to be withheld, ZGI receives the same amount that it would have
received but for the assignment. In the event of any permissible assignment
under this Agreement, the assignor and assignee shall be jointly and severally
liable for assignor's obligations hereunder. ZGI shall have the right to assign
its right to receive any payments under this Agreement.

SECTION 10.2. Relationship between the Parties. Nothing in this Agreement is
intended to create or shall be deemed to constitute a partnership, agency or
joint venture relationship between the parties or their sublicensees,
contractors or licensees. Neither party shall be responsible for the acts or
omissions of the other party, and neither party shall have the authority to
speak for, represent or obligate the other party in any way without the prior
written authority of the other party.

SECTION 10.3. Public Announcements. Neither party shall make any public
announcement, written or oral, concerning this Agreement or the subject matter
hereof, without the prior written approval of the other party. However, ZGI
shall have the right to disclose or announce information concerning the
existence and general nature of this Agreement in order to seek third party
investors in ZGI provided that disclosure of any confidential information shall
only be made under an obligation or expectation of confidentiality. Further, the
parties shall have the right to disclose or announce information concerning the
existence and general nature of this Agreement in order to comply with
government law or regulations, provided that the other party is given prior
written notice of such disclosure or announcement.

SECTION 10.4. Use of Names, Trade Names and Trademarks. Except as provided
herein, nothing contained in this Agreement shall be construed as conferring any
right on either party to use in advertising, publicity or other promotional
activities any name, trade name, trademark or other designation of the other
party hereto, including any contraction, abbreviation or simulation of any of
the foregoing, unless the express written permission of such other party has
been obtained.

SECTION 10.5. Force Majeure. If either party to this Agreement is prevented or
delayed in the performance of any of its obligations under this Agreement by
force majeure, and if such party gives written notice thereof to the other party
specifying the matters constituting force majeure,



together with such evidence as it can reasonably give and specifying the period
for which it is estimated that such prevention or delay will continue, then the
party in question shall be excused from the performance of its obligations or
the punctual performance thereof as the case may be as from the date of such
notice for so long as such cause of prevention or delay shall continue. For the
purpose of this Agreement, "force majeure" shall be deemed to be any cause
affecting the performance of this Agreement arising from or attributable to
acts, events, omissions or accidents beyond the reasonable control of the party.

SECTION 10.6. Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Washington (without regard to its choice of law
provisions).

SECTION 10.7. Waiver of Remedies. No forbearance, delay or indulgence by either
party in enforcing the provisions of this Agreement shall prejudice or restrict
the rights of that party, nor shall any waiver of its rights operate as a waiver
of any subsequent breach, and no right, power or remedy herein conferred upon or
reserved for either party is exclusive of any other right, power or remedy
available to that party.

SECTION 10.8. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all prior oral and written agreements,
understandings or arrangements relating to the subject matter hereof. No
addition to or modification of any provision of this Agreement shall be binding
upon the parties, unless made in writing and signed by a duly authorized
representative of each of the parties.

SECTION 10.9. Notices. All notices or other communication hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
faxed with receipt acknowledged (and with a confirmation copy also sent by
registered mail, return receipt requested), or delivered by a recognized
commercial courier service with receipt acknowledged, postage prepaid, as
follows:

     If to NN:         Novo Nordisk A/S
                       Novo Alle
                       DK-2880 Bagsvaerd
                       Denmark

                       Attn: Chief Scientific Officer & Executive Vice President
                       Research & Development
                       Facsimile:  +45 44 42 72 80

     With a copy to:   Novo Nordisk Legal Department
                       Novo Alle
                       DK-2880 Bagsvaerd
                       Denmark

                       Facsimile: +45 4498 0670

                       and



                                 Senior Vice President, Discovery
                                 Novo Alle
                                 DK-2880 Bagsvaerd
                                 Denmark

                                 Facsimile: 45 4444 45 65:

         If to ZGI:              ZymoGenetics, Inc.
                                 1201 Eastlake Avenue East
                                 Seattle, WA  98102
                                 Attn: Vice President, Intellectual Property
                                 and Legal Affairs
                                 Facsimile: (206) 442-6697

or to such other addresses as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notices or other communication will
be deemed effective as of the date so delivered (either personally or by courier
service) or faxed.

SECTION 10.10. Severability. The parties agree that, if any provision of this
Agreement shall for any reason be held to be invalid or unenforceable, such
provision shall be enforced to the maximum extent permitted by law and the
parties' fundamental intentions hereunder, and the remaining provisions hereof
shall not be affected, impaired or invalidated and shall continue in full force
and effect.

SECTION 10.11. Headings. The headings contained herein are for reference only
and shall not be considered a part of this Agreement, nor shall they in any way
affect the interpretation hereof.

SECTION 10.12. Review of Agreement. This Agreement has been submitted to the
scrutiny of both parties and their counsel and shall be given a fair and
reasonable interpretation in accordance with the words hereof, without
consideration or weight being given to its being drafted by or for one of the
parties.

SECTION 10.13. Compliance with Laws; Export Regulations. In performance of this
Agreement, each party shall comply with all laws, regulations, rules, orders and
other requirements, now or hereafter in effect, governmental authorities having
jurisdiction. This Agreement and any information provided hereunder are subject
to restrictions concerning the export of information and materials that may be
imposed by government. Accordingly, NN agrees that it will not export, directly
or indirectly, any information or materials acquired under this Agreement or any
products utilizing such information or materials to any country for which a
government or any agency thereof at the time of export requires an export
license or other governmental approval, without first obtaining the written
consent to do so from the appropriate agency of the government when required by
an applicable statute or regulation.

SECTION 10.14. Counterparts. This Agreement may be executed in two or more
counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.



[Balance of page intentionally left blank.]



IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
as of the date first above written.

                                         ZymoGenetics, Inc.

                                         By:  /s/ Bruce L.A. Carter
                                             -----------------------------------
                                             Bruce L.A. Carter

                                             Chief Executive Officer



                                         Novo Nordisk A/S

                                         By:  /s/ Peter Kurtzhals
                                            ------------------------------------
                                                  Peter Kurtzhals
                                                  Senior V.P. Discovery



                                         By:  /s/ M. Krogsgaard Thomsen
                                            ------------------------------------
                                                  M. Krogsgaard Thomsen

                                                  Chief Science Officer and
                                                  Executive Vice President,
                                                  Research and Development



                                      ****



**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

EX-10.30

                                                                   EXHIBIT 10.30

Confidential Treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designed as ****. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.

                       EXCLUSIVE PATENT LICENSE AGREEMENT
                                     between
                              AVENTIS BEHRING GMBH
                                       AND
                               ZYMOGENETICS, INC.

This Exclusive Patent License Agreement (the "Agreement") is effective as of
December 18, 2002 ("Effective Date") by and between Aventis Behring GmbH
("Licensor"), a German corporation having a principal place of business at
Emil-von-Behring-Strasse 76, D-35041 Marburg, Germany, and ZymoGenetics, Inc.
("Licensee"), a Washington corporation having a principal place of business at
1201 Eastlake Avenue East, Seattle, Washington 98102.

                                   WITNESSETH

       WHEREAS, Licensor and Licensee are parties to Interference No. ****
relating to Factor XIII pending in the United States Patent and Trademark office
involving certain patent applications owned or controlled by Licensee and a
patent application within the "Licensed Patents" (as hereinafter defined) owned
by Licensor;

       WHEREAS, Licensor is a successor to certain patent rights of Behringwerke
Aktiengesellschaft, which previously entered into a Cross License Agreement with
Hoechst Japan, Ltd. and Licensee relating to Factor XIII dated May 3, 1993
regarding certain patents and patent applications owned or controlled by
Licensee and certain patents and patent applications within the Licensed Patents
owned or controlled by Licensor ("Cross License Agreement");

       WHEREAS, Licensor is the present owner or exclusive licensee of the
Licensed Patents;

       WHEREAS, Licensee desires to modify certain licenses granted under the
Cross License Agreement as such licenses relate to Licensor and Licensee and
obtain from Licensor an exclusive worldwide license under the Licensed Patents
in the Field of Use for Licensed Products in accordance with the terms of this
Agreement;

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                       -1-



       WHEREAS, Licensor is willing to modify certain licenses granted under the
Cross License Agreement as such licenses relate to Licensor and Licensee and
grant an exclusive worldwide license under the Licensed Patents in the Field of
Use for Licensed Products to Licensee on the terms and conditions set forth
herein;

       NOW THEREFORE, in consideration of the mutual covenants contained herein,
it is agreed by the parties as follows:

                                 1. DEFINITIONS

1.1    Affiliate means any company, corporation, business or entity controlled
by, controlling, or under common control with either Licensee or Licensor.
"Control" means direct or indirect beneficial ownership of at least fifty
percent (50%) interest in the voting stock (or the equivalent) of such
corporation or other business or having the right to direct, appoint or remove a
majority or more of the members of its board of directors (or their equivalent).

1.2    Biologically Active Substance means any substance other than Recombinant
Factor XIII that has intrinsic biological or cell stimulatory activity but not
including substances or compounds whose primary function is to act as a vehicle
for the delivery of Licensed Product, including but not limited to stabilizing
agents, excipients and adjuvants.

1.3    Combination Product means a Licensed Product that includes one or more
Biologically Active Substance(s) to achieve the desired therapeutic response.

1.4    Field of Use means the prevention, diagnosis or treatment of any disease
or condition in humans or animals.

1.5    First Commercial Sale means the first sale of any Licensed Product by
Licensee or its Affiliates or Sublicensees to a bona fide independent third
party.

1.6    Licensed Patents means: (a) the patents and the patent applications set
forth in Exhibits A and B (attached hereto) and made part of this Agreement; (b)
all parent, provisional, divisional, continuation (in whole or in part) or
substitute applications with respect to any of the patent applications described
in 1.6(a); (c) any other patent applications, both U.S. and foreign, based on
the patent applications described in 1.6(a) or 1.6(b); (d) all issued or granted
patents resulting from any of the patent applications described above; and (e)
all issued or granted reissue, re-examination, renewal or extension patents,
supplementary protection certificates, and confirmation or registration patents
or patents of addition based on any of the patents described in 1.6(a) or
1.6(d).

1.7    Licensed Product(s) means any product that contains Recombinant Factor
XIII and is covered by a Valid Claim of an issued patent falling within the
Licensed Patents or that, but for this Agreement, would infringe a Valid Claim
of an issued patent falling within the Licensed Patents.

                                       -2-



1.8    Net Sales means the amounts invoiced by Licensee or its Affiliates or
its Sublicensees during the Term of this Agreement for the sale of Licensed
Products to bona fide independent third parties, less deductions for: (i) normal
and customary rebates, and cash and trade discounts, actually taken, including
without limitation chargebacks, retroactive price reductions or other
adjustments to pricing of sales to government agencies; (ii) sales, use and/or
other excise taxes, custom duties, surcharges or other governmental charges
(other than taxes imposed on or measured by net income) actually paid in
connection with sales of Licensed Products; (iii) the cost of any bulk packages
and packing, prepaid freight charges and insurance; (iv) amounts actually
allowed or credited due to returns paid; and (v) amounts written off for bad
debt and uncollectable receivables. Transfers of a Licensed Product among
Licensee and its Affiliates or Sublicensees for sale by such Affiliates or
Sublicensees shall not be considered a sale for purposes of calculating Net
Sales. In the event that a Licensed Product is sold as a Combination Product,
Net Sales for purposes of calculating royalty payments on the Combination
Product shall be calculated by multiplying Net Sales of the Combination Product
by the fraction C/(C+D), where C is the fully allocated cost of the Combination
Product (excluding the fully allocated cost of the other Biologically Active
Substance contained therein) and D is the fully allocated cost of the other
Biologically Active Substance. The distribution of (i) reasonable quantities of
free promotional samples of Licensed Product, or (ii) Licensed Product provided
for clinical trials or research purposes shall not be considered a sale of
Licensed Product for royalty purposes.

1.9    Recombinant Factor XIII means a protein having the amino acid sequence of
naturally occurring factor XIII and that is produced by recombinant DNA
techniques, including without limitation production in prokaryotic and
eukaryotic host cells and transgenic animals, as well as variants, derivatives,
modifications, fragments, hybrids, mutants, conjugates, fusion proteins,
analogs, orthologs and homologs thereof.

1.10   Single Agent Product means a Licensed Product that contains no additional
Biologically Active Substance(s) to achieve the desired therapeutic response.

1.11   Sublicensee means any non-Affiliate to whom Licensee grants a sublicense
of some or all of the rights granted to Licensee under this Agreement.

1.12   Territory means the entire world.

1.13   Valid Claim means a claim of an issued and unexpired patent within the
Licensed Patents that has not lapsed or become abandoned or been held
permanently revoked, unenforceable or invalid by a decision of a court or other
governmental agency of competent jurisdiction, unappealable or unappealed within
the time allowed for appeal, and that has not been admitted to be invalid or
unenforceable through reissue or disclaimer or otherwise.

                                    2. GRANT

2.1    Exclusive License. Licensor hereby grants to Licensee and Licensee hereby
accepts from Licensor, upon the terms and conditions herein specified, an
exclusive license under the Licensed

                                       -3-



Patents in the Territory, and in the Field of Use to develop, make, have made,
import, have imported, use, offer for sale, sell, have sold and otherwise
commercialize Licensed Product(s). For the avoidance of doubt, the exclusive
license granted hereby relates solely to Recombinant Factor XIII.

2.2    Sublicenses. Licensor hereby grants to Licensee and Licensee hereby
accepts from Licensor, upon the terms and conditions herein specified, the right
to grant sublicenses under the Licensed Patents. Each sublicense granted by
Licensee shall be consistent with the terms and conditions of this Agreement,
and Licensee shall remain responsible to Licensor for the compliance of each
such Sublicensee with the financial and other obligations under this Agreement.
Licensee shall promptly notify Licensor of each sublicense granted including the
identity of the Sublicensee.

                             3. TERM AND TERMINATION

3.1    Term. The term of this Agreement shall be for a period beginning with the
Effective Date and extending, on a country-by-country basis, until the
expiration of the last to expire Valid Claim that covers a Licensed Product in
that country. Licensee's obligation to pay royalties shall expire on a
country-by-country basis.

3.2    Termination by Licensee. This Agreement may be terminated by Licensee,
with or without cause, upon thirty (30) days written notice to Licensor.

3.3    Termination for Breach. In the event that Licensee commits any material
breach of this Agreement, unless this Agreement provides a different remedy, the
Licensor at its option, may terminate this Agreement by giving Licensee written
notice of its election to terminate as of a stated date, not less than sixty
(60) days from such stated termination date. Such notice shall state the nature
of the defaults claimed by Licensor. During said sixty (60) day period, Licensee
may cure any default stated in said notice, and if such default is cured, or, if
such default will take longer than sixty (60) days to cure and Licensee is
diligently pursuing such cure, this Agreement shall continue in full force and
effect as if such notice had not been given. Notwithstanding the foregoing, if
Licensee disputes in good faith that the claimed breach exists, such sixty (60)
day period will not start to run until such dispute has been resolved.

3.4    Effect of Termination. If this Agreement is terminated prior to its
expiration, upon such termination Licensee shall cease all production and sale
of Licensed Products except for the production and sale of Licensed Products on
which production is complete prior to receipt of the notice of such termination.
Licensee may continue to sell such Licensed Products for up to one hundred and
eighty (180) days after such notice and shall pay to Licensor any royalties or
milestones that may accrue on such sales.

3.5    Survivability. Articles 1, 6, 8, 9 and 10, and Sections 3.4, 3.5 and 5.3,
and, with respect to amounts accruing prior to expiration or termination,
Sections 4.2, 4.3, 4.4, 4.5 and 4.6 hereof shall survive termination or
expiration of this Agreement.

                                       -4-



                              4. FEES AND ROYALTIES

4.1    License Issue Fee. Upon execution and delivery of this Agreement,
Licensee will pay Licensor the sum of **** by wire transfer to an account
designated in writing by Licensor.

4.2    Royalties. Licensee shall pay or cause to be paid to Licensor a royalty
equal to **** of Net Sales of Licensed Product, the manufacure, sale or use of
which is covered by a Valid Claim of an issued patent falling within the
Licensed Patents in the country of such manufacture, sale or use. If Licensed
Product is sold by a Sublicensee, then in connection with such sales Licensee
shall pay Licensor the amount set forth in this Section 4.2 using Net Sales as
reported to Licensee by the Sublicensee as Net Sales by Licensee. Regardless of
the number of Licensed Patents covering a particular Licensed Product, only one
royalty will be due with respect to such Licensed Product.

4.3    Milestone Payments. Licensee shall provide Licensor written notice within
thirty (30) days after the achievement of the milestone event set forth below,
whether achieved by the Licensee, an Affiliate or a Sublicensee. With such
written notice, Licensee shall pay to Licensor the corresponding amount set
forth below:

       -------------------------------------------------------------------------
                                MILESTONE                        AMOUNT
       -------------------------------------------------------------------------
         ****                                                   ****









       -------------------------------------------------------------------------

For the avoidance of doubt, the parties understand and agree that only a single,
one-time payment shall be due Licensor under this Section 4.3.

4.4    Schedule and Form of Payment/Taxes. Licensee shall pay royalties, if any,
on a quarterly basis commencing on the date of First Commercial Sale of a
Licensed Product and payments shall be due and payable with the reports required
by this Section 4.4 within sixty (60) days following the close of the relevant
calendar quarterly period. Each such payment shall be accompanied by a report
for the period covered showing total number or volume of Licensed Products sold
and identified as Net Sales on a country by country basis, the exchange rate
used to convert any payments into United States dollars, and total royalties
due. All amounts payable to

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                       -5-



Licensor hereunder shall be payable in United States funds. Licensee, if
required by applicable law, shall be responsible for the payment of all
withholding taxes imposed by any country on any royalty payable to Licensor
hereunder and shall withhold such taxes from the amounts payable to Licensor
hereunder. Notwithstanding the foregoing, if the law of any foreign country
prevents any payment payable to Licensor hereunder to be made in the United
States of America or prevents any such payment to be made in United States
dollars, Licensor agrees to accept such royalty in form and place as permitted,
including deposits by Licensee in the applicable foreign currency in a local
bank or banks in such country designated by Licensee. If any currency conversion
is required in connection with any payment to Licensor hereunder, such
conversion shall be made at the buying rate for the transfer of such other
currency as published in the United States in The Wall Street Journal under the
caption "Currency Trading" on the last business day of the applicable accounting
period, in the case of any payment payable with respect to a specified quarterly
period.

4.5    Records. Licensee shall maintain complete and accurate records sufficient
to enable accurate calculation of royalties due Licensor under this Agreement.
Not more than once a calendar year, and not more than three (3) years following
the relevant accounting period, Licensor shall have the right to select a
certified public accountant reasonably acceptable to Licensee to inspect, on not
less than thirty (30) days prior written notice and during regular business
hours, the records of Licensee necessary to verify Licensee's statement and
royalty payments due pursuant to this Agreement. Licensee agrees to provide
reasonable access to the books, records and premises of Licensee; provided,
however, that such access shall be limited to those books and records necessary
to verify the accuracy of the payment made by Licensee to Licensor pursuant to
this Agreement. Such accountant shall not disclose to Licensee any information
other than information relating to the accuracy of the reports and the
calculation of the amounts due to Licensor made under this Agreement. All
financial information disclosed to such accountant or Licensor under this
Section 4.5 shall be considered the Confidential Information of Licensee. The
entire cost for such inspection shall be borne by Licensor unless there is a
discrepancy of greater than, or equal to, ten percent (10%) in Licensee's favor
in which case Licensee shall bear the entire cost of the inspection and audit.
Records shall be preserved by Licensee for at least three (3) years following
the relevant accounting period for inspection by Licensor.

4.6    Payments Based on Audit Results. In the event an inspection conducted in
accordance with Section 4.5 hereinabove shows an undisputed discrepancy in favor
of either party, the party benefiting from the discrepancy shall, within thirty
(30) days of receiving notice of such discrepancy, make a payment to the other
party such that the amount paid hereunder shall conform to the amount so
determined to be payable.

                 5. PROSECUTION AND MAINTENANCE OF PATENT RIGHTS

5.1    Right to Prosecute and Maintain Licensed Patents. During the term hereof,
Licensee, with respect to the Licensed Patents set forth in Exhibit A, and
Licensor, with respect to the Licensed Patents set forth in Exhibit B, shall
have the right, but not the obligation, at its own cost

                                       -6-



and expense, to file, prosecute and maintain such Licensed Patents. Each party
shall render the other party such assistance as the latter may reasonably
require to comply with said obligations. Should Licensee, with respect to the
Licensed Patents set forth in Exhibit A, or Licensor, with respect to the
Licensed Patents set forth in Exhibit B, wish to finally abandon any one or more
of such Licensed Patents or cease the maintenance thereof, it shall notify the
other party not less than sixty (60) days prior to any action required to
preserve such Licensed Patents, and shall offer the other party a right to
prosecute and maintain such Licensed Patents. The other party shall notify
Licensee or Licensor, as appropriate, within sixty (60) days of receipt of
Licensee's or Licensor's notification of its intent to assume such prosecution
and maintenance rights that Licensee or Licensor wishes to abandon or cease
maintaining. The other party shall thereafter have the right, but not the
obligation, to pursue the prosecution and maintenance of such Licensed Patents
at its sole expense, and Licensee or Licensee, as appropriate, shall provide
such assistance and execute such documents as are necessary to assist the other
party in such prosecution and maintenance. The other party shall thereafter
assume all costs and expenses related to such Licensed Patents.

5.2    Assistance and Communication. Licensee, with respect to the Licensed
Patents set forth in Exhibit A, and Licensor, with respect to the Licensed
Patents set forth in Exhibit B, shall have exclusive control over the
prosecution of such Licensed Patents before all national and international
patent offices. The other party shall cooperate with Licensee or Licensor, as
appropriate, and shall render all reasonable assistance to Licensee or Licensor
in preparing, filing and prosecuting such Licensed Patents. Licensee or
Licensor, as appropriate, agrees to provide the other party with copies of all
correspondence to and from the U.S. Patent and Trademark Office and other
national and international patent offices regarding the prosecution of such
Licensed Patents. Notwithstanding the foregoing, this Section 5.2 shall not
apply to currently pending Interference No. ****

5.3    Patent Extensions. Licensee shall have the sole right to apply for any
extensions, supplementary protection certificates and the like for any of the
Licensed Patents set forth in Exhibit A and Licensor shall render Licensee such
assistance as Licensee may reasonably require therefore.

5.4    Marking. Licensee shall comply with all applicable United States and
foreign laws, rules and regulations related to the marking of Licensed Products
and their packaging with patent pending, patent number(s), or other intellectual
property notices and legends required by law to maintain the Licensed Patent
Rights.

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                       -7-



                               6. CONFIDENTIALITY

6.1    Confidential Information. It may be necessary for one party to disclose
to the other party certain confidential or proprietary information.
"Confidential Information" means information related to the business of Licensee
or to the business of Licensor and includes, without limitation, information
exchanged by the parties in anticipation of this Agreement, all tangible and
intangible information relating to scientific data, analyses and projections;
intellectual property, trade secrets, know how, products and product candidates,
business, strategies, operations, systems, software, ideas, financial
information, contracts, business documents, and business records together with
analysis, compilations, studies and other documents, in whatever form furnished,
prepared or stored, whether prepared by a party, its representatives or others,
which are based upon, incorporate or otherwise reflect such information.
Disclosures hereunder may be made orally and in writing, but all oral
disclosures shall be reduced to writing and forwarded to the receiving party
within thirty (30) days of such oral disclosure, and shall be designated as
confidential. During the term of this Agreement and for five (5) years
thereafter, the party receiving Confidential Information of the other party
agrees not to disclose such Confidential Information and not to use it for any
purposes except those specifically allowed in this Agreement. Confidential
Information shall not include information that:

       (a) is now in the public domain or which becomes generally available to
the public through no fault of the receiving party;

       (b) is already known to, or in the possession of, the receiving party
prior to disclosure by the disclosing party as can be demonstrated by written
evidence;

       (c) is disclosed on a non-confidential basis to the receiving party by a
third party having no obligation of confidentiality, directly or indirectly, to
the disclosing party;

       (d) is independently developed by or for the receiving party (by activity
not associated with the Licensed Patent Rights) as can be demonstrated by
written evidence; or

       (e) is required to be disclosed by order of any court or governmental or
regulatory authority, but only after notification to the providing party by the
receiving party of such requirement in order to allow the providing party to
seek protection for the providing party's Confidential Information from such
court or governmental or regulatory authority.

6.2    Permitted Disclosures. Notwithstanding the foregoing, Licensee may
disclose Confidential Information of Licensor to the extent such disclosure is
reasonably required for filing and prosecuting patent applications, prosecuting
or defending litigation, complying with applicable governmental regulations and
obtaining regulatory approvals.

6.3    Terms of the Agreement. Neither party shall disclose the terms and
conditions of this Agreement to any third party without the prior written
consent of the other party, except as required by applicable law or to third
parties with whom Licensor or Licensee has entered into or

                                       -8-



proposes to enter into a business relationship, provided that such third party
has entered into a confidentiality agreement with the party wishing to disclose
such information.

              7. INTERFERENCE, OPPOSITION, ENFORCEMENT AND DEFENSE

7.l    Interference. In the event an interference is declared by the U.S. Patent
and Trademark Office involving one or more of the Licensed Patents, then the
party receiving notice of such interference shall promptly notify the other
party in writing. Licensee, with respect to the Licensed Patents set forth in
Exhibit A, and Licensor, with respect to the Licensed Patents set forth in
Exhibit B, shall have exclusive control at its own expense over the conduct of
the interference. The other party, at no out-of-pocket expense to it, shall
provide reasonable assistance to and cooperate with Licensee or Licensor, as
appropriate, in any such interference upon Licensee's or Licensor's request.
Notwithstanding the foregoing, this Section 7.1 shall not apply to currently
pending Interference No. ****.

7.2    Opposition. In the event that one or more Licensed Patents are subject to
an opposition proceeding, then the party receiving notice of such opposition
shall promptly notify the other party in writing. Licensee, with respect to the
Licensed Patents set forth in Exhibit A, and Licensor, with respect to the
Licensed Patents set forth in Exhibit B, shall have exclusive control at its own
expense over the conduct of the opposition. The other party, at no out-of-pocket
expense to it, shall provide reasonable assistance to and cooperate with
Licensee or Licensee, as appropriate, in any such opposition upon Licensee's or
Licensor's request.

7.3    Enforcement by Licensee. In the event that either party becomes aware of
any infringement relating to Licensed Products by a third party of any of the
Licensed Patent Rights set forth in Exhibit A, it shall promptly notify the
other party in writing (including evidence establishing a prima facie case of
infringement by such third party). Licensee shall have the sole right, but not
the obligation, to initiate and control the prosecution, defense and settlement
(including without limitation the right to sublicense alleged infringers), at
its own expense, of any infringements by third parties of any such Licensed
Patents. If Licensor is required to join any such legal action as a necessary
party and retain independent legal counsel because of a conflict of interest
between Licensee and Licensor, Licensee shall pay the reasonable legal fees for
such independent legal counsel selected by Licensor and reasonably acceptable to
Licensee. Licensor will cooperate fully with Licensee in all reasonable
respects, including without limitation, permitting its employees and appointees
to testify when requested and making available relevant records, papers,
information, samples, specimens and the like and Licensee will reimburse
Licensor for all reasonable out-of-pocket costs incurred at Licensee's request
in connection therewith. The total cost, including legal fees, expenses,
judgments, penalties and liabilities of such infringement action shall be borne
by Licensee, and all damages or other proceeds from any judgment or settlement
will be awarded solely to Licensee.

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                       -9-



7.4   Enforcement by Licensor.  In the event that either party becomes aware of
any infringement related to Licensed Products by a third party of any of the
Licensed Patent Rights set forth in Exhibit B, it shall promptly notify the
other party in writing (including evidence establishing a prima facie case of
infringement by such third party). Licensor shall have the first right, but not
the obligation, to initiate and control the prosecution and defense, at its own
expense, of any infringements by third parties of any such Licensed Patents. If
Licensee is required to join any such legal action as a necessary party and
retain independent legal counsel because of a conflict of interest between
Licensee and Licensor, Licensor shall pay the reasonable legal fees for such
independent legal counsel selected by Licensee and reasonably acceptable to
Licensor. Licensee will cooperate fully with Licensor in all reasonable
respects, including without limitation, permitting its employees and appointees
to testify when requested and making available relevant records, papers,
information, samples, specimens and the like and Licensor will reimburse
Licensee for all reasonable out-of-pocket costs incurred at Licensor's request
in connection therewith. The total cost, including legal fees, expenses,
judgments, penalties and liabilities of such infringement action shall be borne
by Licensor, and all damages or other proceeds from any judgment will be awarded
solely to Licensor. Notwithstanding the foregoing, in the event that Licensor
fails to take action with respect to any such third party infringement related
solely to Recombinant Factor XIII within sixty (60) days of receiving notice of
such infringement, or desires to enter into a settlement with respect to such
third party infringement related solely to Recombinant Factor XIII, then
Licensee shall have the right to take such action and/or control such
settlement, in which event the provisions of Section 7.3 shall apply.

7.5   Declaratory Judgment Action. In the event a third party brings an action
to obtain a declaration of patent invalidity against one or more Licensed
Patents, Licensee, with respect to the Licensed Patents set forth in Exhibit A,
and Licensor, with respect to the Licensed Patents set forth in Exhibit B, shall
have the sole right to defend such action at its own cost and expense, and to
control any ensuing litigation. Notwithstanding the foregoing, in the event that
Licensor elects not to defend any such declaratory judgment action related
solely to Recombinant Factor XIII, or desires to enter into a settlement with
respect to such declaratory judgment action related solely to Recombinant Factor
XIII, it shall give timely notice to Licensee, in which event Licensee shall
have the right to defend such declaratory judgment action and/or control such
settlement, at Licensee's own cost and expense, and to control any ensuing
litigation.

                        8. REPRESENTATIONS AND WARRANTIES

8.1.  Representations, Warranties and Covenants of Licensor and Licensee. Each
party represents and warrants to and covenants with the other party that:

      (a)  it is a corporation duly organized, validly existing and in
corporate good standing under the laws of the State of Washington, in the case
of Licensee, and the laws of Germany, in the case of Licensor; and

      (b)  it has the corporate and legal right, title, authority and power to
enter into this Agreement and to perform its obligations hereunder; and

                                      -10-



      (c) it has taken all necessary action to authorize the execution, delivery
and performance of this Agreement; and

      (d) upon the execution and delivery of this Agreement, this Agreement
shall constitute a valid and binding obligation of such party, enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally; and

      (e) the performance of its obligations under this Agreement will not
conflict with or result in a breach of any agreements, contracts or other
arrangements to which it is a party; and

      (f) it will not during the term of this Agreement enter into any
agreements, contracts or other arrangements that would prevent it from meeting
its obligations or conflict with the other party's rights under this Agreement;
and

      (g) it will comply with all applicable laws, rules, regulations and
guidelines in connection with the activities conducted by it pursuant to this
Agreement, including but not limited to all applicable product safety, product
testing, product labeling, package marking and product advertising laws and
regulations and the regulations of the United States and any other relevant
nation concerning any export or other transfer of technology, services or
products.

8.2   Representations, Warranties and Covenants of Licensor. Licensor represents
and warrants to and covenants with License that:

      (a) it is the sole and current owner or exclusive licensee of the Licensed
Patents and that it has the right to grant the licenses granted hereunder; and

      (b) there are no other patents or patent applications owned or controlled
by Licensor that cover the manufacture, use, importation, or sale of Recombinant
Factor XIII as a Single Agent Product or as a component of a Combination Product
other than the Licensed Patents; and

      (c) according to the Joint Venture Agreement dated February 22, 1995
which formed Centeon Pharma GmbH, the predecessor corporation of Aventis
Behring GmbH), Aventis Behring GmbH with respect to its parent company and
related affiliates (including Hoechst Japan, Ltd., now Aventis Pharma Ltd.,
Japan), has jointly with Aventis Behring L.L.C. the exclusive, worldwide right
to operate in the field of therapeutics and prophylaxis for blood and blood
plasma derivative products including recombinant substitutes and synthetic
equivalents for such products, including without limitation Recombinant Factor
XIII; and

      (d) Aventis Pharma Ltd., Japan has no right to develop, sell or otherwise
commercialize any of the products referred to in Section 8.2 (c) hereinabove
anywhere in the world or grant licenses or sublicenses to third parties to
develop, sell or otherwise commercialize any such products anywhere in the world
and Licensor shall not, during the term of this Agreement, enter into or modify
any agreement, contract or other arrangement to grant Aventis Pharma Japan, Ltd.
any such right for any product containing Recombinant Factor XIII.

                                      -11-



8.3   Certain Japanese Patent Rights. Licensor shall use commercially reasonably
efforts to have Aventis Pharma Ltd., Japan, the successor corporation of Hoechst
Japan, Ltd., assign the following patents and patent applications to Licensor:
****. Licensor shall promptly notify Licensee of the occurrence of such
assignments, whereupon, without further action on the part of Licensor or
Licensee, the patent application set forth in Section 8.3 (a) shall be added to
Exhibit A of this Agreement and the remaining patents and patent applications
set forth in this Section 8.3 shall be added to Exhibit B of this Agreement. All
such patents and patent applications shall be considered to be Licensed Patents
subject to the terms and conditions of this Agreement.

8.4   Termination of Cross License Agreement. Licensor shall use commercially
reasonable efforts to have Aventis Pharma Ltd., Japan, the successor corporation
of Hoechst Japan, Ltd., assign its interest in the Cross License Agreement to
Licensor. Licensor shall promptly notify Licensee in writing of the occurrence
of such assignment, whereupon Licensee and Licensor shall amend this Agreement
to terminate the Cross License Agreement, provided, however, the license granted
by Hoechst Japan, Ltd. to ZymoGenetics, Inc. under the Cross License Agreement
to the HJL Licensed Patent Rights (as defined in the Cross License Agreement)
shall remain in full force and effect until the patents and patent applications
set forth in Section 8.3 hereinabove have been licensed by Licensor to Licensee
as provided therein.

8.5   Representations, Warranties and Covenants of Licensee. Licensee represents
and warrants to and covenants with Licensor that it shall use commercially
reasonable efforts to develop and commercialize Licensed Product(s).

8.6   Warranty Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO THE LICENSED
PATENTS, GOODS, SERVICES OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY
DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NON-INFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE FOREGOING.

                               9. INDEMNIFICATION

9.1   Personal Injury or Property Damage.  Licensee shall indemnify and hold
Licensor and its Affiliates and their respective directors, officers, employees
and agents harmless from and against any and all claims, judgments, costs,
awards, expenses (including, but not limited to, any attorney's fees) or
liability of any kind arising out of any activities performed by Licensee and
its Affiliates or Sublicensees pursuant to this Agreement, including without
limitation personal

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                      -12-



injury or property damage caused or alleged to be caused by a Licensed Product.
In addition, Licensee shall assume all obligations for warranties and product
liability claims that accompany or result from the sale or use of a Licensed
Product; and shall indemnify and hold Licensor harmless from and against any and
all claims, judgments, costs, awards, expenses (including, but not limited to,
any attorney's fees) or liability of any kind arising from customers and
relating to such warranty obligations or product liability claims. Licensee's
obligation to indemnify Licensor under this Section 9.1 shall not apply to the
extent caused by the gross negligence or willful misconduct of or breach of this
agreement by Licensor.

9.2   Patent Infringement.  Licensee shall indemnify and hold Licensor and its
Affiliates and their respective directors, officers, employees and agents
harmless from and against any and all claims, judgments, costs, awards, expenses
(including, but not limited to, any attorney's fees) or liability of any kind
arising out of or connected with the actual or alleged infringement of any
patent or other proprietary right of third parties by reason of Licensee's and
its Affiliates' or Sublicensee's making, having made, using, importing, offering
for sale, selling or having sold any Licensed Product, provided, however, that
in the event a suit, claim or action is brought against Licensee and its
Affiliates or Sublicensee(s) by a third party, Licensor shall render all
reasonable assistance to Licensee upon request of Licensee, at Licensee's cost
and expense in connection therewith. Licensee's obligation to indemnify Licensor
under this Section 9.2 shall not apply to the extent caused by the gross
negligence or willful misconduct of or breach of this Agreement by Licensor.

9.3   Notification. It shall be a condition precedent to Licensee's
indemnification obligations under Sections 9.1 and 9.2 hereinabove that each
person or entity seeking indemnification hereunder must (a) promptly notify
Licensee of the assertion of any claims, legal proceedings or causes of action
(collectively, "Claims") against it/him/her, (b) authorize and permit Licensee
to conduct and exercise sole control of the defense and disposition (including
all decisions relative to litigation, appeal or settlement) of such Claims, and
(c) fully cooperate with Licensee regarding any such Claims (including access to
pertinent records and documents and provision of relevant testimony) and in
determining the scope of Licensee's obligations hereunder.

                             10. GENERAL PROVISIONS

10.1  Severability. If any provision of this Agreement shall be found by a court
of competent jurisdiction to be void, invalid or unenforceable, the same shall
either be conformed to the extent necessary to comply with applicable law or
stricken if not so conformable, so as not to affect the validity of this
Agreement. Captions and paragraph headings are for convenience only and shall
not form an interpretive part of this Agreement.

10.2  Notices. All notices, requests, demands, waivers, consents, approvals or
other communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally, faxed with receipt acknowledged (and
with a confirmation copy also sent by first class mail, return receipt
requested), delivered by a recognized commercial courier service with receipt
acknowledged, or mailed by registered or certified mail, return receipt
requested, postage prepaid, as follows:

                                      -13-



If to Licensor:    Aventis Behring GmbH
                   Emil-von-Behring-Strasse 76,
                   D-35041 Marburg, Germany
                   Attention: Head of Patent Department

With a copy to:    Aventis Behring L.L.C.
                   1020 First Avenue
                   P.O. Box 61501
                   King of Prussia, PA 19406
                   Attention: General Counsel

If to ZGI:         ZymoGenetics, Inc.
                   1201 Eastlake Avenue East
                   Seattle, WA  98102
                   Attention: Vice President, Intellectual Property and Legal
                   Affairs

or to such other addresses as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed effective as of the date
received.

10.3  Force Majeure. Neither party to this Agreement shall be liable for delay
or failure in the performance of any of its obligations hereunder if such delay
or failure is due to causes beyond its reasonable control, including, without
limitation, acts of God, fires, earthquakes, strikes and labor disputes, acts of
war, acts of terrorism, civil unrest, or intervention of any governmental
authority, but any such delay or failure shall be remedied by such party as soon
as is reasonably possible.

10.4  Assignments.  This Agreement may be assigned by either party without the
written prior consent of the other party. The assigning party shall notify the
other party of such assignment within thirty (30) days of the occurrence
thereof. This Agreement shall inure to the benefit of and be binding on the
parties' assigns and successors in interest. The parties hereto agree that each
is acting as an independent contractor and not as an agent or partner of the
other by virtue of this Agreement.

10.5  Waivers and Modifications. The failure of any party to insist on the
performance of any obligation hereunder shall not act as a waiver of such
obligation. No waiver, modification, change, release, or amendment of this
Agreement or any obligation under this Agreement shall be valid or effective
unless in writing and signed by both parties hereto.

10.6  Choice of Law and Jurisdiction. This Agreement is subject to and shall be
construed and enforced in accordance with the laws of the State of Delaware
without reference to its choice of law provisions.

10.7  Entire Agreement. This Agreement constitutes the entire understanding
between the

                                      -14-



parties with respect to the subject matter hereof, and supercedes and replaces
all prior negotiations, representations, agreements and understandings and
writings between the parties as to said subject matter, excluding the Cross
License Agreement. Notwithstanding the foregoing:

      (a) the Interference Settlement Agreement dated November 1, 1997 between
Hoechst Aktiengesellschaft and Zymogenetics, Inc. shall remain in full force and
effect in accordance with its terms; and

      (b) subject to Section 10.7 (c)hereinbelow, Licensor shall have no rights
in any ZymoGenetics Patent Rights (as defined in the Cross License Agreement);
and

      (c) Licensee agrees that it shall not assert the ZymoGenetics Licensed
Patent Rights (as defined in the Cross License Agreement) corresponding to
United States Serial Nos. **** set forth in Appendix A of the Cross License
Agreement, against Licensor, its Affiliates or sublicensees with respect to the
manufacture, use, importation or sale of any Factor XIII product isolated and
purified from human plasma; and

      (d) the license granted by Behringwerke Aktiengesellschaft to
ZymoGenetics, Inc. under the Cross License Agreement under the Behringwerke
Licensed Patent Rights (as defined in the Cross License Agreement), and all
terms and conditions of the Cross License Agreement applicable to such license,
shall be replaced in its entirety by this Agreement.

10.8  Recording and Further Assurances.  Licensee may record this Agreement in
each place necessary or convenient to perfect, protect or otherwise evidence
Licensee's rights hereunder. Each party agrees, promptly upon request, to
execute such further documents as the other party may reasonably request for the
purpose of making effective the rights of such party under this Agreement, at
the sole expense of the party so requesting.

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                      -15-



10.9  Publicity. The parties shall not use or permit to be used by any other
person or entity the name of the other party or any adaptation thereof, or the
name of the other party's employees in any advertising, promotional or sales
literature without the prior written permission of the other party.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
Effective Date.

AVENTIS BEHRING GMBH                     ZYMOGENETICS, INC.

By:    /s/ Lauppe                         By:    /s/ Bruce L.A. Carter, Ph.D
       ----------------------                    ----------------------------

Name:  Lauppe                             Name:  Bruce L.A. Carter, Ph.D
       ----------------------                    ----------------------------

Its:   Senior Director                    Its:   President and CEO
       ----------------------                    ----------------------------

By:    /s/ Matthias Runge
       ----------------------

Name:  M. Runge
       ----------------------

Its:   Senior Director
       ----------------------

                                      -16-



                                      ****

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                      -17-



                                      ****

**** designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the commission.

                                      -18-

EX-10.37

                                                                   Exhibit 10.37

                                      LEASE

                         LAKE UNION STEAM PLANT BUILDING

THIS LEASE is entered into and effective as of October 4, 2002 ("Effective
Date"), between ARE-1201/1208 EASTLAKE AVENUE, LLC, a Delaware limited liability
company ("Landlord") and ZYMOGENETICS, INC., a Washington corporation
("Tenant").

The parties agree as follows:

1.       PREMISES/LEASE

         1.1      Premises. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord on the terms contained herein all property purchased by
Landlord from Tenant and located at 1201 Eastlake Avenue East, Seattle,
Washington ("Premises"), including (Section 27.2) the land described on Exhibit
A, together with the easements, rights and appurtenances thereto and the
buildings and other improvements located thereon ("Improvements"); including the
Fixed Equipment (Section 8.8) and excluding the Removable Equipment (Section
8.8).

         1.2      Operating Lease. Landlord and Tenant stipulate that this Lease
is a true lease and does not represent a financing arrangement. Each party shall
reflect the transactions represented by this Lease in a manner consistent with
"true lease" treatment rather than "financing" treatment in all applicable
books, records and reports (including income tax filings). Tenant intends to
record this Lease as an operating lease for SEC reporting purposes in accordance
with generally accepted accounting principles ("GAAP"), but failure to do so
shall not be considered a default under this Lease.

         1.3      Acceptance of Premises. As the prior owner of the Premises,
Tenant designed and constructed substantial modifications to the Improvements on
the Premises and has occupied the Improvements since completion of those
modifications and is therefore completely familiar with the condition of the
Improvements. By entering this Lease, Tenant is deemed to have accepted the
Premises in its current condition, AS-IS and with all faults. To the extent
necessary to comply with its obligations to maintain and repair the Premises,
Tenant shall enforce the warranties and other obligations of contractors and
suppliers for the original construction of the Premises and Landlord shall
cooperate with Tenant in doing so, but Landlord shall have no other
responsibility or liability for the design, construction or condition of
Premises and makes no warranties with respect thereto and Tenant shall reimburse
Landlord for all its reasonable out-of-pocket third party costs and expenses,
including its attorneys' fees, incurred in connection with its cooperation.
Landlord shall not be required to make any repairs or replacements of any kind
whatsoever during the Term. Notwithstanding the sale of the Premises to
Landlord, all warranties and guaranties regarding the development of the
Premises remain with Tenant for the Term and any remaining warranties and
guaranties will be deemed automatically transferred to Landlord upon termination
of this Lease.

2.       TERM

         2.1      Initial Term. The "Initial Term" of this Lease shall be 15
years commencing on October 4, ("Commencement Date") and ending on October 3,
2017, unless sooner terminated pursuant to any provision hereof. Tenant and
Landlord's affiliate are parties to the Earl Davie Building Lease (Section
15.2). If the Initial Term of the Earl Davie Building Lease is extended by
operation of Section 24.11 of the Earl Davie Building Lease, then the Initial
Term of this Lease will be extended to the same expiration date, and the parties
shall enter into an amendment to this Lease in the form of Exhibit I evidencing
such extension. As used herein, "Term" shall mean the Initial Term and any
Renewal Term (Section 2.2) which becomes effective hereunder.

         2.2      Extensions. Provided that Tenant is not in default on exercise
of a right to extend or on the commencement of the Renewal Term (unless such
default is cured within any applicable cure period),

                                       1



Tenant shall have the right to extend this Lease for 4 consecutive renewal terms
(each, a "Renewal Term") of 5 years each, with at least 16 months prior written
notice to Landlord. If Landlord does not receive such notice 16 months prior to
the end of a current Term, Tenant's renewal rights shall lapse. The rights to
extend the Lease for the Renewal Terms are personal to Tenant and may not be
assigned, pledged or transferred to any third party. Notwithstanding the
foregoing, such rights may be assigned or transferred to Tenant's Affiliates
(Section 13.2).

         2.3      Rent For Renewal Terms. As of the commencement of each Renewal
Term, the Base Rent (Section 3.1) shall be adjusted to the greater of (a) the
fair market rental value of the Premises as of the commencement of the Renewal
Term, or (b) 90% of the Base Rent applicable to the last year of the term prior
to commencement of the applicable Renewal Term. Fair market rental value shall
be the amount of rent which a well-informed tenant, willing, but not obliged to
lease the Premises, would pay, and which a well-informed landlord, willing, but
not obligated to lease, would accept, taking into consideration all uses to
which the Premises is adapted and might in reason be applied, and the then
market terms being offered in the Seattle metropolitan area (e.g. including
Elliott Bay, the University District, Queen Anne/Interbay, Lake Union, Denny
Triangle, etc.) for space reasonably comparable to the Premises. If, after
bargaining in good faith for 30 days (the "Bargaining Period"), the parties have
not reached agreement on the fair market rental value, it shall be established
by binding arbitration in accordance with Section 2.4. Commencing at the start
of the second year of each Renewal Term and continuing each year thereafter, the
Renewal Term's Base Rent shall be increased by 3.5%.

         2.4      Arbitration. The arbitration process outlined below must be
commenced no more than 18 months before the first day of the ensuing Renewal
Term and pursued in good faith. Each arbitrator shall be an MAI real estate
appraiser with at least 7 years experience in appraising real property used for
comparable "wet science" biological laboratory and research and development
facilities or such similar uses to which the parties agree ("Arbitrator"). If
the parties are able to reach agreement on a single Arbitrator within 10 days
after the end of the Bargaining Period, that Arbitrator shall determine the fair
market rental value. Otherwise, each party shall select its own Arbitrator and
shall provide the name to the other party within 15 days following expiration of
the Bargaining Period. The two Arbitrators shall meet within 20 days following
their selection and attempt in good faith during such 20 days to reach agreement
on the fair market rental value of the Premises. If the two Arbitrators are
unable to agree, they shall jointly select a third Arbitrator. If they fail to
either agree on the fair market rental value or appoint a third Arbitrator
within 20 days following their appointments, the third Arbitrator shall be
selected by the then Presiding Judge of King County Superior Court upon the
request of either party. Within 10 days after the appointment of the third
Arbitrator, the first two Arbitrators shall each submit in writing to the third
Arbitrator the amount which they propose be established as the Renewal Term's
Base Rent ("Submissions"). The Submissions shall not be disclosed by the third
Arbitrator until the third Arbitrator has received both of the other
Arbitrators' Submissions. Each Arbitrator may include in such Submissions any
information which he/she deems relevant or helpful to the third Arbitrator in
determining the fair market rental value of the Premises, and the third
Arbitrator may not obtain, accept or consider any additional information in
making its decision. The third Arbitrator's determination of the fair market
rental value is strictly limited to selection, as the more reasonable
approximation of the fair market rental value of the Premises, of the amount
stated in one of the Submissions, and third Arbitrator may not select or declare
any third number. The third Arbitrator's decision shall be made within 20 days
after delivery of the Submissions, by a report in writing to each of the parties
and in any event at least 12 1/2 months before the commencement of the Renewal
Term. Each party shall pay the costs of its own Arbitrator and one-half of the
single Arbitrator or the third Arbitrator's fee. If the Arbitrator's
determination of fair market rental value is greater than 110% of the then Base
Rent payable during the 12 months immediately preceding the applicable Renewal
Term, Tenant may elect to rescind exercise of the option by written notice to
Landlord given at least 12 months before the commencement of the Renewal Term.
Notwithstanding the provisions of this Section 2.4, if during the arbitration
period, Tenant and Landlord reach agreement on fair market rental value
(independent of Arbitrator's findings), the arbitration shall be terminated and
the determination of the parties shall govern.

                                        2



3.       RENT

         3.1      Base Rent. Commencing on the Commencement Date, and continuing
on the first of each month thereafter, Tenant shall pay to Landlord $284,220.54
per month ("Base Rent"). Base Rent shall be remitted to the Landlord at its
address stated for notices in this Lease as the same may be amended from time to
time or to such other address required by Landlord in a written notice to Tenant
and shall be due and payable on the first day of each month during the Term and
tendered in cash. Base Rent for any partial month shall be prorated based on the
number of days in the applicable calendar month.

         3.2      Increases in Base Rent. Commencing one year after the
Commencement Date and continuing annually thereafter, the Base Rent shall be
increased by 3.5%.

         3.3      Intentionally Omitted

         3.4      Additional Rent. All amounts other than Base Rent due by
Tenant to Landlord under this Lease shall be deemed "Additional Rent" and
Landlord shall have all of the same remedies for Tenant's failure to pay
Additional Rent as for failure to pay Base Rent. The term "Rent" shall mean the
combined Base Rent and Additional Rent. Tenant's obligations to pay Rent are in
the nature of independent covenants and all Rent shall be paid without demand,
notice, abatement, reduction or offset, except that Additional Rent may be
subject to demand or notice where provided in this Lease.

         3.5      Late Fee. If any installment of Base Rent is not received by
Landlord by the 5/th/ of the month, Tenant shall pay to Landlord, on demand, a
late charge equal to six percent (6%) on such overdue installment of Base Rent
(the "Late Fee"). Notwithstanding the foregoing, Landlord agrees that pursuant
to Section 15.2 below, Landlord will deliver notice to Tenant of any such
delinquency and, not more than once each Lease Year, Landlord will waive the
Late Fee if such delinquency is paid within three business days after Tenant's
receipt of such notice. Tenant acknowledges that such late charge represents a
reasonable estimate of the costs Landlord will incur as a result of such late
payment.

         3.6      Fines/Penalties. Subject to Section 22, Tenant shall pay and
discharge when due all other amounts and obligations which Tenant assumes or
agrees to pay pursuant to this Lease.

         3.7      Abatement of Rent. Except as expressly agreed upon in Sections
10 and 12 below, Tenant's obligations to pay Rent shall not abate during any
period that the Premises or any part thereof are untenantable regardless of the
cause of such untenantability.

         3.8      Asset Management Fee. In addition to the Base Rent, Tenant
shall pay to Landlord each month with the Base Rent an asset management fee
equal to one-half of one percent (0.5%) of the Base Rent.

4.       USE

         4.1      Use. Tenant may use the Premises only for office and
laboratory, and research and development facilities and uses that are a
reasonably necessary adjunct thereto. "Laboratory" as used herein refers to that
portion of the Premises devoted to "wet" laboratory and related research and
development use. Exhibit H shows the current allocation of Laboratory and office
spaces. Changes resulting in more than 50% or less than 25% of the net rentable
square feet of the Premises designated for office use will be considered a
change in use. The methodology which will be used for calculating the percent of
use will be calculated consistent with the methodology as was employed to
calculate the current use percentage as described on Exhibit H (said uses and
the permitted deviation in the ratio being hereinafter referred to as the "Use
Requirements"). Any other uses or changes in uses shall require Landlord's
approval, in accordance with the approval standards set forth in Section 8. The
Premises shall not be used for any purpose which would constitute a public or
private nuisance or waste, or violate the agreements listed on Exhibit B ("Title
Encumbrances").

                                       3



         4.2 Compliance with Laws. Tenant shall, at its cost, comply with all
Laws (Section 27.2) and the requirements of any board of fire underwriters,
including all modifications required thereby, relating to or affecting the
condition, use or occupancy of the Premises. Upon request of Landlord, Tenant
shall provide Landlord with copies of all documents evidencing Tenant's
compliance with any particular Law specified by Landlord. Tenant shall notify
Landlord in writing immediately of any threatened or actual notice or citation,
regarding an alleged failure of the Premises to comply with any Law.

         4.3      Mechanic's Liens. Except for claims for delinquent payments
for which Landlord is contractually obligated, which shall be the sole
responsibility of Landlord, Tenant agrees that during the Term hereof it shall
not do or suffer any waste to the Premises, or cause, suffer or permit any liens
for labor, services or materials to attach to the Premises by reason of any act
or omission of Tenant or person claiming through Tenant. If any lien is filed
arising out of work performed for Tenant, Tenant shall either discharge the lien
or post a bond pursuant to RCW 60.04.161 to remove the lien from the Premises
within 30 days after it receives notice of the lien.

         4.4      Quiet Enjoyment. So long as no Event of Default (Section 15.2)
exists hereunder, Landlord covenants that Tenant shall have quiet occupation and
enjoyment of the Premises from any person claiming through Landlord.

         4.5      Development Agreement. During the Term, Tenant shall be
responsible for all of Tenant's obligations under that certain Real Estate
Agreement, Development Conditions, and Physical Restrictions for Lake Union
Steam Plant dated May 5, 1993 (the "Development Agreement"). Capitalized terms
used in this Section 4.5 which are not defined in this Lease shall have the
meanings set forth in the Development Agreement. Tenant's obligations under the
Development Agreement shall not include the following:

                  (a) without impairing Tenant's own obligations to cooperate,
any failure of Landlord to cooperate with the City of Seattle (the "City") as
required by Section 7.1.1 of the Development Agreement;

                  (b) any exoneration of the City from liability under the
Development Agreement as a result of Landlord's entering into a consent decree
or consent order under Section 7.1.4 of the Development Agreement without the
consent of Tenant;

                  (c) the costs of any remediation of Hazardous Materials under
any consent decree or consent order under Section 7.1.4 of the Development
Agreement that was entered into without the consent of Tenant unless such
remediation is otherwise an obligation of Tenant under this Lease and its
failure to pursue the same is an Event of Default;

                  (d) any costs, expenses, penalties, attorneys' or consultants'
fees which become owed to the City under Section 7.1.5 of the Development
Agreement as a result of the release of Historic Contamination by Landlord or
Landlord Related Parties (Section 14); or

                  (e) any costs, expenses, damages, fees or penalties relating
to the remediation of Historic Contamination that become owed to the City under
Section 7.5 of the Development Agreement as a result of the action of Landlord
or Landlord Related Parties; provided, however, Tenant's use and occupancy of
the Premises and the obligations of Tenant under the Lease to maintain,
construct, alter, expand, repair, or restore any existing or future improvements
on the Premises shall be deemed the sole acts of Tenant hereunder, whether the
same are performed by (a) Tenant, or (b) Landlord on behalf of Tenant as a
result of any Event of Default.

5.       MAINTENANCE AND REPAIR

         5.1      Tenant's Obligations. Tenant shall keep and maintain all
portions of the Premises in good order and condition, in a manner typical of
other properly maintained and operated facilities of a

                                        4



similar nature and in accordance with all Laws and with the standards of
maintenance and repair adhered to by Tenant prior to the Commencement Date.
Tenant shall promptly make all repairs and replacements required in order to
keep and maintain the Premises in such order and condition. Tenant shall also
keep the Premises in compliance with all Laws and the requirements of the
property and environmental insurance coverages. The provisions of this Section
shall not conflict with Tenant's rights to obtain insurance and condemnation
proceeds under Sections 10, 11 and 12. If Tenant fails to perform the required
maintenance and repairs, Landlord shall have the cure rights described in
Section 15.7.

         5.2      Condition on Surrender. Upon termination of this Lease, Tenant
shall remove its personal property, repair any damage caused by removal, comply
with any removal and Restoration Requirements (Section 8), and leave the
Premises in good repair and condition, subject to Section 10.3. In addition,
prior to termination of the Lease, Tenant shall perform all decommissioning
required by governmental agencies and shall provide copies of all
decommissioning reports to Landlord. If Tenant has failed to complete the
governmental decommissioning process by the expiration or earlier termination
date of this Lease, and as a result, the Premises cannot be relet, the Tenant
shall be required to continue to pay full Rent and perform its obligations
hereunder until such decommissioning is complete. The foregoing shall also be
considered holding over and be subject to the terms of Section 27.13 if, and for
so long as, Tenant fails to pursue such decommissioning with due diligence. The
Fixed Equipment then existing in the Premises shall be surrendered with the
Premises in good and operating condition and free of any liens, financing leases
or other encumbrances created by or imposed against Tenant, and belong solely to
Landlord.

6.       UTILITIES AND TAXES

         6.1      Utilities. Subject to Section 22, Tenant shall pay when due
all charges for utility services provided to the Premises including power, water
and sewer, and gas. No interruption of utility service shall give Tenant the
right to abate Rent or terminate this Lease.

         6.2      Taxes. Subject to Section 22, Tenant shall pay when due all
Real Property Taxes. "Real Property Taxes" shall mean: (i) the ad valorem
property taxes and other similar taxes levied against the Premises which become
due and payable during the Term, (ii) all installments of assessments imposed by
governmental entities on the Premises which become due and payable during the
Term, and (iii) governmental licensing or similar fees. Real Property Taxes
shall include all taxes and assessments levied against the Premises other than
conveyance taxes arising from Landlord's transfer of the Premises, Landlord's
rental taxes (if any), Landlord's business and occupation taxes, franchise or
net income taxes of Landlord, any estate, succession, gift, capital levy or
similar taxes. If any assessment may be paid in installments, Tenant shall be
responsible only for those installments due and payable during the Term and for
those portions of installments to the extent they accrued during the Lease Term,
even if they are payable thereafter. If Landlord enters into private agreements
for off-site improvements for the benefit of the Premises which are in lieu of
government imposed improvements, Tenant shall pay Landlord's installments
thereunder to the extent they accrued during the Term. Notwithstanding the
foregoing, if the amortization period used in calculating the amount of the
installments is less than the amortization period that would have been used for
the government assessment that would have otherwise been imposed, then Tenant
shall pay a portion of the Landlord's installments due under such private
agreements, to the extent they accrued during the Term, recalculated using the
same amortization period as would have been used for the government assessment.
Tenant shall pay all personal property taxes levied against the Premises as and
when due to the extent the levy thereof is attributable to the Term and all such
taxes are assessed against its own property. It is Landlord's and Tenant's
express intent that all Fixed Equipment identified on Exhibit G and all
substitutions, modifications or additions thereto, is part of the real property
and not personal property. No personal property is being leased by Landlord to
Tenant. Notwithstanding the foregoing, if the Department of Revenue assesses any
personal property taxes relating to the Premises, the Fixed Equipment or this
Lease, Tenant shall pay such taxes, subject to Section 22.

                                        5



7.       SECURITY DEPOSIT

         7.1      General Requirements. Upon execution of this Lease, Tenant
will provide to Landlord a security deposit ("Security Deposit") in the amount
of $568,441.08 (i.e. two months Base Rent). Tenant shall increase the amount of
the Security Deposit to correspond to increases in Base Rent at the time such
adjustments become effective. Tenant can elect to provide the Security Deposit
in the form of either a letter of credit ("LOC"), or pledged marketable
securities from Tenant's corporate cash investment portfolio, or a combination
thereof, variable over the Term. Landlord will hold the Security Deposit as
security for the performance of Tenant's obligations under the Lease. The
Security Deposit will not be considered an advance payment of Rent or a measure
of Tenant's liability for damages. Landlord may, from time to time, without
prejudice to any other remedy, upon the occurrence of an Event of Default, use
all or a portion of the Security Deposit to cure any Event of Default. Following
any such application of the Security Deposit, Tenant will replenish the Security
Deposit to its required amount. Landlord shall transfer the Security Deposit to
any subsequent owner of the Premises. Landlord and its successors and assigns
will not be bound by any assignment or encumbrance of the Security Deposit by
Tenant, provided, however, if Tenant's interest in the Lease has been assigned,
Landlord will return the Security Deposit to such assignee in accordance with
the terms and conditions hereof. Within 30 days following the expiration of this
Lease and the performance by Tenant of all of its obligations hereunder,
Landlord shall return the then existing balance of the Security Deposit to
Tenant. Landlord shall have no obligation to pay interest on the Security
Deposit. If Landlord returns the Security Deposit to Tenant's assignee as
aforesaid, Landlord will have no further obligation to any party with respect
thereto. Tenant shall not encumber the Security Deposit.

         7.2      Letter of Credit. During any period that Tenant elects to
satisfy all or any portion of the Security Deposit with an LOC, the LOC must be
an irrevocable and unconditional standby letter of credit, issued by the Bank of
America or its successors or another financial institution reasonably
satisfactory to Landlord and with a term of at least one year substantially in
the form of Exhibit D. Landlord may draw upon the LOC to cure any Event of
Default, as described in Section 7.1. In addition, if at any time there are less
than 30 days remaining before the expiration of the LOC, and if Tenant does not
deliver an extension or replacement of the LOC within 5 business days after
notice from Landlord, Landlord may draw upon the LOC; provided that if Tenant
subsequently provides a replacement LOC, and to the extent Landlord has not
applied the same to any default, Landlord will return the funds drawn to Tenant
without interest.

         7.3      Pledged Securities. So long as Tenant's reported Cash Position
(defined below) is at least $50,000,000.00 (the "Cash Position Minimum"), Tenant
may satisfy all or any portion of the Security Deposit with marketable
securities satisfying the criteria stated in this Section 7.3. "Cash Position"
is defined as the sum of unrestricted cash, cash equivalents and marketable
securities as determined by reference to GAAP. If Tenant's reported Cash
Position drops below the Cash Position Minimum at any time, then Tenant shall
immediately convert all of its Security Deposit to an LOC. Tenant may
subsequently satisfy its Security Deposit with marketable securities once Tenant
has again exceeded the Cash Position Minimum for at least two consecutive
quarters. During any period that Tenant elects to satisfy all or any portion of
the Security Deposit with marketable securities, the pledge will be of short
term (2 years or less) fixed income marketable securities from Tenant's
corporate cash investment portfolio, including money market funds, rated not
lower than Aa, AA, A1 or P1 or equivalent by a nationally recognized credit
rating service. The pledged marketable securities will be held by Union Bank of
California or another bank or financial institution mutually approved by
Landlord and Tenant as custodian for Landlord, either in a separate custodian
account or as specially designated securities within a larger custodian account.
The pledge agreement must be substantially in the form of Exhibit E and provide
Landlord with a perfected first lien security interest in the pledged
securities. The custodial agreement must be substantially in the form of Exhibit
F and provide direct access authorization which would permit Landlord in an
Event of Default, without approval of Tenant, to authorize the sale of the
securities and the withdrawal of the proceeds thereof (not to exceed the amount
of the then required Security Deposit) for application by Landlord to cure any
Event of Default, as described in Section 7.1. So long as the value of the
pledged securities comply with the requirements of this Lease, Tenant will be
entitled to retain all interest and other earnings generated by the pledged
securities. If the market value

                                        6



of the pledged securities drops below the required amount of the Security
Deposit, Tenant will immediately add additional marketable securities to the
pledge to increase the value of the pledged securities to equal or exceed the
required level. Failure of Tenant to increase the pledged securities as required
within 3 business days of notice from Landlord and/or the account custodian will
constitute an Event of Default. Tenant will have the right to substitute
marketable securities meeting the rating criteria and having all of the other
characteristics specified above for the securities subject to the pledge.

8.       ALTERATIONS

         8.1      General. All alterations of Premises shall be made at Tenant's
sole cost and expense. All alterations shall be made in a good and workmanlike
manner and in compliance with all Laws and insurance requirements and Tenant
shall enforce any warranties to the extent necessary to cause any defects in
workmanship or materials to be corrected. Subject to Section 8.6, all
alterations shall be fully consistent with the overall character of the Premises
as a first class scientific research and development facility (the "Function
Requirements") and the Use Requirements. Tenant shall indemnify, defend and hold
Landlord harmless from all claims, costs (including attorneys' fees and costs)
or damage occurring in connection with Tenant's alterations; notwithstanding the
foregoing, Tenant shall not be liable to reimburse Landlord for Landlord's
overhead and expenses in reviewing any plans, specifications and other documents
or in otherwise confirming Tenant's conformance to the requirements of this
Section 8 ("Review Costs") except that for Category D and E Alterations, Tenant
shall pay Landlord a fee equal to the lesser of $10,000 or 5% of all costs
incurred by Tenant or its contractors or agents in connection with any Category
D or E Alteration, to defray Landlord's Review Costs. Prior to commencing any
alterations, Tenant shall obtain all necessary permits from governmental
authorities. Irrespective of Landlord's receipt, review and any approval of the
plans and specifications for Tenant's alterations, Tenant, and not Landlord,
shall have sole responsibility for the accuracy or sufficiency of the plans and
specifications, their compliance with applicable Laws, codes, regulations or
statutes, and their fitness for Tenant's purpose. If any alterations by Tenant
trigger any legal requirements to make other modifications to the Premises,
Tenant shall make such modifications at its sole cost and expense. Tenant shall
provide to Landlord as-built drawings for all alterations by Tenant promptly
after completion of the alteration. Except for Removable Equipment, all
alterations shall become the property of Landlord immediately upon installation
or completion and shall be subject to all of the terms of this Lease. Prior to
commencing any Category "B-E" Alteration, Tenant must deliver to Landlord
evidence of insurance from all contractors and subcontractors reasonably
satisfactory to Landlord to protect Landlord against liability for personal
injury or property damage during construction, naming Landlord as an additional
insured.

         8.2      Category "A" Alterations. An alteration is a "Category A
Alteration" if the estimated cost of such alteration is less than $5,000 and the
alteration does not fall within the definition of Category D or E Alterations.
For Category A Alterations, in addition to the requirements of Section 8.1,
Tenant will deliver notice to Landlord describing the alteration promptly after
its completion, in the manner stated in Section 27.3.

         8.3      Category "B" Alterations. An alteration is a "Category B
Alteration" if the estimated cost of such alteration is between $5,000 and
$25,000, and the alteration does not fall within the definition of Category D or
E Alterations. For Category B Alterations, in addition to the requirements of
Section 8.1, Tenant shall notify Landlord, in the manner stated in Section 27.3,
of the planned alteration at least 5 business days prior to commencement of the
work, providing a brief description of the work, the estimated cost, and any
permit drawings, if applicable.

         8.4      Category "C" Alterations. An alteration is a "Category C
Alteration" if the estimated cost of such alteration exceeds $25,000 and the
alteration does not fall within the definition of Category D or E Alterations.
For Category C Alterations, in addition to the requirements of Section 8.1,
Tenant shall notify Landlord, in the manner stated in Section 27.3, of the
planned alteration at least 10 business days prior to the commencement of the
work, providing a description of the work, the estimated cost and any permit
drawings for Landlord's review and approval. Landlord will not withhold its
approval of the alteration, however Landlord may impose reasonable conditions on
the alteration to the extent necessary to protect its investment, provided that
Landlord may not require Tenant to restore the Premises or

                                        7



remove the Category C Alteration as a condition of its consent. For Category C
Alterations, if Landlord does not respond to Tenant's notice of such alteration
within the 10 business day period, Landlord shall be deemed to have approved
such alteration without conditions.

         8.5      Category "D" Alterations. An alteration is a "Category D
Alteration," regardless of estimated cost, if such alteration does not fall
within the definition of a Category E Alteration, and either (a) such alteration
when aggregated with past alterations and concurrent alterations, fails to
comply with the Use Requirements, or (b) such alteration results in a net change
in rentable square footage for any Function which is outside of the "Function
Tolerances" set forth in the Table of Uses contained in Exhibit H.

         "Function" is defined by reference to physical and functional
distinctions evident in the floor plans attached as Exhibit H. For Category D
Alterations, in addition to the requirements of Section 8.1, Tenant must obtain
Landlord's prior written approval, which shall not be unreasonably withheld. To
request Landlord's approval, Tenant shall provide to Landlord schematic drawings
for Category D Alterations and Landlord shall respond with its comments on such
proposed alteration within 10 business days after receipt thereof. Such approval
is also subject to Landlord's subsequent 10 business day review and approval of
the construction drawings for the proposed alteration. Landlord shall be
required to approve the Category D Alteration and the construction drawings, if
(i) Landlord had previously approved the schematic drawings, and (ii) the
construction drawings reflect the same alterations as such schematic drawings.
If Landlord disapproves of either the schematic drawings or the construction
drawings, it shall provide Tenant with reasonably detailed reasons therefor.
Failure to provide any such notice shall not be construed as an approval of or
consent to any alteration. Landlord may condition its approval of Category D
Alterations on a Restoration Requirement (Section 8.7).

         8.6      Category "E" Alterations. An alteration is a "Category E
Alteration," regardless of estimated cost, if such alteration (a) fails to
comply with the Function Requirements, (b) incorporates materials or employs
construction standards that are of a materially lesser quality than those used
in the then existing Premises, (c) decreases the number of net rentable square
feet in the Premises, (d) involves any alterations to the foundation, roof or
structural components of the Improvements, (e) alters the exterior appearance of
the Premises (but specifically excluding landscaping, Removable Equipment,
antennas or mechanical systems on the roof, and signage when reasonably required
for Tenant's business); (f) is designed for any use that is not expressly
permitted under Section 4.1; (g) results in Laboratory space being improved for
use as a "Process Lab" (defined by reference to Exhibit H) outside of the
"Extreme Max" Function Tolerances set forth in Exhibit H; (h) results in more
than 60% of the Premises being improved for office use; or (i) results in more
than 80% of the Premises being improved for Laboratory use (Section 4.1). For
Category E Alterations, in addition to the requirements of Section 8.1, Tenant
must request Landlord's prior written approval, which is subject to Landlord's
sole discretion. To request Landlord's approval, Tenant shall provide to
Landlord schematic drawings for Category E alterations and Landlord shall
respond with its comments on the proposal within 10 business days after receipt
thereof, which is subject to Landlord's subsequent 10 business day review and
approval of the construction drawings. Landlord shall approve the Category E
Alteration and the construction drawings, if (i) Landlord had previously
approved the schematic drawings, and (ii) the construction drawings reflect the
same alterations as such schematic drawings. If Landlord disapproves of either
the schematic drawings or the construction drawings, it shall provide Tenant
with reasonably detailed reasons therefor. Failure to provide any such notice
shall not be construed as an approval of or consent to any alteration. Landlord
may condition its approval of Category E Alterations on a Restoration
Requirement.

         8.7      Restoration Requirement and Restoration Deposit. Landlord may
condition its approval of Category D and E Alterations on a requirement that
Tenant remove such alterations at the end of the Term and fully restore the
Premises to the location, size, design, configuration, condition and state of
improvement and fixturing that existed immediately prior to making such
alterations and consistent with the degree of maintenance and repair required by
this Lease (the "Restoration Requirement"). If Landlord conditions its approval
of a Category D or E Alteration on a Restoration Requirement, Landlord may
further require that Tenant post a deposit (the "Restoration Deposit") in an
amount equal to Landlord's reasonable estimate of the removal and restoration
costs in any circumstance

                                        8



in which the same exceed $100,000 and which shall be subject to the same terms
and conditions as those that are applicable to the Security Deposit; provided,
however, the Restoration Deposit shall be returned to Tenant to the extent and
at the earlier of such time as (a) Landlord waives its requirement in writing
that such alterations be removed and the Premises restored, which election shall
be at Landlord's sole and absolute discretion, or (b) Tenant completes the
removals and restorations, Landlord accepts the same as having complied with
Tenant's obligations under this section, and Tenant provides Landlord with final
lien waivers and evidence of payment for all of the costs and expenses incurred
to do so. Notwithstanding the foregoing, in no event shall Tenant be required to
post a Restoration Deposit unless (a) Landlord has made a good faith
determination that Restoration will likely be required and (b) Tenant's cash
flow position drops below the Cash Position Minimum (Section 7.3).

         8.8      Fixed and Removable Equipment. This Lease arises
simultaneously with the sale of the Premises by Tenant to Landlord pursuant to
that certain Agreement of Purchase and Sale dated August 29, 2002, as amended
(the "Purchase Agreement"). In order to establish which elements and/or pieces
of equipment within the Premises were included in the sale and which were not,
the parties applied the criteria listed below to develop the listing contained
on Exhibit G containing those items which were considered affixed and part of
the Premises. All other items not listed on Exhibit G were considered personal
property retained by Tenant. "Fixed Equipment" is defined as the equipment
listed on Exhibit G, plus any new equipment brought onto the Premises which
either replaces the items listed on Exhibit G, has the same the physical and
functional distinctions as the equipment listed on Exhibit G, or satisfies the
criteria stated below.

FIXED EQUIPMENT CRITERIA:

         1)       Equipment that is built into the facility in such a manner
                  that it will require the removal of walls, floors, ceilings or
                  additions to or modifications of existing structural support,
                  whether temporary or permanent, to install or relocate it;

         2)       Equipment that is connected to common building systems in such
                  a way that the service must be modified outside the local area
                  or room where the equipment is located when the equipment is
                  disconnected; or

         3)       Equipment that provides service to other Fixed Equipment or
                  without which such other Fixed Equipment would not be
                  functional.

         As new equipment is brought into the Premises, the determination of
whether such equipment is considered Fixed Equipment or Removable Equipment will
be made by using the physical and functional distinctions evident in the listing
attached as Exhibit G and where that does not provide sufficient guidance,
applying the above Fixed Equipment criteria. If any alteration is intended to
include attached equipment, Tenant shall give written notice to Landlord of its
suggested classification as either Fixed or Removable when it gives the notices
or requests the approvals as required above. New Fixed Equipment shall become
Landlord's property immediately. No Fixed Equipment may be leased or subject to
any lien or security interest by Tenant.

9.       INSURANCE

         9.1      Tenant's Insurance. Tenant shall maintain at its sole cost and
expense the following insurance on the Premises, and in all cases such policies
shall name as additional insureds (a) Landlord, (b) any lender of Landlord
holding any security interest in the Premises, and (c) any management company
retained by Landlord to manage the Premises:

                  9.1.1 Property. Insurance against loss or damage to the
Premises on an all risk basis, including sprinkler damage and flood for an
amount not less than the actual replacement cost of the Premises. The insurance
shall include coverage from business interruption and extra expense for a period
of not less than 18 months. Tenant shall also carry earthquake insurance and
insurance against damage caused by terrorism and acts of war to the extent the
same is or are available at commercially

                                        9



reasonable rates and is required by Landlord. In determining whether such
insurance is available at a commercially reasonably rate, the parties will take
into consideration the cost and availability of similar policies for Landlord's
(or its affiliates') other Seattle properties (or in similarly rated seismic
areas if Landlord or its affiliates no longer own other Seattle properties). At
Tenant's option, the Premises may be included in Landlord's (or its affiliates')
blanket policy of insurance, if and for so long as the same is maintained by
Landlord (or its affiliates), in which case the cost of insurance allocable to
the Premises will be based on the insurer's cost calculations. In addition,
Tenant shall maintain during the Term all risk insurance for Tenant's personal
property (including business interruption and extra expense coverage) covering
the full replacement cost of all property, improvements and equipment placed in
or on the Premises by Tenant, with the understanding that the proceeds of such
policies shall be paid to and belong to Tenant.

                  9.1.2 Liability. Commercial liability insurance with a
combined single limit (including umbrella) of at least $10 million per
occurrence and $10 million in the aggregate, naming Landlord as an additional
insured and such insurance shall be primary to and not contributory with any
insurance carried by Landlord regarding events that occur in the Premises.

                  9.1.3 Boiler. Insurance against loss or damage from explosion
of any steam or pressure boilers or similar apparatus located in or about the
Premises in an amount not less than the actual cost to repair or replace the
insured equipment/machinery. At Tenant's option, the Premises may be included in
Landlord's (or its affiliates') blanket policy of insurance, if and so long as
the same is maintained by Landlord (or its affiliates), in which case the cost
allocable to the Premises will be based on the insurer's cost calculations.

                  9.1.4 Builder's Risk. Whenever Tenant, whether as Landlord's
construction agent or otherwise, is engaged in alterations costing in excess of
$5 million, Tenant shall obtain completed value builder's risk insurance.

                  9.1.5 Environmental Insurance. To the extent available at a
commercially reasonable rate, pollution legal liability insurance with a limit
of not less than $10,000,000 covering the Premises and contamination therefrom.
In determining whether such insurance is available at a commercially reasonable
rate, the parties will take into consideration the cost and availability of
similar policies for other of Landlord's (or its affiliates') similar
properties. Such insurance shall be on a claims-made basis. At Tenant's option,
the Premises may be included in Landlord's (or its affiliates') blanket policy
of insurance, if and for so long as Landlord (or its affiliates) maintains such
policies, in which case the cost of such insurance allocable to the Premises
will be based on the insurer's cost calculations.

                  9.1.6 Workers' Compensation. Tenant shall maintain workers'
compensation insurance with no less than the minimum limits required by law.

                  9.1.7 Other Tenant Insurance. In addition to the insurance
coverage listed above in this Section 9.1, at Tenant's and Landlord's option,
Tenant may be included in Landlord's (or its affiliates') blanket policy for
other insurance (e.g. mold insurance), if and for so long as Landlord (or its
affiliates) maintains such policies, in which case the cost of such insurance
allocable to the Premises will be based on the insurer's cost calculations.

                  9.1.8 Landlord's Evidence of Insurance. In those instances
where Tenant is included in Landlord's (or its affiliates') blanket policies of
insurance, at Tenant's request, Landlord shall provide Tenant with insurance
certificates, or such other reasonable evidence of coverage under such policies.

         9.2      Rating. The insurance required by Section 9.1 shall be written
by companies rated not less than A - and having a size rating of X or higher in
the current edition of A. M. Best's Key Rating Guide, and all such companies
shall be authorized to do insurance business in Washington, or otherwise agreed
to by Landlord. The insurance policies shall be in amounts sufficient at all
times to satisfy any coinsurance requirements thereof. If said insurance or any
part thereof shall expire or be withdrawn,

                                       10



Tenant shall immediately obtain new or additional insurance reasonably
satisfactory to Landlord. As of the date of the Lease, Tenant's insurers are
rated A++ (Chubb) and A+ (FM Global).

         9.3 Mortgagee. Each insurance policy referred to in Sections 9.1.1,
9.1.3 and 9.1.4, shall contain standard non-contributory mortgagee clauses in
favor of any mortgagee. Each such policy shall provide that the issuer will
endeavor to notify the mortgagee if there are any material changes to the
policy.

         9.4 Renewal. Tenant shall pay when due all premiums for the insurance
required by this Section 9 and shall deliver to Landlord copies of any insurance
policy upon Landlord's request and a certificate or other evidence (reasonably
satisfactory to Landlord) of the existing policies and of renewal or replacement
policies prior to the policy expiration date (which may be by extension of the
existing policy). If Tenant fails to comply with the requirements of this
Section 9 within 5 business days after written notice by Landlord to Tenant,
Landlord shall be entitled to procure such insurance pursuant to Section 15.7.

         9.5 Landlord's Blanket Policies. As noted in Sections 9.1.1, 9.1.3, and
9.1.5, Tenant shall have the option of obtaining the insurance through
Landlord's (or its affiliates') blanket insurance policies for its portfolio to
obtain improved coverage or cost savings, if and for so long as Landlord (or its
affiliates) maintains such policies. At Tenant's request, Landlord will provide
Tenant with premium rating information, copies of insurance policies, and other
information reasonably necessary to facilitate Tenant's evaluation of this
option.

         9.6 Landlord's Insurance. Landlord, at its expense, shall carry
comprehensive general liability insurance with a combined single limit
(including umbrella) of at least $5 million per occurrence and $5 million in the
aggregate.

          9.7 Waiver of Subrogation. Notwithstanding any other provisions of
this Lease to the contrary, Landlord and Tenant waive their respective rights of
recovery against the other and the officers, employees, agents and
representatives of such other party for damage to the property of the other by
fire or other casualty to the extent such damage is insured or required
hereunder to be insured. The insurance policies carried by Landlord and Tenant
shall include a waiver of the insurer's rights of subrogation.

10.      CASUALTY; OBLIGATION TO RESTORE

         10.1     Definitions.

         "Casualty" shall mean damage to or destruction of the Premises by
storm, fire, lightning, earthquake, or from any other cause, other than such
damage or destruction which is the subject of a Condemnation (Section 12).

         "Excess Insurance Proceeds" shall mean that portion of any Insurance
Proceeds which are received by the Landlord or its mortgagee that are not used
to pay the third party costs of restoring any damage to the Premises or any
other third party out of pocket costs incurred, including attorneys' fees, in
connection with the Casualty, including such costs to obtain the Insurance
Proceeds, but in any event excluding Tenant's Proceeds. The determination of
Excess Insurance Proceeds shall be made upon completion of the Casualty
Restoration.

         "Excess Insurance Proceeds Rent Reduction" shall mean a dollar for
dollar reduction to the Base Rent for the then remainder of the Term until
exhausted, from and after the date Landlord receives any Excess Insurance
Proceeds.

         "Fair Market Value of Premises" for purposes of this Section 10 is
defined in Exhibit L.

                                       11



         "Insurance Proceeds" shall mean the proceeds of any insurance
maintained by Tenant under Section 9, which is paid for a Casualty Restoration
(Section 10.4), but excludes Tenant's Proceeds.

         "Substantial or Full Casualty" shall mean a Casualty which is
certified, by an affidavit from Tenant's president, chief executive officer or
chief financial officer, stating with a reasonable basis that such event has
rendered the Premises (taken separately from any other properties owned or
leased by Tenant) unavailable for Tenant's continued business operations in
compliance with the Use Requirements and Function Requirements for more than 12
months and the cost of restoring the Premises is reasonably estimated to exceed
$10,000,000.

         "Tenant's Proceeds" shall mean any proceeds of insurance policies
payable for Tenant's business interruption or damage to Tenant's personal
property.

         10.2     Substantial or Full Casualty in Last 18 Months of Term. If and
only if there is a Substantial or Full Casualty of the Premises during the last
18 months of the then current Term, then (i) Landlord will receive the Insurance
Proceeds; and (ii) provided Tenant has maintained the insurance coverages
required under this Lease, the Lease will terminate effective as of the date of
the Casualty, and Tenant's obligations under the Lease will be replaced by an
obligation for Tenant to pay any deductibles under applicable insurance
policies, plus Rent for the balance of the then current Term.

         10.3     Substantial or Full Casualty Prior to Last 18 Months of Term.
If and only if there is a Substantial or a Full Casualty of the Premises prior
to the last 18 months of the then current Term, then Tenant shall have the
option to either (i) continue the Lease pursuant to Section 10.3.1 below; or
(ii) make a rejectable offer to purchase pursuant to Section 10.3.2 below. If
Tenant makes a rejectable offer to purchase, unless and until Tenant closes on
the purchase, or the Lease terminates pursuant to 10.3.2, Tenant shall continue
to pay Rent when due.

                  10.3.1 Lease Continuation. If there is a Substantial or Full
Casualty of the Premises prior to the last 18 months of the then current Term,
unless Tenant delivers a Termination Notice under Section 10.3.2 below, the
Lease shall continue in full force and effect, and no Rent shall abate under
this Lease as a result of such Substantial or Full Casualty; provided, however,
the Base Rent under this Lease shall be subject to an Excess Insurance Proceeds
Rent Reduction (as defined above). In such event, Tenant's restoration
obligations set forth in Section 10.4 below shall apply. If Tenant elects to
restore, and pursuant to Tenant's rights to sublet or assign under Section 13,
Tenant may exercise up to 2 of its remaining 5 year Renewal Options. In such
event Tenant waives its rescission right under Section 2.4 as it relates to such
exercise only.

                  10.3.2 Lease Termination. If there is a Substantial or Full
Casualty of the Premises prior to the last 18 months of the then current Term,
and Tenant will not be re-occupying the Premises following such Substantial or
Full Casualty Restoration, then Tenant may elect to terminate this Lease by
delivering notice of such election to Landlord within 90 days after the Casualty
("Casualty Termination Notice"). The Casualty Termination Notice shall include
an offer by Tenant to purchase the Premises from Landlord for the greater of (i)
the original purchase price paid by Landlord for the Premises; or (ii) the Fair
Market Value of the Premises. Within 60 days from Landlord's receipt of the
Casualty Termination Notice, Landlord will notify Tenant whether it will accept
or reject Tenant's offer to purchase the Premises, with Landlord's silence
deemed rejection.

         If Landlord accepts Tenant's offer to purchase, then notwithstanding
Section 10.5 below, Tenant shall be entitled to all Insurance Proceeds, and such
purchase shall close on the later of (i) 10 business days after Tenant's receipt
of all Insurance Proceeds; or (ii) 30 days after Tenant's receipt of Landlord's
acceptance of such offer.

         If Landlord rejects, or is deemed to have rejected, Tenant's offer to
purchase, then the Lease will be deemed terminated effective as of the date of
Landlord's rejection, with Landlord retaining the Insurance Proceeds. In such
event, Tenant shall also be liable to pay Landlord any applicable deductibles on
insurance policies relating to the Casualty Restoration, and Tenant shall pay
such

                                       12



deductible amount to Landlord within 30 days of the date of Landlord's rejection
and the Lease's termination date.

         10.4     Obligation to Restore. If there is a Casualty and the Lease
has not terminated by the application of Sections 10.2 or 10.3 above, then,
irrespective of the extent of the Casualty or whether the cause is covered by
insurance, Tenant shall repair, restore and rebuild the Premises in accordance
with the Function Requirements and the Use Requirements and all applicable
building and zoning codes at the time of rebuilding to substantially the same
location, size, design, configuration and condition immediately prior to damage
or destruction (with any departures from said characteristics in accordance with
Section 8 for Alterations) and this Lease shall remain in full force and effect.
Such repair, restoration and rebuilding, including the repair, restoration or
replacement of Fixed Equipment (all of which are herein called a "Casualty
Restoration") shall be commenced as soon as reasonably practical and taking into
consideration a reasonable time for the insurance adjustment of the loss, the
work to design the repairs/replacements, and permitting delays; and shall be
diligently pursued to completion.

         10.5.    Insurance Proceeds. Insurance Proceeds shall be paid to Tenant
for application to costs of Casualty Restoration; provided that if the proceeds
exceed $3 million (unless Landlord's mortgagee should require a lesser amount,
but in no event less than $1 million), they shall be held by an insurance
trustee pursuant to Section 11. If the Insurance Proceeds are insufficient to
cover the cost of repair, the deficit shall be paid by Tenant. Any Excess
Insurance Proceeds shall be paid and belong to Landlord. For avoidance of doubt,
this Section 10.5 shall not apply to Tenant's Proceeds; in every instance
Tenant's Proceeds shall be paid to and be the sole property of Tenant.

         10.6     No Casualty Termination. Notwithstanding any other provisions
of this Lease to the contrary, unless Sections 10.2 or 10.3 above apply, this
Lease may not be terminated by Tenant or Landlord as a result of a Casualty to
the Premises, irrespective of the extent thereof, whether such loss is insured
or when such Casualty occurs, or whether such damage is legally permitted to be
restored, and Tenant and Landlord waive the provisions of any Law permitting
termination of a lease due to destruction of the Premises.

         10.7     No Abatement of Rent. Except to the extent stated in Sections
10.2 and 10.3 above, no Rent shall abate under this Lease as a result of any
Casualty, whether or not or to the extent the same may be insured, and
irrespective of whether or not such damage or destruction is prohibited from
being repaired or restored; provided, however, the Base Rent shall be subject to
an Excess Insurance Proceeds Rent Reduction.

11.      INSURANCE TRUSTEE

         11.1     Procedure. If the Insurance Proceeds exceed $3 million (unless
Landlord's mortgagee should require a lesser amount, but in no event less than
$1 million) and this Lease has not terminated by application of Sections 10.2 or
10.3, then such Insurance Proceeds shall be held by an insurance trustee which
shall be a financial institution jointly selected by Landlord and Tenant and
reasonably satisfactory to any mortgagee(s) (the "Trustee"). If Landlord's
mortgagee is an institutional lender, such lender may elect to be the Trustee.
Each insurer is authorized to make payment directly to the Trustee; and Tenant
and Landlord each appoints such Trustee as its attorney-in-fact to endorse any
check for Insurance Proceeds after approval by Tenant of the Trustee (if other
than Landlord's mortgagee). The Insurance Proceeds, net of reasonable expenses
incurred in obtaining them, shall be retained in a separate interest-bearing
federally insured account by the Trustee for application to restoration, with
the interest added to the proceeds. The Trustee shall make the net Insurance
Proceeds available to Tenant for restoration, in accordance with the provisions
of this Section 11. The net Insurance Proceeds held by the Trustee shall be
disbursed in accordance with the following conditions:

                  11.1.1 Landlord's Approval. The plans and specifications for
the restoration shall be subject to Landlord's reasonable approval, which
approval shall be granted to the extent that the plans and specifications
conform with the conditions specified in Section 10.4.

                                       13



                  11.1.2 No Default. At the time of any disbursement, no Event
of Default shall exist and no mechanics' or materialmen's liens shall have been
filed and remain undischarged or unbonded except to the extent the disbursement
would satisfy and discharge such liens.

         11.2     Disbursements. After all of the uninsured costs to repair and
restore the Premises have been paid by Tenant out of its own funds,
disbursements shall be made monthly by the Trustee to reflect that percentage of
the work that is being paid for with the Insurance Proceeds that has been
completed since the prior disbursement upon receipt of (1) a Draw Certificate
(Section 11.3), (2) completion and performance of the work to date in a good and
workmanlike manner in accordance with the contracts, plans and specifications,
(3) customary lien waivers for the work covered by the prior progress payments,
and (4) other reasonable evidence of cost and payment so that Trustee can verify
that the amounts disbursed from time to time constitute the same percentage of
the total budgeted Casualty Restoration costs, as such budget may be adjusted
from time to time.

         11.3     Draw Certificates. Each request for disbursement shall be
accompanied by a certificate using AIA Forms G702 and G703 ("Draw
Certificates"), as the same may be amended or replaced by AIA or a similar
entity describing the work, materials or other costs or expenses, for which
payment is requested, stating the cost incurred in connection therewith and
stating that Tenant has not previously received payment for such work or
expense. For soft costs, where the referenced AIA Forms would not apply,
Tenant's delivery of reasonable documentation of such costs shall satisfy the
Draw Certificate requirement. The Draw Certificate to be delivered by Tenant
upon completion of the work shall, in addition, state that the work covered by
the request has been substantially completed.

12.      CONDEMNATION

         12.1     Definitions.

         "Condemnation" shall mean any taking of the Premises by condemnation or
other eminent domain proceedings pursuant to any Law or any conveyance under
threat thereof.

         "Excess Condemnation Award" shall mean that portion of any Condemnation
Award which is paid to Landlord or its mortgagee and not used by Landlord, its
mortgagee or Tenant to pay the third party out of pocket costs of restoring any
damage to the Premises caused by the Condemnation or any third party out of
pocket costs, including attorneys' fees, incurred by Landlord or its mortgagee
in connection with the Condemnation.

         "Fair Market Value of Premises" for purposes of this Section 12 is
defined in Exhibit L.

         "Substantial or Complete Condemnation" shall mean a Condemnation that
is not a Temporary Taking, which is certified by an affidavit from Tenant's
president, chief executive officer or chief financial officer, stating with a
reasonable basis that such Condemnation has rendered the Premises (taken
separately from any other properties owned or leased by Tenant) unavailable for
Tenant's continued business operations in compliance with this Lease's Use
Requirements and Function Requirements and results in a loss of 35% or more of
the rentable square feet of the Premises.

         "Temporary Taking" shall mean a condemnation of all or part of the
Premises for up to two (2) years.

         12.2 Notice/Award. Either party, promptly upon obtaining knowledge of
any Condemnation proceeding affecting the Premises, shall notify the other party
and both parties shall be entitled to participate in any Condemnation
proceeding. Subject to the provisions of this Section 12, Tenant hereby
irrevocably assigns to Landlord any award or payment with respect to any
Condemnation of Landlord's interest in the Premises (the "Condemnation Award"),
except that nothing in this Lease shall be deemed to preclude Tenant from making
a separate claim for an award on account of the Removable Equipment,

                                       14



moving expenses, relocation costs, business interruption or out-of-pocket
expenses incidental to the move so long as in doing so the amount of Landlord's
award is not reduced.

         12.3     Substantial or Complete Condemnation. If there is a
Substantial or Complete Condemnation of the Premises Tenant will deliver notice
thereof to Landlord within 120 days after receipt of demand for turnover from
the condemning agency ("Condemnation Termination Notice")and this Lease shall
terminate. The Condemnation Termination Notice shall verify the Substantial or
Complete Condemnation and include an offer by Tenant to terminate the Lease by
paying Landlord the greater of (i) the original purchase price paid by Landlord
for the Premises; or (ii) the Fair Market Value of the Premises (the
"Termination Fee"). Within 60 days from Landlord's receipt of the Termination
Notice, Landlord will notify Tenant whether it will accept or reject Tenant's
offer to terminate the Lease with Landlord's silence deemed rejection.

         If Landlord accepts Tenant's offer to terminate the Lease, then
notwithstanding Section 12.2 above, Tenant shall be entitled to the entire
Condemnation Award, and Tenant shall pay Landlord the Termination Fee by the
later of (y) 10 business days after Tenant's receipt of the Condemnation Award;
or (z) 30 days after Tenant's receipt of Landlord's acceptance of such offer. If
there is less than a total condemnation, Landlord shall transfer to Tenant fee
title to any remainder of the Premises, upon Landlord's receipt of the
Termination Fee.

         If Landlord rejects, or is deemed to have rejected Tenant's offer to
terminate the Lease, then the Lease will be deemed terminated effective as of
the date the Premises are surrendered to the condemning authority, with Landlord
retaining the Condemnation Award (subject to Section 12.2).

         Tenant shall continue to pay Rent until the latest of date on which (a)
the Termination Fee is paid, (b) the Lease is deemed terminated, or (c) the
Tenant vacates the Premises.

         12.4     Partial Condemnation. If there is a partial Condemnation which
is not a Substantial or Complete Condemnation, Section 12.3 shall not apply,
this Lease will not terminate and the Condemnation Award shall be made available
to Tenant to restore the Premises to a complete architectural unit with the
character, function and commercial value as nearly as possible equal to the
value of the Premises immediately prior to the taking. For such purposes,
Landlord may require that the Condemnation Award be deposited with and disbursed
by a trustee in the same manner that would have been applicable had the Premises
been damaged by a casualty that invoked the provisions of Section 11. The Base
Rent shall then be reduced to reflect the reduction in the Premises. If the
reduction is to the interior, the Rent would be proportionately reduced to
reflect the reduction in the rentable square feet; if the reduction affects the
number of parking spaces available, the Rent reduction will reflect the excess
cost to Tenant for comparable parking. There will be no Rent reduction for the
Condemnation of unimproved or landscaped areas. Notwithstanding the foregoing,
in no event shall the net present value of the Rent reduction exceed the Excess
Condemnation Award.

         12.5     Temporary Taking. If there is a Temporary Taking, then
notwithstanding Section 12.2 above, the entire Condemnation Award shall be paid
to Tenant to the extent it is attributable to the Term and Tenant shall continue
to pay the Rent due hereunder without abatement or adjustment.

13.      SUBLETTING AND ASSIGNMENT

         13.1     General. Tenant shall have the right to assign or sublet the
Premises, in whole or in part (any of which events being a "Transfer" and any
assignee or sublessee being a "Transferee"), with the consent of Landlord, which
shall not be unreasonably withheld as further detailed in this Section 13.
Landlord will be deemed to have approved the Transfer unless within 10 business
days after receipt of Tenant's request complying with this Section 13, Landlord
gives written notice specifying its objections to the Transfer. Such request
shall be accompanied by a complete and accurate copy of the proposed assignment
or sublease, the name of the proposed assignee or sublessee, its address,
telephone number and principal representative who may be contacted for
information and inquiries, the uses it intends to make of the Premises, if and
how it is affiliated with Tenant, and a then current credit report, an operating

                                       15



statement for the immediately preceding 12 months and a then current financial
statement reflecting its financial condition in accordance with GAAP (Section
1.2).

         13.2     Affiliates/Cooperative Business Arrangements. Notwithstanding
Section 13.1, Tenant shall have the right, upon not less than 30 days' advance
written notice to Landlord but without Landlord's consent, to Transfer this
Lease in whole or in part to Affiliates. "Affiliates" shall mean (a) entities
which control, are controlled by or are under common control with Tenant; (b)
Tenant's successor entities by merger or acquisition; and (c) entities in which
Tenant is a 50% or more owner or joint venturer, and jointly pursuing business
objectives consistent with Tenant's business operations, such as discovery or
development of pharmaceutical products, so long as such entity has a Cash
Position equal to or greater than Tenant's then Cash Position (Section 7.3).

         13.3     Landlord's Consent.  Landlord will not withhold its consent to
a Transfer if:

                  (a) The proposed uses of the Transferee comply with the
provisions of Section 4.1.

                  (b) In the case of a sublease, the demising configuration
between the retained space and the subleased space does not unreasonably impair
the marketability of the remaining space.

         13.4     No Release. No Transfer shall release Tenant from any
obligations hereunder and Tenant shall remain primarily liable for performance
of its obligations under this Lease. Landlord may accept any Rent or performance
of Tenant's obligations from any Transferee and such acceptance shall not
constitute a waiver of Landlord's rights. If an Event of Default occurs,
Landlord may proceed directly against Tenant, or any Transferee, without first
exhausting Landlord's remedies against any other person or entity responsible
therefor.

         13.5     Assumption. Any assignee of this Lease shall execute an
assumption agreement in form and substance reasonably satisfactory to Landlord
in which such assignee becomes jointly and severally liable with Tenant for the
performance of Tenant's obligations under the Lease to the extent claims arise
after the effective date of the assumption.

         13.6     Subleases. Each sublease shall provide that (a) it is subject
and subordinate to this Lease; (ii) the term is not longer than the then Term of
this Lease, plus any extensions which have been irrevocably exercised, and (iii)
if this Lease is terminated for any reason, Landlord may, at its option, either
(A) terminate the sublease, or (B) takeover all of the rights and interest of
Tenant under the sublease, in which case the sublessee shall attorn to Landlord.
If Landlord elects to takeover the rights and interest of Tenant, Landlord shall
not (1) be liable for any previous act or omission of Tenant under the sublease,
(2) be subject to any defense or offset in favor of the sublessee against
Tenant, (3) be bound by any modification to the sublease made without Landlord's
written consent or by any prepayment by sublessee of more than one month's rent,
or (4) be liable for the application or return of any security deposit not
actually received by Landlord. Landlord will agree to the same waiver of
subrogation with sublessees as is set forth in Section 9.7.

         13.7     Assignment and Sublease Profit. Landlord and Tenant shall each
be entitled to 50% of the rent profit on assignment consideration (i.e.
consideration for assignment of the Lease) and sublease rents. The assignment
consideration shall be determined and paid as and when received by Tenant. For
any nonmonetary consideration, Tenant will have option of assigning half of such
non-monetary consideration to Landlord, or having the nonmonetary consideration
fairly valued and half of such value paid to Landlord in immediately available
funds within a reasonable time after receipt by Tenant of the consideration, to
allow for liquidation/valuation. The rent profit on subleases will be determined
and paid each month during the sublease term. The rent profit on subleases shall
be calculated by taking the rent and other consideration and reimbursements
payable by the sublessee to Tenant or to any third party pursuant to the
sublease and subtracting (a) the Base Rent due from Tenant hereunder with
respect to the subleased space over the same period to which the sublessee's
rent applies (per square foot allocation), (b) the monthly amortization of the
costs incurred in connection with the sublease for commissions, tenant
improvement costs and legal fees (all amortized on a straight-line basis over
the

                                       16



sublease term), (c) any reasonable amounts specified in the sublease as rental
payments for use of equipment owned by Tenant, (d) Tenant's reasonable estimate
of those third party costs payable by Tenant under the Lease or under the
sublease and other direct actual reimbursements of third party costs incurred at
sublessee's request in connection with the Premises or sublessee's business
operations at the Premises, (e) Tenant's reasonable estimate of the cost of
providing additional services to the sublessee such as maintaining agreed
temperature ranges with regard to the HVAC system and specified air pressures to
fume hoods that are in addition to the costs Tenant would otherwise incur for
such portion of the Premises. If the sublease is subsequently extended, the then
outstanding balance of costs described in clause (b) above shall be reamortized
over the remainder of the then sublease term and including the extension.
Landlord shall have the right to require Tenant to provide subsequent reports
for and confirmations and calculations of the amounts subtracted for (b) through
(e) above and the parties agree that Landlord's share of the rent profit may be
adjusted from time to time to more closely reflect the actual costs incurred by
Tenant and reasonably allocated to sublessee pursuant to this Section.

14.      TENANT'S INDEMNIFICATION

         Except to the extent caused by the gross negligence or willful
misconduct of Landlord or any Landlord Related Parties, and subject to the
waiver of subrogation in Section 9.7, Tenant shall indemnify, defend and hold
Landlord, its employees, mortgagee(s) and agents ("Landlord Related Parties")
harmless from and against all claims, liabilities, damages and costs (including
attorneys fees and costs) arising out of (a) its use of or activities on the
Premises, (b) any acts or omissions (including violations of Law) by Tenant or
Tenant Related Parties (Section 19.1), and (c) any breach of this Lease by
Tenant or Tenant Related Parties.

15.      TENANT'S INSOLVENCY OR DEFAULT

         15.1     Insolvency. Tenant shall be in default upon the occurrence of
one or more of the following events (each, an "Event of Default"): (i) Tenant
files a petition in bankruptcy or otherwise seeks any judicial protection, stay
or relief against its creditors generally, (ii) an involuntary petition in
bankruptcy against Tenant or any request for the appointment of a receiver or a
custodian or other similar officer for any portion of the Tenant's property is
filed or made and not dismissed within 90 days; or (iii) the assignment for the
benefit of creditors of any portion of the Tenant's property is made; or (iv)
Tenant's interests in this Lease shall be attached, levied upon or judicially
seized, whereupon Landlord may, by notice to Tenant, terminate this Lease, and
neither Tenant nor any person claiming through or under Tenant shall be entitled
to be in possession of the Premises but shall forthwith surrender the same, and
Landlord, in addition to the other rights Landlord may have, retains as security
for its damages any Rent, Security Deposit or other monies received by Landlord
on behalf of Tenant. If any such action, case or petition has been commenced by
an unrelated third party against Tenant and is dismissed within a period of 90
days, then the Event of Default shall be deemed cured for purposes hereof. This
Lease is upon the further condition that if a petition for relief under any
chapter of the Bankruptcy Code is filed by an unrelated third party against
Tenant and the trustee or debtor or debtor in possession has not cured all
defaults hereunder and assigned or assumed this Lease under the Bankruptcy Code
within 90 days after the entry of the Order for Relief, then this Lease shall,
at Landlord's sole option, terminate. In case of termination pursuant to this
Section 15.1, Tenant shall indemnify Landlord against all costs and expenses and
loss of Rent, including amounts due under Section 15.3.

         15.2 Defaults. Tenant shall be in default hereunder if: (i) Tenant
fails to pay any installment of Base Rent or Additional Rent when due; or (ii)
Tenant abandons the Premises, or (iii) Tenant fails to perform any other
covenant, term, agreement or condition of this Lease not referred to in (i),
(ii) or (iv) when required; or (iv) any insurance required to be maintained by
Tenant is cancelled or reduced below its required limits or in its scope of
coverage and Tenant does not replace the same at least 20 business days before
the effective date of such cancellation or reduction (an "Insurance Default").
An "Event of Default" will exist if (a) Tenant is in default under subsection
(i) and the default is not cured within 5 days after Landlord gives Tenant
written notice of such default; (b) Tenant abandons the Premises, (c) Tenant is
in default under subsection (iii) and the default is not cured within 30 days
after Landlord gives Tenant written notice specifying the default (provided that
if the default can not be cured within the 30 day period,

                                       17



Tenant shall have such additional time to cure the default as is reasonably
necessary so long as Tenant commences the cure within 10 days after such notice
is given and diligently prosecutes the cure to completion within 90 days after
Tenant is given the default notice, and such deadline may be further extended
for Force Majeure (Section 27.11), provided that Tenant delivers notice to
Landlord of such Force Majeure and monthly written status reports during any
further extension arising therefrom), (d) an Insurance Default has occurred and
Tenant has not cured such default by the sooner of 5 days after Landlord's
notice of default or 10 days before the effective date of such cancellation or
reduction, or (e) a default by Tenant occurs and is not cured within any
applicable cure period, under (i) the Purchase Agreement, (ii) the Lease between
Landlord's affiliate and Tenant dated concurrently herewith for the property
located at 1208 Eastlake Avenue East, Seattle, WA ("Earl Davie Building Lease"),
or (iii) the Line of Credit Loan (Section 26). When there is an Event of
Default, Landlord may, at any time thereafter, exercise any of its legal,
equitable or contractual remedies for a Tenant default, which may include an
election to terminate this Lease by notice, lawful entry or otherwise, in which
latter event Landlord shall be entitled to recover possession of the Premises
from Tenant and those claiming through Tenant. Any termination of this Lease and
any repossession of the Premises shall be without prejudice to any remedies
which Landlord might otherwise have. In case of such termination, Tenant shall
indemnify Landlord against all third party out of pocket costs and expenses
including the amounts due under Section 15.3 and loss of Rent. All notice and
cure periods provided for in this Lease shall run concurrently with any notice
and cure periods provided for in any and all of the agreements referred to in
part (e) of this Section.

         15.3     Expense Recovery. Expenses for which Tenant shall indemnify
Landlord shall include all third-party out of pocket collection costs, including
attorneys' fees and all other third party out of pocket costs proximately caused
by the Event of Default, with or without litigation, including any such costs
incurred in connection with issues that are particular to a bankruptcy or any
other type of proceeding and on appeal. These sums shall be due immediately upon
notice from Landlord and shall bear interest at the Default Rate (Section 15.8)
if not paid within 5 business days after written demand. If proceedings are
brought under the Bankruptcy Code which relate to this Lease, Landlord shall be
paid the costs incurred by Landlord in connection with the proceedings.

         15.4     Damages. Notwithstanding termination of this Lease and reentry
by Landlord pursuant to Section 15.1 or Section 15.2, Landlord shall be entitled
to recover from Tenant:

         (i)      The worth at the time of an award (including interest at the
Default Rate) of any unpaid Rent which had been earned by Landlord at the time
of termination; plus

         (ii)     The worth at the time of an award (including interest at the
Default Rate) of the amount by which the unpaid Rent which would have been
earned after termination until the time of an award exceeds the amount of loss
of Rent that Tenant proves could have been reasonably avoided; plus

         (iii)    The worth at the time of an award of the amount by which the
unpaid Rent and Additional Rent for the balance of the Term (as extended, if at
all prior to termination) exceeds the amount of such loss of Rent that Tenant
proves could have been reasonably avoided (including Default Interest from the
date of the award until paid). Such worth at the time of award shall be computed
at the discount rate of the Federal Reserve Bank of San Francisco, or successor
Federal Reserve Bank, on the date of termination; plus

         (iv)     Any other amount necessary to compensate Landlord for all the
damage proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including amounts due and payable pursuant to Section 15.3.

         15.5     Non-Termination of Lease. If Landlord reenters the Premises
pursuant to Section 15.1, Landlord may elect, by notice to Tenant, not to
terminate this Lease, in which case Tenant shall indemnify Landlord for the loss
of Rent by a payment at the end of each month during the remaining Term
representing the difference between the Rent due in accordance with this Lease
and the rental actually

                                       18



derived from the Premises by Landlord for such month. Without any previous
notice or demand, separate actions may be maintained by Landlord against Tenant
from time to time to recover any damages which, at the commencement of any
action, have then or theretofore become due and payable to Landlord under this
Section 15 without waiting until the end of the Term.

         15.6     Reletting. If this Lease is terminated as hereinabove provided
or by summary proceedings or otherwise, Landlord may at any time and from time
to time relet the Premises in whole or in part either in its own name or as
agent of Tenant for any period equal to or greater or less than the remainder of
the then-current Term. All rentals received by Landlord from such reletting
shall be applied first to the payment of the costs of the reletting and
alterations and repairs; second, to the payment of any amounts other than Base
Rent due to Landlord; third, to Rent due and unpaid hereunder, and the residual,
if any, shall be held by Landlord and applied in payment of future Rent when it
becomes due.

         15.7     Right of Landlord to Cure Defaults. If an Event of Default
occurs, Landlord may, but shall not be required to, cure the Event of Default,
for the account and at the expense of Tenant, if Tenant has not cured the
default within 15 business days' after written notice from Landlord that
Landlord intends to take action to cure Tenant's Event of Default; provided,
however, such notice need not precede Landlord's payment or action in any
circumstance that involves an immediate risk of foreclosure, loss or impairment
of any insurance, property damage, personal injury, or enforcement by any
governmental entity. Where an Event of Default concerns a release or imminent
release of Hazardous Materials, Landlord will not have the ability to exercise
self-help if Tenant (a) has previously delivered to Landlord a Hazardous
Materials Response Plan (the "Response Plan") which outlines methods and persons
reasonably acceptable to Landlord to address, treat, abate, forestall or prevent
the release or imminent release of Hazardous Materials; and (b) promptly
delivers written notice to Landlord of any release or imminent release of
Hazardous Materials along with confirmation that Tenant is complying with the
Response Plan. Tenant shall reimburse Landlord for any third party out of pocket
expenses incurred in such cure, with interest accruing pursuant to Section 15.8,
as Additional Rent, within 30 days after receipt of Landlord's invoice.

         15.8     Default Interest. Any amounts owing from Tenant to Landlord
under this Lease which are not paid when due shall bear interest at the greater
of (a) 12% per annum or (b) 4% higher than and varying daily with the prime rate
quoted by any of the three largest banks in the United States (as measured by
assets) or such similar rate that is generally publicly announced by commercial
lending institutions as an index for loans to its most credit-worthy customers
(said prime rate or similar rate being hereinafter referred to as the "Prime
Rate"), in either event calculated from the date due or expended until and
including the date of payment (the "Default Rate").

         15.9     Other Available Remedies. At Landlord's election, upon an
Event of Default, Landlord may pursue such other amounts or other remedies in
addition to or in lieu of any one or more of the specific remedies listed in
this Section and no articulation of any remedy shall be construed to be in lieu
of any others that may be available to Landlord at law or in equity.

16.      LANDLORD'S DEFAULT

         16.1     Default. Landlord shall be in default hereunder if Landlord
fails to perform any of its obligations hereunder within 30 business days after
receipt of written notice from Tenant specifying such failure; provided that if
the nature of the default is such that more than 30 business days are necessary
for the cure, Landlord shall have such additional time as is reasonably
necessary so long as Landlord commences the cure within the cure period and
diligently pursues it to completion. Tenant shall not have the right to
terminate the Lease due to a Landlord default.

         16.2     Limitations on Landlord's Liability. The term "Landlord" as
used herein shall mean only the owner or owners, at the time in question, of the
fee title of the Premises. If Landlord transfers its interest in this Lease
other than for security purposes, Landlord shall cause its assignee or
transferee to assume the provisions of this Lease and Landlord shall deliver
notice of such assignment or transfer and a copy of the effective instrument of
transfer to Tenant within 15 business days after the date of transfer.

                                       19



Tenant shall be entitled to continue to pay Rent and give all notices to
Landlord until Tenant has received the foregoing from Landlord. Landlord shall
deliver all funds in which Tenant has an interest except those which are then in
the possession of an insurance or condemnation trustee, including but not
limited to Tenant's Security Deposit to Landlord's purchaser or assignee. From
and after such transfer, Landlord shall be released from all liability toward
Tenant arising from this Lease due to any act, occurrence or omission of
Landlord's successors occurring after the transfer of Landlord's interest in
this Lease, provided Landlord's purchaser or assignee expressly assumes
Landlord's duties and covenants under this Lease subject to the same limitations
upon its personal liability as are applicable to Landlord in Section 16.3.

         Landlord's liability hereunder is limited to the extent agreed upon in
Section 16.3 below, and except for Landlord's gross negligence or intentional
misconduct, Landlord shall not be liable for any business interruption, property
damage or personal injury (including death) sustained by Tenant or any person
claiming through Tenant resulting from any accident, casualty, or other event or
matter of any kind or nature occurring on or about the Premises and Tenant
hereby waives and covenants not to bring any action based upon any claims or
losses for which Landlord is not liable as stated above.

         16.3     Further Limitations on Landlord's Liability. NOTWITHSTANDING
ANYTHING SET FORTH HEREIN OR IN ANY OTHER AGREEMENT BETWEEN LANDLORD AND TENANT
TO THE CONTRARY: (A) LANDLORD SHALL NOT BE LIABLE TO TENANT OR ANY OTHER PERSON
FOR (AND TENANT AND EACH SUCH OTHER PERSON ASSUME ALL RISK OF) LOSS, DAMAGE OR
INJURY, WHETHER ACTUAL OR CONSEQUENTIAL TO: ANY TENANT'S PERSONAL PROPERTY OF
EVERY KIND AND DESCRIPTION, INCLUDING, WITHOUT LIMITATION TRADE FIXTURES,
REMOVABLE EQUIPMENT, INVENTORY, SCIENTIFIC RESEARCH, SCIENTIFIC EXPERIMENTS,
LABORATORY ANIMALS, PRODUCT, SPECIMENS, SAMPLES, AND/OR SCIENTIFIC, BUSINESS,
ACCOUNTING AND OTHER RECORDS OF EVERY KIND AND DESCRIPTION KEPT AT THE PREMISES
AND ANY AND ALL INCOME DERIVED OR DERIVABLE THEREFROM; (B) TENANT WAIVES ALL
CLAIMS FOR CONSEQUENTIAL DAMAGES; (C) THERE SHALL BE NO PERSONAL RECOURSE TO
LANDLORD FOR ANY ACT OR OCCURRENCE IN, ON OR ABOUT THE PREMISES OR ARISING IN
ANY WAY UNDER THIS LEASE OR ANY OTHER AGREEMENT BETWEEN LANDLORD AND TENANT WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND ANY LIABILITY OF LANDLORD HEREUNDER
SHALL BE STRICTLY LIMITED SOLELY TO LANDLORD'S INTEREST IN THE PREMISES AND ANY
PROCEEDS FROM SALE, CONDEMNATION THEREOF OR ANY INSURANCE PROCEEDS PAYABLE IN
RESPECT OF LANDLORD'S INTEREST IN THE PREMISES OR IN CONNECTION WITH ANY SUCH
LOSS AND (D) IN NO EVENT SHALL ANY PERSONAL LIABILITY BE ASSERTED AGAINST ANY OF
LANDLORD'S OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR CONTRACTORS. UNDER NO
CIRCUMSTANCES SHALL LANDLORD OR ANY OF LANDLORD'S OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS OR CONTRACTORS BE LIABLE FOR INJURY TO TENANT'S BUSINESS OR
FOR ANY LOSS OF INCOME OR PROFIT THEREFROM. NOTWITHSTANDING THE CONTRARY,
NOTHING IN THIS SECTION 16.3 WILL LIMIT THE LIABILITY OF THOSE LANDLORD'S
CONTRACTORS OR AGENTS WHO EXECUTE A SEPARATE "ACCESS AND CONFIDENTIALITY
AGREEMENT" (SECTION 21.2) DIRECTLY WITH TENANT, AND SUCH AGENTS AND CONTRACTORS'
LIABILITY DIRECTLY TO TENANT SHALL BE AS AGREED UPON IN THOSE SEPARATE
AGREEMENTS ALTHOUGH IN NO EVENT SHALL TENANT HAVE A CLAIM AGAINST LANDLORD UNDER
SUCH SEPARATE AGREEMENT, AS LANDLORD'S LIABILITY FOR THE ACTIONS OF ITS
CONTRACTORS AND AGENTS IS LIMITED TO THE EXTENT AGREED UPON IN THIS SECTION 16.3
AND IN SECTION 21.5.

17.      LANDLORD'S FINANCING. So long as Tenant's rights of possession to the
Premises will not be disturbed in the absence of a Tenant's Event of Default
under this Lease, Tenant shall, upon request, enter into a Subordination,
Non-Disturbance and Attornment Agreement ("SNDA") with any Landlord mortgagee in
the form customarily required by such mortgagee, provided that such form does
not require Tenant to adversely modify its rights or obligations under this
Lease. Tenant agrees to provide Landlord's ,mortgagees with copies of notices
sent to Landlord pursuant to Section15, upon Landlord's request and pursuant to
the SNDA.

                                       20



18. TENANT'S FINANCING. Tenant shall not pledge or encumber this Lease or enter
into a financing lease and leaseback or comparable financing arrangement.
Landlord shall cooperate with Tenant regarding any financing by Tenant which
encumbers Removable Equipment or other personal property, including the
execution of reasonable confirmations regarding the status of this Lease and the
extent to which Tenant's lender may have access to the Premises to inspect or
remove the Removable Equipment during the term hereof, and Tenant shall
reimburse Landlord of all of its third party out of pocket costs and expenses,
including its attorneys' fees in doing so. Tenant may enter into UCC fixture
filings and/or financing statements for its Removable Equipment and other
personal property.

19. HAZARDOUS SUBSTANCES

    19.1 Prohibition. Tenant shall not cause or permit any Hazardous Materials
(Section 19.8) to be brought upon, kept, used, stored, handled, treated,
generated in or about, or released or disposed of from, the Premises in
violation of applicable Environmental Requirements (as hereinafter defined) by
Tenant, its Affiliates and their respective assignees, sublessees, employees,
agents or contractors (collectively "Tenant Related Party").

    19.2 Tenant's Indemnity. If Tenant breaches the obligation stated in Section
19.1, or if the presence of any Hazardous Materials in the Premises results in
contamination of the Premises prior to or during the Term, any Renewal Term or
any holding over by Hazardous Materials brought into, kept, used, stored,
handled, treated, generated in or about, or released or disposed of from, the
Premises by anyone other than Landlord and Landlord's employees, agents and
contractors (collectively the "Relevant Contamination"), Tenant hereby
indemnifies and shall defend and hold Landlord, its officers, directors,
employees, agents and contractors harmless from any and all actions (including,
without limitation, remedial or enforcement actions of any kind, administrative
or judicial proceedings, and orders or judgments arising out of or resulting
therefrom), costs, claims, damages (including, without limitation, punitive
damages and damages based upon diminution in value of the Premises or the loss
of, or restriction on, use of the Premises), expenses (including, without
limitation, attorneys', consultants' and experts' fees, court costs and amounts
paid in settlement of any claims or actions), fines, forfeitures or other civil,
administrative or criminal penalties, injunctive or other relief (whether or not
based upon personal injury, property damage, or contamination of, or adverse
effects upon, the environment, water tables or natural resources), liabilities
or losses (collectively, "Environmental Claims") which arise prior to, during or
after the Term as a result of Relevant Contamination. This indemnification of
Landlord by Tenant includes, without limitation, costs incurred in connection
with any investigation of site conditions or any cleanup, treatment,
remediation, removal, or restoration work required by any federal, state or
local governmental authority because of Hazardous Materials present in the air,
soil or ground water above, on, or under the Premises. Without limiting the
foregoing, if the presence of any Hazardous Materials on the Premises or any
adjacent property caused or permitted by Tenant or any Tenant Related Party
results in the Relevant Contamination of the Premises or any adjacent property,
Tenant shall promptly take all actions at its sole expense and in accordance
with applicable Environmental Requirements as are necessary to return the
Premises or any adjacent property to the condition existing prior to the time of
such contamination, provided that Landlord's approval of such action shall first
be obtained, which approval shall not be unreasonably withheld so long as such
actions would not potentially have any material adverse long-term or short-term
effect on the Premises. The foregoing obligations include all Historic
Contamination present on the Premises, but subject to the limitations contained
in Section 19.10(b) and(c) below. Notwithstanding anything to the contrary
stated in this Section 19, (a) for claims relating to Relevant Contamination of
property adjacent to the Premises, Tenant's obligations under this Section 19.2
are limited to any clean up requirement imposed by a governmental entity; and
(b) in no event shall Tenant's obligations in this Section 19 include any
Hazardous Materials releases to the extent they are caused by Landlord, its
employees, agents or contractors.

    19.3 Tenant's Business. Landlord acknowledges that it is not the intent of
this Section to prohibit Tenant from using the Premises pursuant to the Use
Requirements. Tenant may operate its business according to prudent industry
practices so long as the use or presence of Hazardous Materials is strictly and
properly monitored according to all applicable Environmental Requirements.
Tenant shall deliver to Landlord prior to the Commencement Date copies of
Tenant's current Hazardous Materials

                                       21



reports, which list each type of Hazardous Materials currently present at the
Premises and thereafter to annually provide Landlord with copies of updated
reports to incorporate any additional Hazardous Materials which Tenant has
brought upon, kept, used, stored, handled, treated, generated on or released or
disposed of from the Premises during the past year, along with copies of
citations, claims of noncompliance or liability, Remediation Plans relating to
Hazardous Materials, if any and Hazardous Materials assessments provided by
third parties, if any. Landlord agrees that Tenant's annual delivery of reports
Tenant has prepared and delivered to governmental entities to comply with
Environmental Requirements reporting requirements will satisfy this Section 19.3
and specifically, Landlord agrees that either the HMIS (Hazardous Material
Inventory Statement) Report submitted to the Seattle Fire Department or the
Dangerous Waste Annual Report filed with the Washington State Department of
Ecology, satisfy this reporting requirement. To the extent not included in any
other written report given by Tenant to Landlord, and reasonably requested by
Landlord, Tenant shall provide Landlord with copies of permits and permit
applications relating to Hazardous Materials at the Premises. To the extent
reasonably requested by Landlord, Tenant will summarily explain requested
matters regarding information provided to Landlord by Tenant under this Section
19.3. Tenant is not required, to include in the annual Hazardous Materials
reports information of a proprietary nature. It is not the intent of this
Section to provide Landlord with proprietary information which could be
detrimental to Tenant's business should such information become possessed by
Tenant's competitors.

         19.4 Tenant's Representations and Warranties. Tenant hereby represents
and warrants to Landlord that as of the Effective Date, except as related to
1150 Eastlake Ave. East in Seattle and as disclosed in Property Documents (as
defined in the Purchase Agreement) and except for the Historic Contamination (i)
Tenant has not been required by any prior landlord, lender or governmental
authority at any time to take remedial action in connection with Hazardous
Materials contaminating any property which contamination was permitted by Tenant
or its predecessors or resulted from Tenant's or its predecessors' action or use
of the Premises, and (ii) Tenant is not subject to any enforcement order for any
property issued by any governmental authority in connection with the use,
storage, handling, treatment, generation, release or disposal of Hazardous
Materials (including, without limitation, any order related to the failure to
make a required reporting to any governmental authority).

         19.5 Testing. Subject to the terms of Section 21.5, Landlord shall have
the right to conduct annual tests and examinations of the Premises, at
Landlord's sole expense, to determine whether any contamination of the Premises
or on the Premises has occurred as a result of Tenant's use. Tenant shall be
required to pay Landlord's third-party out of pocket expenses relating to such
annual test or examination of the Premises only if such test or examination
discloses unreported Relevant Contamination for which Tenant is liable pursuant
to Section 19.2. If Tenant conducts its own tests of the Premises, at Tenant's
expense, using third party contractors and test procedures reasonably acceptable
to Landlord, and the tests are certified to Landlord, Landlord shall accept such
tests in lieu of Landlord's annual tests. Landlord's right to conduct Hazardous
Materials testing of the Premises at all other times to determine if
contamination has occurred as a result of Tenant's use of the Premises shall be
governed by Sections 15.7 and 21. In connection with Landlord's Hazardous
Materials testing or examination, upon the request of Landlord, Tenant shall
deliver to Landlord or its consultant such non-proprietary information
concerning the use of Hazardous Materials in or about the Premises by Tenant or
any Tenant Related Party. Landlord shall provide Tenant with a copy of all third
party, non-confidential reports and tests of the Premises made by or on behalf
of Landlord during the Term without representation or warranty and subject to a
confidentiality agreement. If necessary and pursuant to Section 15.7 and a
Response Plan referenced therein, Tenant shall, at its sole cost and expense,
promptly and satisfactorily remediate any environmental conditions identified by
such testing in accordance with all Environmental Requirements. Landlord's
receipt of or satisfaction with any environmental assessment in no way waives
any rights which Landlord may have against Tenant.

         19.6 Underground Tanks. Tenant will not install underground storage
tanks storing Hazardous Materials on the Premises without first obtaining
Landlord's advance written consent, which will be given or withheld at
Landlord's sole discretion. If Tenant is permitted to install underground
storage tanks, it shall install, use, monitor, operate, maintain, upgrade and
manage such storage tanks, maintain appropriate records, obtain and maintain
appropriate insurance, implement reporting

                                       22



procedures, properly close any underground storage tanks, and take or cause to
be taken all other actions necessary or required under applicable state and
federal Environmental Requirements, as such now exists or may hereafter be
adopted or amended in connection with the installation, use, maintenance,
management, operation, upgrading and closure of such underground storage tanks.

         19.7 Tenant's Obligations. Tenant's obligations under this Section 19
shall survive the expiration or earlier termination of the Lease. During any
period of time after the expiration or earlier termination of this Lease
required by Tenant or Landlord to complete the removal from the Premises of any
Hazardous Materials (including, without limitation, the release and termination
of any licenses or permits restricting the use of the Premises and the
completion of a surrender plan reasonably approved by Landlord), Tenant shall
continue to pay the pro-rata Rent as reasonably adjusted to reflect the
differential rental values of different portions of the Premises, in accordance
with this Lease for that portion of the Premises which cannot be relet by
Landlord due to and during such clean up, provided such Rent shall be pro-rated
daily and provided further that Tenant's obligation to pay the pro-rated Rent
under this Section 19.7 is conditioned on Tenant having full access to such
portion of the Premises.

         19.8 Definitions. As used herein, the term "Environmental Requirements"
means all applicable present and future statutes, regulations, ordinances,
rules, codes, judgments, orders or other similar enactments of any governmental
authority regulating or relating to health, safety, or environmental conditions
on, under, or about the Premises, or the environment, including without
limitation, the following: the Comprehensive Environmental Response,
Compensation and Liability Act; the Resource Conservation and Recovery Act; and
all state and local counterparts thereto, and any regulations or policies
promulgated or issued thereunder. As used herein, the term "Hazardous Materials"
means and includes any substance, material, waste, pollutant, or contaminant
listed or defined as hazardous or toxic, or regulated by reason of its impact or
potential impact on humans, animals and/or the environment under any
Environmental Requirements, asbestos and petroleum, including crude oil or any
fraction thereof, natural gas liquids, liquefied natural gas, or synthetic gas
usable for fuel (or mixtures of natural gas and such synthetic gas) and
Stacchybotris chartarum and other toxic molds. As defined in Environmental
Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's
"facility" and the "owner" of all Hazardous Materials brought on the Premises by
Tenant or any Tenant Related Party, and the wastes, by-products, or residues
generated, resulting, or produced therefrom.

         19.9 Notice to Landlord. To the extent that Tenant or Landlord has
actual knowledge thereof, such party shall promptly provide notice to the other
of any of the following matters:

         (i)   any proceeding or investigation commenced or threatened by any
         governmental authority, against Tenant or Landlord, with respect to the
         presence, suspected presence, release or threatened release of
         Hazardous Materials on or from the Premises;

         (ii)  all written notices of any pending or threatened claims or
         citations regarding Hazardous Materials on the Premises or released
         from the Premises;

         (iii) all written notices given to or received from the City of Seattle
         in connection with the Development Agreement or to or from the
         Landmarks Preservation Board in connection with the condition or use of
         the Premises;

         (iv)  the discovery of any occurrence or condition on the Premises, or
         written notice received by Tenant of an occurrence or condition on any
         real property adjoining or in the vicinity of the Premises, which
         reasonably could be expected to lead to the Premises or any portion
         thereof being in violation of Environmental Requirements or which might
         subject Landlord to any claim alleging potential liability arising out
         of (A) the presence, or release into the environment, of any Hazardous
         Materials at the Premises, or (B) circumstances forming the basis of
         any violation, or alleged violation, of any Environmental Requirement;
         and

         (v)   the commencement, nature, extent and completion of any remedial
         work.

                                       23



     19.10  Historical Contamination.

     (a) In connection with Tenant's acquisition of the Premises, Tenant and the
City entered into the Development Agreement. Capitalized terms used in this
Section 19.10 which are not defined in this Lease shall have the definitions set
forth in the Development Agreement. This Section 19.10 expressly modifies
Section 19.2 for those Hazardous Materials which are defined as Historic
Contamination in the Development Agreement. In addition to the indemnities
provided by Tenant pursuant to Section 19.2 above, until and unless Tenant
obtains from the City consent to the assignment of the Development Agreement to
Landlord in which the City acknowledges Landlord is a successor to Tenant's
rights thereunder, confirms that Tenant is not in default under the Development
Agreement, and does not contain any requirement for Landlord to assume any
obligations thereunder ("City Confirmation"), Tenant shall indemnify, defend and
hold Landlord, its agents and employees, harmless from and against any claims,
costs (including attorneys' fees and other litigation costs) and damages arising
from the failure of the City of Seattle to perform it's obligations relating to
the remediation of Historic Contamination pursuant to the Development Agreement.

     (b) From and after the date Tenant obtains the City Confirmation in the
form described herein, or such other confirmation of assignment from the City
which Landlord accepts, Landlord agrees to first pursue its rights under the
Development Agreement before seeking recovery against Tenant for matters related
to Historic Contamination, except that Tenant may be named in or joined to any
such action by Landlord to the extent such joinder is compulsory or is otherwise
required for Landlord to preserve all of its rights against Tenant. It is the
parties' intent that Tenant's obligations in Section 19.10(a) above shall only
be obviated by this Section 19.10(b) to the extent of the City's performance.

     (c) Tenant's obligations and indemnities in Sections 19.10(a) and (b) above
shall not apply to the extent that Landlord or Landlord's Related Parties
actions or failures to act cause the City to be exonerated from liability or
performance of its obligations under the Development Agreement.

20.  FIRST OFFER. Tenant shall have a "Right of First Offer" if Landlord elects
to market or sell the Premises to an unrelated third party. In such event,
Landlord shall provide Tenant with a notice in writing of its intention to sell,
setting forth the terms under which Landlord is prepared to sell the Premises.
Tenant shall have 30 days to notify Landlord in writing whether it wishes to
purchase the Premises on the proposed terms. If Landlord's notice states that
its affiliate also intends to sell the Earl Davie Building property also leased
by Tenant, Tenant will be required to purchase both unless Landlord and its
affiliate specifically provides a single building alternative. If Tenant
notifies Landlord that it wishes to purchase the applicable property (the "Sale
Property") on the terms and conditions stated in Landlord's notice, the parties
will negotiate in good faith for 30 days to reach agreement on a purchase and
sale agreement. In the event that Tenant does not notify Landlord of its intent
to purchase the Sale Property or the parties are unable to reach an agreement on
a purchase and sale agreement within the prescribed time frames, Landlord shall
be free to sell the Sale Property to any third party on such terms and
conditions that Landlord finds acceptable. If Landlord does not transfer
ownership of the Sale Property within 18 months of its original notice to
Tenant, Tenant's Right of First Offer shall be reinstated. If Landlord does
transfer ownership within 18 months of its original notice to Tenant to any
unrelated third party, Tenant's Right of First Offer shall automatically
terminate and be of no further force or effect for that or any subsequent sale
of any property demised by this Lease or the Earl Davie Building Lease. All of
Tenant's rights under this Section are personal to Tenant and may not be
assigned, pledged or transferred to any third party. Notwithstanding the
foregoing, such rights may be assigned or transferred to Tenant's Affiliate
(Section 13.2). Tenant also agrees that its rights provided for in this Section
shall not apply (a) so long as any Event of Default exists hereunder at the time
Landlord's notice was otherwise required to be given to Tenant, in which event
Landlord may proceed to negotiate and consummate a sale free of such right, (b)
to any lease, mortgage or encumbrance of the Premises or other transfer of less
than fee simple title thereto or any portion thereof, (c) to any transfer of any
kind of any portion or all of the membership interests in Landlord, or (d) to
any conveyance of the Premises or any portion thereof to (i) any entity that
controls, is controlled by or under the common control with Landlord or any of
their respective affiliates, or (ii) any entity in condemnation or in lieu of
condemnation, or (iii) any judicial or nonjudicial foreclosure or deed in lieu
of a judicial or nonjudicial foreclosure, and Tenant's right of first offer
shall automatically

                                       24




terminate with respect to the Premises or any portion thereof which are conveyed
pursuant to part (ii) or (iii) of this Section.

21.  ACCESS BY LANDLORD

     21.1 Access. Subject to the terms and provisions of this Section 21, Tenant
shall permit Landlord and its employees and authorized agents, consultants,
contractors, and representatives (with Landlord, the "Landlord Representatives")
to enter upon the Premises during normal business hours to inspect, examine, and
show the Premises for lease (during the last 12 months of the Term), financing
or sale, or to cure an Event of Default pursuant to Section 15.7 (generally,
"Inspections"); provided, however, Landlord may enter the Premises during other
hours when it is reasonably necessary to either address an emergency or an Event
of Default. This right specifically excludes the right to obtain proprietary
information relating to Tenant's business operations. Hazardous Materials tests
and responses are specifically limited by Sections 15.7 and 19.5.

     21.2 Conditions to Entry. At least 2 business days prior to entering the
Premises or conducting any Inspections, Landlord shall (a) give Tenant oral or
written notice of the times and dates it wishes to do so, (b) make arrangements
with Tenant to have the Landlord Representatives to be accompanied by a
representative of Tenant ("Tenant's Representative"), and (c) cause each
Landlord Representative (other than the Landlord) accessing the Premises to sign
an "Access and Confidentiality Agreement" in the form attached as Exhibit C or
such other form reasonably acceptable to Tenant. The advance notice agreed upon
shall apply in emergencies and following a default; provided that Tenant
promptly delivers to Landlord reasonable assurances that such emergency or
default is being adequately and diligently addressed (and for Hazardous
Materials, so long as Tenant delivers and confirms compliance with its Response
Plan). All Inspections shall be in accordance with all applicable Laws and
regulations. Tenant agrees to make reasonable efforts to cause Tenant's
Representatives to be available for such purposes during normal business hours.
Tenant agrees that Landlord shall have no liability for any breach of an Access
and Confidentiality Agreement by anyone other than Landlord except to the extent
of Landlord's indemnity set forth in Section 21.5 below.

     21.3 Inspection Costs. Except for any salary to be paid to Tenant's
Representatives or as otherwise stated in this Lease or when necessitated by an
Event of Default, Landlord shall bear the cost of all Inspections.

     21.4 Inspection Obligations. (a) In conducting any Inspections, Landlord
Representatives shall: (i) not materially interfere with the use of the Premises
by any occupant; (ii) not materially interfere with the operation and
maintenance of the Premises or any construction on the Premises; (iii) not
damage any part of the Premises or personal property located at the Premises;
(iv) not injure or otherwise cause bodily harm to any Tenant's Representative or
any other person or entity or their respective employees, agents, contractors,
representatives, guests, or invitees; (iv) at Tenant's request, provide Tenant
with complete and accurate copies of all of the third-party reports and
assessments of the Premises that are not proprietary to Landlord (collectively
"Inspection Reports"); and (v) provide Tenant with copies of any Inspection
Reports which provide information relating to Tenant's obligations under this
Lease. No Landlord Representative will conduct any invasive Inspections which
damage the Premises, unless such Inspections are (1) otherwise permitted by this
Lease, (2) required by any governmental entity, (3) subject to Section 21.2, and
except as restricted under Section 15.7, reasonably necessary in connection with
a release or potential release of Hazardous Materials or there exists a
reasonable belief that Environmental Requirements have been violated and such
access and testing is conducted only by Landlord Representatives who are
appropriately qualified as experts; or (4) are otherwise reasonably necessary
and Landlord has first obtained Tenant's consent, which consent will not be
unreasonably withheld. For Inspections relating to Hazardous Materials, the
terms of Section 19.5 shall also apply. If the Premises are damaged during an
Inspection, Landlord will immediately repair such damage and restore the
Premises, pursuant to Section 21.5 below. Tenant acknowledges and agrees that
Landlord shall have no responsibility for the accuracy or completeness of any
such report or assessment or the suitability thereof for use by any person other
than Landlord.

                                       25



          (b) Landlord and all Landlord Related Parties, including their
respective partners, members, officers, directors, and attorneys will treat as
confidential the information disclosed to them by Tenant or discovered on
account of or pursuant to Landlord's Inspections (which information is disclosed
orally, in writing or in visual or electronic form, and including any
observations, knowledge, information, reports (written or oral), tests, or
studies (together with the results of such studies and tests) obtained by or
provided to Landlord or any Landlord Related Parties regarding the Premises,
whether in connection with the Inspections, or otherwise, but shall not include
information known by Landlord or Landlord Related Parties prior to any
disclosures by Tenant or any Inspections or any other information that is
generally known or available to the public) (the "Information"), giving it at
least the same care as Landlord's own confidential information, and make no use
of any such Information except in connection with (a) verifying Tenant's
compliance with the terms of this Lease, (b) disclosing the condition of the
Premises in connection with a sale, financing or lease of the Premises, or (c)
to the extent required by court or legal requirements (which may include SEC
regulations, NYSE and NASDAQ requirements). In addition, and except as required
by applicable law, neither Landlord nor Tenant shall make or agree to any press
releases in which the other party is identified without the prior written
consent of the other party, and when such consent is given, the information
disclosed and the persons to whom it is disclosed shall be limited to such
releases. To the extent that the terms, provisions, and obligations of this
Section 21, are inconsistent with the other provisions of this Lease, the terms
of this Section 21 will control, but subject to limitations stated in Section
16.3. This Section 21.4(b) is not applicable to any Landlord Related Party who
is also a Landlord Representative (Section 21.2) who executes a Access and
Confidentiality Agreement pursuant to Section 21.2.

     21.5 Indemnification and Repair. Landlord hereby agrees to indemnify,
defend (with counsel reasonably acceptable to Tenant), and hold Tenant and its
officers, directors, successors, and assigns harmless from and against any and
all liens, claims, causes of action, liabilities, demands, suits, obligations,
losses, penalties, costs, and expenses (including reasonable attorneys' fees)
(generally, "Damages") including without limitation Damages for any actual
physical damage to the Premises or any injury to persons, all to the extent
caused by or in connection with the entry onto the Premises by a Landlord
Representative or an act of a Landlord Representative in connection with the
Inspections; provided, however, that Landlord's indemnity hereunder shall be
limited to actual, direct damages only and shall not include (a) any
consequential damages, or (b) any damages to the extent resulting from (i) the
acts or omissions of any Tenant's Representative, or (ii) the discovery of any
condition of the Premises that existed prior to Landlord's entry thereon (a
"Pre-Existing Condition"), except that such indemnity shall apply to the extent,
and only to the extent, such Pre-Existing Condition is directly exacerbated,
aggravated, or worsened by the entry onto the Premises by an Landlord
Representative or an act of an Landlord Representative in connection with the
Inspections. In addition, Landlord shall promptly repair any physical damage to
the Premises caused by any Landlord Representative (including without limitation
damage relating to an Inspection) and shall promptly restore the Premises to the
condition in which it existed prior to such entry; provided, however, that
Landlord shall have no obligation to repair any damage caused by the acts or
omissions of any Tenant's Representative or to remediate, remove, contain,
abate, or control any Pre-Existing Condition, except to the extent, and only to
the extent, necessary to restore the Pre-Existing Condition to the condition in
which it existed prior to such entry. As an example only, if a Landlord
Representative should cause a limited and confined release of asbestos while
taking a sample of ceiling materials within the Premises, Landlord's sole
obligation would be to remove, control and abate any released asbestos,
indemnify and defend Tenant for any personal injury Damages claimed relating to
the release, and to re-seal the ceiling materials where the sample was taken;
Landlord would have no further obligation to remediate, remove, contain, abate,
control, or take any further action whatsoever with respect to the asbestos
contained in the sampled or any other ceiling materials. Landlord's obligations
under this Section 21 shall survive termination of the Lease; provided that
Tenant will only have two years from the expiration or termination of this Lease
to commence an action against Landlord under this Section.

     21.6 Building Signage. Landlord hereby agrees not to modify or require any
changes to the current signage at the Premises, and further agrees that during
the Term, Tenant shall have the sole right to designate the name of the
Premises', but subject to Landlord's consent, which will not be unreasonably
withheld (e.g., the Tenant's name on the Steam Stacks). Tenant's right under
this Section 21.6 are

                                       26



personal to Tenant and Tenant may not Transfer (Section 13.1) such rights,
except to Tenant's Affiliates (Section 13.2).

22.  CONTESTS

    22.1 Notice. Notwithstanding the provisions of this Lease which require
Tenant pay certain amounts to third parties ("Third Party Payments") on or
before the date due (Sections 3.4, 4.3 and 6), Tenant shall not be required to
(i) pay any Third Party Amounts, (ii) comply with any Law, or (iii) discharge or
remove any lien arising out of Tenant, so long as Tenant contests, in good faith
and at its expense, the existence, the amount or the applicability or validity
thereof, and by appropriate proceedings so long as during the pendency thereof
Tenant takes any necessary steps to prevent (A) the collection of, or other
realization upon, the claim so contested, (B) the sale, forfeiture or loss of
any of the Premises, or the Rent to satisfy the same, (C) any interference with
the use or occupancy of any of the Premises, and (D) the cancellation of any
insurance Tenant is required to carry pursuant to Section 9.

    22.2 Conditions. In no event shall Tenant pursue any contest in such manner
that exposes Landlord to (i) criminal liability, penalty or sanction, or (ii)
defeasance of its interest in the Premises.

    22.3 Hold Harmless. Tenant agrees that each contest shall be promptly and
diligently prosecuted to a final conclusion, except that Tenant shall have the
right to attempt to settle or compromise such contest through negotiations;
provided that if such contest is not concluded and all amounts for which Tenant
is liable are not paid prior to the expiration of this Lease, then Tenant agrees
that its obligation to diligently pursue or settle such contest and its
liability for such unpaid amounts shall survive the expiration of this Lease.
Tenant shall pay and save Landlord harmless against any and all losses,
judgments, decrees and costs (including all attorneys' fees and expenses) in
connection with any such contest and shall, promptly after the final
determination of such contest, fully pay and discharge the amounts which shall
be levied, assessed, charged or imposed or be determined to be payable therein
or in connection therewith, together with all penalties, fines, interest, costs
and expenses thereof or in connection therewith, and perform all acts the
performance of which shall be ordered or decreed as a result thereof.

23. ESTOPPEL CERTIFICATE. Each party shall at any time and from time to time
upon not less than 20 days written notice from the other and without charge,
execute and deliver to the other an estoppel certificate in the form of Exhibit
J.

24. INTENTIONALLY OMITTED

25. PARKING FOR EARL DAVIE BUILDING. During the Term, Landlord grants to the
tenant under the Earl Davie Building Lease (the "EDB Tenant") the right to
utilize up to 49 parking stalls at the Premises which have been specifically
covenanted and reserved for the EDB Tenant; provided that the EDB Tenant shall
make commercially reasonable efforts to minimize or eliminate the need for the
EDB Tenant to utilize such parking.

26. CROSS DEFAULTS. At Tenant's option, Landlord (or its affiliate) and Tenant
may be parties to a $3,000,000 line of credit loan ("Line of Credit Loan") which
will be documented by the forms attached to the fourth amendment to the Purchase
Agreement, with such forms executed upon Tenant's election to draw on the Line
of Credit Loan. Regardless of the actual date of execution of the Line of Credit
Loan documents, the maturity date thereunder shall be five years from the
Effective Date. As provided in Section 15.2, any Event of Default under the Line
of Credit Loan or the Earl Davie Building Lease (Section 15.2) shall be an Event
of Default hereunder and any default under this Lease shall be a default under
the Earl Davie Building Lease and the Line of Credit Loan.

                                       27




27.  MISCELLANEOUS

     27.1 Tenant's Obligations Unconditional. Tenant acknowledges and agrees
that except as otherwise specifically stated in this Lease it shall be
absolutely and unconditionally obligated to pay all Rent and all of the costs
and expenses that relate to the ownership, occupancy, use, maintenance,
insurance, repair, restoration, replacement, and remediation of the Premises and
all utilities and other services provided thereto and taxes and installments of
assessments levied thereon during the Initial Term and any Renewal Term and for
those portions of installments of assessments to the extent they accrued during
the Term of this Lease, even if they are payable thereafter and to take such
other actions at its sole expense as are required to comply with all existing
and future Laws with respect thereto and such obligations shall not be subject
to abatement, offset or impairment for any cause or reason whatsoever. Except as
otherwise stated in this Lease, nothing in this Section 27.1 is intended to
require Tenant to pay or reimburse Landlord for (a) those taxes and assessments
excluded from Tenant's obligations in Section 6.2, (b) Landlord's internal costs
and expenses, (c) Landlord's third party out of pocket expenses, or (d) any
Hazardous Materials remediation costs in excess of those agreed upon by the
parties in Section 19 above.

     27.2 Additional Definitions. "Landlord" as used in this Lease shall include
the original Landlord hereunder, its successors, and if this Lease shall be
validly assigned, shall also include Landlord's assignees. "Tenant" shall
include the original Tenant hereunder, its successors, and if this Lease shall
be validly assigned or sublet, shall include also Tenant's assignee or sublessee
as to premises covered by such assignment or sublease. References to "Tenant's
knowledge" shall refer to the actual personal knowledge of any one or more of
the officers of Tenant, not the actual or constructive knowledge of any other
employee, agent, officer, director or other representative of Tenant and shall
in no case impose upon Tenant any duty or obligation to investigate or verify
the information. References herein to "Law" shall mean any governmental statute,
ordinance, rule or regulation now in force or which may hereafter be enacted,
promulgated or modified and any easement, reservation, restriction or covenant
now or hereafter recorded against the Premises or any portion thereof to the
extent applicable to the particular matter at issue (collectively "CC&Rs"),
excluding CC&Rs to the extent that they are created without Tenant's consent
after the Effective Date and that they interfere with Tenant's use of the
Premises or cause Tenant to incur additional cost. References to "including" or
"includes" shall mean "includes, without limitation" and "including, but not
limited to." References to "business days" shall mean Monday through Friday,
excluding federal and national bank holidays. If any time period is to expire on
a date which is not a business day, the time period shall be extended to the
next business day.

     27.3 Notices. Any notice or consent required to be given by or on behalf of
either party to the other shall be in writing and given by mailing such notice
or consent by either (i) one business day after sending by an overnight courier
service when deposited with the courier in time for delivery the next business
day or otherwise on the next business day thereafter, or (ii) 2 business days
after deposit with the United States Post Office by registered or certified
mail, return receipt requested, as evidenced by the date of the postmark
thereon, or (iii) on the day transmitted via facsimile if completed in time for
receipt by 12:00 p.m. recipient's time on a business day or otherwise on the
next business day thereafter (provided that facsimile notice is only effective
if notice is also delivered pursuant to Sections 27.3(i) or (ii) the next
business day following the transmission of the facsimile notice); addressed to
the other party as follows:

     If to Landlord:         ARE-1201/1208 Eastlake Avenue, LLC
                             135 N. Los Robles Ave., Ste. 250
                             Pasadena, CA 91101
                             Attn: Corporate Secretary
                             Telephone:  (626) 578-0777
                             Fax:  (626) 578-0770

                                       28



                  With a copy to:      Stoel Rives LLP
                                       Attn: David H. Rockwell
                                       600 University Street, Suite 3600
                                       Seattle, WA 98101-3197
                                       Telephone:  (206) 386-7694
                                       Fax:  (206) 386-7500

         If to Tenant:                 ZymoGenetics, Inc.
                                       Attn: Chief Financial Officer
                                       1201 Eastlake Avenue E.
                                       Seattle, WA 98102
                                       Telephone:  (206) 442-6600
                                       Fax: (206) 442-6808

                  With a copy to:      Real Property Law Group, PLLC
                                       Attn:  Cynthia Thomas
                                       1218 Third Avenue, Suite 1900
                                       Seattle, WA 98101
                                       Telephone:  (206) 625-1717
                                       Fax:  (206) 374-2782

or to such other addresses as the parties may designate in writing by the means
above described.

In addition to the foregoing, any notice Tenant gives to Landlord which in any
manner relates to any Alterations shall be given to:

                                       Alexandria Real Estate Equities, Inc.
                                       9820 Willow Creek Road
                                       Suite 440
                                       San Diego, CA 98131
                                       Attn:  Senior Vice President,
                                              Construction & Development
                                       Telephone: (858) 530-8190
                                       Fax: (858) 530-8191

The time period in which to respond to any notice or consent shall commence to
run on the date on which such notice is deemed effective as stated above. Any
notices of the same matter that are required by or given in connection with this
Lease, the Earl Davie Building Lease, the Purchase Agreement or the Line of
Credit Loan need be given once to a party and not duplicated for each such
contract.

         27.4 Survival. The obligations of each party applicable to time periods
prior to the termination or expiration of this Lease shall survive termination
or expiration of this Lease, including each party's right to indemnification and
defense from claims arising from matters occurring prior to termination even
though the claim is asserted after termination.

         27.5 No Oral Agreements. It is expressly agreed between Landlord and
Tenant that there is no verbal understanding or agreement which in any way
changes the terms, covenants and conditions herein set forth, and that no
modification of this Lease shall be effective unless made in writing and duly
executed by the authorized officers of the necessary parties or party and
consented to by Landlord's mortgagee, if any. Landlord and Tenant hereby agree
that all prior or contemporaneous oral understandings, agreements or
negotiations relative to the leasing of the Premises are merged into this Lease.

         27.6 No Waiver. The failure of Landlord or Tenant to insist, in one or
more instances, upon the strict performance by Tenant or Landlord of any of the
provisions of this Lease shall not be construed as a waiver of any right or
remedy available for any future breach of such provisions. Receipt by Landlord
of Rent with knowledge of the breach of any provisions hereof shall not be
deemed a waiver of any right or remedy available for such breach.

                                       29



     27.7  Time of Essence. Time is of the essence of this Lease.

     27.8  Waiver of Common Law. Tenant waives any of the following rights, to
the extent they exist now or will exist in the future under Law(including common
law): the right to terminate this Lease, any right to offset amounts due against
Rent, and/or any right to make repairs at the expense of Landlord. Landlord
waives any statutory landlord's lien against Tenant's personal property,
including its Removable Equipment.

     27.9  Legal Expense. If either party incurs any third party out of pocket
costs or expenses, including those of a collection agency and any attorneys'
fees, to collect any sum which is past due hereunder, the defaulting party shall
reimburse the nondefaulting party therefor, with or without litigation. If any
action, arbitration or proceeding (including any appeal thereof) is brought by
either party to enforce its rights under this Lease or to collect a judgment
against the other arising from this Lease ("Action"), the unsuccessful party
therein shall pay all enforcement costs incurred by the prevailing party
therein, including reasonable attorneys' fees and costs.

     27.10 Governing Law/Venue/Waiver of Jury. This Lease shall be performed,
construed and enforced in accordance with the laws of the State of Washington
and the parties agree that venue shall lie in King County, Washington. Landlord
and Tenant each unconditionally waives any right to trial by jury to resolve any
claim, action or demand asserted in connection with any matter arising in
connection with this Lease.

     27.11 Force Majeure. Except as specifically provided otherwise herein, and
except for the periods during which either party may cure a default hereunder
the time periods for Landlord's or Tenant's performance hereunder (except for
the payment of money) shall be extended for periods of time during which the
non-performing party's performance is prevented due to circumstances beyond the
party's control, including, without limitation, strikes, embargoes, newly
imposed governmental regulations, inclement weather and other acts of God, war
or other strife (collectively "Force Majeure"). Notwithstanding the foregoing, a
Force Majeure may apply to certain Events of Default pursuant to Section 15.2.

     27.12 Headings. The headings used in this Lease are for convenience only
and shall not have any bearing or meaning with respect to the content or context
of this instrument.

     27.13 Holding Over. Tenant shall have no right to retain possession of the
Premises beyond the expiration or earlier termination of the Lease. If Tenant
holds over after the expiration of the Term, with the express consent of
Landlord, such tenancy shall be from month-to-month only, and not a renewal
hereof or an extension for any further Term, and such month-to-month tenancy
shall be subject to each and every term, covenant and agreement contained
herein; provided, however, that Tenant shall pay as rent during any holding over
period, an amount equal to 150% of the Base Rent payable immediately preceding
the expiration of the Term plus all Additional Rent. Nothing in this Section
shall be construed as a consent by Landlord to any holding over by Tenant and
Landlord expressly reserves the right to require Tenant to surrender possession
of the Premises upon the expiration of the Term or upon the earlier termination
thereof and to assert any remedy in law or equity to evict Tenant and/or collect
damages in connection with such holding over.

     27.14 Rights Are Cumulative. All rights, powers and privileges conferred
hereunder upon the parties shall be cumulative, but not restricted to those
given by law.

     27.15 Severability. If any term or provision of this Lease shall be held
invalid or unenforceable to any extent, the remaining terms, conditions and
covenants of this Lease shall not be affected thereby and each of said terms,
covenants and conditions shall be valid and enforceable to the fullest extent
permitted by law, unless an essential purpose of this Lease would be defeated by
loss of the invalid or unenforceable provision.

                                       30



         27.16 Interpretation. This Lease has been fully negotiated and no
provision shall be construed for or against either Tenant or Landlord, and this
Lease shall be interpreted in accordance with its general tenor in an effort to
reach an equitable result. Whenever words such as "herein," "hereunder," etc.,
are used in this Lease, they shall mean and refer to this Lease in its entirety
and not to any specific section, paragraph or other part of this Lease.

         27.17 Brokers. The Staubach Company represents Tenant and
Insignia/Kidder Mathews represents Landlord. Each party shall be responsible for
paying any commissions or fees due to its broker and shall hold the other party
harmless from any claims for commissions or finders fees due from any other
third parties claiming to have been engaged by that party.

         27.18 Counterparts. This Lease may be executed in counterparts which,
when taken together, will comprise a single original agreement. Facsimile
signatures shall be binding upon transmission.

IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed as of
the day and year first written above.

                       LANDLORD:
                       ARE-1201/1208 Eastlake Avenue, LLC,
                        a Delaware limited liability company

                        By: ALEXANDRIA REAL ESTATE EQUITIES, L.P.
                            a Delaware limited partnership, its managing member

                                 By: ARE-QRS CORP.,a Maryland corporation,
                                 general partner

                                         By: /s/ Peter J. Nelson
                                             ----------------------------
                                         Peter J. Nelson, Chief Financial
                                         Officer

                       TENANT:
                       ZYMOGENETICS, INC.
                       a Washington corporation

                       By: /s/ James A. Johnson
                           ----------------------------------------------
                           James A. Johnson
                           Senior Vice President - Chief Financial Officer

EXHIBITS:
Exhibit A:    Legal Description
Exhibit B:    Title Encumbrances
Exhibit C:    Access and Confidentiality Agreement
Exhibit D:    Letter of Credit
Exhibit E:    Pledge Agreement
Exhibit F:    Custodial Agreement
Exhibit G:    Fixed Equipment
Exhibit H:    Use and Function of Leased Space
Exhibit I:    Intentionally Deleted
Exhibit J:    Estoppel
Exhibit K:    Intentionally Deleted
Exhibit L:    Fair Market Value Determination
Exhibit M:    Amendment to Lease

                                       31



STATE OF CALIFORNIA       )
                          ) ss.
COUNTY OF LOS ANGELES     )

         I certify that I know or have satisfactory evidence that PETER J.
NELSON is the person who appeared before me, and said person acknowledged that
he signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the Chief Financial Officer of ARE-QRS, CORP.,
a Maryland corporation, which is the General Partner of ALEXANDRIA REAL ESTATE
EQUITIES, L.P., a Delaware limited partnership, which is the Managing Member of
ARE-1201/1208EASTLAKE AVENUE, LLC, to be the free and voluntary act of such
party for the uses and purposes mentioned in this instrument.

         DATED: October 15, 2002


                                                 /s/ Teresa A. Flores
                                                 -------------------------------
                                                 (Signature of Notary Public)

                                                 Teresa A. Flores
                                                 -------------------------------
                                                 (Printed Name of Notary Public)

                                                 My Appointment expires: 6-24-05




STATE OF WASHINGTON       )
                          ) ss.
COUNTY OF KING            )

         I certify that I know or have satisfactory evidence that James A.
Johnson is the person who appeared before me, and said person acknowledged that
he/she signed this instrument, on oath stated that he/she was authorized to
execute the instrument and acknowledged it as the Senior Vice President and
Chief Financial Officer of ZYMOGENETICS, INC. to be the free and voluntary act
of such party for the uses and purposes mentioned in this instrument.

         DATED: October 16, 2002



                                                 /s/ Carol A. Alto
                                                 -------------------------------
                                                 (Signature of Notary Public)

                                                 Carol A. Alto
                                                 -------------------------------
                                                 (Printed Name of Notary Public)

                                                 My Appointment expires: 3-7-06

                                       32



                                    EXHIBIT A
                                LEGAL DESCRIPTION

PARCEL A (Lake Union Steam Plant):

THAT PORTION OF LOTS 1 THROUGH 7, INCLUSIVE, BLOCK 4, R. C. GRAVES ADDITION TO
THE CITY OF SEATTLE, ACCORDING TO THE PLAT THEREOF RECORDED IN VOLUME 3 OF
PLATS, PAGE(S) 120, IN KING COUNTY, WASHINGTON, LYING SOUTHEASTERLY OF FAIRVIEW
AVENUE EAST AS CONDEMNED IN KING COUNTY SUPERIOR COURT CAUSE NUMBER 67239 UNDER
CITY OF SEATTLE ORDINANCE NUMBER 20186;

ALSO, LOTS 1 THROUGH 3 AND LOTS 6 THROUGH 10, BLOCK 4, FRANCE'S ADDITION TO THE
CITY OF SEATTLE, ACCORDING TO THE PLAT THEREOF RECORDED IN VOLUME 1 OF PLATS,
PAGE(S) 195, IN KING COUNTY, WASHINGTON;

EXCEPT THAT PORTION THEREOF CONDEMNED FOR EXTENSION OF LAKE AVENUE (NOW
EASTLAKE AVENUE EAST) UNDER CITY OF SEATTLE ORDINANCE NUMBER 1284;

ALSO, THAT PORTION OF GOVERNMENT LOT 1 OF SECTION 29, TOWNSHIP 25 NORTH, RANGE 4
EAST, WILLAMETTE MERIDIAN, IN KING COUNTY, WASHINGTON, BOUNDED ON THE NORTH BY
LOT 6, BLOCK 4, FRANCE'S ADDITION TO THE CITY OF SEATTLE, ACCORDING TO THE PLAT
THEREOF, RECORDED IN VOLUME 1 OF PLATS, PAGE 195, IN KING COUNTY, WASHINGTON; ON
THE SOUTH BY THE NORTH LINE OF LOT 9 AND THE SOUTHEASTERLY PRODUCTION THEREOF,
BLOCK 11, EAST PARK ADDITION TO THE CITY OF SEATTLE, ACCORDING TO THE PLAT
THEREOF, RECORDED IN VOLUME 8 OF PLATS, PAGE 83, IN KING COUNTY, WASHINGTON; ON
THE EAST BY EASTLAKE AVENUE EAST; AND ON THE WEST BY LOT 12, BLOCK 68, LAKE
UNION SHORELANDS, IN KING COUNTY, WASHINGTON, AS SHOWN ON THE OFFICIAL MAPS ON
FILE IN THE OFFICE OF THE COMMISSIONER OF PUBLIC LANDS AT OLYMPIA, WASHINGTON,
ON JULY 1, 1907;

ALSO, LOTS 8 AND 9, BLOCK 11, EAST PARK ADDITION TO THE CITY OF SEATTLE,
ACCORDING TO THE PLAT THEREOF RECORDED IN VOLUME 8 OF PLATS, PAGE(S) 83, IN KING
COUNTY, WASHINGTON;

ALSO, LOTS 5 THROUGH 14, BLOCK 68, LAKE UNION SHORELANDS, IN KING COUNTY,
WASHINGTON, AS SHOWN ON THE OFFICIAL MAPS ON FILE IN THE OFFICE OF THE
COMMISSIONER OF PUBLIC LANDS AT OLYMPIA, WASHINGTON, ON JULY 1, 1907; EXCEPT
THAT PORTION OF LOTS 5 THROUGH 8, LYING WITHIN FAIRVIEW AVENUE EAST AS CONDEMNED
IN KING COUNTY SUPERIOR COURT CAUSE NUMBER 67239 UNDER CITY OF SEATTLE ORDINANCE
NUMBER 20186;

ALSO, THAT PORTION OF VACATED BELLEVUE AVENUE EAST, FORMERLY OREGON STREET,
AS ESTABLISHED IN THE PLAT OF FRANCE'S ADDITION TO THE CITY OF SEATTLE,
ACCORDING TO THE PLAT THEREOF, RECORDED IN VOLUME 1 OF PLATS, PAGE 195, IN KING
COUNTY, WASHINGTON, LYING NORTHWESTERLY OF THE NORTHWESTERLY MARGIN OF LAKE
AVENUE (NOW EASTLAKE AVENUE EAST), AS ESTABLISHED BY ORDINANCE NUMBER 1284;

                                       A-1



ALSO, THAT PORTION OF VACATED LAKE AVENUE (NOW EASTLAKE AVENUE EAST), AS
ESTABLISHED IN THE PLAT OF EAST PARK ADDITION TO THE CITY OF SEATTLE, ACCORDING
TO THE PLAT THEREOF, RECORDED IN VOLUME 8 OF PLATS, PAGE 83, IN KING COUNTY,
WASHINGTON, LYING NORTHWESTERLY OF THE NORTHWESTERLY MARGIN OF SAID LAKE AVENUE
(NOW EASTLAKE AVENUE EAST), AS ESTABLISHED BY ORDINANCE NUMBER 1284, AND
ADJACENT TO LOT 9, BLOCK 11 OF SAID PLAT;

ALSO, THAT PORTION OF VACATED EASTLAKE AVENUE EAST AT EAST NELSON PLACE
DESCRIBED AS FOLLOWS:

BEGINNING AT THE MOST EASTERLY CORNER OF BLOCK 11, EAST PARK ADDITION TO THE
CITY OF SEATTLE, ACCORDING TO THE PLAT THEREOF RECORDED IN VOLUME 8 OF PLATS,
PAGE(S) 83, IN KING COUNTY, WASHINGTON; THENCE SOUTH 34(degree)41'22" WEST ALONG
THE SOUTHEASTERLY LINE OF SAID BLOCK TO THE INTERSECTION WITH THE PRODUCTION
SOUTHWESTERLY OF THE NORTHWESTERLY MARGIN OF EASTLAKE AVENUE NORTH AS
ESTABLISHED BY ORDINANCE NUMBER 1284 AND THE TRUE POINT OF BEGINNING; THENCE
CONTINUING SOUTHWESTERLY ALONG SAID SOUTHEASTERLY LINE OF SAID BLOCK 11, A
DISTANCE OF 17.96 FEET; THENCE NORTH 41(degree)17'56" EAST, A DISTANCE OF 91.02
FEET TO THE NORTHWESTERLY MARGIN OF EASTLAKE AVENUE NORTH AS ESTABLISHED BY
ORDINANCE NUMBER 1284; THENCE SOUTH 42(degree)55'03" WEST ALONG SAID
NORTHWESTERLY MARGIN OF EASTLAKE AVENUE NORTH AND ITS PROJECTION, A DISTANCE OF
73.21 FEET, TO THE TRUE POINT OF BEGINNING.

(BEING KNOWN AS LOTS 1 AND 2 OF CITY OF SEATTLE LOT BOUNDARY ADJUSTMENT NUMBER
9604526, RECORDED UNDER RECORDING NUMBER 9611060361).

                                       A-2



                                    EXHIBIT B
                              CURRENT ENCUMBRANCES

EASEMENT AND THE TERMS AND CONDITIONS THEREOF:
GRANTEE: CITY OF SEATTLE, A MUNICIPAL CORPORATION
PURPOSE: WATER DRAIN PIPE AND APPURTENANCES, AND FOR THE INSTALLATION,
OPERATION, MAINTENANCE, PROTECTION, REPAIR, ALTERATION OR RECONSTRUCTION THEREOF
RECORDED: MAY 5, 1993
RECORDING NUMBER: 9305051203

EXCEPTIONS AND RESERVATIONS CONTAINED IN DEEDS FROM THE STATE OF WASHINGTON,
WHEREBY THE GRANTOR EXCEPTS AND RESERVES ALL OIL, GASES, COAL, ORES, MINERALS,
FOSSILS, ETC., AND THE RIGHT OF ENTRY FOR OPENING, DEVELOPING AND WORKING THE
SAME AND PROVIDING THAT SUCH RIGHTS SHALL NOT BE EXERCISED UNTIL PROVISION HAS
BEEN MADE FOR FULL PAYMENT OF ALL DAMAGES SUSTAINED BY REASON OF SUCH ENTRY;
RECORDED UNDER RECORDING NUMBERS 2326072, 575452, 774699, 867187, 531949, 868275
AND 544487.

         RIGHT OF STATE OF WASHINGTON OR ITS SUCCESSORS, SUBJECT TO PAYMENT OF
         COMPENSATION THEREFOR, TO ACQUIRE RIGHTS OF WAY FOR PRIVATE RAILROADS,
         SKID ROADS, FLUMES, CANALS, WATER COURSES OR OTHER EASEMENTS FOR
         TRANSPORTING AND MOVING TIMBER, STONE, MINERALS AND OTHER PRODUCTS FROM
         THIS AND OTHER PROPERTY, AS RESERVED IN DEEDS REFERRED TO ABOVE.

AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS, INC. AND: CITY OF SEATTLE
RECORDED: MARCH 15, 1993
RECORDING NUMBER: 9303150948
REGARDING: TRANSPORTATION MANAGEMENT PLAN

AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS, INC., A WASHINGTON CORPORATION AND: CITY OF SEATTLE, A
MUNICIPAL CORPORATION RECORDED: MAY 5, 1993
RECORDING NUMBER: 9305051200
REGARDING: DEVELOPMENT AND USE OF SAID PREMISES AND RESTRICTIONS RELATED THERETO

RELEASE OF DAMAGE AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS INC., A WASHINGTON CORPORATION AND: CITY OF SEATTLE
RECORDED: MAY 10, 1993
RECORDING NUMBER: 9305100412
RELEASING CITY OF SEATTLE FROM ALL FUTURE CLAIMS FOR DAMAGES RESULTING FROM:
PERMISSION TO OCCUPY PUBLIC RIGHT OF WAY ALONG EASTLAKE AVENUE EAST FROM 155
FEET NORTH OF EAST NELSON AND CONTINUING NORTH 110 FEET BY ERECTING AND
MAINTAINING THEREIN A SHORING SYSTEM WITH EXTERIOR TIEBACKS.

COVENANTS, CONDITIONS AND RESTRICTIONS CONTAINED IN CITY OF SEATTLE ORDINANCE
NUMBER 117251 RELATING TO HISTORIC PRESERVATION:
RECORDED: SEPTEMBER 6, 1994
RECORDING NUMBER: 9409060952
         SAID INSTRUMENT IS A RE-RECORDING OF DOCUMENT RECORDED UNDER RECORDING
         NUMBER 9408150393.

                                       B-1



COVENANTS, CONDITIONS AND RESTRICTIONS RELATING TO LANDMARK PRESERVATION
CONTAINED IN INSTRUMENT:
RECORDED: JANUARY 26, 1995
RECORDING NUMBER: 9501260857

COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS, NOTES, DEDICATIONS AND SETBACKS,
IF ANY, SET FORTH IN OR DELINEATED ON THE BOUNDARY/LOT LINE ADJUSTMENT RECORDED
UNDER RECORDING NUMBER 9611060361.

AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS, INC.AND: CITY OF SEATTLE
RECORDED: MAY 1, 1997
RECORDING NUMBER: 9705011660
REGARDING: TRANSPORTATION MANAGEMENT PLAN

RIGHT TO MAKE NECESSARY SLOPES FOR CUTS OR FILLS UPON PROPERTY HEREIN DESCRIBED
AS RESERVED IN CITY OF SEATTLE ORDINANCE NUMBER 115487, RECORDED UNDER RECORDING
NUMBER 9101221562.

RIGHT TO MAKE NECESSARY SLOPES FOR CUTS OR FILLS UPON PROPERTY HEREIN DESCRIBED
AS RESERVED IN CITY OF SEATTLE ORDINANCE NUMBER 116905, RECORDED UNDER RECORDING
NUMBER 9311021657.

MATTERS DISCLOSED BY UNRECORDED SURVEY BY BUSH, ROED & HITCHINGS, INC., DATED
JUNE 2, 2002, JOB NO. 96189.09.

NON-DELINQUENT TAXES AND ASSESSMENTS WHICH ARE NOT SHOWN AS EXISTING LIENS BY
THE RECORDS OF ANY TAXING AUTHORITY THAT LEVIES TAXES OR ASSESSMENTS ON REAL
PROPERTY OR BY THE PUBLIC RECORD.

GENERAL TAXES AND RELATED CHARGES PAYABLE THEREWITH, IF ANY, FOR 2002, A LIEN
NOW PAYABLE, BUT NOT YET DELINQUENT.

                                       B-2



                                    EXHIBIT C
                      ACCESS AND CONFIDENTIALITY AGREEMENT

         This ACCESS AND CONFIDENTIALITY AGREEMENT (this "Agreement") is
executed effective as of the date indicated below, by undersigned ("Contractor")
for the benefit of ZYMOGENETICS, INC., a Washington corporation ("ZGI").

         A. ZGI owns certain real property and improvements commonly known as
1201 and 1208 Eastlake Avenue East in Seattle, Washington (the "Property").

         B. ZGI is the tenant and _______________________________.("ARE") is the
landlord under those certain Leases dated _______________________, 2002 for the
Property (the "Leases"). Pursuant to Section 21 of each of the Leases, Landlord
has various rights of access to the Property and a corresponding right to extend
that right of access to its agents, consultants, contractors and
representatives.

         C. ARE requested that ZGI allow Contractor to enter the______________
Property (the "Subject Property") for the following purpose:
_____________________________________ (the "Access Purpose").

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Contractor agrees and acknowledges as follows:

         1. Purpose. Subject to the terms and provisions of this Agreement and
the Leases, Contractor, as ARE's agent, will be entering upon the Subject
Property to perform the Access Purpose at ARE's request and direction.

         2. Conditions to Entry. Contractor's access to the Property will be
limited to regular business hours. At least 2 business days prior to entering
onto or into the Subject Property, Contractor shall contact ZGI's
representative, Scott Anderson at (206) 442-6747 or Cecil Weight at (206)
442-6689 who will make arrangements to have the Contractor accompanied by a ZGI
representative ("ZGI Representative"). Contractor must be accompanied by a ZGI
Representative at all times Contractor is on the Subject Property, and all of
Contractor's activities shall be in accordance with all applicable Laws and
regulations.

         3. Costs. Contractor is engaged by ARE. ARE is not acting as ZGI's
agent and ZGI is not liable to pay Contractor for any services provided by
Contractor to ARE.

         4. Inspection Obligations. While on the Subject Property and while
performing the Access Purpose, Contractor shall: (a) not interfere with the use
of the Subject Property by any occupant; (b) not interfere with the operation
and maintenance of the Subject Property or any construction on the Subject
Property; (c) not damage any part of the Subject Property or personal property
located at the Subject Property owned or held by any person or entity; (d) not
injure or otherwise cause bodily harm to any ZGI Representative or any other
person or entity; (e) maintain comprehensive general liability (occurrence)
insurance covering any accident arising in connection with the presence of the
Contractor on the Subject Property in an amount not less than $2,000,000,
evidence of such insurance shall name ZGI as an additional insured and be
delivered to the ZGI Representative prior to accessing the Subject Property; (f)
not permit any liens to attach to the Subject Property by reason of Contractor's
work; and (g) not conduct any invasive activities, unless Contractor confirms in
advance that ZGI has consented to each such invasive inspection.

                                       C-1



         5. Confidentiality. Contractor and all of Contractor's partners,
members, officers, directors, and attorneys (collectively the "Contractor
Parties") will treat as confidential all the information disclosed to them by
ZGI and/or ARE or discovered in connection with its access to the Subject
Property (whether information is disclosed orally, in writing or in visual or
electronic form, and including any observations, knowledge, information, reports
(written or oral), tests, or studies (together with the results of such studies
and tests) obtained by or provided to any of the Contractor Parties regarding
the Subject Property, whether in connection with the Inspections, Contractor's
review of the due diligence materials delivered or made available to Contractor,
or otherwise, but not including information known by Contractor prior to any
disclosures by ZGI and/or ARE or any information that is generally known or
available to the public) (the "Information"), giving it no less care than
Contractor's own confidential information, and make no use of any such
Information except in connection with its engagement by ARE and subject to the
limitations on ARE's use of the Information pursuant to Section 21.4 of the
Leases, or to the extent required by court or legal requirements (which may
include SEC regulations, NYSE and NASDAQ requirements). Contractor will not
record any memorandum disclosing this Agreement.

         If Contractor receives any Information from ZGI, it will return
originals and all copies of Information to ZGI immediately upon request (except
for the copy delivered to ARE). In addition, and except as required by
applicable law, Contractor shall not issue any release, make any statement to,
or confirm or deny any statement made by the media without both ZGI and ARE's
advance written consent, which may be withheld in their sole and absolute
discretion.

         6. Indemnification and Repair. Contractor hereby agrees to indemnify,
defend (with counsel acceptable to ZGI), and hold ZGI and its officers,
directors, successors, and assigns harmless from and against any and all liens,
claims, causes of action, liabilities, demands, suits, obligations, losses,
penalties, costs, and expenses (including reasonable attorneys' fees)
(generally, "Damages"), including without limitation, Damages for any actual
physical damage to the Subject Property or any injury to persons, all to the
extent caused by or in connection with the entry onto the Subject Property by a
Contractor Party or an act of a Contractor Party; provided, however, that
Contractor's indemnity hereunder shall not include any Damages to the extent
resulting from the acts or omissions of any ZGI Representative; and provided
further, if there are any liens arising from or relating to Contractor's entry
or any other activity of the Contractor Parties relating to the Subject
Property, then Contractor will cause such liens to be removed from the Subject
Property within 10 business days after notice thereof, and if Contractor fails
to timely perform, then ZGI shall thereafter have the right but not the
obligation to pay the amount claimed on the lien and collect from Contractor all
costs incurred in removing the lien, including attorney's fees. In addition,
Contractor shall promptly repair any physical damage to the Subject Property
caused by any Contractor Party. ZGI will only have two years from the last date
of Contractor's access to the Subject Property to commence an against Contractor
under this Section.

         7. No Right of Contribution from ARE. Contractor agrees that if it
breaches its rights hereunder and such breach results in a payment to ZGI, then
Contractor will not have any right to seek contribution or reimbursement from
ARE.

         8. Entire Agreement. This Agreement reflects the entire Agreement
between Contractor and ZGI, and there are no other agreements, oral or written,
between Contractor and ZGI regarding the Subject Property. This Agreement can be
amended only by written agreement signed by both ZGI and Contractor.

         9. Survival. This Agreement, and the terms, covenants, and conditions
herein contained, shall inure to the benefit of and be binding upon the heirs,
personal representatives, successors, and assigns of each of the Contractor and
ZGI. Contractor agrees that all of the Contractor Parties' access to the Subject
Property is subject to this Agreement.

         10. Governing Law, Legal Expenses. This Agreement will be construed,
performed, and enforced in accordance with the laws of the State of Washington.
Supplementing ZGI's rights under Section 6 above, if any action, arbitration or
proceeding (including any appeal thereof) is brought by ZGI to enforce its
rights under this Agreement or to collect a judgment against Contractor arising
from this

                                       C-2



Agreement, the unsuccessful party therein shall pay all enforcement costs
incurred by the prevailing party therein, including reasonable attorneys' fees
and costs.

         11. Notice. For purposes of this Agreement only, any notice (including
written notice) required by this Agreement may be provided either to:

         ZGI:                 ZYMOGENETICS, INC.
                              Attn: Chief Financial Officer
                              1201 Eastlake Avenue East
                              Seattle, WA 98121
                              Telephone:   (206)442-6600
                              Facsimile:  (206)442-6608

         Contractor:          see address below signature


     IN WITNESS WHEREOF, Contractor has executed this Agreement effective as of
_______________, 2002.

Contractor:

_____________________________________________
a____________________________________________________


By:__________________________________________________

Name:________________________________________________
Title:_______________________________________________
Notice Address:______________________________________
_____________________________________________________
Fax:_________________________________________________
Telephone:___________________________________________

                                       C-3



                                    EXHIBIT D
                                LETTER OF CREDIT

                      IRREVOCABLE STANDBY LETTER OF CREDIT

PLACE AND DATE OF ISSUE:                        CREDIT NUMBER:  ___________
____________________[PLACE]                     DATE AND PLACE OF EXPIRY:
____________________[DATE]                      ___________ [DATE]
                                                IN __________________[PLACE]

BENEFICIARY:                                    APPLICANT:  [TENANT]
__________________________________              ____________________________
__________________________________              ____________________________
__________________________________              ____________________________


Up to an aggregate amount of ____________________ US DOLLARS (US$____________).

Dear Sirs:

We hereby issue in your favor this Standby Letter of Credit which is available
by your drafts at sight drawn on [ISSUER], at [OFFICE OF ISSUER] and accompanied
by one of the following documents:

     1.   Your notarized signed written certification, stating substantially the
          following (all blank spaces shall be completed by Beneficiary):

               In reference to [ISSUER] Letter of Credit No. ____________, we
               hereby certify and affirm that an event has occurred which
               entitles [BENEFICIARY] to draw on this Letter of Credit pursuant
               to that certain lease dated [LEASE DATE] between [BENEFICIARY],
               "Landlord," and [TENANT] "Tenant."

               We hereby irrevocably instruct [ISSUER] to pay the sum of $
               _______ Such sum shall be paid directly to [BENEFICIARY] at
               ___________________________________.


               IN WITNESS WHEREOF, the undersigned has executed and delivered
               this Certificate as of the ____ day of _______________, 200__.

                              __________________________________,


                              By: _______________________________
                                    Name:
                                    Title:

     2.   Your notarized signed written certification, notarized, stating
          substantially the following (all blank spaces shall be completed by
          Beneficiary):

               In reference to [ISSUER] Letter of Credit No. ________ we hereby
               certify that this Letter of Credit is to expire within 30
               business days and Tenant has not provided a renewal of this
               Letter of Credit or an acceptable security replacement after 5
               business days notice as required by that certain Lease dated
               [LEASE DATE] between [BENEFICIARY], "Landlord," and [TENANT]
               "Tenant."

               We hereby irrevocably instruct [ISSUER] to pay the sum of
               $__________ directly to [BENEFICIARY] at
               _______________________________ ____________________.

                                       D-1



               IN WITNESS WHEREOF, the undersigned has executed and delivered
               this Certificate as of the ____ day of _______________, 200___.

                              ___________________________________,



                              By: _______________________________
                                    Name:
                                    Title:

This Letter of Credit may be drawn in whole or in part from time to time to the
aggregate of its face amount.

This Letter of Credit is transferable. Transfer of this Letter of Credit is
subject to our receipt of beneficiary's instructions in the form attached hereto
as Exhibit A accompanied by the original Letter of Credit and amendment(s) if
any, costs or expenses of such transfer shall be for the account of the
beneficiary.

We hereby agree with the beneficiary that documents presented to our office in
compliance with the terms and conditions of this letter of credit will be duly
honored as specified herein.

This Letter of Credit is subject to the International Standby Practices 1998,
ICC Publication No. 590. [or other convention selected by Issuer]

All inquiries and/or correspondence pertaining to this Letter of Credit must be
in writing and directed to the attention of _____________________, telephone
number _____________________ at the above mentioned address and must
specifically refer to this Letter of Credit No. ____________________.

                              Very truly yours,
                              [ISSUER]

                              By: _______________________________
                                   Authorized Signature
                                   Title:

                                       D-2



                                    EXHIBIT A

                 REQUEST FOR ENTIRE TRANSFER OF LETTER OF CREDIT
                        WITHOUT SUBSTITUTION OF INVOICES

{Issuer}
________________________            Letter of Credit No.________
ADDRESS

________________________

TO:      [Issuer]

We request you to transfer all of our rights as beneficiary under the Letter of
Credit referenced above to a second beneficiary named below:

________________________________________________________________________________
NAME OF SECOND BENEFICIARY

________________________________________________________________________________
ADDRESS

By this transfer, all our rights as the original beneficiary, including all
rights to make drawings under the Letter of Credit, go to the second
beneficiary. The second beneficiary shall have sole rights as beneficiary,
whether existing now or in the future, including sole rights to agree to any
amendments, including increases or extensions or other changes. All amendments
will be sent directly to the second beneficiary without the necessity of consent
by or notice to us.

We enclose the original letter of credit and any amendments. Please indicate
your acceptance of our request for the transfer by endorsing the letter of
credit and send it to the second beneficiary with your customary notice of
transfer.

__       Enclose is our check for $_________________

__       You may debit my/our account No. _________

We also agree to pay you on demand any expenses which may be incurred by you in
connection with this transfer.

The signature and title below conform with those shown in our files as
authorized to sign for the beneficiary. Policies governing signature
authorization as required for withdrawals from customer accounts shall also be
applied to the authorization of signatures on this form.

_________________________________________
NAME OF BENEFICIARY


_________________________________________
NAME OF AUTHORIZED SIGNER AND TITLE

_________________________________________
AUTHORIZED SIGNATURE

                                       D-3



- -----------------------------------------
                                            Date: __________________________
_________________________________________
NAME OF BANK

_________________________________________
AUTHORIZED SIGNATURE AND TITLE

- -----------------------------------------

                                       D-4



                                    EXHIBIT E
                                PLEDGE AGREEMENT

                        SECURITY DEPOSIT PLEDGE AGREEMENT

     THIS SECURITY DEPOSIT PLEDGE AGREEMENT (the "Agreement"), dated as of
_______________, 20__, is between ZYMOGENETICS, INC, a Washington corporation
("Tenant"), and ____________________________, a _______________ ("Landlord").

     The parties hereto agree as follows:

1.   Definitions

     For purposes of this Agreement, the following terms have the meanings set
forth below:

     "Collateral" has the meaning specified in Section 5.

     "Collateral Securities" means fixed income securities that meet the
following requirements:

     (a) are rated AA or A1 or better by Standard & Poor's Rating Group;
     (b) are freely transferable without restriction of any kind (including any
restrictions that may be imposed under federal or state securities laws); and
     (c) have remaining maturities of not more than 2 years.

     "Control Account" means the account established by Tenant in its name at
_________________ or such other brokerage firm or bank as Landlord may
reasonably approve, which account is subject to the terms and conditions of the
Control Account Agreement.

     "Control Account Agreement" means the "Security, Custodian and Control
Account Agreement" in substantially the form of EXHIBIT A hereto, which is
entered into with respect to the Control Account.

     "Event of Default" has the meaning specified in Section 8.

     "Lease" means the "Lease" between Tenant and Landlord dated ______________,
2002, as now or hereafter amended, relating to_____________ [street address],
Seattle, Washington.

     "Market Value" means, as of any date of determination, the market value of
the Collateral Securities then held in the Control Account, as reflected, at
Landlord's option, as of the end of a business day in the Wall Street Journal or
other any nationally recognized business publication of similar stature
containing the current bid and asked prices for securities traded on a major
exchange in the United States or on the most recently monthly account statement
delivered to Landlord and Tenant pursuant to the Control Account Agreement.

2.   Purpose

     This Agreement is for the purpose of securing the prompt payment and
performance in full when due, whether at stated maturity, by acceleration or
otherwise, of Tenant's obligations (the "Obligations") with respect to the
security deposit (the "Security Deposit") that are detailed in Section 7 of the
Lease. The amount of the Security Deposit which is to be covered by the
Collateral described in this Agreement is $______________ and is referred to
herein as the "Required Balance."

3.   Collateral Securities

     As collateral for the Obligations throughout the term of the Lease, Tenant
will pledge to Landlord, and grant Landlord, a perfected, first priority
security interest in, Collateral Securities held in the Control

                                       E-1



Account with a Market Value at all times equal to the Required Balance. A list
of the initial Collateral Securities pledged by Tenant and held in the Control
Account is attached to this Agreement as EXHIBIT B.

4.   Control Account

     Subject to the terms of the Agreement and the Control Account Agreement,
the Collateral Securities pledged by Tenant pursuant to this Agreement shall at
all times be held in the Control Account. The maintenance, disposition and
transfer of the Control Account and all Collateral Securities held therein shall
at all times be subject to the terms of the Agreement and the Control Account
Agreement.

5.   Grant of Perfected First Lien Security Interest

     Throughout the term of the Lease, as security for the Obligations, Tenant
hereby delivers, pledges, grants, transfers, assigns and sets over to Landlord,
and hereby grants to Landlord a continuing perfected first lien security
interest in, the following (the "Collateral"):

     (a) All Collateral Securities, cash and other assets held in the Control
         Account;
     (b) The Control Account;
     (c) All securities entitlements and financial assets relating to the
         foregoing; and
     (d) All proceeds and products of any of the foregoing held in the Control
         Account.

6.   Consent Rights, Trading Rights and Payments in Respect of the Collateral

     (a) So long as no Event of Default has occurred and is continuing, Tenant
shall be entitled (i) to exercise (but not in a manner inconsistent with this
Agreement or the Control Account Agreement) all consent or other voting rights
with respect to the Collateral Securities, (ii) to receive and retain all
regularly scheduled payments of interest or dividends in respect of the
Collateral Securities or (iii) to substitute at any time during the term of the
Lease the Collateral Securities with other Collateral Securities, provided
Landlord obtains a perfected first priority security interest in the substitute
Collateral Securities prior to the release of the pledged Collateral Securities
and provided that Market Value of all Collateral Securities after the
substitution is equal to or greater than the Required Balance. Upon such
substitution, release and withdrawal of such released assets from the Control
Account, such released assets will no longer be subject to a security interest
in favor of Landlord and, unless subsequently re-deposited into the Control
Account, will no longer be "Collateral": within the meaning of this Agreement.

     (b) If an Event of Default (as defined in the Lease) has occurred and is
continuing, Landlord shall be entitled (i) to exercise all consent or other
voting rights with respect to the Collateral Securities, (ii) to any and all
rights of sale, conversion, exchange, subscription, withdrawal and any other
rights, privileges or options pertaining to the Collateral as if Landlord were
the absolute owner thereof and (iii) to receive and retain, as additional
Collateral hereunder, any and all interest, dividends or other payments at any
time and from time to time paid on the Collateral; provided, however, that prior
to any exercise by Landlord of any of the preceding rights with respect to the
Collateral Securities, Landlord agrees to provide Tenant 3 business days' prior
written notice of its intent to exercise its rights to the Collateral.

     (c) Any principal amount at any time paid in respect of the Collateral
Securities (whether at the acceleration thereof, as a scheduled or mandatory
sinking fund payment, in redemption or prepayment thereof or at the maturity
thereof) shall constitute part of the Collateral and shall be held in the
Control Account until reinvested as provided in the Collateral Account
Agreement. If for any reason Tenant should receive any such payment of principal
in respect of the Collateral Securities, Tenant shall receive and hold the same
in trust, for the benefit of Landlord, and shall promptly deposit such payment
(or, at Tenant's option, substitute Collateral Securities) in the Control
Account.

                                       E-2



7.   Representations, Warranties and Covenants by Tenant

     (a) Tenant represents that the execution, delivery and performance of this
Agreement does not violate any agreement to which it is bound or any law or
regulation applicable to Tenant, and that it has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder.

     (b) Tenant represents that it is the sole beneficial owner of the
Collateral Securities and the proceeds thereof free and clear of any security
interest or other encumbrance other than the first priority security interest
created favor of Landlord pursuant to and in accordance with this Agreement and
Tenant will not create or permit to exist any other security interest or other
encumbrance against the Collateral. Tenant further represents, except as
permitted under this Agreement and the Control Account Agreement, that for the
term of this Agreement it will not sell, convey, transfer or otherwise dispose
of any of the Collateral Securities.

     (c) Tenant represents that this Agreement and delivery of the Collateral
into the Collateral Account creates a valid, perfected, and first priority
security interest in the Collateral in favor of Landlord, and all actions
necessary to achieve such perfection have been duly taken.

     (d) Tenant represents that this Agreement and delivery of the substitute
Collateral Securities into the Collateral Account pursuant to clause (iii) of
Section 6(a) will create a valid, perfected, and first priority security
interest in the substitute Collateral in favor of Landlord, and all actions
necessary to achieve such perfection, upon delivery to the Custodian, will have
been duly taken.

     (e) Tenant at all times will cause the Control Agreement to remain in full
force and effect and will cause the Collateral Securities to be held in the
Control Account.

     (f) Upon demand by Landlord, Tenant will permit inspection of the
Collateral Securities by Landlord.

     (f) Tenant at all times will cause the Market Value of Collateral
Securities held in the Control Account to equal or exceed the Required Balance.
If, at any time, the Market Value of Collateral Securities held in the Control
Account is less than the Required Balance, Tenant shall immediately cause to be
deposited in the Control Account additional Collateral Securities with a Market
Value sufficient to cause the aggregate Market Value of all Collateral
Securities then held in the Collateral Account to equal or exceed the Required
Balance.

8.   Liability

     Tenant shall indemnify the financial institution party to the Control
Account Agreement for any and all costs and expenses, and attorney's fees and
court costs, which directly result from any sale of Collateral Securities and
the withdrawal of the settlement proceeds thereof (not to exceed the amount of
the Security Deposit Amount) authorized by Landlord to fulfill any of Tenant's
Obligations; provided, however, that nothing in this indemnification provision
shall operate or be construed to limit Tenant's rights against Landlord under
the terms of the Lease or Landlord's rights against Tenant thereunder. Tenant
shall indemnify and defend, with counsel reasonably acceptable to Landlord,
Landlord's right, title and first priority security interest in the Collateral
and Substitute Collateral. After Landlord delivers a Notice of Exclusive Control
to the financial institution party to the Control Account Agreement, (a)
Landlord may liquidate or sell all or any part of the Collateral in a
commercially reasonable manner and whether or not the value of any of the
Collateral is rising, falling or holding, and (b) Landlord is not required to
exercise any right, option or privilege arising from or relating to the
Collateral. The provisions of this section shall survive expiration or
termination of this Agreement or any determination that this Agreement or any
portion is void or voidable.

                                       E-3



9.     Assignment and Amendment

       (a) This Agreement may not be amended without the prior written consent
of both parties.

       (b) This Agreement may not be assigned by either party without the prior
written consent of the other party; provided, however, that:

  (i)  Landlord may, at any time, and without notice to or the necessity of
  obtaining Tenant's consent, assign to any financial institution providing a
  loan to Landlord in connection with the property subject of the Lease
  (together with any such financial institution's successors or assigns, the
  "Lender") all of its rights under, and interest in, this Agreement. Within one
  (1) business day after making any such assignment, Landlord shall deliver to
  Tenant written notice of the assignment and a copy of the instrument of
  assignment. Upon receipt by Tenant of the aforementioned notice, Lender shall
  thereafter succeed to all of the rights and privileges of Landlord and shall
  be subject to the same obligations, terms, conditions and restrictions
  applicable to Landlord under the terms of this Agreement, provided that after
  Lender sends Custodian a Lender Notice of Exclusive Control pursuant to
  Section 10(b) of the Control Account Agreement, Lender shall also be subject
  to the same obligations (including indemnification obligations arising from
  and after the date of the Lender Notice of Exclusive Control) as Landlord.
  Lender will not be liable for any act, omission or breach by Landlord of any
  obligation under this Agreement or the Control Account Agreement which occurs
  prior to the date of the Lender Notice of Exclusive Control and will, upon any
  sale or transfer by Lender of its interest in the property and the Lease,
  automatically be released and discharged from any and all liability thereafter
  accruing under this Agreement or the Control Account Agreement; and

  (ii) If Landlord assigns its interest in the Lease, whether voluntarily or
  through involuntary assignment or transfer such as bankruptcy or foreclosure,
  such assignment will automatically and without further action or notice to
  Tenant, cause an assignment of Landlord's rights in this Agreement and the
  Collateral to the assignee and upon the assignee's assumption of Landlord's
  obligations under the Lease (including Landlord's obligations with respect to
  this Agreement and the Collateral), Landlord will thereafter accrue no further
  liability for the return of the Collateral. Upon request of either party,
  Landlord and Tenant agree to execute such documents as may be necessary or
  desirable to reflect or better confirm such assignment, assumption and/or
  release.

10.    Waivers

       A waiver by either party of a breach of any provision of this Agreement
shall not constitute a waiver of any subsequent breach of such provision or of
any other provision hereof. Failure of either party to enforce at any time or
from time to time any provision of this Agreement shall not be construed as a
waiver thereof.

11.    Severability

       Each provision of this Agreement is intended to be severable from the
others so that if any provision or term hereof is illegal or invalid for any
reason whatsoever, such illegality or invalidity shall not affect the validity
of the remaining provisions and terms hereof.

12.    Governing Law:  Successors Bound

       This Agreement shall be construed in accordance with the internal laws of
the State of Washington, determined without regard to conflicts of law. Subject
to all the terms and provisions hereof, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. Each party hereto consents to submit to the jurisdiction of the courts
of the State of Washington and of the United States of America located in King
County, Washington for any action, suit or proceeding arising out of or relating
to this Agreement. Each party further waives any objection to the laying of
venue of any such action, suit or proceeding in such courts, and further agrees

                                       E-4



not to plead or claim in any such court that any such action, suit or proceeding
has been brought in an inconvenient forum.

13.  Notices

     All notices must be in writing and must be sent by personal delivery,
United States registered or certified mail (postage prepaid) or by an
independent overnight courier service, addressed to the addresses specified
below or at such other place which is not a post office box as either party may
designate to the other party by written notice given in accordance with this
section. Notices given by mail are deemed effective within 3 business days after
the party sending the notice deposits the notice with the United States Post
Office. Notices delivered by courier are deemed effective on the next business
day after the day the party delivering the notice timely deposits the notice
with the courier for overnight (next day) delivery.

If to Tenant:                        ZymoGenetics, Inc.
                                     Attn: Chief Financial Officer
                                     1201 Eastlake Avenue E.
                                     Seattle, WA 98121
                                     Telephone:  (206) 442-6600
                                     Fax: (206) 442-6608

                  With a copy to:    Real Property Law Group, PLLC
                                     Attn:  Cynthia Thomas
                                     1218 Third Avenue, Suite 1900
                                     Seattle, WA 98101
                                     Telephone:  (206) 625-1717
                                     Fax:  (206) 374-2782

If to Landlord:                      _________________________
                                     Attn: ___________________
                                     _________________________
                                     _________________________
                                     Telephone: ______________
                                     Fax: ____________________

                  With a copy to:    Stoel Rives LLP
                                     Attn:  David H. Rockwell
                                     600 University Street, Suite 3600
                                     Seattle, WA 98101-3197
                                     Telephone:  (206) 386-7694
                                     Fax:  (206) 386-7500

14.  Entire Agreement

     This Agreement, together with the Lease and the Control Account Agreement,
embody the entire agreement and understanding between the parties pertaining to
the subject matters hereof and thereof, and supersedes any prior agreements,
understandings, negotiations, representations and discussions, whether oral or
written, of the parties, pertaining to such subject matters. The parties
acknowledge that they have all participated in the drafting of this Agreement,
and that they all have been represented by legal counsel of their own choosing
and the language of all parts of this Agreement shall in all cases be construed
as a whole, according to its fair meaning, and not strictly for or against any
of the parties.

15.  Further Assurances

     Tenant shall, upon the request of Landlord, execute and deliver such other
instruments and take and cause to be taken such further actions as may be
reasonably necessary or reasonably appropriate to

                                       E-5



carry out the provisions and purposes of this Agreement, and specifically to
continue the creation, attachment and perfection of the security interest
granted hereunder.

         IN WITNESS WHEREOF, Tenant and Landlord have caused this Agreement to
be executed by their proper corporate officers as of the day and year first
above written.

                                               TENANT

                                               ZymoGenetics, Inc.
                                               a Washington corporation

                                               By_______________________________
                                                  Name:_________________________
                                                  Title:________________________


                                               LANDLORD:

                                               _________________________,
                                               a _____________________


                                               By_______________________________
                                                  Name:_________________________
                                                  Title:________________________

                                       E-6



                                    EXHIBIT F
                               CUSTODIAL AGREEMENT

                            ACCOUNT CONTROL AGREEMENT

     THIS ACCOUNT CONTROL AGREEMENT (this "Agreement") is made and entered into
as of the _____________day of _________________, 200_, by and among UNION BANK
OF CALIFORNIA, N.A., a national banking association ("Securities Intermediary'),
___________________________________, a ___________________("Customer"), and
____________________________________, a
_________________________________________("Secured Party").

                                    RECITALS:

     A. Pursuant to a Personal Custody Agreement, dated _______________, 200_
(the "Account Agreement"), by and between Customer and Securities Intermediary,
Customer has established a securities account, bearing Account No. _________
_______________________ (the "Account"), with Securities Intermediary.

     B. Pursuant to a ____________________________ , dated __________________,
200_ (the "Security Agreement"). Customer has granted to Secured Party a
security interest in certain personal property of Customer, including without
limitation (i) the Account, (ii) all securities entitlements, investment
property and other financial assets now or hereafter credited to the Account,
(iii) all of Customer's rights in respect of the Account, such securities
entitlements, investment property and other financial assets, and (iv) all
products, proceeds and revenues of and from any of the foregoing personal
property (collectively, the "Collateral").

     C. Securities Intermediary, Customer and Secured Party are entering into
this Agreement in order to perfect Secured Party's security interest in the
Account by means of control.

                                   AGREEMENT:

In consideration of the foregoing recitals, Securities Intermediary, Customer
and Secured Party hereby agree as follows:

1. All terms used in this Agreement which are defined in the Commercial Code of
the state whose law governs this Agreement ("Commercial Code") but are not
otherwise defined herein shall have the meanings assigned to such terms in the
Commercial Code, as in effect on the date of this Agreement.

2. Upon receipt of a fully executed and acknowledged Notice of Exclusive
Control, substantially in the form attached as Exhibit A, Securities
Intermediary will comply with all entitlement orders originated by Secured Party
with respect to the Collateral, or any portion of the Collateral, without
further consent by Customer.

3. Securities Intermediary hereby represents and warrants (a) that the records
of Securities Intermediary show that Customer is the sole owner of the
Collateral, (b) that Securities Intermediary has not been served with any notice
of levy or received any notice of any security interest in or other claim to the
Collateral, or any portion of the Collateral, other than Secured Party's claim
pursuant to this Agreement, and (c) that Securities Intermediary is not
presently obligated to accept any entitlement order from any person with respect
to the Collateral, except for entitlement orders that Securities Intermediary is
obligated to accept from Secured Party under this Agreement and entitlement
orders that Securities Intermediary, subject to the provisions of Section 5
below, is obligated to accept from Customer.

                                       F-1



4. Without the prior written consent of Secured Party, Securities Intermediary
will not enter into any agreement by which Securities Intermediary agrees to
comply with any entitlement order of any person other than Secured Party or,
subject to the provisions of Section 5 below, Customer, with respect to any
portion or all of the Collateral. Securities Intermediary shall promptly notify
Secured Party and Customer if any person requests Securities Intermediary to
enter into any such agreement or otherwise assert or seeks to assert a lien,
encumbrance or adverse claim against any portion or all of the Collateral.

5. Except as otherwise provided in this Section 5, Securities Intermediary may
allow Customer to effect sales, trades, transfers and exchanges of Collateral
within the Account, but will not, without the prior written consent of Secured
Party, allow Customer to withdraw any Collateral from the Account (other than
withdrawals consisting solely of ordinary cash dividends or interest income).
Securities Intermediary acknowledges that Secured Party reserves the right, by
delivery of a fully executed and acknowledged Notice of Exclusive Control to
Securities Intermediary, to prohibit Customer from effecting any further
withdrawals (including withdrawals of ordinary cash dividends and interest
income), sales, trades, transfers or exchanges of any Collateral held in the
Account. Further, upon receipt of such fully executed and acknowledged Notice of
Exclusive Control, Securities Intermediary hereby agrees from thereafter to
comply with any and all written instructions delivered by Secured Party to
Securities Intermediary and from thereafter has no obligation to and will not,
investigate the reason for any action taken by Secured Party, the amount of any
obligations of Customer to Secured Party, the validity of any of Secured Party's
claims against or agreements with Customer, the existence of any defaults under
such agreements, or any other matter.

6. Customer hereby irrevocably waives any rights Customer may have under the
Account Agreement to the extent such rights are inconsistent with the provisions
of this Agreement, and hereby irrevocably authorizes Securities Intermediary to
comply with all instructions and entitlement orders delivered by Secured Party
to Securities Intermediary.

7. Securities Intermediary will not attempt to assert control, and does not
claim and will not accept any security or other interest in any part of the
Collateral, and Securities Intermediary will not exercise, enforce or attempt to
enforce any right of setoff against the Collateral, or otherwise charge or
deduct from the Collateral any amount whatsoever, except for any right
Securities Intermediary may have to collect account maintenance or similar fees
under the Account Agreement.

8. Securities Intermediary and Customer shall not amend, supplement or otherwise
modify the Account Agreement (including, without limitation the choice of law
provision and provisions providing for treatment of property held in the Account
as a financial asset) in any respect without Secured Party's prior written
consent.

9. Securities Intermediary shall not terminate the Account, and shall not permit
Customer to terminate the Account, without Secured Party's prior written
consent.

10. This Agreement shall remain in full force and effect until Securities
Intermediary receives written notice of its termination given by Secured Party.

11. Securities Intermediary and Customer hereby agree that any property held in
the Account shall be treated as a financial asset under such section of the
Commercial Code as corresponds with Section 8-102 of the Uniform Commercial
Code, notwithstanding any contrary provision of any other agreement to which
Securities Intermediary may be a party.

12. Securities Intermediary is hereby authorized and instructed, and hereby
agrees, to send to Secured Party at its address set forth in Section 18 below,
concurrently with the sending thereof to Customer, duplicate copies of any and
all monthly Account statements or reports issued or

                                       F-2



sent to Customer with respect to the Account. In addition, Securities
Intermediary shall (i) issue a confirmation or safekeeping receipt to both
Customer and Secured Party for each transaction made on the Account; and (ii)
upon request will provide Secured Party with information on the Account and the
financial assets held therein, and will provide Customer with a copy of any
information provided to Secured Party.

13. This Agreement does not create any obligation or duty on the part of
Securities Intermediary other than those expressly set forth herein. Secured
Party and Customer hereby acknowledge that Securities Intermediary has no
obligation to monitor the value of the Collateral for Secured Party or Customer.

14. Secured Party and Customer hereby agree, jointly and severally, to indemnify
and hold harmless Securities Intermediary from and against any and all losses,
liabilities, demands, claims, expenses and attorneys' fees which Securities
Intermediary may incur or suffer if all or any portion of the Collateral is
found to be fraudulent in nature or otherwise worthless or invalid for any
reason excepting only such losses, liabilities, demands, claims, expenses and
attorneys' fees which result solely from the gross negligence or willful
misconduct of Securities Intermediary.

15. Any forbearance or failure or delay by Secured Party in exercising any right
hereunder shall not be deemed a waiver thereof and any single or partial
exercise of any right shall not preclude the further exercise thereof. This
Agreement may be amended only in writing signed by all parties hereto.

16. Notwithstanding the terms of any other agreement, the parties hereto agree
that this Agreement shall be governed under and in accordance with the laws of
the State of California and, for purposes of this Agreement, such state shall be
deemed to be Securities Intermediary's jurisdiction.

17. This Agreement constitutes the entire agreement among Securities
Intermediary, Customer and Secured Party with respect to the subject matter
hereof, and all prior communications, whether verbal or written, between any of
the parties hereto with respect to the subject matter hereof shall be of no
further effect or evidentiary value.

18. Any notice or other communication provided for or allowed hereunder shall be
effective only when given by one of the following methods and addressed to the
respective party at its address provided below (or at such other address as the
party changing its address shall notify the others as provided herein) and shall
be considered to have been validly given (a) upon delivery, if delivered
personally, (b) upon receipt, if mailed, first class postage prepaid with the
United States Postal Service, (c) on the next business day, if sent by overnight
courier service of recognized standing, and (d) upon telephoned confirmation of
receipt, if telecopied:

If to Securities Intermediary:
Union Bank of California, N.A.

_______________________________
_______________________________
_______________________________

If to Secured Party:

_______________________________
_______________________________
_______________________________

If to Customer:

_______________________________
_______________________________
_______________________________

                                       F-3



19. To the extent that the terms or conditions of this Agreement are
inconsistent with the Account Agreement or any other document, instrument or
agreement between Securities Intermediary and Customer, the terms and conditions
of this Agreement shall prevail.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.

"Securities Intermediary"                "Customer"              "Secured Party"

{Signature blocks to be inserted}

                                       F-4



                                    EXHIBIT A
                                       TO
                            ACCOUNT CONTROL AGREEMENT

                       Form of Notice of Exclusive Control
                                ____________, __
TO:  [Name and address of Custodian]
     ___________________________________
     ___________________________________
     ___________________________________

     Re:  Notice of Exclusive Control--Account No. ___________ (the "Account")

Dear Sir/Madam:

     Pursuant to the provisions of the Account Control Agreement dated as of
___________, among the undersigned as Secured Party, ZymoGenetics, Inc. as
Customer and you as Securities Intermediary (the "Agreement"), the undersigned
hereby gives notice of the exercise of exclusive control over the Account due to
the occurrence and continuance of an Event of Default under the security
agreement between Customer and the undersigned. Subject to the provisions of the
Agreement, you are hereby notified that from this date forward you are
instructed to comply only with entitlement orders for the Account issued by the
undersigned.

     In accordance with the Agreement, you are hereby notified to cease
complying with entitlement orders or other directions concerning the Account or
the Financial Assets therein, or from making any withdrawals from the Account,
if such directions, orders or requests are originated by Customer or its
representatives.

     The undersigned hereby affirms and certifies under penalty of perjury that
three (3) business days prior to the date hereof it has given notice to Customer
that it is in default under the security agreement, that Customer has not cured
such default, and such notice informed Customer that the undersigned intended to
exercise its remedies under the Agreement.

     All capitalized terms used herein without definition have the same meanings
as are ascribed to such terms in the Agreement.

                                                  Very truly yours,

                                                  ______________________________

                                                  By____________________________
                                                    Name:_______________________
                                                    Title:______________________

                                       F-5



STATE OF _____________  )
                        ) ss.
COUNTY OF ___________   )

I certify that I know or have satisfactory evidence that ____________________ is
the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the __________________ of ___________________,
to be the free and voluntary act of such party for the uses and purposes
mentioned in this instrument.

DATED: ____________________.

                                          ______________________________________
                                          (Signature of Notary Public)

                                          ______________________________________
                                          (Printed Name of Notary Public)

                                          My Appointment expires:_______________

                                       F-6



                                    EXHIBIT G
                                 FIXED EQUIPMENT

    Equipment No.                               Description
    -------------                               -----------
AC-002                               AIR, CONDITIONER, WALL MOUNT
AC-1                                 BIG BOX, LAB AIR
AC-1N                                BIG BOX, NORTH
AC-1N-EF                             FAN, EXHAUST, BIG BOX, NORTH
AC-1N-SF                             FAN, SUPPLY, BIG BOX, NORTH
AC-1S                                BIG BOX, SOUTH
AC-1S-EF                             FAN, EXHAUST, BIG BOX, SOUTH
AC-1S-SF                             FAN, SUPPLY, BIG BOX, SOUTH
AC-2                                 OFFICE AIR HANDLER
BLDG-CONT-SYS                        BUILDING, CONTROL SYSTEM
BLDG-SEC-SYS                         BUILDING SECURITY SYSTEM AXXESS 200
BOIL-H20-L001                        BOILER, HOTWATER, FORCED DRAFT
BOIL-H20-L002                        BOILER, HOTWATER, FORCED DRAFT
BOIL-STM-L001                        BOILER, STEAM, NATURAL DRAFT, 125 PSI
CC-003                               COOLING COIL, IF-8, ROOF
COMPACTOR-001                        TRASH COMPACTOR, AUGER
COMP-AIR-001                         COMPRESSOR, AIR, LAB, 120 PSI
COMP-AIR-002                         COMPRESSOR, AIR, DRY FIRE SPRINKLER SYS
COMP-REF-001                         COMPRESSOR, REFRIG, AC-1S
COMP-REF-002                         COMPRESSOR, REFRIG, AC-1S
COMP-REF-003                         COMPRESSOR, REFRIG, AC-1S
COMP-REF-004                         COMPRESSOR, REFRIG, AC-1N
COMP-REF-005                         COMPRESSOR, REFRIG, AC-1N
COMP-REF-006                         COMPRESSOR, REFRIG, AC-1N
COMP-REF-007                         COMPRESSOR, REFRIG, AC-1N
CP-L001                              PUMP, HW PRODUCTION
CP-L002                              PUMP, HW PRODUCTION
CP-L003                              PUMP, HW DISTRIBUTION
CP-L004                              PUMP, HW DISTRIBUTION
CP-L006                              PUMP, CONDENSOR WATER,
CP-L007                              PUMP, CONDENSOR WATER,
CP-L008                              PUMP, HW DISTRIBUTION, IF-8
CP-L009                              PUMP, HEAT RECOVERY, BIGBOX
CT-1                                 COOLING TOWER W/4 MOTORS
CU-DP-L001                           CONDENSING UNIT, DXFC-DP-1, FREEZERS
CU-L001                              CONDENSING UNIT, DXFC-1, EXERCISE
CU-L002                              CONDENSING UNIT, DXFC-2, CAFETERIA
CU-L004                              CONDENSING UNIT, DXFC-4, COMPUTER RM
CU-L005                              CONDENSING UNIT, IF-8, VIVARIUM
CU-L006                              CONDENSING UNIT, DXFC-6, 1ST FL CMPTR RM
CU-L007                              CONDENSING UNIT, DXFC-7, 3RD FL COMTR RM
CU-RU-L001                           CONDENSING UNIT, COLD RM. 321
DH-1                                 DUCT HEATER
DH-2                                 DUCT HEATER
DOOR-FIRE-001                        DOOR,FIRE,WON
DOOR-ROLL-001                        DOOR, ROLLUP,GARAGE, ENTRANCE

                                       G-1



DOOR-ROLL-002                        DOOR, ROLLUP,GARAGE, EXIT
DOOR-ROLL-003                        DOOR, ROLLUP,GARAGE,ENTRANCE
DOOR-ROLL-004                        DOOR, ROLLUP,GARAGE,EXIT
DOOR-ROLL-005                        DOOR, ROLLUP, SHIPPING & RECEIVING
DXFC-1                               DIRECT EXCHANGE FAN COIL, EXERCISE
DXFC-2                               DIRECT EXCHANGE FAN COIL,  CAFETERIA
DXFC-4                               DIRECT EXCHANGE FAN COIL, COMPUTER RM
DXFC-6                               DIRECT EXCHANGE FAN COIL, COMPUTER RM
DXFC-7                               DIRECT EXCHANGE FAN COIL, COMPUTER RM
DXFC-DP-L001                         DIRECT EXCHANGE FAN COIL, -80 FREEZERS
ELEVATOR-001                         ELEVATOR, PASSENGER,LUSP
ELEVATOR-002                         ELEVATOR, SERVICE, LUSP
EUH-L1                               HEATER, ELECTRICAL, RO/DI ROOM
EUH-L2                               HEATER, ELECTRICAL, ISOTOPE ROOM
EUH-L3                               HEATER, ELECTRICAL, PUMP/SPRINKLER ROOM
EUH-L4                               HEATER, ELECTRICAL, PUMP/SPRINKLER ROOM
EUH-L5                               HEATER, ELECTRICAL, ELEVATOR SOUTH MECH.
EUH-L6                               HEATER, ELECTRICAL, ELEVATOR NORTH MECH.
EUH-L7                               HEATER, ELECTRICAL, MAIN WATER ROOM
FILTER-HEPA-001                      FILTER, HEPA, IN-LINE, UEF-14
FILTER-HEPA-002                      FILTER, HEPA, IN-LINE, UEF-15
FILTER-HEPA-003                      FILTER, HEPA, IN-LINE, RAD-COMPACTOR
FIRE-SYS-001                         FIRE ALARM SYSTEM AT LUSP [SITE #01]
GENERATOR-001                        GENERATOR, 250 KW
HC-L003                              HEATING COIL, IF-8, VIVARIUM
HOOD-BSC-016                         BIO SAFETY CABINET, 6FT WIDE
HOOD-BSC-046                         BIO SAFETY CABINET, 4 FT WIDE, CLASS II
HOOD-BSC-059                         BIO SAFETY CABINET, CLASS II TYPE B2
HOOD-BSC-067                         BIO SAFETY CABINET, CLASS II TYPE B2
HOOD-BSC-068                         BIO SAFETY CABINET, CLASS II TYPE B2
HOOD-FUME-003                        HOOD, FUME
HOOD-FUME-004                        HOOD, FUME
HOOD-FUME-005                        HOOD, FUME
HOOD-FUME-006                        HOOD, FUME
HOOD-FUME-007                        HOOD, FUME
HOOD-FUME-008                        HOOD, FUME
HOOD-FUME-010                        HOOD, FUME
HOOD-FUME-011                        HOOD, FUME
HOOD-FUME-012                        HOOD, FUME
HOOD-FUME-014                        HOOD, FUME
HOOD-FUME-015                        HOOD, FUME
HOOD-FUME-016                        HOOD, FUME
HOOD-FUME-017                        HOOD, FUME
HOOD-FUME-018                        HOOD, FUME
HOOD-FUME-021                        HOOD, FUME
HOOD-FUME-024                        HOOD, FUME
HOOD-FUME-027                        HOOD, FUME
HOOD-FUME-028                        HOOD, FUME
HOOD-FUME-032                        HOOD, FUME
HOOD-FUME-034                        HOOD, FUME

                                      G-2



HOOD-FUME-035                        HOOD, FUME
HOOD-FUME-036                        HOOD, FUME
HOOD-FUME-037                        HOOD, FUME
HOOD-FUME-038                        HOOD, FUME
HOOD-FUME-039                        HOOD, FUME
HOOD-FUME-040                        HOOD, FUME
HOOD-FUME-050                        HOOD, FUME, 4 FT
HRC-L005                             HEAT RECLAIM COIL, UEF-1
HRC-L006                             HEAT RECLAIM COIL, UEF-2
HRC-L007                             HEAT RECLAIM COIL, UEF-3
HRC-L008                             HEAT RECLAIM COIL, UEF-4
HRC-L009                             HEAT RECLAIM COIL, UEF-6
HRC-L011                             HEAT RECLAIM COIL, UEF-8
HRC-L012                             HEAT RECLAIM COIL, UEF-9
HRC-L013                             HEAT RECLAIM COIL, UEF-10
HRC-L014                             HEAT RECLAIM COIL, UEF-11
HRC-L015                             HEAT RECLAIM COIL, UEF-12
HRC-L017                             HEAT RECLAIM COIL, UEF-14
HRC-L019                             HEAT RECLAIM COIL,UEF-20
HRC-L020                             HEAT RECLAIM COIL,UEF-21
HRC-L021                             HEAT RECLAIM COIL, UEF-22
HUMIDIFIER-001                       HUMIDIFIER, IF-8, VIVARIUM
HWFC-1                               FAN COIL, HOT WATER
IF-1                                 FAN, IN-LINE, 37 DEG. WARM RM
IF-2                                 FAN, IN-LINE, 30 DEG. WARM RM
IF-3                                 FAN, IN-LINE, H.H. SHOWERS AND DELI R.R.
IF-4                                 FAN, IN-LINE, FLAMMABLE STORAGE
IF-5                                 FAN, IN-LINE, RADIOACTIVE RECEIVE
IF-6                                 FAN, IN-LINE, GAS CYLINDER RM.
IF-7                                 FAN, IN-LINE, BIOHAZARD STORAGE
IF-8                                 FAN, IN-LINE, VIVARIUM SUPPLY AIR
IF-9                                 FAN, IN-LINE, RADIOACTIVE COMPACTOR
LOOP-DHW-001                         DOMESTIC HOT WATER SYSTEM
LOOP-HHW-001                         LOOP, HEATING HOT WATER
LOOP-HR-001                          LOOP, HEAT RECOVERY
PUMP-HSVAC-001                       PUMP,VACUUM, HOUSE, LUSP
REF-1                                RESTROOM EXHAUST FAN
RO-DI-001                            WATER SYSTEM, RO-DI
SPRINK-DRY-001                       SPRINKLER, FIRE, DRY,LOWERPARKING
SPRINK-DRY-002                       SPRINKLER, FIRE, DRY,UPPERPARKING
SPRINK-DRY-003                       SPRINKLER, FIRE, DRY,FAN FARM
SPRINK-WET-001                       SPRINKLER, FIRE, WET
TAF-1                                FAN, EXHAUST, TUBE AXIAL, FREIGHT ELEV.
TAF-2                                FAN, EXHAUST, TUBE AXIAL, PASSENGR ELEV.
UEF-001                              FAN, EXHAUST, VIVARIUM
UEF-002                              FAN, EXHAUST, HUMAN FLUIDS, BL-3
UEF-003                              FAN, EXHAUST, FUME HOOD, SW 4TH FLR
UEF-004                              FAN, EXHAUST, 5TH FLOOR FUME HOOD
UEF-005                              FAN, EXHAUST, ETHERIZING HOOD, RM 466
UEF-006                              FAN, EXHAUST, FUME HOOD, SW 2ND FLR

                                      G-3



UEF-008                              FAN, EXHAUST, FUME HOOD, NW 2ND FLR
UEF-009                              FAN, EXHAUST, FUME HOOD, VIVARIUM
UEF-010                              FAN, EXHAUST, FUME HOOD, SW 3RD FLR
UEF-011                              FAN, EXHAUST, FUME HOOD, SE 3RD FLR
UEF-012                              FAN, EXHAUST, FUME HOOD, NW 3RD FLR
UEF-014                              FAN, EXHAUST, FUME HOOD, RI 3RD SOUTH
UEF-015                              FAN, EXHAUST, FUME HOOD, RI 3RD NORTH
UEF-018                              FAN, EXHAUST, GLASS WASH
UEF-019                              FAN, EXHAUST, CAGE WASH
UEF-020                              FAN, EXHAUST, FUME HOOD, FERMENTATION
UEF-021                              FAN, EXHAUST, RESTROOM
UEF-022                              FAN, EXHAUST, RESTROOM
UPS-001                              UNINTERUPTABLE POWER SOURCE
UPS-003                              UNINTERUPTABLE POWER SOURCE
UPS-004                              UNINTERUPTABLE POWER SOURCE
VAV-FAN-Z101                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z102                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z103                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z104                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z105                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z106                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z107                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z108                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z109                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z110                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z111                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z112                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z113                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z114                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z115                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z116                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z117                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z118                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z119                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z121                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z122                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z123                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z124                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z125                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z126                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z127                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z128                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z129                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z130                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z131                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z132                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z260                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z261                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z262                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z263                         VAV, WITH ELECTRIC HEAT, FAN POWERED

                                      G-4



VAV-FAN-Z264                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z265                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z266                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z267                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z268                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z269                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z270                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z271                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z272                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z360                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z361                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z362                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z363                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z364                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z365                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z366                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z367                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z368                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z369                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z370                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z431                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z432                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z433                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z434                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z435                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z436                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z531                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z532                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z533                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z534                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z535                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-FAN-Z536                         VAV, WITH ELECTRIC HEAT, FAN POWERED
VAV-Z140                             VAV, WITH HOT WATER REHEAT
VAV-Z141                             VAV, WITH HOT WATER REHEAT
VAV-Z201                             VAV, WITH HOT WATER REHEAT
VAV-Z202                             VAV, WITH HOT WATER REHEAT
VAV-Z203                             VAV, WITH HOT WATER REHEAT
VAV-Z204                             VAV, WITH HOT WATER REHEAT
VAV-Z205                             VAV, WITH HOT WATER REHEAT
VAV-Z206                             VAV, WITH HOT WATER REHEAT
VAV-Z207                             VAV, WITH HOT WATER REHEAT
VAV-Z208                             VAV, WITH HOT WATER REHEAT
VAV-Z209                             VAV, WITH HOT WATER REHEAT
VAV-Z210                             VAV, WITH HOT WATER REHEAT
VAV-Z211                             VAV, WITH HOT WATER REHEAT
VAV-Z212                             VAV, WITH HOT WATER REHEAT
VAV-Z213                             VAV, WITH HOT WATER REHEAT
VAV-Z214                             VAV, WITH HOT WATER REHEAT
VAV-Z215                             VAV, WITH HOT WATER REHEAT
VAV-Z216                             VAV, WITH HOT WATER REHEAT

                                      G-5



VAV-Z217                             VAV, WITH HOT WATER REHEAT
VAV-Z218                             VAV, WITH HOT WATER REHEAT
VAV-Z219                             VAV, WITH HOT WATER REHEAT
VAV-Z230                             VAV, WITH HOT WATER REHEAT
VAV-Z231                             VAV, WITH HOT WATER REHEAT
VAV-Z232                             VAV, WITH HOT WATER REHEAT
VAV-Z233                             VAV, WITH HOT WATER REHEAT
VAV-Z234                             VAV, WITH HOT WATER REHEAT
VAV-Z235                             VAV, WITH HOT WATER REHEAT
VAV-Z236                             VAV, WITH HOT WATER REHEAT
VAV-Z237                             VAV, WITH HOT WATER REHEAT
VAV-Z238                             VAV, WITH HOT WATER REHEAT
VAV-Z239                             VAV, WITH HOT WATER REHEAT
VAV-Z240                             VAV, WITH HOT WATER REHEAT
VAV-Z241                             VAV, WITH HOT WATER REHEAT
VAV-Z242                             VAV, WITH HOT WATER REHEAT
VAV-Z243                             VAV, WITH HOT WATER REHEAT
VAV-Z244                             VAV, WITH HOT WATER REHEAT
VAV-Z245                             VAV, WITH HOT WATER REHEAT
VAV-Z246                             VAV, WITH HOT WATER REHEAT
VAV-Z247                             VAV, WITH HOT WATER REHEAT
VAV-Z248                             VAV, WITH HOT WATER REHEAT
VAV-Z301                             VAV, WITH HOT WATER REHEAT
VAV-Z302                             VAV, WITH HOT WATER REHEAT
VAV-Z303                             VAV, WITH HOT WATER REHEAT
VAV-Z304                             VAV, WITH HOT WATER REHEAT
VAV-Z305                             VAV, WITH HOT WATER REHEAT
VAV-Z306                             VAV, WITH HOT WATER REHEAT
VAV-Z307                             VAV, WITH HOT WATER REHEAT
VAV-Z308                             VAV, WITH HOT WATER REHEAT
VAV-Z309                             VAV, WITH HOT WATER REHEAT
VAV-Z310                             VAV, WITH HOT WATER REHEAT
VAV-Z312                             VAV, WITH HOT WATER REHEAT
VAV-Z313                             VAV, WITH HOT WATER REHEAT
VAV-Z314                             VAV, WITH HOT WATER REHEAT
VAV-Z315                             VAV, WITH HOT WATER REHEAT
VAV-Z330                             VAV, WITH HOT WATER REHEAT
VAV-Z331                             VAV, WITH HOT WATER REHEAT
VAV-Z332                             VAV, WITH HOT WATER REHEAT
VAV-Z333                             VAV, WITH HOT WATER REHEAT
VAV-Z334                             VAV, WITH HOT WATER REHEAT
VAV-Z335                             VAV, WITH HOT WATER REHEAT
VAV-Z336                             VAV, WITH HOT WATER REHEAT
VAV-Z338                             VAV, WITH HOT WATER REHEAT
VAV-Z339                             VAV, WITH HOT WATER REHEAT
VAV-Z340                             VAV, WITH HOT WATER REHEAT
VAV-Z341                             VAV, WITH HOT WATER REHEAT
VAV-Z342                             VAV, WITH HOT WATER REHEAT
VAV-Z343                             VAV, WITH HOT WATER REHEAT
VAV-Z401                             VAV, WITH HOT WATER REHEAT

                                      G-6



VAV-Z402                             VAV, WITH HOT WATER REHEAT
VAV-Z403                             VAV, WITH HOT WATER REHEAT
VAV-Z404                             VAV, WITH HOT WATER REHEAT
VAV-Z405                             VAV, WITH HOT WATER REHEAT
VAV-Z406                             VAV, WITH HOT WATER REHEAT
VAV-Z407                             VAV, WITH HOT WATER REHEAT
VAV-Z408                             VAV, WITH HOT WATER REHEAT
VAV-Z409                             VAV, WITH HOT WATER REHEAT
VAV-Z410                             VAV, WITH HOT WATER REHEAT
VAV-Z411                             VAV, WITH HOT WATER REHEAT
VAV-Z412                             VAV, WITH HOT WATER REHEAT
VAV-Z413                             VAV, WITH HOT WATER REHEAT
VAV-Z414                             VAV, WITH HOT WATER REHEAT
VAV-Z415                             VAV, WITH HOT WATER REHEAT
VAV-Z416                             VAV, WITH HOT WATER REHEAT
VAV-Z417                             VAV, WITH HOT WATER REHEAT
VAV-Z418                             VAV, WITH HOT WATER REHEAT
VAV-Z419                             VAV, WITH HOT WATER REHEAT
VAV-Z420                             VAV, WITH HOT WATER REHEAT
VAV-Z421                             VAV, WITH HOT WATER REHEAT
VAV-Z422                             VAV, WITH HOT WATER REHEAT
VAV-Z423                             VAV, WITH HOT WATER REHEAT
VAV-Z538                             VAV, WITH HOT WATER REHEAT
VAV-Z539                             VAV, WITH HOT WATER REHEAT
VAV-Z540                             VAV, WITH HOT WATER REHEAT
VAV-Z541                             VAV, WITH HOT WATER REHEAT
VAV-Z542                             VAV, WITH HOT WATER REHEAT
VAV-Z543                             VAV, WITH HOT WATER REHEAT
VID-CON-002                          VIDEO CONFRENCING SYSTEM
WARM-RM-001                          WARM ROOM, WALK IN, 30 DEG
WARM-RM-002                          WARM ROOM, WALK IN, 37 DEG
WATER-PUR-007                        PURIFIER, WATER
WEF-001                              FAN, EXHAUST, GARAGE
WEF-002                              FAN, EXHAUST, GARAGE
WEF-003                              FAN, EXHAUST, TRANSFORMER VAULT
WEF-004                              FAN, EXHAUST, PASSENGER ELEVATOR
WEF-005                              FAN, EXHAUST, FREIGHT ELEVATOR

                                      G-7



                      EXHIBIT H - Floor Plans and Functions

                                       H-1



                        EXHIBIT I - INTENTIONALLY DELETED

                                       I-1



                                   EXHIBIT J-1

                          Landlord Estoppel Certificate

     THIS LANDLORD ESTOPPEL CERTIFICATE ("Certificate"), dated as of ________
__, 2001, is executed by ____________________, a _____________ ("Landlord") in
favor of_____________________________, ( "Subtenant"[or other appropriate
identifier, such as "Assignee"]).

                                    RECITALS

     A.   Tenant and Landlord have entered into that certain Lease Agreement
dated as of ________ ___, 20___ (together with all amendments, modifications,
supplements, guarantees and restatements thereof, the "Lease"), for a portion of
the improved real property located in the City of Seattle, County of King, State
of Washington, more particularly described on Exhibit A attached hereto ( the
"Property").

     B.   Pursuant to the Lease, Landlord has agreed that upon the request of
Tenant, Landlord would execute and deliver an estoppel certificate certifying
the status of the Lease.

     C.   Tenant has requested that Landlord execute this Certificate with an
understanding that Subtenant will rely on the representations and agreements
below in [subleasing space in the Premises from Tenantinsert appropriate
description of transaction] (the "Transaction").

     NOW, THEREFORE, Landlord certifies and represents to Subtenant as follows:

     1.   Lease. Attached hereto as Exhibit B is a true, correct and complete
copy of the Lease, including the following amendments, modifications,
supplements, guarantees and restatements thereof, which together represent all
of the amendments, modifications, supplements, guarantees and restatements
thereof: __
________________________________________________________________________________
(If none, please state "None.")

     2.   Premises. Pursuant to the Lease, Tenant leases those certain premises
(the "Premises") consisting of approximately ___________ rentable square feet
within the Property, as more particularly described in the Lease. In addition,
pursuant to the terms of the Lease, Tenant has the right to use [_______ parking
spaces/the parking area] located on the Property during the term of the Lease.

     3.   Full Force of Lease. The Lease has been duly authorized, executed and
delivered by Landlord, is in full force and effect has not been terminated and
constitutes a legally valid instrument, binding and enforceable against Landlord
in accordance with its terms, subject only to applicable limitations imposed by
laws relating to bankruptcy and creditor's rights.

     4.   Complete Agreement. The Lease constitutes the complete agreement
between Landlord and Tenant for the Premises and the Property, except as
modified by the Lease amendments noted above (if any), has not been modified,
altered or amended.

     5.   Lease Term. The term of the Lease commenced on ________ ___, 20___ and
ends on ________ ___, 20___, subject to the following options to extend:
_______________________________________________________________________________.
(If none, please state "None.")

     6.   Purchase Rights. Tenant has no option, right of first refusal, right
of first offer, or other right to acquire or purchase all or any portion of the
Premises or all or any portion of, or interest in, the

                                      J-1-1



Property, except as follows: ___________________________________________________
_______________________________________________________________________________.
(If none, please state "None.")

     7.   Rights of Tenant. Except as expressly stated in this Certificate,
Tenant:

     (a)  has no right to renew or extend the term of the Lease, except as
follows: _____________________________________________________;

     (b)  has no right, title, or interest in the Premises, other than as Tenant
under the Lease or as the owner of all Removable Equipment and personal property
not identified as Fixed Equipment under the Lease.

     8.   Rent.

     (a)   The obligation to pay Rent under the Lease commenced on ________ ___,
20___. The Rent under the Lease is curRent, and to the best of Landlord's actual
knowledge, Tenant is not in default in the performance of any of its obligations
under the Lease.

     (b)   Tenant is currently paying Base Rent under the Lease in the amount of
$________ per month. Tenant has not received and is not, presently, entitled to
any abatement, refunds, rebates, concessions or forgiveness of Rent or other
charges, free Rent, partial Rent, or credits, offsets or reductions in Rent,
except as follows: ____________________________________________________________
_______________________________________________________________________________.
(If none, please state "None.")

     (c)   There are no existing defenses or offsets against Rent due or to
become due under the terms of the Lease, and there presently is no default or
other wrongful act or omission by Landlord under the Lease or otherwise in
connection with Tenant's occupancy of the Premises, nor to the best of
Landlord's actual knowledge is there a state of facts which with the passage of
time or the giving of notice or both could ripen into a default on the part of
Tenant, , except as follows: _______________________
_______________________________________________________________________________.
(If none, please state "None.")

     9.   Security Deposit. Tenant's compliance with the Security Deposit
provision of the Lease (Section 7) is through a Letter of Credit in the amount
of $______ and pledged marketable securities of $________.

     10.  Prepaid Rent. The amount of prepaid Rent, separate from the security
deposit, is $___________, covering the period from ________ ___, 20___ to
________ ___, 20___.

     11.  Insurance. To the best of Landlord's actual knowledge, all insurance,
if any, required to be maintained by Tenant under the Lease is presently in
effect.

     12.  Pending Actions. There is not pending or, to the best of Landlord's
actual knowledge, threatened against or contemplated by the Landlord, any
petition in bankruptcy, whether voluntary or otherwise, any assignment for the
benefit of creditors, or any petition seeking reorganization or arrangement
under the federal bankruptcy laws or those of any state.

     13.  Tenant Improvements. As of the date of this Certificate, to the best
of Landlord's actual knowledge: Tenant has performed all obligations required of
Tenant pursuant to the Lease; no offsets, counterclaims, or defenses of Landlord
under the Lease exist against Tenant; and no events have occurred that, with the
passage of time or the giving of notice, would constitute a basis for offsets,
counterclaims, or defenses against Tenant, except as follows: __________________
_________________. (If none, please state "None.")

                                      J-1-2



     14.   Assignments by Tenant. To the best of Landlord's actual knowledge,
Tenant has not sublet or assigned the Premises or the Lease or any portion
thereof to any sublessee or assignee. No one except Tenant and its employees
will occupy the Premises. The address for notices to be sent to Tenant is as set
forth in the Lease or is:

     15.   Reliance. Landlord makes this Certificate with the knowledge that it
will only be relied upon by Subtenant in agreeing to complete the Transaction.

     Landlord has executed this Certificate as of the date first written above
by the person named below, who is duly authorized to do so.

LANDLORD:                         ______________________________________________
                                  a ____________________________________________

                                  By:___________________________________________
                                           Name: _______________________________
                                           Its:_________________________________

                                      J-1-3



                                   Exhibit J-2

                           Tenant Estoppel Certificate

     THIS TENANT ESTOPPEL CERTIFICATE ("Certificate"), dated as of ________ __,
2001, is executed by ____________________, a _____________ ("Tenant") in favor
of_____________________________, ( "Buyer"[or other appropriate identifier, such
as "Lender"]).

                                    RECITALS

     A.   Tenant and Landlord have entered into that certain Lease Agreement
dated as of ________ ___, 20___ (together with all amendments, modifications,
supplements, guarantees and restatements thereof, the "Lease"), for a portion of
the improved real property located in the City of Seattle, County of King, State
of Washington, more particularly described on Exhibit A attached hereto ( the
"Property").

     B.   Pursuant to the Lease, Tenant has agreed that upon the request of
Landlord, Tenant would execute and deliver an estoppel certificate certifying
the status of the Lease.

     C.   Landlord has requested that Tenant execute this Certificate with an
understanding that Buyer [Lender} will rely on the representations and
agreements below in [acquiring the Property and Landlord's interest under the
Lease] [connection with a loaninsert appropriate description of transaction]
(the "Transaction").

     NOW, THEREFORE, Tenant certifies and represents to Buyer as follows:

     16.  Lease. Attached hereto as Exhibit B is a true, correct and complete
copy of the Lease, including the following amendments, modifications,
supplements, guarantees and restatements thereof, which together represent all
of the amendments, modifications, supplements, guarantees and restatements
thereof:___
_______________________________________________________________________________.
(If none, please state "None.")

     17.  Leased Premises. Pursuant to the Lease, Tenant leases those certain
premises (the "Premises") consisting of approximately ___________ rentable
square feet within the Property, as more particularly described in the Lease. In
addition, pursuant to the terms of the Lease, Tenant has the right to use
[_______ parking spaces/the parking area] located on the Property during the
term of the Lease.

     18.  Full Force of Lease. The Lease has been duly authorized, executed and
delivered by Tenant, is in full force and effect has not been terminated and
constitutes a legally valid instrument, binding and enforceable against Tenant
in accordance with its terms, subject only to applicable limitations imposed by
laws relating to bankruptcy and creditor's rights.

     19.  Complete Agreement. The Lease constitutes the complete agreement
between Landlord and Tenant for the Premises and the Property, except as
modified by the Lease amendments noted above (if any), has not been modified,
altered or amended.

     20.  Acceptance of Premises. Tenant has accepted possession and is
currently occupying the Premises.

     21.  Lease Term. The term of the Lease commenced on ________ ___, 20___ and
ends on ________ ___, 20___, subject to the following options to extend:________
(If none, please state "None.")

                                      J-2-1



     22.  Purchase Rights. Tenant has no option, right of first refusal, right
of first offer, or other right to acquire or purchase all or any portion of the
Premises or all or any portion of, or interest in, the Property, except as
follows: _______________________________________________________________________
_______________________________________________________________________________.
(If none, please state "None.")

     23.  Rights of Tenant. Except as expressly stated in this Certificate,
Tenant:

     (a)  has no right to renew or extend the term of the Lease except as
follows: ___________________________________________________________;

     (b)  has no right, title, or interest in the Premises, other than as Tenant
under the Lease or as the owner of all Removable Equipment and personal property
not identified as Fixed Equipment under the Lease.

     24.  Rent.

     (a)  The obligation to pay rent under the Lease commenced on ________ ___,
20___. The Rent under the Lease is current, and Tenant is not in default in the
performance of any of its obligations under the Lease.

     (b)  Tenant is currently paying Base Rent under the Lease in the amount of
$________ per month. Tenant has not received and is not, presently, entitled to
any abatement, refunds, rebates, concessions or forgiveness of Rent or other
charges, free rent, partial Rent, or credits, offsets or reductions in rent,
except as follows: _____________________________________________________________
_______________________________________________________________________________.
(If none, please state "None.")

     (c)  There are no existing defenses or offsets against Rent due or to
become due under the terms of the Lease, and there presently is no default or
other wrongful act or omission by Landlord under the Lease or otherwise in
connection with Tenant's occupancy of the Premises, nor is there a state of
facts which with the passage of time or the giving of notice or both could ripen
into a default on the part of Tenant, or to the best of Tenant's actual
knowledge, or could ripen into a default on the part of Landlord under the
Lease, except as follows: ______________________________________________________
_______________________________________________________________________________.
(If none, please state "None.")

     25.  Security Deposit. Tenant's compliance with the Security Deposit
provision of the Lease (Section 7) is through a Letter of Credit in the amount
of $______ and pledged marketable securities of $________.

     26.  Prepaid Rent. The amount of prepaid Rent, separate from the Security
Deposit, is $___________, covering the period from ________ ___, 20___ to
________ ___, 20___.

     27.  Insurance. All insurance, required to be maintained by Tenant under
the Lease is presently in effect.

     28.  Pending Actions. There is not pending or, to the best of Tenant's
actual knowledge, threatened against or contemplated by the Tenant, any petition
in bankruptcy, whether voluntary or otherwise, any assignment for the benefit of
creditors, or any petition seeking reorganization or arrangement under the
federal bankruptcy laws or those of any state.

     29.  Tenant Improvements. As of the date of this Certificate, to the best
of Tenant's actual knowledge: Landlord has performed all obligations required of
Landlord pursuant to the Lease; no offsets, counterclaims, or defenses of Tenant
under the Lease exist against Landlord; and no events have

                                      J-2-2



occurred that, with the passage of time or the giving of notice, would
constitute a basis for offsets, counterclaims, or defenses against Landlord,
except as follows: _____________________________________________________________
_______________________________________________________________________________.
(If none, please state "None.")

     30.  Assignments by Landlord. Tenant has received no notice of any
assignment, hypothecation or pledge of the Lease or rentals under the Lease by
Landlord. Tenant hereby consents to an assignment of leases and rents to be
executed by Landlord to Buyer in connection with the Transaction and
acknowledges that said assignment does not violate the provisions of the Lease.
The address for notices to be sent to Landlord is as set forth in the Lease or
is: _________________________________________________.

     31.  Assignments by Tenant. Tenant has not sublet or assigned the Premises
or the Lease or any portion thereof to any sublessee or assignee. No one except
Tenant and its employees will occupy the Premises. The address for notices to be
sent to Tenant is as set forth in the Lease or is: ____________________________.

     32.  Environmental Matters. Tenant is in compliance with the Lease and
Environmental Requirements in connection with its generation, treatment,
storage, disposal or release into the environment of any Hazardous Materials at
the Premises. Environmental Requirements and Hazardous Materials are defined by
reference to Lease Section 19.8. Concerning Lease Section 19 specifically, there
presently is no default or other wrongful act or omission by Tenant under the
Lease or otherwise in connection with Tenant's occupancy of the Premises, nor is
there a state of facts which with the passage of time or the giving of notice or
both could ripen into a default under Lease Section 19 on the part of Tenant;
except as follows: _____________________________ (If none, please state "None.")

     33.  Succession of Interest. Tenant agrees that, in the event Buyer
succeeds to interest of Landlord under the Lease:

     (a)  Buyer shall not be bound by any amendments or modifications of the
Lease, subsequent to the date of this Certificate, made without prior consent of
Buyer which will not be unreasonably withheld, delayed or conditioned; with the
understanding that this Section 17(a) shall not longer apply if the Transaction
terminates;

     34.  Reliance. Tenant makes this Certificate with the knowledge that it
will only be relied upon by Buyer in agreeing to complete the Transaction.

     Tenant has executed this Certificate as of the date first written above by
the person named below, who is duly authorized to do so.

TENANT:                                _________________________________________
                                       a________________________________________

                                       By:______________________________________
                                               Name:____________________________
                                               Its:_____________________________

                                      J-2-3



                                    EXHIBIT K

                              INTENTIONALLY DELETED

                                       K-1



                                    EXHIBIT L

     Fair Market Value Determination For Premises (Lease Sections 10 and 12)

Determination of "Fair Market Value" of the Premises under paragraphs 10 and 12
of this Lease shall be made in accordance with the following procedures, which
shall be valued assuming the Premises are encumbered by the Lease and Renewal
Options, with the sum of such determinations being the Fair Market Value of the
Premises as a whole:

(a)  Fair Market Value of the Premises  shall be determined by the agreement of
     two (2) appraisers (each, an "Initial Appraiser"), one of which shall be
     selected by Landlord and the other of which shall be selected by Tenant as
     set forth in this Exhibit L. Each of the parties shall concurrently
     identify in writing, an Initial Appraiser selected and retained by such
     party and specifically identify such Initial Appraiser's name, address,
     phone number and qualifications as an appraiser. Within five (5) days after
     the parties have designated their Initial Appraisers, each of Landlord and
     Tenant shall direct, in writing with a copy to the other party, its Initial
     Appraiser to work with the other party's Initial Appraiser to endeavor to
     determine and reach agreement upon the Fair Market Value of the Premises
     (including the land and the improvements), considered as encumbered by this
     Lease and its extensions, and considered as not having been the subject of
     a casualty or condemnation, as applicable, and thereafter to deliver in
     writing to Landlord and Tenant within thirty (30) days (such 30-day period,
     the "Valuation Period") the agreed-upon Fair Market Value (the "Valuation
     Notice"). The costs and expenses of each Initial Appraiser shall be paid by
     the party selecting such Initial Appraiser. If Tenant fails to identify in
     writing an Initial Appraiser as required by this Exhibit, Landlord shall
     identify an Initial Appraiser on behalf of Tenant; provided, however,
     Tenant shall be liable for the costs and expenses of such Initial Appraiser
     identified on Tenant's behalf by Landlord as if Tenant had selected such
     Initial Appraiser.

(b)  If the Initial Appraisers are not able to reach agreement upon the Fair
     Market Value within the Valuation Period, within ten (10) days after the
     end of the Valuation Period each Initial Appraiser shall deliver a written
     notice to Landlord, Tenant, and the other Initial Appraiser setting forth
     (i) such Initial Appraiser's valuation of the Fair Market Value (each, an
     "Initial Valuation") and (ii) the name, address and qualifications of a
     third appraiser selected jointly by the Initial Appraisers (the "Third
     Appraiser"). The Initial Appraisers shall, in writing with a copy to
     Landlord and Tenant, direct the Third Appraiser (or substitute Third
     Appraiser) to determine a valuation of the Fair Market Value of the
     Premises (including the land and the improvements), considered as
     encumbered by this Lease and its extensions, and considered as not having
     been the subject of a casualty or condemnation, as applicable, and to
     deliver in writing to Landlord, Tenant and the Initial Appraisers such
     valuation (the "Third Valuation") within twenty (20) days of the date of
     the written direction retaining such Third Appraiser. The Fair Market Value
     shall be the arithmetic mean of (A) the Third Valuation and (B) the Initial
     Valuation closer to the Third Valuation. If the Third Valuation is exactly
     between the two Initial Valuations, then the Fair Market Value shall be the
     Third Valuation. If the Initial Appraisers are unable to agree upon the
     designation of a Third Appraiser within the requisite time period or if the
     Third Appraiser selected does not make a valuation of the Fair Market Value
     within twenty (20) days after being directed by the Initial Appraisers,
     then such Third Appraiser or a substitute Third Appraiser, as applicable,
     shall, at the request of Landlord or Tenant, be appointed by the President
     or Chairman of the American Arbitration Association in the area in which
     the Premises exist which is the subject of the fair market valuation
     determination determined hereunder. The costs and expenses of the Third
     Appraiser (and substitute Third Appraiser and the American Arbitration
     Association, if applicable) shall be divided evenly between, and paid for
     by, Landlord and Tenant.

(c)  All appraisers selected or appointed pursuant to this Exhibit shall be
     independent qualified appraisers and shall be, at a minimum, MAI real
     estate appraisers with at least 7 years experience in appraising real
     property used for comparable "wet science" biological laboratory

                                       L-1



     and research and development facilities or such similar uses to which the
     parties agree. Such appraisers shall have no right, power or authority to
     alter or modify the provisions of this Lease, and such appraisers shall
     determine the Fair Market Value of the Premises, as applicable, considered
     as encumbered by this Lease including assuming all Extension Terms have
     been exercised by Tenant and considered as not having been the subject of a
     casualty or condemnation, as applicable.

(d)  Notwithstanding the foregoing, if Landlord and Tenant are able to agree
     upon a Fair Market Value of the Premises, Landlord and Tenant shall execute
     an agreement setting forth such agreed-upon Fair Market Value of the
     Premises, as applicable, and waiving each party's right to have the Fair
     Market Value of the Premises, as applicable, determined in accordance with
     the procedures set forth in paragraphs (a) and (b) of this Exhibit.

(e)  If Tenant elects not to make an offer to purchase the Premises under
     Sections 10 or 12 after this valuation process has been conducted, Tenant
     shall reimburse Landlord its out of pocket third party costs (including
     attorney's fees and the costs of Landlord's Initial Appraiser). and pay all
     charges assessed by the Third Appraiser.

                                       L-2



                                    EXHIBIT M
                              Lease Amendment Form

                            AMENDMENT NO. __ TO LEASE

     This AMENDMENT NO. ____ TO LEASE (this "Amendment") is entered into as of
the below date between ARE-1201/1208 EASTLAKE AVENUE, LLC, a Delaware limited
liability company("Landlord") and ZYMOGENETICS, INC., a Washington corporation
("Tenant").

     Landlord and Tenant are parties to that certain Lease dated October ___,
2002 {, as amended by Amendment No. to Lease ___ dated ____________ - to be
included if there are any prior amendments at that time} (as amended, the
"Lease"). Capitalized terms not defined herein shall have the meanings set forth
in the Lease. Pursuant to Section 2.1 of the Lease, the initial term has been
extended and the purpose of this Amendment is to reflect the extension.

     Now, therefore, Landlord and Tenant agree as follows:

     1.   EXTENSION OF INITIAL TERM. Effective on _________________, expiration
date of the Initial Term of the Lease is extended to ____________________.

     2.   NO OTHER AMENDMENTS. Except as modified by this Amendment {and by
Amendment No. ____ dated ______________}, the Lease remains in full force and
effect and has not been modified or amended.

     DATED: _______________________.

                         LANDLORD:

                         ARE-1201/1208 Eastlake Avenue, LLC,
                         a Delaware limited liability company

                         By:  ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
                              a Delaware limited partnership,
                              managing member

                              By:  ARE-QRS CORP.,
                                   a Maryland corporation,
                                   general partner


                                   By:  ___________________________
                                        Peter J. Nelson, CFO

                                       M-1



                         TENANT:

                         ZYMOGENETICS, INC.,
                         a Washington corporation

                         By _______________________________________
                         Name:__________________________________________________
                         Title:_________________________________________________

STATE OF WASHINGTON  )
                     ) ss.
COUNTY OF KING       )


I certify that I know or have satisfactory evidence that ______________________
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the _____________________________ of
ZymoGenetics, Inc. to be the free and voluntary act of such party for the uses
and purposes mentioned in the instrument.

Dated: ______________.

                                            ____________________________________
                                            (Signature)

                                            ____________________________________
                                            Title
                                            My appointment expires _____________

STATE OF __________  )
                     ) ss.
COUNTY OF _________  )

     I certify that I know or have satisfactory evidence that Peter J. Nelson is
the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the Chief Financial Officer of ARE-QRS Corp.,
general partner of Alexandria Real Estate Equities, L.P., the Managing Member of
ARE-1201/1208 Eastlake Avenue, LLC, to be the free and voluntary act of such
party for the uses and purposes mentioned in this instrument.

     DATED:________________.

                                                 ______________________________
                                                 (Signature of Notary Public)
                                                 ______________________________
                                                 (Printed Name of Notary Public)
                                                 My Appointment expires:_______

                                       M-2

EX-10.38

                                                                   Exhibit 10.38

                                      LEASE

                               EARL DAVIE BUILDING

THIS LEASE is entered into and effective as of October 4, 2002 ("Effective
Date"), between ARE-1208 EASTLAKE AVENUE, LLC, a Delaware limited liability
company ("Landlord") and ZYMOGENETICS, INC., a Washington corporation
("Tenant").

The parties agree as follows:

1.   PREMISES/LEASE

     1.1 Premises. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord on the terms contained herein all property purchased by Landlord
from Tenant and located at 1208 Eastlake Avenue East, Seattle, Washington
("Premises"), including (Section 27.2) the land described on Exhibit A, together
with the easements, rights and appurtenances thereto and the buildings and other
improvements located thereon ("Improvements"); including the Fixed Equipment
(Section 8.8) and excluding the Removable Equipment (Section 8.8).

     1.2 Operating Lease. Landlord and Tenant stipulate that this Lease is a
true lease and does not represent a financing arrangement. Each party shall
reflect the transactions represented by this Lease in a manner consistent with
"true lease" treatment rather than "financing" treatment in all applicable
books, records and reports (including income tax filings). Tenant intends to
record this Lease as an operating lease for SEC reporting purposes in accordance
with generally accepted accounting principles ("GAAP"), but failure to do so
shall not be considered a default under this Lease.

     1.3 Acceptance of Premises. As the prior owner of the Premises, Tenant
designed and constructed the Improvements on the Premises and has occupied the
Improvements since their completion and is therefore completely familiar with
the condition of the Improvements. By entering this Lease, Tenant is deemed to
have accepted the Premises in its current condition, AS-IS and with all faults.
To the extent necessary to comply with its obligations to maintain and repair
the Premises, Tenant shall enforce the warranties and other obligations of
contractors and suppliers for the original construction of the Premises and
Landlord shall cooperate with Tenant in doing so, but Landlord shall have no
other responsibility or liability for the design, construction or condition of
Premises and makes no warranties with respect thereto and Tenant shall reimburse
Landlord for all its reasonable out-of-pocket third party costs and expenses,
including its attorneys' fees, incurred in connection with its cooperation.
Landlord shall not be required to make any repairs or replacements of any kind
whatsoever during the Term. Notwithstanding the sale of the Premises to
Landlord, all warranties and guaranties regarding the development of the
Premises remain with Tenant for the Term and any remaining warranties and
guaranties will be deemed automatically transferred to Landlord upon termination
of this Lease.

2.   TERM

     2.1 Initial Term. The Initial Term of this Lease shall be 15 years
commencing on October 4, , 2002 ("Commencement Date") and ending on October 3,
2017, unless sooner terminated pursuant to any provision hereof. The Initial
Term is subject to extension pursuant to Section 24. As used herein, "Term"
shall mean the Initial Term and any Renewal Term (Section 2.2) which becomes
effective hereunder.

     2.2 Extensions. Provided that Tenant is not in default on exercise of a
right to extend or on the commencement of the Renewal Term (unless such default
is cured within any applicable cure period), Tenant shall have the right to
extend this Lease for 4 consecutive renewal terms (each, a "Renewal Term") of 5
years each, with at least 16 months prior written notice to Landlord. If
Landlord does not receive such notice 16 months prior to the end of a current
Term, Tenant's renewal rights shall lapse. The rights to extend the Lease for
the Renewal Terms are personal to Tenant and may not be assigned,

                                       1



pledged or transferred to any third party. Notwithstanding the foregoing, such
rights may be assigned or transferred to Tenant's Affiliates (Section 13.2).

     2.3 Rent For Renewal Terms. As of the commencement of each Renewal Term,
the Base Rent (Section 3.1) shall be adjusted to the greater of (a) the fair
market rental value of the Premises as of the commencement of the Renewal Term,
or (b) 90% of the Base Rent applicable to the last year of the term prior to
commencement of the applicable Renewal Term. Fair market rental value shall be
the amount of rent which a well-informed tenant, willing, but not obliged to
lease the Premises, would pay, and which a well-informed landlord, willing, but
not obligated to lease, would accept, taking into consideration all uses to
which the Premises is adapted and might in reason be applied, and the then
market terms being offered in the Seattle metropolitan area (e.g. including
Elliott Bay, the University District, Queen Anne/Interbay, Lake Union, Denny
Triangle, etc.) for space reasonably comparable to the Premises. If, after
bargaining in good faith for 30 days (the "Bargaining Period"), the parties have
not reached agreement on the fair market rental value, it shall be established
by binding arbitration in accordance with Section 2.4. Commencing at the start
of the second year of each Renewal Term and continuing each year thereafter, the
Renewal Term's Base Rent shall be increased by 3.5%.

     2.4 Arbitration. The arbitration process outlined below must be commenced
no more than 18 months before the first day of the ensuing Renewal Term and
pursued in good faith. Each arbitrator shall be an MAI real estate appraiser
with at least 7 years experience in appraising real property used for comparable
"wet science" biological laboratory and research and development facilities or
such similar uses to which the parties agree ("Arbitrator"). If the parties are
able to reach agreement on a single Arbitrator within 10 days after the end of
the Bargaining Period, that Arbitrator shall determine the fair market rental
value. Otherwise, each party shall select its own Arbitrator and shall provide
the name to the other party within 15 days following expiration of the
Bargaining Period. The two Arbitrators shall meet within 20 days following their
selection and attempt in good faith during such 20 days to reach agreement on
the fair market rental value of the Premises. If the two Arbitrators are unable
to agree, they shall jointly select a third Arbitrator. If they fail to either
agree on the fair market rental value or appoint a third Arbitrator within 20
days following their appointments, the third Arbitrator shall be selected by the
then Presiding Judge of King County Superior Court upon the request of either
party. Within 10 days after the appointment of the third Arbitrator, the first
two Arbitrators shall each submit in writing to the third Arbitrator the amount
which they propose be established as the Renewal Term's Base Rent
("Submissions"). The Submissions shall not be disclosed by the third Arbitrator
until the third Arbitrator has received both of the other Arbitrators'
Submissions. Each Arbitrator may include in such Submissions any information
which he/she deems relevant or helpful to the third Arbitrator in determining
the fair market rental value of the Premises, and the third Arbitrator may not
obtain, accept or consider any additional information in making its decision.
The third Arbitrator's determination of the fair market rental value is strictly
limited to selection, as the more reasonable approximation of the fair market
rental value of the Premises, of the amount stated in one of the Submissions,
and third Arbitrator may not select or declare any third number. The third
Arbitrator's decision shall be made within 20 days after delivery of the
Submissions, by a report in writing to each of the parties and in any event at
least 12 1/2 months before the commencement of the Renewal Term. Each party
shall pay the costs of its own Arbitrator and one-half of the single Arbitrator
or the third Arbitrator's fee. If the Arbitrator's determination of fair market
rental value is greater than 110% of the then Base Rent payable during the 12
months immediately preceding the applicable Renewal Term, Tenant may elect to
rescind exercise of the option by written notice to Landlord given at least 12
months before the commencement of the Renewal Term. Notwithstanding the
provisions of this Section 2.4, if during the arbitration period, Tenant and
Landlord reach agreement on fair market rental value (independent of
Arbitrator's findings), the arbitration shall be terminated and the
determination of the parties shall govern.

3.   RENT

     3.1 Base Rent. Commencing on the Commencement Date, and continuing on the
first of each month thereafter, Tenant shall pay to Landlord $140,317.86 per
month ("Base Rent"). Base Rent shall be remitted to the Landlord at its address
stated for notices in this Lease as the same may be amended from time to time or
to such other address required by Landlord in a written notice to Tenant

                                       2



and shall be due and payable on the first day of each month during the Term and
tendered in cash. Base Rent for any partial month shall be prorated based on the
number of days in the applicable calendar month.

     3.2 Increases in Base Rent. Commencing one year after the Commencement Date
and continuing annually thereafter, the Base Rent shall be increased by 3.5%.

     3.3 Expansion. See Section 24.10.

     3.4 Additional Rent. All amounts other than Base Rent due by Tenant to
Landlord under this Lease shall be deemed "Additional Rent" and Landlord shall
have all of the same remedies for Tenant's failure to pay Additional Rent as for
failure to pay Base Rent. The term "Rent" shall mean the combined Base Rent and
Additional Rent. Tenant's obligations to pay Rent are in the nature of
independent covenants and all Rent shall be paid without demand, notice,
abatement, reduction or offset, except that Additional Rent may be subject to
demand or notice where provided in this Lease.

     3.5 Late Fee. If any installment of Base Rent is not received by Landlord
by the 5th of the month, Tenant shall pay to Landlord, on demand, a late charge
equal to six percent (6%) on such overdue installment of Base Rent (the "Late
Fee"). Notwithstanding the foregoing, Landlord agrees that pursuant to Section
15.2 below, Landlord will deliver notice to Tenant of any such delinquency and,
not more than once each Lease Year, Landlord will waive the Late Fee if such
delinquency is paid within three business days after Tenant's receipt of such
notice. Tenant acknowledges that such late charge represents a reasonable
estimate of the costs Landlord will incur as a result of such late payment.

     3.6 Fines/Penalties. Subject to Section 22, Tenant shall pay and discharge
when due all other amounts and obligations which Tenant assumes or agrees to pay
pursuant to this Lease.

     3.7 Abatement of Rent. Except as expressly agreed upon in Sections 10 and
12 below, Tenant's obligations to pay Rent shall not abate during any period
that the Premises or any part thereof are untenantable regardless of the cause
of such untenantability.

     3.8 Asset Management Fee. In addition to the Base Rent, Tenant shall pay to
Landlord each month with the Base Rent an asset management fee equal to one-half
of one percent (0.5%) of the Base Rent.

4.   USE

     4.1 Use. Tenant may use the Premises only for office and laboratory, and
research and development facilities and uses that are a reasonably necessary
adjunct thereto. "Laboratory" as used herein refers to that portion of the
Premises devoted to "wet" laboratory and related research and development use.
Exhibit H shows the current allocation of Laboratory and office spaces. Changes
resulting in more than 40% or less than 25% of the net rentable square feet of
the Premises designated for office use will be considered a change in use. The
methodology which will be used for calculating the percent of use will be
calculated consistent with the methodology as was employed to calculate the
current use percentage as described on Exhibit H (said uses and the permitted
deviation in the ratio being hereinafter referred to as the "Use Requirements").
Any other uses or changes in uses shall require Landlord's approval, in
accordance with the approval standards set forth in Section 8. The Premises
shall not be used for any purpose which would constitute a public or private
nuisance or waste, or violate the agreements listed on Exhibit B ("Title
Encumbrances").

     4.2 Compliance with Laws. Tenant shall, at its cost, comply with all Laws
(Section 27.2) and the requirements of any board of fire underwriters, including
all modifications required thereby, relating to or affecting the condition, use
or occupancy of the Premises. Upon request of Landlord, Tenant shall provide
Landlord with copies of all documents evidencing Tenant's compliance with any
particular Law specified by Landlord. Tenant shall notify Landlord in writing
immediately of any

                                       3



threatened or actual notice or citation, regarding an alleged failure of the
Premises to comply with any Law.

     4.3 Mechanic's Liens. Except for claims for delinquent payments for which
Landlord is contractually obligated, which shall be the sole responsibility of
Landlord, Tenant agrees that during the Term hereof it shall not do or suffer
any waste to the Premises, or cause, suffer or permit any liens for labor,
services or materials to attach to the Premises by reason of any act or omission
of Tenant or person claiming through Tenant. If any lien is filed arising out of
work performed for Tenant, Tenant shall either discharge the lien or post a bond
pursuant to RCW 60.04.161 to remove the lien from the Premises within 30 days
after it receives notice of the lien.

     4.4 Quiet Enjoyment. So long as no Event of Default (Section 15.2) exists
hereunder, Landlord covenants that Tenant shall have quiet occupation and
enjoyment of the Premises from any person claiming through Landlord.

5.   MAINTENANCE AND REPAIR

     5.1 Tenant's Obligations. Tenant shall keep and maintain all portions of
the Premises in good order and condition, in a manner typical of other properly
maintained and operated facilities of a similar nature and in accordance with
all Laws and with the standards of maintenance and repair adhered to by Tenant
prior to the Commencement Date. Tenant shall promptly make all repairs and
replacements required in order to keep and maintain the Premises in such order
and condition. Tenant shall also keep the Premises in compliance with all Laws
and the requirements of the property and environmental insurance coverages. The
provisions of this Section shall not conflict with Tenant's rights to obtain
insurance and condemnation proceeds under Sections 10, 11 and 12. If Tenant
fails to perform the required maintenance and repairs, Landlord shall have the
cure rights described in Section 15.7.

     5.2 Condition on Surrender. Upon termination of this Lease, Tenant shall
remove its personal property, repair any damage caused by removal, comply with
any removal and Restoration Requirements (Section 8), and leave the Premises in
good repair and condition, subject to Section 10.3. In addition, prior to
termination of the Lease, Tenant shall perform all decommissioning required by
governmental agencies and shall provide copies of all decommissioning reports to
Landlord. If Tenant has failed to complete the governmental decommissioning
process by the expiration or earlier termination date of this Lease, and as a
result, the Premises cannot be relet, the Tenant shall be required to continue
to pay full Rent and perform its obligations hereunder until such
decommissioning is complete. The foregoing shall also be considered holding over
and be subject to the terms of Section 27.13 if, and for so long as, Tenant
fails to pursue such decommissioning with due diligence. The Fixed Equipment
then existing in the Premises shall be surrendered with the Premises in good and
operating condition and free of any liens, financing leases or other
encumbrances created by or imposed against Tenant, and belong solely to
Landlord.

6.   UTILITIES AND TAXES

     6.1 Utilities. Subject to Section 22, Tenant shall pay when due all charges
for utility services provided to the Premises including power, water and sewer,
and gas. No interruption of utility service shall give Tenant the right to abate
Rent or terminate this Lease.

     6.2 Taxes. Subject to Section 22, Tenant shall pay when due all Real
Property Taxes. "Real Property Taxes" shall mean: (i) the ad valorem property
taxes and other similar taxes levied against the Premises which become due and
payable during the Term, (ii) all installments of assessments imposed by
governmental entities on the Premises which become due and payable during the
Term, and (iii) governmental licensing or similar fees. Real Property Taxes
shall include all taxes and assessments levied against the Premises other than
conveyance taxes arising from Landlord's transfer of the Premises, Landlord's
rental taxes (if any), Landlord's business and occupation taxes, franchise or
net income taxes of Landlord, any estate, succession, gift, capital levy or
similar taxes. If any assessment may be paid in installments, Tenant shall be
responsible only for those installments due and payable

                                       4



during the Term and for those portions of installments to the extent they
accrued during the Lease Term, even if they are payable thereafter. If Landlord
enters into private agreements for off-site improvements for the benefit of the
Premises which are in lieu of government imposed improvements, Tenant shall pay
Landlord's installments thereunder to the extent they accrued during the Term.
Notwithstanding the foregoing, if the amortization period used in calculating
the amount of the installments is less than the amortization period that would
have been used for the government assessment that would have otherwise been
imposed, then Tenant shall pay a portion of the Landlord's installments due
under such private agreements, to the extent they accrued during the Term,
recalculated using the same amortization period as would have been used for the
government assessment. Tenant shall pay all personal property taxes levied
against the Premises as and when due to the extent the levy thereof is
attributable to the Term and all such taxes are assessed against its own
property. It is Landlord's and Tenant's express intent that all Fixed Equipment
identified on Exhibit G and all substitutions, modifications or additions
thereto, is part of the real property and not personal property. No personal
property is being leased by Landlord to Tenant. Notwithstanding the foregoing,
if the Department of Revenue assesses any personal property taxes relating to
the Premises, the Fixed Equipment or this Lease, Tenant shall pay such taxes,
subject to Section 22.

7.   SECURITY DEPOSIT

     7.1 General Requirements. Upon execution of this Lease, Tenant will provide
to Landlord a security deposit ("Security Deposit") in the amount of $280,635.72
(i.e. two months Base Rent). Tenant shall increase the amount of the Security
Deposit to correspond to increases in Base Rent at the time such adjustments
become effective. Tenant can elect to provide the Security Deposit in the form
of either a letter of credit ("LOC"), or pledged marketable securities from
Tenant's corporate cash investment portfolio, or a combination thereof, variable
over the Term. Landlord will hold the Security Deposit as security for the
performance of Tenant's obligations under the Lease. The Security Deposit will
not be considered an advance payment of Rent or a measure of Tenant's liability
for damages. Landlord may, from time to time, without prejudice to any other
remedy, upon the occurrence of an Event of Default, use all or a portion of the
Security Deposit to cure any Event of Default. Following any such application of
the Security Deposit, Tenant will replenish the Security Deposit to its required
amount. Landlord shall transfer the Security Deposit to any subsequent owner of
the Premises. Landlord and its successors and assigns will not be bound by any
assignment or encumbrance of the Security Deposit by Tenant, provided, however,
if Tenant's interest in the Lease has been assigned, Landlord will return the
Security Deposit to such assignee in accordance with the terms and conditions
hereof. Within 30 days following the expiration of this Lease and the
performance by Tenant of all of its obligations hereunder, Landlord shall return
the then existing balance of the Security Deposit to Tenant. Landlord shall have
no obligation to pay interest on the Security Deposit. If Landlord returns the
Security Deposit to Tenant's assignee as aforesaid, Landlord will have no
further obligation to any party with respect thereto. Tenant shall not encumber
the Security Deposit.

     7.2 Letter of Credit. During any period that Tenant elects to satisfy all
or any portion of the Security Deposit with an LOC, the LOC must be an
irrevocable and unconditional standby letter of credit, issued by the Bank of
America or its successors or another financial institution reasonably
satisfactory to Landlord and with a term of at least one year substantially in
the form of Exhibit D. Landlord may draw upon the LOC to cure any Event of
Default, as described in Section 7.1. In addition, if at any time there are less
than 30 days remaining before the expiration of the LOC, and if Tenant does not
deliver an extension or replacement of the LOC within 5 business days after
notice from Landlord, Landlord may draw upon the LOC; provided that if Tenant
subsequently provides a replacement LOC, and to the extent Landlord has not
applied the same to any default, Landlord will return the funds drawn to Tenant
without interest.

     7.3 Pledged Securities. So long as Tenant's reported Cash Position (defined
below) is at least $50,000,000.00 (the "Cash Position Minimum"), Tenant may
satisfy all or any portion of the Security Deposit with marketable securities
satisfying the criteria stated in this Section 7.3. "Cash Position" is defined
as the sum of unrestricted cash, cash equivalents and marketable securities as
determined by reference to GAAP. If Tenant's reported Cash Position drops below
the Cash Position

                                       5



Minimum at any time, then Tenant shall immediately convert all of its Security
Deposit to an LOC. Tenant may subsequently satisfy its Security Deposit with
marketable securities once Tenant has again exceeded the Cash Position Minimum
for at least two consecutive quarters. During any period that Tenant elects to
satisfy all or any portion of the Security Deposit with marketable securities,
the pledge will be of short term (2 years or less) fixed income marketable
securities from Tenant's corporate cash investment portfolio, including money
market funds, rated not lower than Aa, AA, A1 or P1 or equivalent by a
nationally recognized credit rating service. The pledged marketable securities
will be held by Union Bank of California or another bank or financial
institution mutually approved by Landlord and Tenant as custodian for Landlord,
either in a separate custodian account or as specially designated securities
within a larger custodian account. The pledge agreement must be substantially in
the form of Exhibit E and provide Landlord with a perfected first lien security
interest in the pledged securities. The custodial agreement must be
substantially in the form of Exhibit F and provide direct access authorization
which would permit Landlord in an Event of Default, without approval of Tenant,
to authorize the sale of the securities and the withdrawal of the proceeds
thereof (not to exceed the amount of the then required Security Deposit) for
application by Landlord to cure any Event of Default, as described in Section
7.1. So long as the value of the pledged securities comply with the requirements
of this Lease, Tenant will be entitled to retain all interest and other earnings
generated by the pledged securities. If the market value of the pledged
securities drops below the required amount of the Security Deposit, Tenant will
immediately add additional marketable securities to the pledge to increase the
value of the pledged securities to equal or exceed the required level. Failure
of Tenant to increase the pledged securities as required within 3 business days
of notice from Landlord and/or the account custodian will constitute an Event of
Default. Tenant will have the right to substitute marketable securities meeting
the rating criteria and having all of the other characteristics specified above
for the securities subject to the pledge.

8.   ALTERATIONS

     8.1 General. Except as provided in Section 24 regarding the Expansion, all
alterations of Premises shall be made at Tenant's sole cost and expense. All
alterations shall be made in a good and workmanlike manner and in compliance
with all Laws and insurance requirements and Tenant shall enforce any warranties
to the extent necessary to cause any defects in workmanship or materials to be
corrected. Subject to Section 8.6, all alterations shall be fully consistent
with the overall character of the Premises as a first class scientific research
and development facility (the "Function Requirements") and the Use Requirements.
Tenant shall indemnify, defend and hold Landlord harmless from all claims, costs
(including attorneys' fees and costs) or damage occurring in connection with
Tenant's alterations; notwithstanding the foregoing, Tenant shall not be liable
to reimburse Landlord for Landlord's overhead and expenses in reviewing any
plans, specifications and other documents or in otherwise confirming Tenant's
conformance to the requirements of this Section 8 ("Review Costs") except that
for Category D and E Alterations, Tenant shall pay Landlord a fee equal to the
lesser of $10,000 or 5% of all costs incurred by Tenant or its contractors or
agents in connection with any Category D or E Alteration, to defray Landlord's
Review Costs. Prior to commencing any alterations, Tenant shall obtain all
necessary permits from governmental authorities. Irrespective of Landlord's
receipt, review and any approval of the plans and specifications for Tenant's
alterations, Tenant, and not Landlord, shall have sole responsibility for the
accuracy or sufficiency of the plans and specifications, their compliance with
applicable Laws, codes, regulations or statutes, and their fitness for Tenant's
purpose. If any alterations by Tenant trigger any legal requirements to make
other modifications to the Premises, Tenant shall make such modifications at its
sole cost and expense. Tenant shall provide to Landlord as-built drawings for
all alterations by Tenant promptly after completion of the alteration. Except
for Removable Equipment, all alterations shall become the property of Landlord
immediately upon installation or completion and shall be subject to all of the
terms of this Lease. Prior to commencing any Category "B-E" Alteration, Tenant
must deliver to Landlord evidence of insurance from all contractors and
subcontractors reasonably satisfactory to Landlord to protect Landlord against
liability for personal injury or property damage during construction, naming
Landlord as an additional insured.

     8.2 Category "A" Alterations. An alteration is a "Category A Alteration" if
the estimated cost of such alteration is less than $5,000 and the alteration
does not fall within the definition of Category D or E Alterations. For Category
A Alterations, in addition to the requirements of Section 8.1, Tenant will

                                       6



deliver notice to Landlord describing the alteration promptly after its
completion, in the manner stated in Section 27.3.

     8.3 Category "B" Alterations. An alteration is a "Category B Alteration" if
the estimated cost of such alteration is between $5,000 and $25,000, and the
alteration does not fall within the definition of Category D or E Alterations.
For Category B Alterations, in addition to the requirements of Section 8.1,
Tenant shall notify Landlord, in the manner stated in Section 27.3, of the
planned alteration at least 5 business days prior to commencement of the work,
providing a brief description of the work, the estimated cost, and any permit
drawings, if applicable.

     8.4 Category "C" Alterations. An alteration is a "Category C Alteration" if
the estimated cost of such alteration exceeds $25,000 and the alteration does
not fall within the definition of Category D or E Alterations. For Category C
Alterations, in addition to the requirements of Section 8.1, Tenant shall notify
Landlord, in the manner stated in Section 27.3, of the planned alteration at
least 10 business days prior to the commencement of the work, providing a
description of the work, the estimated cost and any permit drawings for
Landlord's review and approval. Landlord will not withhold its approval of the
alteration, however Landlord may impose reasonable conditions on the alteration
to the extent necessary to protect its investment, provided that Landlord may
not require Tenant to restore the Premises or remove the Category C Alteration
as a condition of its consent. For Category C Alterations, if Landlord does not
respond to Tenant's notice of such alteration within the 10 business day period,
Landlord shall be deemed to have approved such alteration without conditions.

     8.5 Category "D" Alterations. An alteration is a "Category D Alteration,"
regardless of estimated cost, if such alteration does not fall within the
definition of a Category E Alteration, and either (a) such alteration when
aggregated with past alterations and concurrent alterations, fails to comply
with the Use Requirements, or (b) such alteration results in a net change in
rentable square footage for any Function which is outside of the "Function
Tolerances" set forth in the Table of Uses contained in Exhibit H.

     "Function" is defined by reference to physical and functional distinctions
evident in the floor plans attached as Exhibit H. For Category D Alterations, in
addition to the requirements of Section 8.1, Tenant must obtain Landlord's prior
written approval, which shall not be unreasonably withheld. To request
Landlord's approval, Tenant shall provide to Landlord schematic drawings for
Category D Alterations and Landlord shall respond with its comments on such
proposed alteration within 10 business days after receipt thereof. Such approval
is also subject to Landlord's subsequent 10 business day review and approval of
the construction drawings for the proposed alteration. Landlord shall be
required to approve the Category D Alteration and the construction drawings, if
(i) Landlord had previously approved the schematic drawings, and (ii) the
construction drawings reflect the same alterations as such schematic drawings.
If Landlord disapproves of either the schematic drawings or the construction
drawings, it shall provide Tenant with reasonably detailed reasons therefor.
Failure to provide any such notice shall not be construed as an approval of or
consent to any alteration. Landlord may condition its approval of Category D
Alterations on a Restoration Requirement (Section 8.7).

     8.6 Category "E" Alterations. An alteration is a "Category E Alteration,"
regardless of estimated cost, if such alteration (a) fails to comply with the
Function Requirements, (b) incorporates materials or employs construction
standards that are of a materially lesser quality than those used in the then
existing Premises, (c) decreases the number of net rentable square feet in the
Premises, (d) involves any alterations to the foundation, roof or structural
components of the Improvements, (e) alters the exterior appearance of the
Premises (but specifically excluding landscaping, Removable Equipment, antennas
or mechanical systems on the roof, and signage when reasonably required for
Tenant's business); (f) is designed for any use that is not expressly permitted
under Section 4.1; (g) results in Laboratory space being improved for use as a
"Process Lab" (defined by reference to Exhibit H) or "Vivarium" (as defined by
reference to Exhibit H) outside of the "Extreme Max" Function Tolerances set
forth in Exhibit H; (h) results in more than 60% of the Premises being improved
for office use; or (i) results in more than 80% of the Premises being improved
for Laboratory use (Section 4.1). For Category E Alterations, in addition to the
requirements of Section 8.1, Tenant must request Landlord's prior written

                                       7



approval, which is subject to Landlord's sole discretion. To request Landlord's
approval, Tenant shall provide to Landlord schematic drawings for Category E
alterations and Landlord shall respond with its comments on the proposal within
10 business days after receipt thereof, which is subject to Landlord's
subsequent 10 business day review and approval of the construction drawings.
Landlord shall approve the Category E Alteration and the construction drawings,
if (i) Landlord had previously approved the schematic drawings, and (ii) the
construction drawings reflect the same alterations as such schematic drawings.
If Landlord disapproves of either the schematic drawings or the construction
drawings, it shall provide Tenant with reasonably detailed reasons therefor.
Failure to provide any such notice shall not be construed as an approval of or
consent to any alteration. Landlord may condition its approval of Category E
Alterations on a Restoration Requirement.

     8.7 Restoration Requirement and Restoration Deposit. Landlord may condition
its approval of Category D and E Alterations on a requirement that Tenant remove
such alterations at the end of the Term and fully restore the Premises to the
location, size, design, configuration, condition and state of improvement and
fixturing that existed immediately prior to making such alterations and
consistent with the degree of maintenance and repair required by this Lease (the
"Restoration Requirement"). If Landlord conditions its approval of a Category D
or E Alteration on a Restoration Requirement, Landlord may further require that
Tenant post a deposit (the "Restoration Deposit") in an amount equal to
Landlord's reasonable estimate of the removal and restoration costs in any
circumstance in which the same exceed $100,000 and which shall be subject to the
same terms and conditions as those that are applicable to the Security Deposit;
provided, however, the Restoration Deposit shall be returned to Tenant to the
extent and at the earlier of such time as (a) Landlord waives its requirement in
writing that such alterations be removed and the Premises restored, which
election shall be at Landlord's sole and absolute discretion, or (b) Tenant
completes the removals and restorations, Landlord accepts the same as having
complied with Tenant's obligations under this section, and Tenant provides
Landlord with final lien waivers and evidence of payment for all of the costs
and expenses incurred to do so. Notwithstanding the foregoing, in no event shall
Tenant be required to post a Restoration Deposit unless (a) Landlord has made a
good faith determination that Restoration will likely be required and (b)
Tenant's cash flow position drops below the Cash Position Minimum (Section 7.3).

     8.8 Fixed and Removable Equipment. This Lease arises simultaneously with
the sale of the Premises by Tenant to Landlord pursuant to that certain
Agreement of Purchase and Sale dated August 29, 2002, as amended (the "Purchase
Agreement"). In order to establish which elements and/or pieces of equipment
within the Premises were included in the sale and which were not, the parties
applied the criteria listed below to develop the listing contained on Exhibit G
containing those items which were considered affixed and part of the Premises.
All other items not listed on Exhibit G were considered personal property
retained by Tenant. "Fixed Equipment" is defined as the equipment listed on
Exhibit G, plus any new equipment brought onto the Premises which either
replaces the items listed on Exhibit G, has the same the physical and functional
distinctions as the equipment listed on Exhibit G, or satisfies the criteria
stated below.

FIXED EQUIPMENT CRITERIA:

     1)   Equipment that is built into the facility in such a manner that it
          will require the removal of walls, floors, ceilings or additions to or
          modifications of existing structural support, whether temporary or
          permanent, to install or relocate it;

     2)   Equipment that is connected to common building systems in such a way
          that the service must be modified outside the local area or room where
          the equipment is located when the equipment is disconnected; or

     3)   Equipment that provides service to other Fixed Equipment or without
          which such other Fixed Equipment would not be functional.

     As new equipment is brought into the Premises, the determination of whether
such equipment is considered Fixed Equipment or Removable Equipment will be made
by using the physical and functional

                                       8



distinctions evident in the listing attached as Exhibit G and where that does
not provide sufficient guidance, applying the above Fixed Equipment criteria. If
any alteration is intended to include attached equipment, Tenant shall give
written notice to Landlord of its suggested classification as either Fixed or
Removable when it gives the notices or requests the approvals as required above.
New Fixed Equipment shall become Landlord's property immediately. No Fixed
Equipment may be leased or subject to any lien or security interest by Tenant.

9.   INSURANCE

     9.1 Tenant's Insurance. Tenant shall maintain at its sole cost and expense
the following insurance on the Premises, and in all cases such policies shall
name as additional insureds (a) Landlord, (b) any lender of Landlord holding any
security interest in the Premises, and (c) any management company retained by
Landlord to manage the Premises:

         9.1.1 Property. Insurance against loss or damage to the Premises on an
all risk basis, including sprinkler damage and flood for an amount not less than
the actual replacement cost of the Premises. The insurance shall include
coverage from business interruption and extra expense for a period of not less
than 18 months. Tenant shall also carry earthquake insurance and insurance
against damage caused by terrorism and acts of war to the extent the same is or
are available at commercially reasonable rates and is required by Landlord. In
determining whether such insurance is available at a commercially reasonably
rate, the parties will take into consideration the cost and availability of
similar policies for Landlord's (or its affiliates') other Seattle properties
(or in similarly rated seismic areas if Landlord or its affiliates no longer own
other Seattle properties). At Tenant's option, the Premises may be included in
Landlord's (or its affiliates') blanket policy of insurance, if and for so long
as the same is maintained by Landlord (or its affiliates), in which case the
cost of insurance allocable to the Premises will be based on the insurer's cost
calculations. In addition, Tenant shall maintain during the Term all risk
insurance for Tenant's personal property (including business interruption and
extra expense coverage) covering the full replacement cost of all property,
improvements and equipment placed in or on the Premises by Tenant, with the
understanding that the proceeds of such policies shall be paid to and belong to
Tenant.

         9.1.2 Liability. Commercial liability insurance with a combined single
limit (including umbrella) of at least $10 million per occurrence and $10
million in the aggregate, naming Landlord as an additional insured and such
insurance shall be primary to and not contributory with any insurance carried by
Landlord regarding events that occur in the Premises.

         9.1.3 Boiler. Insurance against loss or damage from explosion of any
steam or pressure boilers or similar apparatus located in or about the Premises
in an amount not less than the actual cost to repair or replace the insured
equipment/machinery. At Tenant's option, the Premises may be included in
Landlord's (or its affiliates') blanket policy of insurance, if and so long as
the same is maintained by Landlord (or its affiliates), in which case the cost
allocable to the Premises will be based on the insurer's cost calculations.

         9.1.4 Builder's Risk. Whenever Tenant, whether as Landlord's
construction agent or otherwise, is engaged in alterations costing in excess of
$5 million, Tenant shall obtain completed value builder's risk insurance.

         9.1.5 Environmental Insurance. To the extent available at a
commercially reasonable rate, pollution legal liability insurance with a limit
of not less than $10,000,000 covering the Premises and contamination therefrom.
In determining whether such insurance is available at a commercially reasonable
rate, the parties will take into consideration the cost and availability of
similar policies for other of Landlord's (or its affiliates') similar
properties. Such insurance shall be on a claims-made basis. At Tenant's option,
the Premises may be included in Landlord's (or its affiliates') blanket policy
of insurance, if and for so long as Landlord (or its affiliates) maintains such
policies, in which case the cost of such insurance allocable to the Premises
will be based on the insurer's cost calculations.

                                       9



             9.1.6 Workers' Compensation. Tenant shall maintain workers'
compensation insurance with no less than the minimum limits required by law.

             9.1.7 Other Tenant Insurance. In addition to the insurance coverage
listed above in this Section 9.1, at Tenant's and Landlord's option, Tenant may
be included in Landlord's (or its affiliates') blanket policy for other
insurance (e.g. mold insurance), if and for so long as Landlord (or its
affiliates) maintains such policies, in which case the cost of such insurance
allocable to the Premises will be based on the insurer's cost calculations.

             9.1.8 Landlord's Evidence of Insurance. In those instances where
Tenant is included in Landlord's (or its affiliates') blanket policies of
insurance, at Tenant's request, Landlord shall provide Tenant with insurance
certificates, or such other reasonable evidence of coverage under such policies.

         9.2 Rating. The insurance required by Section 9.1 shall be written by
companies rated not less than A - and having a size rating of X or higher in the
current edition of A. M. Best's Key Rating Guide, and all such companies shall
be authorized to do insurance business in Washington, or otherwise agreed to by
Landlord. The insurance policies shall be in amounts sufficient at all times to
satisfy any coinsurance requirements thereof. If said insurance or any part
thereof shall expire or be withdrawn, Tenant shall immediately obtain new or
additional insurance reasonably satisfactory to Landlord. As of the date of the
Lease, Tenant's insurers are rated A++ (Chubb) and A+ (FM Global).

         9.3 Mortgagee. Each insurance policy referred to in Sections 9.1.1,
9.1.3 and 9.1.4, shall contain standard non-contributory mortgagee clauses in
favor of any mortgagee. Each such policy shall provide that the issuer will
endeavor to notify the mortgagee if there are any material changes to the
policy.

         9.4 Renewal. Tenant shall pay when due all premiums for the insurance
required by this Section 9 and shall deliver to Landlord copies of any insurance
policy upon Landlord's request and a certificate or other evidence (reasonably
satisfactory to Landlord) of the existing policies and of renewal or replacement
policies prior to the policy expiration date (which may be by extension of the
existing policy). If Tenant fails to comply with the requirements of this
Section 9 within 5 business days after written notice by Landlord to Tenant,
Landlord shall be entitled to procure such insurance pursuant to Section 15.7.

         9.5 Landlord's Blanket Policies. As noted in Sections 9.1.1, 9.1.3, and
9.1.5, Tenant shall have the option of obtaining the insurance through
Landlord's (or its affiliates') blanket insurance policies for its portfolio to
obtain improved coverage or cost savings, if and for so long as Landlord (or its
affiliates) maintains such policies. At Tenant's request, Landlord will provide
Tenant with premium rating information, copies of insurance policies, and other
information reasonably necessary to facilitate Tenant's evaluation of this
option.

         9.6 Landlord's Insurance. Landlord, at its expense, shall carry
comprehensive general liability insurance with a combined single limit
(including umbrella) of at least $5 million per occurrence and $5 million in the
aggregate.

          9.7 Waiver of Subrogation. Notwithstanding any other provisions of
this Lease to the contrary, Landlord and Tenant waive their respective rights of
recovery against the other and the officers, employees, agents and
representatives of such other party for damage to the property of the other by
fire or other casualty to the extent such damage is insured or required
hereunder to be insured. The insurance policies carried by Landlord and Tenant
shall include a waiver of the insurer's rights of subrogation.

                                       10



10.  CASUALTY; OBLIGATION TO RESTORE

     10.1  Definitions.

     "Casualty" shall mean damage to or destruction of the Premises by storm,
fire, lightning, earthquake, or from any other cause, other than such damage or
destruction which is the subject of a Condemnation (Section 12).

     "Excess Insurance Proceeds" shall mean that portion of any Insurance
Proceeds which are received by the Landlord or its mortgagee that are not used
to pay the third party costs of restoring any damage to the Premises or any
other third party out of pocket costs incurred, including attorneys' fees, in
connection with the Casualty, including such costs to obtain the Insurance
Proceeds, but in any event excluding Tenant's Proceeds. The determination of
Excess Insurance Proceeds shall be made upon completion of the Casualty
Restoration.

     "Excess Insurance Proceeds Rent Reduction" shall mean a dollar for dollar
reduction to the Base Rent for the then remainder of the Term until exhausted,
from and after the date Landlord receives any Excess Insurance Proceeds.

     "Fair Market Value of Premises" for purposes of this Section 10 is defined
in Exhibit L.

     "Insurance Proceeds" shall mean the proceeds of any insurance maintained by
Tenant under Section 9, which is paid for a Casualty Restoration (Section 10.4),
but excludes Tenant's Proceeds.

     "Substantial or Full Casualty" shall mean a Casualty which is certified, by
an affidavit from Tenant's president, chief executive officer or chief financial
officer, stating with a reasonable basis that such event has rendered the
Premises (taken separately from any other properties owned or leased by Tenant)
unavailable for Tenant's continued business operations in compliance with the
Use Requirements and Function Requirements for more than 12 months and the cost
of restoring the Premises is reasonably estimated to exceed $10,000,000.

     "Tenant's Proceeds" shall mean any proceeds of insurance policies payable
for Tenant's business interruption or damage to Tenant's personal property.

     10.2 Substantial or Full Casualty in Last 18 Months of Term. If and only if
there is a Substantial or Full Casualty of the Premises during the last 18
months of the then current Term, then (i) Landlord will receive the Insurance
Proceeds; and (ii) provided Tenant has maintained the insurance coverages
required under this Lease, the Lease will terminate effective as of the date of
the Casualty, and Tenant's obligations under the Lease will be replaced by an
obligation for Tenant to pay any deductibles under applicable insurance
policies, plus Rent for the balance of the then current Term.

     10.3 Substantial or Full Casualty Prior to Last 18 Months of Term. If and
only if there is a Substantial or a Full Casualty of the Premises prior to the
last 18 months of the then current Term, then Tenant shall have the option to
either (i) continue the Lease pursuant to Section 10.3.1 below; or (ii) make a
rejectable offer to purchase pursuant to Section 10.3.2 below. If Tenant makes a
rejectable offer to purchase, unless and until Tenant closes on the purchase, or
the Lease terminates pursuant to 10.3.2, Tenant shall continue to pay Rent when
due.

          10.3.1 Lease Continuation. If there is a Substantial or Full Casualty
of the Premises prior to the last 18 months of the then current Term, unless
Tenant delivers a Termination Notice under Section 10.3.2 below, the Lease shall
continue in full force and effect, and no Rent shall abate under this Lease as a
result of such Substantial or Full Casualty; provided, however, the Base Rent
under this Lease shall be subject to an Excess Insurance Proceeds Rent Reduction
(as defined above). In such event, Tenant's restoration obligations set forth in
Section 10.4 below shall apply. If Tenant elects to restore, and pursuant to
Tenant's rights to sublet or assign under Section 13, Tenant may exercise up to

                                       11



2 of its remaining 5 year Renewal Options. In such event Tenant waives its
rescission right under Section 2.4 as it relates to such exercise only.

               10.3.2 Lease Termination. If there is a Substantial or Full
Casualty of the Premises prior to the last 18 months of the then current Term,
and Tenant will not be re-occupying the Premises following such Substantial or
Full Casualty Restoration, then Tenant may elect to terminate this Lease by
delivering notice of such election to Landlord within 90 days after the Casualty
("Casualty Termination Notice"). The Casualty Termination Notice shall include
an offer by Tenant to purchase the Premises from Landlord for the greater of (i)
the original purchase price paid by Landlord for the Premises plus any Allowance
(Section 24.8.2) disbursed by Landlord pursuant to this Lease; or (ii) the Fair
Market Value of the Premises. Within 60 days from Landlord's receipt of the
Casualty Termination Notice, Landlord will notify Tenant whether it will accept
or reject Tenant's offer to purchase the Premises, with Landlord's silence
deemed rejection.

         If Landlord accepts Tenant's offer to purchase, then notwithstanding
Section 10.5 below, Tenant shall be entitled to all Insurance Proceeds, and such
purchase shall close on the later of (i) 10 business days after Tenant's receipt
of all Insurance Proceeds; or (ii) 30 days after Tenant's receipt of Landlord's
acceptance of such offer.

         If Landlord rejects, or is deemed to have rejected, Tenant's offer to
purchase, then the Lease will be deemed terminated effective as of the date of
Landlord's rejection, with Landlord retaining the Insurance Proceeds. In such
event, Tenant shall also be liable to pay Landlord any applicable deductibles on
insurance policies relating to the Casualty Restoration, and Tenant shall pay
such deductible amount to Landlord within 30 days of the date of Landlord's
rejection and the Lease's termination date.

         10.4 Obligation to Restore. If there is a Casualty and the Lease has
not terminated by the application of Sections 10.2 or 10.3 above, then,
irrespective of the extent of the Casualty or whether the cause is covered by
insurance, Tenant shall repair, restore and rebuild the Premises in accordance
with the Function Requirements and the Use Requirements and all applicable
building and zoning codes at the time of rebuilding to substantially the same
location, size, design, configuration and condition immediately prior to damage
or destruction (with any departures from said characteristics in accordance with
Section 8 for Alterations) and this Lease shall remain in full force and effect.
Such repair, restoration and rebuilding, including the repair, restoration or
replacement of Fixed Equipment (all of which are herein called a "Casualty
Restoration") shall be commenced as soon as reasonably practical and taking into
consideration a reasonable time for the insurance adjustment of the loss, the
work to design the repairs/replacements, and permitting delays; and shall be
diligently pursued to completion.

         10.5. Insurance Proceeds. Insurance Proceeds shall be paid to Tenant
for application to costs of Casualty Restoration; provided that if the proceeds
exceed $3 million (unless Landlord's mortgagee should require a lesser amount,
but in no event less than $1 million), they shall be held by an insurance
trustee pursuant to Section 11. If the Insurance Proceeds are insufficient to
cover the cost of repair, the deficit shall be paid by Tenant. Any Excess
Insurance Proceeds shall be paid and belong to Landlord. For avoidance of doubt,
this Section 10.5 shall not apply to Tenant's Proceeds; in every instance
Tenant's Proceeds shall be paid to and be the sole property of Tenant.

         10.6 No Casualty Termination. Notwithstanding any other provisions of
this Lease to the contrary, unless Sections 10.2 or 10.3 above apply, this Lease
may not be terminated by Tenant or Landlord as a result of a Casualty to the
Premises, irrespective of the extent thereof, whether such loss is insured or
when such Casualty occurs, or whether such damage is legally permitted to be
restored, and Tenant and Landlord waive the provisions of any Law permitting
termination of a lease due to destruction of the Premises.

         10.7 No Abatement of Rent. Except to the extent stated in Sections 10.2
and 10.3 above, no Rent shall abate under this Lease as a result of any
Casualty, whether or not or to the extent the same may be insured, and
irrespective of whether or not such damage or destruction is prohibited from
being

                                       12



repaired or restored; provided, however, the Base Rent shall be subject to an
Excess Insurance Proceeds Rent Reduction.

11.  INSURANCE TRUSTEE

     11.1 Procedure. If the Insurance Proceeds exceed $3 million (unless
Landlord's mortgagee should require a lesser amount, but in no event less than
$1 million) and this Lease has not terminated by application of Sections 10.2 or
10.3, then such Insurance Proceeds shall be held by an insurance trustee which
shall be a financial institution jointly selected by Landlord and Tenant and
reasonably satisfactory to any mortgagee(s) (the "Trustee"). If Landlord's
mortgagee is an institutional lender, such lender may elect to be the Trustee.
Each insurer is authorized to make payment directly to the Trustee; and Tenant
and Landlord each appoints such Trustee as its attorney-in-fact to endorse any
check for Insurance Proceeds after approval by Tenant of the Trustee (if other
than Landlord's mortgagee). The Insurance Proceeds, net of reasonable expenses
incurred in obtaining them, shall be retained in a separate interest-bearing
federally insured account by the Trustee for application to restoration, with
the interest added to the proceeds. The Trustee shall make the net Insurance
Proceeds available to Tenant for restoration, in accordance with the provisions
of this Section 11. The net Insurance Proceeds held by the Trustee shall be
disbursed in accordance with the following conditions:

          11.1.1 Landlord's Approval. The plans and specifications for the
restoration shall be subject to Landlord's reasonable approval, which approval
shall be granted to the extent that the plans and specifications conform with
the conditions specified in Section 10.4.

          11.1.2 No Default. At the time of any disbursement, no Event of
Default shall exist and no mechanics' or materialmen's liens shall have been
filed and remain undischarged or unbonded except to the extent the disbursement
would satisfy and discharge such liens.

     11.2 Disbursements. After all of the uninsured costs to repair and restore
the Premises have been paid by Tenant out of its own funds, disbursements shall
be made monthly by the Trustee to reflect that percentage of the work that is
being paid for with the Insurance Proceeds that has been completed since the
prior disbursement upon receipt of (1) a Draw Certificate (Section 11.3), (2)
completion and performance of the work to date in a good and workmanlike manner
in accordance with the contracts, plans and specifications, (3) customary lien
waivers for the work covered by the prior progress payments, and (4) other
reasonable evidence of cost and payment so that Trustee can verify that the
amounts disbursed from time to time constitute the same percentage of the total
budgeted Casualty Restoration costs, as such budget may be adjusted from time to
time.

     11.3 Draw Certificates. Each request for disbursement shall be accompanied
by a certificate using AIA Forms G702 and G703 ("Draw Certificates"), as the
same may be amended or replaced by AIA or a similar entity describing the work,
materials or other costs or expenses, for which payment is requested, stating
the cost incurred in connection therewith and stating that Tenant has not
previously received payment for such work or expense. For soft costs, where the
referenced AIA Forms would not apply, Tenant's delivery of reasonable
documentation of such costs shall satisfy the Draw Certificate requirement. The
Draw Certificate to be delivered by Tenant upon completion of the work shall, in
addition, state that the work covered by the request has been substantially
completed.

12.  CONDEMNATION

     12.1 Definitions.

     "Condemnation" shall mean any taking of the Premises by condemnation or
other eminent domain proceedings pursuant to any Law or any conveyance under
threat thereof.

     "Excess Condemnation Award" shall mean that portion of any Condemnation
Award which is paid to Landlord or its mortgagee and not used by Landlord, its
mortgagee or Tenant to pay the third

                                       13



party out of pocket costs of restoring any damage to the Premises caused by the
Condemnation or any third party out of pocket costs, including attorneys' fees,
incurred by Landlord or its mortgagee in connection with the Condemnation.

         "Fair Market Value of Premises" for purposes of this Section 12 is
defined in Exhibit L.

         "Substantial or Complete Condemnation" shall mean a Condemnation that
is not a Temporary Taking, which is certified by an affidavit from Tenant's
president, chief executive officer or chief financial officer, stating with a
reasonable basis that such Condemnation has rendered the Premises (taken
separately from any other properties owned or leased by Tenant) unavailable for
Tenant's continued business operations in compliance with this Lease's Use
Requirements and Function Requirements and results in a loss of 35% or more of
the rentable square feet of the Premises.

         "Temporary Taking" shall mean a condemnation of all or part of the
Premises for up to two (2) years.

         12.2 Notice/Award. Either party, promptly upon obtaining knowledge of
any Condemnation proceeding affecting the Premises, shall notify the other party
and both parties shall be entitled to participate in any Condemnation
proceeding. Subject to the provisions of this Section 12, Tenant hereby
irrevocably assigns to Landlord any award or payment with respect to any
Condemnation of Landlord's interest in the Premises (the "Condemnation Award"),
except that nothing in this Lease shall be deemed to preclude Tenant from making
a separate claim for an award on account of the Removable Equipment, moving
expenses, relocation costs, business interruption or out-of-pocket expenses
incidental to the move so long as in doing so the amount of Landlord's award is
not reduced.

         12.3 Substantial or Complete Condemnation. If there is a Substantial or
Complete Condemnation of the Premises Tenant will deliver notice thereof to
Landlord within 120 days after receipt of demand for turnover from the
condemning agency ("Condemnation Termination Notice") and this Lease shall
terminate. The Condemnation Termination Notice shall verify the Substantial or
Complete Condemnation and include an offer by Tenant to terminate the Lease by
paying Landlord the greater of (i) the original purchase price paid by Landlord
for the Premises plus any Allowance disbursed by Landlord pursuant to this
Lease; or (ii) the Fair Market Value of the Premises (the "Termination Fee").
Within 60 days from Landlord's receipt of the Termination Notice, Landlord will
notify Tenant whether it will accept or reject Tenant's offer to terminate the
Lease with Landlord's silence deemed rejection.

         If Landlord accepts Tenant's offer to terminate the Lease, then
notwithstanding Section 12.2 above, Tenant shall be entitled to the entire
Condemnation Award, and Tenant shall pay Landlord the Termination Fee by the
later of (y) 10 business days after Tenant's receipt of the Condemnation Award;
or (z) 30 days after Tenant's receipt of Landlord's acceptance of such offer. If
there is less than a total condemnation, Landlord shall transfer to Tenant fee
title to any remainder of the Premises, upon Landlord's receipt of the
Termination Fee.

         If Landlord rejects, or is deemed to have rejected Tenant's offer to
terminate the Lease, then the Lease will be deemed terminated effective as of
the date the Premises are surrendered to the condemning authority, with Landlord
retaining the Condemnation Award (subject to Section 12.2).

         Tenant shall continue to pay Rent until the latest of date on which (a)
the Termination Fee is paid, (b) the Lease is deemed terminated, or (c) the
Tenant vacates the Premises.

         12.4 Partial Condemnation. If there is a partial Condemnation which is
not a Substantial or Complete Condemnation, Section 12.3 shall not apply, this
Lease will not terminate and the Condemnation Award shall be made available to
Tenant to restore the Premises to a complete architectural unit with the
character, function and commercial value as nearly as possible equal to the
value of the Premises immediately prior to the taking. For such purposes,
Landlord may require that the Condemnation Award be deposited with and disbursed
by a trustee in the same manner that would have

                                       14



been applicable had the Premises been damaged by a casualty that invoked the
provisions of Section 11. The Base Rent shall then be reduced to reflect the
reduction in the Premises. If the reduction is to the interior, the Rent would
be proportionately reduced to reflect the reduction in the rentable square feet;
if the reduction affects the number of parking spaces available, the Rent
reduction will reflect the excess cost to Tenant for comparable parking. There
will be no Rent reduction for the Condemnation of unimproved or landscaped
areas. Notwithstanding the foregoing, in no event shall the net present value of
the Rent reduction exceed the Excess Condemnation Award.

     12.5 Temporary Taking. If there is a Temporary Taking, then notwithstanding
Section 12.2 above, the entire Condemnation Award shall be paid to Tenant to the
extent it is attributable to the Term and Tenant shall continue to pay the Rent
due hereunder without abatement or adjustment.

13.  SUBLETTING AND ASSIGNMENT

     13.1 General. Tenant shall have the right to assign or sublet the Premises,
in whole or in part (any of which events being a "Transfer" and any assignee or
sublessee being a "Transferee"), with the consent of Landlord, which shall not
be unreasonably withheld as further detailed in this Section 13. Landlord will
be deemed to have approved the Transfer unless within 10 business days after
receipt of Tenant's request complying with this Section 13, Landlord gives
written notice specifying its objections to the Transfer. Such request shall be
accompanied by a complete and accurate copy of the proposed assignment or
sublease, the name of the proposed assignee or sublessee, its address, telephone
number and principal representative who may be contacted for information and
inquiries, the uses it intends to make of the Premises, if and how it is
affiliated with Tenant, and a then current credit report, an operating statement
for the immediately preceding 12 months and a then current financial statement
reflecting its financial condition in accordance with GAAP (Section 1.2).

     13.2 Affiliates/Cooperative Business Arrangements. Notwithstanding Section
13.1, Tenant shall have the right, upon not less than 30 days' advance written
notice to Landlord but without Landlord's consent, to Transfer this Lease in
whole or in part to Affiliates. "Affiliates" shall mean (a) entities which
control, are controlled by or are under common control with Tenant; (b) Tenant's
successor entities by merger or acquisition; and (c) entities in which Tenant is
a 50% or more owner or joint venturer, and jointly pursuing business objectives
consistent with Tenant's business operations, such as discovery or development
of pharmaceutical products, so long as such entity has a Cash Position equal to
or greater than Tenant's then Cash Position (Section 7.3).

     13.3 Landlord's Consent. Landlord will not withhold its consent to a
Transfer if:

          (a) The proposed uses of the Transferee comply with the provisions of
Section 4.1.

          (b) In the case of a sublease, the demising configuration between the
retained space and the subleased space does not unreasonably impair the
marketability of the remaining space.

     13.4 No Release. No Transfer shall release Tenant from any obligations
hereunder and Tenant shall remain primarily liable for performance of its
obligations under this Lease. Landlord may accept any Rent or performance of
Tenant's obligations from any Transferee and such acceptance shall not
constitute a waiver of Landlord's rights. If an Event of Default occurs,
Landlord may proceed directly against Tenant, or any Transferee, without first
exhausting Landlord's remedies against any other person or entity responsible
therefor.

     13.5 Assumption. Any assignee of this Lease shall execute an assumption
agreement in form and substance reasonably satisfactory to Landlord in which
such assignee becomes jointly and severally liable with Tenant for the
performance of Tenant's obligations under the Lease to the extent claims arise
after the effective date of the assumption.

                                       15



     13.6 Subleases. Each sublease shall provide that (a) it is subject and
subordinate to this Lease; (ii) the term is not longer than the then Term of
this Lease, plus any extensions which have been irrevocably exercised, and (iii)
if this Lease is terminated for any reason, Landlord may, at its option, either
(A) terminate the sublease, or (B) takeover all of the rights and interest of
Tenant under the sublease, in which case the sublessee shall attorn to Landlord.
If Landlord elects to takeover the rights and interest of Tenant, Landlord shall
not (1) be liable for any previous act or omission of Tenant under the sublease,
(2) be subject to any defense or offset in favor of the sublessee against
Tenant, (3) be bound by any modification to the sublease made without Landlord's
written consent or by any prepayment by sublessee of more than one month's rent,
or (4) be liable for the application or return of any security deposit not
actually received by Landlord. Landlord will agree to the same waiver of
subrogation with sublessees as is set forth in Section 9.7.

     13.7 Assignment and Sublease Profit. Landlord and Tenant shall each be
entitled to 50% of the rent profit on assignment consideration (i.e.
consideration for assignment of the Lease) and sublease rents. The assignment
consideration shall be determined and paid as and when received by Tenant. For
any nonmonetary consideration, Tenant will have option of assigning half of such
non-monetary consideration to Landlord, or having the nonmonetary consideration
fairly valued and half of such value paid to Landlord in immediately available
funds within a reasonable time after receipt by Tenant of the consideration, to
allow for liquidation/valuation. The rent profit on subleases will be determined
and paid each month during the sublease term. The rent profit on subleases shall
be calculated by taking the rent and other consideration and reimbursements
payable by the sublessee to Tenant or to any third party pursuant to the
sublease and subtracting (a) the Base Rent due from Tenant hereunder with
respect to the subleased space over the same period to which the sublessee's
rent applies (per square foot allocation), (b) the monthly amortization of the
costs incurred in connection with the sublease for commissions, tenant
improvement costs and legal fees (all amortized on a straight-line basis over
the sublease term), (c) any reasonable amounts specified in the sublease as
rental payments for use of equipment owned by Tenant, (d) Tenant's reasonable
estimate of those third party costs payable by Tenant under the Lease or under
the sublease and other direct actual reimbursements of third party costs
incurred at sublessee's request in connection with the Premises or sublessee's
business operations at the Premises, (e) Tenant's reasonable estimate of the
cost of providing additional services to the sublessee such as maintaining
agreed temperature ranges with regard to the HVAC system and specified air
pressures to fume hoods that are in addition to the costs Tenant would otherwise
incur for such portion of the Premises. If the sublease is subsequently
extended, the then outstanding balance of costs described in clause (b) above
shall be reamortized over the remainder of the then sublease term and including
the extension. Landlord shall have the right to require Tenant to provide
subsequent reports for and confirmations and calculations of the amounts
subtracted for (b) through (e) above and the parties agree that Landlord's share
of the rent profit may be adjusted from time to time to more closely reflect the
actual costs incurred by Tenant and reasonably allocated to sublessee pursuant
to this Section.

14.  TENANT'S INDEMNIFICATION

     Except to the extent caused by the gross negligence or willful misconduct
of Landlord or any Landlord Related Parties, and subject to the waiver of
subrogation in Section 9.7, Tenant shall indemnify, defend and hold Landlord,
its employees, mortgagee(s) and agents ("Landlord Related Parties") harmless
from and against all claims, liabilities, damages and costs (including attorneys
fees and costs) arising out of (a) its use of or activities on the Premises, (b)
any acts or omissions (including violations of Law) by Tenant or Tenant Related
Parties (Section 19.1), and (c) any breach of this Lease by Tenant or Tenant
Related Parties.

15.  TENANT'S INSOLVENCY OR DEFAULT

     15.1 Insolvency. Tenant shall be in default upon the occurrence of one or
more of the following events (each, an "Event of Default"): (i) Tenant files a
petition in bankruptcy or otherwise seeks any judicial protection, stay or
relief against its creditors generally, (ii) an involuntary petition in
bankruptcy against Tenant or any request for the appointment of a receiver or a
custodian or other similar officer for any portion of the Tenant's property is
filed or made and not dismissed within 90 days; or (iii) the

                                       16



assignment for the benefit of creditors of any portion of the Tenant's property
is made; or (iv) Tenant's interests in this Lease shall be attached, levied upon
or judicially seized, whereupon Landlord may, by notice to Tenant, terminate
this Lease, and neither Tenant nor any person claiming through or under Tenant
shall be entitled to be in possession of the Premises but shall forthwith
surrender the same, and Landlord, in addition to the other rights Landlord may
have, retains as security for its damages any Rent, Security Deposit or other
monies received by Landlord on behalf of Tenant. If any such action, case or
petition has been commenced by an unrelated third party against Tenant and is
dismissed within a period of 90 days, then the Event of Default shall be deemed
cured for purposes hereof. This Lease is upon the further condition that if a
petition for relief under any chapter of the Bankruptcy Code is filed by an
unrelated third party against Tenant and the trustee or debtor or debtor in
possession has not cured all defaults hereunder and assigned or assumed this
Lease under the Bankruptcy Code within 90 days after the entry of the Order for
Relief, then this Lease shall, at Landlord's sole option, terminate. In case of
termination pursuant to this Section 15.1, Tenant shall indemnify Landlord
against all costs and expenses and loss of Rent, including amounts due under
Section 15.3.

     15.2 Defaults. Tenant shall be in default hereunder if: (i) Tenant fails to
pay any installment of Base Rent or Additional Rent when due; or (ii) Tenant
abandons the Premises, or (iii) Tenant fails to perform any other covenant,
term, agreement or condition of this Lease not referred to in (i), (ii) or (iv)
when required; or (iv) any insurance required to be maintained by Tenant is
cancelled or reduced below its required limits or in its scope of coverage and
Tenant does not replace the same at least 20 business days before the effective
date of such cancellation or reduction (an "Insurance Default"). An "Event of
Default" will exist if (a) Tenant is in default under subsection (i) and the
default is not cured within 5 days after Landlord gives Tenant written notice of
such default; (b) Tenant abandons the Premises, (c) Tenant is in default under
subsection (iii) and the default is not cured within 30 days after Landlord
gives Tenant written notice specifying the default (provided that if the default
can not be cured within the 30 day period, Tenant shall have such additional
time to cure the default as is reasonably necessary so long as Tenant commences
the cure within 10 days after such notice is given and diligently prosecutes the
cure to completion within 90 days after Tenant is given the default notice, and
such deadline may be further extended for Force Majeure (Section 27.11),
provided that Tenant delivers notice to Landlord of such Force Majeure and
monthly written status reports during any further extension arising therefrom),
(d) an Insurance Default has occurred and Tenant has not cured such default by
the sooner of 5 days after Landlord's notice of default or 10 days before the
effective date of such cancellation or reduction, or (e) a default by Tenant
occurs and is not cured within any applicable cure period, under (i) the
Purchase Agreement, (ii) the Lease between Landlord's Affiliate and Tenant dated
concurrently herewith for the property located at 1201 Eastlake Avenue East,
Seattle, WA ("Steam Plant Lease"), or (iii) the Line of Credit Loan (Section
26). When there is an Event of Default, Landlord may, at any time thereafter,
exercise any of its legal, equitable or contractual remedies for a Tenant
default, which may include an election to terminate this Lease by notice, lawful
entry or otherwise, in which latter event Landlord shall be entitled to recover
possession of the Premises from Tenant and those claiming through Tenant. Any
termination of this Lease and any repossession of the Premises shall be without
prejudice to any remedies which Landlord might otherwise have. In case of such
termination, Tenant shall indemnify Landlord against all third party out of
pocket costs and expenses including the amounts due under Section 15.3 and loss
of Rent. All notice and cure periods provided for in this Lease shall run
concurrently with any notice and cure periods provided for in any and all of the
agreements referred to in part (e) of this Section.

     15.3 Expense Recovery. Expenses for which Tenant shall indemnify Landlord
shall include all third-party out of pocket collection costs, including
attorneys' fees and all other third party out of pocket costs proximately caused
by the Event of Default, with or without litigation, including any such costs
incurred in connection with issues that are particular to a bankruptcy or any
other type of proceeding and on appeal. These sums shall be due immediately upon
notice from Landlord and shall bear interest at the Default Rate (Section 15.8)
if not paid within 5 business days after written demand. If proceedings are
brought under the Bankruptcy Code which relate to this Lease, Landlord shall be
paid the costs incurred by Landlord in connection with the proceedings.

                                       17



         15.4 Damages. Notwithstanding termination of this Lease and reentry by
Landlord pursuant to Section 15.1 or Section 15.2, Landlord shall be entitled to
recover from Tenant:

         (i)   The worth at the time of an award (including interest at the
Default Rate) of any unpaid Rent which had been earned by Landlord at the time
of termination; plus

         (ii)  The worth at the time of an award (including interest at the
Default Rate) of the amount by which the unpaid Rent which would have been
earned after termination until the time of an award exceeds the amount of loss
of Rent that Tenant proves could have been reasonably avoided; plus

         (iii) The worth at the time of an award of the amount by which the
unpaid Rent and Additional Rent for the balance of the Term (as extended, if at
all prior to termination) exceeds the amount of such loss of Rent that Tenant
proves could have been reasonably avoided (including Default Interest from the
date of the award until paid). Such worth at the time of award shall be computed
at the discount rate of the Federal Reserve Bank of San Francisco, or successor
Federal Reserve Bank, on the date of termination; plus

         (iv)  Any other amount necessary to compensate Landlord for all the
damage proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including amounts due and payable pursuant to Section 15.3.

         15.5 Non-Termination of Lease. If Landlord reenters the Premises
pursuant to Section 15.1, Landlord may elect, by notice to Tenant, not to
terminate this Lease, in which case Tenant shall indemnify Landlord for the loss
of Rent by a payment at the end of each month during the remaining Term
representing the difference between the Rent due in accordance with this Lease
and the rental actually derived from the Premises by Landlord for such month.
Without any previous notice or demand, separate actions may be maintained by
Landlord against Tenant from time to time to recover any damages which, at the
commencement of any action, have then or theretofore become due and payable to
Landlord under this Section 15 without waiting until the end of the Term.

         15.6 Reletting. If this Lease is terminated as hereinabove provided or
by summary proceedings or otherwise, Landlord may at any time and from time to
time relet the Premises in whole or in part either in its own name or as agent
of Tenant for any period equal to or greater or less than the remainder of the
then-current Term. All rentals received by Landlord from such reletting shall be
applied first to the payment of the costs of the reletting and alterations and
repairs; second, to the payment of any amounts other than Base Rent due to
Landlord; third, to Rent due and unpaid hereunder, and the residual, if any,
shall be held by Landlord and applied in payment of future Rent when it becomes
due.

         15.7 Right of Landlord to Cure Defaults. If an Event of Default occurs,
Landlord may, but shall not be required to, cure the Event of Default, for the
account and at the expense of Tenant, if Tenant has not cured the default within
15 business days' after written notice from Landlord that Landlord intends to
take action to cure Tenant's Event of Default; provided, however, such notice
need not precede Landlord's payment or action in any circumstance that involves
an immediate risk of foreclosure, loss or impairment of any insurance, property
damage, personal injury, or enforcement by any governmental entity. Where an
Event of Default concerns a release or imminent release of Hazardous Materials,
Landlord will not have the ability to exercise self-help if Tenant (a) has
previously delivered to Landlord a Hazardous Materials Response Plan (the
"Response Plan") which outlines methods and persons reasonably acceptable to
Landlord to address, treat, abate, forestall or prevent the release or imminent
release of Hazardous Materials; and (b) promptly delivers written notice to
Landlord of any release or imminent release of Hazardous Materials along with
confirmation that Tenant is complying with the Response Plan. Tenant shall
reimburse Landlord for any third party out of pocket expenses incurred in such
cure, with interest accruing pursuant to Section 15.8, as Additional Rent,
within 30 days after receipt of Landlord's invoice.

                                       18



     15.8 Default Interest. Any amounts owing from Tenant to Landlord under this
Lease which are not paid when due shall bear interest at the greater of (a) 12%
per annum or (b) 4% higher than and varying daily with the prime rate quoted by
any of the three largest banks in the United States (as measured by assets) or
such similar rate that is generally publicly announced by commercial lending
institutions as an index for loans to its most credit-worthy customers (said
prime rate or similar rate being hereinafter referred to as the "Prime Rate"),
in either event calculated from the date due or expended until and including the
date of payment (the "Default Rate").

     15.9 Other Available Remedies. At Landlord's election, upon an Event of
Default, Landlord may pursue such other amounts or other remedies in addition to
or in lieu of any one or more of the specific remedies listed in this Section
and no articulation of any remedy shall be construed to be in lieu of any others
that may be available to Landlord at law or in equity.

16.  LANDLORD'S DEFAULT

     16.1 Default. Landlord shall be in default hereunder if Landlord fails to
perform any of its obligations hereunder within 30 business days after receipt
of written notice from Tenant specifying such failure; provided that if the
nature of the default is such that more than 30 business days are necessary for
the cure, Landlord shall have such additional time as is reasonably necessary so
long as Landlord commences the cure within the cure period and diligently
pursues it to completion. Tenant shall not have the right to terminate the Lease
due to a Landlord default.

     16.2 Limitations on Landlord's Liability. The term "Landlord" as used
herein shall mean only the owner or owners, at the time in question, of the fee
title of the Premises. If Landlord transfers its interest in this Lease other
than for security purposes, Landlord shall cause its assignee or transferee to
assume the provisions of this Lease and Landlord shall deliver notice of such
assignment or transfer and a copy of the effective instrument of transfer to
Tenant within 15 business days after the date of transfer. Tenant shall be
entitled to continue to pay Rent and give all notices to Landlord until Tenant
has received the foregoing from Landlord. Landlord shall deliver all funds in
which Tenant has an interest except those which are then in the possession of an
insurance or condemnation trustee, including but not limited to Tenant's
Security Deposit to Landlord's purchaser or assignee. From and after such
transfer, Landlord shall be released from all liability toward Tenant arising
from this Lease due to any act, occurrence or omission of Landlord's successors
occurring after the transfer of Landlord's interest in this Lease, provided
Landlord's purchaser or assignee expressly assumes Landlord's duties and
covenants under this Lease subject to the same limitations upon its personal
liability as are applicable to Landlord in Section 16.3.

     Landlord's liability hereunder is limited to the extent agreed upon in
Section 16.3 below, and except for Landlord's gross negligence or intentional
misconduct, Landlord shall not be liable for any business interruption, property
damage or personal injury (including death) sustained by Tenant or any person
claiming through Tenant resulting from any accident, casualty, or other event or
matter of any kind or nature occurring on or about the Premises and Tenant
hereby waives and covenants not to bring any action based upon any claims or
losses for which Landlord is not liable as stated above.

     16.3 Further Limitations on Landlord's Liability. NOTWITHSTANDING ANYTHING
SET FORTH HEREIN OR IN ANY OTHER AGREEMENT BETWEEN LANDLORD AND TENANT TO THE
CONTRARY: (A) LANDLORD SHALL NOT BE LIABLE TO TENANT OR ANY OTHER PERSON FOR
(AND TENANT AND EACH SUCH OTHER PERSON ASSUME ALL RISK OF) LOSS, DAMAGE OR
INJURY, WHETHER ACTUAL OR CONSEQUENTIAL TO: ANY TENANT'S PERSONAL PROPERTY OF
EVERY KIND AND DESCRIPTION, INCLUDING, WITHOUT LIMITATION TRADE FIXTURES,
REMOVABLE EQUIPMENT, INVENTORY, SCIENTIFIC RESEARCH, SCIENTIFIC EXPERIMENTS,
LABORATORY ANIMALS, PRODUCT, SPECIMENS, SAMPLES, AND/OR SCIENTIFIC, BUSINESS,
ACCOUNTING AND OTHER RECORDS OF EVERY KIND AND DESCRIPTION KEPT AT THE PREMISES
AND ANY AND ALL INCOME DERIVED OR DERIVABLE THEREFROM; (B) TENANT WAIVES ALL
CLAIMS FOR CONSEQUENTIAL DAMAGES; (C) THERE SHALL BE NO PERSONAL RECOURSE TO
LANDLORD FOR ANY ACT OR OCCURRENCE IN, ON OR ABOUT THE PREMISES OR ARISING IN
ANY WAY UNDER THIS LEASE OR ANY OTHER AGREEMENT BETWEEN

                                       19



LANDLORD AND TENANT WITH RESPECT TO THE SUBJECT MATTER HEREOF AND ANY LIABILITY
OF LANDLORD HEREUNDER SHALL BE STRICTLY LIMITED SOLELY TO LANDLORD'S INTEREST IN
THE PREMISES AND ANY PROCEEDS FROM SALE, CONDEMNATION THEREOF OR ANY INSURANCE
PROCEEDS PAYABLE IN RESPECT OF LANDLORD'S INTEREST IN THE PREMISES OR IN
CONNECTION WITH ANY SUCH LOSS AND (D) IN NO EVENT SHALL ANY PERSONAL LIABILITY
BE ASSERTED AGAINST ANY OF LANDLORD'S OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
CONTRACTORS. UNDER NO CIRCUMSTANCES SHALL LANDLORD OR ANY OF LANDLORD'S
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR CONTRACTORS BE LIABLE FOR INJURY TO
TENANT'S BUSINESS OR FOR ANY LOSS OF INCOME OR PROFIT THEREFROM. NOTWITHSTANDING
THE CONTRARY, NOTHING IN THIS SECTION 16.3 WILL LIMIT THE LIABILITY OF THOSE
LANDLORD'S CONTRACTORS OR AGENTS WHO EXECUTE A SEPARATE "ACCESS AND
CONFIDENTIALITY AGREEMENT" (SECTION 21.2) DIRECTLY WITH TENANT, AND SUCH AGENTS
AND CONTRACTORS' LIABILITY DIRECTLY TO TENANT SHALL BE AS AGREED UPON IN THOSE
SEPARATE AGREEMENTS ALTHOUGH IN NO EVENT SHALL TENANT HAVE A CLAIM AGAINST
LANDLORD UNDER SUCH SEPARATE AGREEMENT, AS LANDLORD'S LIABILITY FOR THE ACTIONS
OF ITS CONTRACTORS AND AGENTS IS LIMITED TO THE EXTENT AGREED UPON IN THIS
SECTION 16.3 AND IN SECTION 21.5.

17. LANDLORD'S FINANCING. So long as Tenant's rights of possession to the
Premises will not be disturbed in the absence of a Tenant's Event of Default
under this Lease, Tenant shall, upon request, enter into a Subordination,
Non-Disturbance and Attornment Agreement ("SNDA") with any Landlord mortgagee in
the form customarily required by such mortgagee, provided that such form does
not require Tenant to adversely modify its rights or obligations under this
Lease. Tenant agrees to provide Landlord's ,mortgagees with copies of notices
sent to Landlord pursuant to Section15, upon Landlord's request and pursuant to
the SNDA.

18. TENANT'S FINANCING. Tenant shall not pledge or encumber this Lease or enter
into a financing lease and leaseback or comparable financing arrangement.
Landlord shall cooperate with Tenant regarding any financing by Tenant which
encumbers Removable Equipment or other personal property, including the
execution of reasonable confirmations regarding the status of this Lease and the
extent to which Tenant's lender may have access to the Premises to inspect or
remove the Removable Equipment during the term hereof, and Tenant shall
reimburse Landlord of all of its third party out of pocket costs and expenses,
including its attorneys' fees in doing so. Tenant may enter into UCC fixture
filings and/or financing statements for its Removable Equipment and other
personal property.

19. HAZARDOUS SUBSTANCES

    19.1 Prohibition. Tenant shall not cause or permit any Hazardous Materials
(Section 19.8) to be brought upon, kept, used, stored, handled, treated,
generated in or about, or released or disposed of from, the Premises in
violation of applicable Environmental Requirements (as hereinafter defined) by
Tenant, its Affiliates and their respective assignees, sublessees, employees,
agents or contractors (collectively "Tenant Related Party").

    19.2 Tenant's Indemnity. If Tenant breaches the obligation stated in Section
19.1, or if the presence of any Hazardous Materials in the Premises results in
contamination of the Premises prior to or during the Term, any Renewal Term or
any holding over by Hazardous Materials brought into, kept, used, stored,
handled, treated, generated in or about, or released or disposed of from, the
Premises by anyone other than Landlord and Landlord's employees, agents and
contractors (collectively the "Relevant Contamination"), Tenant hereby
indemnifies and shall defend and hold Landlord, its officers, directors,
employees, agents and contractors harmless from any and all actions (including,
without limitation, remedial or enforcement actions of any kind, administrative
or judicial proceedings, and orders or judgments arising out of or resulting
therefrom), costs, claims, damages (including, without limitation, punitive
damages and damages based upon diminution in value of the Premises or the loss
of, or restriction on, use of the Premises), expenses (including, without
limitation, attorneys', consultants' and experts' fees, court costs and amounts
paid in settlement of any claims or actions), fines, forfeitures or other civil,
administrative or criminal penalties, injunctive or other relief (whether or not
based upon

                                       20



personal injury, property damage, or contamination of, or adverse effects upon,
the environment, water tables or natural resources), liabilities or losses
(collectively, "Environmental Claims") which arise prior to, during or after the
Term as a result of Relevant Contamination. This indemnification of Landlord by
Tenant includes, without limitation, costs incurred in connection with any
investigation of site conditions or any cleanup, treatment, remediation,
removal, or restoration work required by any federal, state or local
governmental authority because of Hazardous Materials present in the air, soil
or ground water above, on, or under the Premises. Without limiting the
foregoing, if the presence of any Hazardous Materials on the Premises or any
adjacent property caused or permitted by Tenant or any Tenant Related Party
results in the Relevant Contamination of the Premises or any adjacent property,
Tenant shall promptly take all actions at its sole expense and in accordance
with applicable Environmental Requirements as are necessary to return the
Premises or any adjacent property to the condition existing prior to the time of
such contamination, provided that Landlord's approval of such action shall first
be obtained, which approval shall not be unreasonably withheld so long as such
actions would not potentially have any material adverse long-term or short-term
effect on the Premises. Notwithstanding anything to the contrary stated in this
Section 19, (a) for claims relating to Relevant Contamination of property
adjacent to the Premises, Tenant's obligations under this Section 19.2 are
limited to any clean up requirement imposed by a governmental entity; and (b) in
no event shall Tenant's obligations in this Section 19 include any Hazardous
Materials releases to the extent they are caused by Landlord, its employees,
agents or contractors.

         19.3 Tenant's Business. Landlord acknowledges that it is not the intent
of this Section to prohibit Tenant from using the Premises pursuant to the Use
Requirements. Tenant may operate its business according to prudent industry
practices so long as the use or presence of Hazardous Materials is strictly and
properly monitored according to all applicable Environmental Requirements.
Tenant shall deliver to Landlord prior to the Commencement Date copies of
Tenant's current Hazardous Materials reports, which list each type of Hazardous
Materials currently present at the Premises and thereafter to annually provide
Landlord with copies of updated reports to incorporate any additional Hazardous
Materials which Tenant has brought upon, kept, used, stored, handled, treated,
generated on or released or disposed of from the Premises during the past year,
along with copies of citations, claims of noncompliance or liability,
Remediation Plans relating to Hazardous Materials, if any and Hazardous
Materials assessments provided by third parties, if any. Landlord agrees that
Tenant's annual delivery of reports Tenant has prepared and delivered to
governmental entities to comply with Environmental Requirements reporting
requirements will satisfy this Section 19.3 and specifically, Landlord agrees
that either the HMIS (Hazardous Material Inventory Statement) Report submitted
to the Seattle Fire Department or the Dangerous Waste Annual Report filed with
the Washington State Department of Ecology, satisfy this reporting requirement.
To the extent not included in any other written report given by Tenant to
Landlord, and reasonably requested by Landlord, Tenant shall provide Landlord
with copies of permits and permit applications relating to Hazardous Materials
at the Premises. To the extent reasonably requested by Landlord, Tenant will
summarily explain requested matters regarding information provided to Landlord
by Tenant under this Section 19.3. Tenant is not required, to include in the
annual Hazardous Materials reports information of a proprietary nature. It is
not the intent of this Section to provide Landlord with proprietary information
which could be detrimental to Tenant's business should such information become
possessed by Tenant's competitors.

         19.4 Tenant's Representations and Warranties. Tenant hereby represents
and warrants to Landlord that as of the Effective Date, except as related to
1150 Eastlake Ave. East in Seattle and as disclosed in Property Documents (as
defined in the Purchase Agreement) (i) Tenant has not been required by any prior
landlord, lender or governmental authority at any time to take remedial action
in connection with Hazardous Materials contaminating any property which
contamination was permitted by Tenant or its predecessors or resulted from
Tenant's or its predecessors' action or use of the Premises, and (ii) Tenant is
not subject to any enforcement order for any property issued by any governmental
authority in connection with the use, storage, handling, treatment, generation,
release or disposal of Hazardous Materials (including, without limitation, any
order related to the failure to make a required reporting to any governmental
authority).

                                       21



         19.5 Testing. Subject to the terms of Section 21.5, Landlord shall have
the right to conduct annual tests and examinations of the Premises, at
Landlord's sole expense, to determine whether any contamination of the Premises
or on the Premises has occurred as a result of Tenant's use. Tenant shall be
required to pay Landlord's third-party out of pocket expenses relating to such
annual test or examination of the Premises only if such test or examination
discloses unreported Relevant Contamination for which Tenant is liable pursuant
to Section 19.2. If Tenant conducts its own tests of the Premises, at Tenant's
expense, using third party contractors and test procedures reasonably acceptable
to Landlord, and the tests are certified to Landlord, Landlord shall accept such
tests in lieu of Landlord's annual tests. Landlord's right to conduct Hazardous
Materials testing of the Premises at all other times to determine if
contamination has occurred as a result of Tenant's use of the Premises shall be
governed by Sections 15.7 and 21. In connection with Landlord's Hazardous
Materials testing or examination, upon the request of Landlord, Tenant shall
deliver to Landlord or its consultant such non-proprietary information
concerning the use of Hazardous Materials in or about the Premises by Tenant or
any Tenant Related Party. Landlord shall provide Tenant with a copy of all third
party, non-confidential reports and tests of the Premises made by or on behalf
of Landlord during the Term without representation or warranty and subject to a
confidentiality agreement. If necessary and pursuant to Section 15.7 and a
Response Plan referenced therein, Tenant shall, at its sole cost and expense,
promptly and satisfactorily remediate any environmental conditions identified by
such testing in accordance with all Environmental Requirements. Landlord's
receipt of or satisfaction with any environmental assessment in no way waives
any rights which Landlord may have against Tenant.

         19.6 Underground Tanks. Tenant will not install underground storage
tanks storing Hazardous Materials on the Premises without first obtaining
Landlord's advance written consent, which will be given or withheld at
Landlord's sole discretion. If Tenant is permitted to install underground
storage tanks, it shall install, use, monitor, operate, maintain, upgrade and
manage such storage tanks, maintain appropriate records, obtain and maintain
appropriate insurance, implement reporting procedures, properly close any
underground storage tanks, and take or cause to be taken all other actions
necessary or required under applicable state and federal Environmental
Requirements, as such now exists or may hereafter be adopted or amended in
connection with the installation, use, maintenance, management, operation,
upgrading and closure of such underground storage tanks.

         19.7 Tenant's Obligations. Tenant's obligations under this Section 19
shall survive the expiration or earlier termination of the Lease. During any
period of time after the expiration or earlier termination of this Lease
required by Tenant or Landlord to complete the removal from the Premises of any
Hazardous Materials (including, without limitation, the release and termination
of any licenses or permits restricting the use of the Premises and the
completion of a surrender plan reasonably approved by Landlord), Tenant shall
continue to pay the pro-rata Rent as reasonably adjusted to reflect the
differential rental values of different portions of the Premises, in accordance
with this Lease for that portion of the Premises which cannot be relet by
Landlord due to and during such clean up, provided such Rent shall be pro-rated
daily and provided further that Tenant's obligation to pay the pro-rated Rent
under this Section 19.7 is conditioned on Tenant having full access to such
portion of the Premises.

         19.8 Definitions. As used herein, the term "Environmental Requirements"
means all applicable present and future statutes, regulations, ordinances,
rules, codes, judgments, orders or other similar enactments of any governmental
authority regulating or relating to health, safety, or environmental conditions
on, under, or about the Premises, or the environment, including without
limitation, the following: the Comprehensive Environmental Response,
Compensation and Liability Act; the Resource Conservation and Recovery Act; and
all state and local counterparts thereto, and any regulations or policies
promulgated or issued thereunder. As used herein, the term "Hazardous Materials"
means and includes any substance, material, waste, pollutant, or contaminant
listed or defined as hazardous or toxic, or regulated by reason of its impact or
potential impact on humans, animals and/or the environment under any
Environmental Requirements, asbestos and petroleum, including crude oil or any
fraction thereof, natural gas liquids, liquefied natural gas, or synthetic gas
usable for fuel (or mixtures of natural gas and such synthetic gas) and
Stacchybotris chartarum and other toxic molds. As defined in Environmental
Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's
"facility" and the "owner" of

                                       22



all Hazardous Materials brought on the Premises by Tenant or any Tenant Related
Party, and the wastes, by-products, or residues generated, resulting, or
produced therefrom.

     19.9 Notice to Landlord. To the extent that Tenant or Landlord has actual
knowledge thereof, such party shall promptly provide notice to the other of any
of the following matters:

     (i)   any proceeding or investigation commenced or threatened by any
     governmental authority, against Tenant or Landlord, with respect to the
     presence, suspected presence, release or threatened release of Hazardous
     Materials on or from the Premises;

     (ii)  all written notices of any pending or threatened claims or citations
     regarding Hazardous Materials on the Premises or released from the
     Premises;

     (iii) the discovery of any occurrence or condition on the Premises, or
     written notice received by Tenant of an occurrence or condition on any real
     property adjoining or in the vicinity of the Premises, which reasonably
     could be expected to lead to the Premises or any portion thereof being in
     violation of Environmental Requirements or which might subject Landlord to
     any claim alleging potential liability arising out of (A) the presence, or
     release into the environment, of any Hazardous Materials at the Premises,
     or (B) circumstances forming the basis of any violation, or alleged
     violation, of any Environmental Requirement; and

     (iv)   the commencement, nature, extent and completion of any remedial
     work.

20.  FIRST OFFER. Tenant shall have a "Right of First Offer" if Landlord elects
to market or sell the Premises to an unrelated third party. In such event,
Landlord shall provide Tenant with a notice in writing of its intention to sell,
setting forth the terms under which Landlord is prepared to sell the Premises.
Tenant shall have 30 days to notify Landlord in writing whether it wishes to
purchase the Premises on the proposed terms. If Landlord's notice states that
its affiliate also intends to sell the Lake Union Steam Plant property also
leased by Tenant, Tenant will be required to purchase both unless Landlord and
its affiliate specifically provides a single building alternative. If Tenant
notifies Landlord that it wishes to purchase the applicable property (the "Sale
Property") on the terms and conditions stated in Landlord's notice, the parties
will negotiate in good faith for 30 days to reach agreement on a purchase and
sale agreement. In the event that Tenant does not notify Landlord of its intent
to purchase the Sale Property or the parties are unable to reach an agreement on
a purchase and sale agreement within the prescribed time frames, Landlord shall
be free to sell the Sale Property to any third party on such terms and
conditions that Landlord finds acceptable. If Landlord does not transfer
ownership of the Sale Property within 18 months of its original notice to
Tenant, Tenant's Right of First Offer shall be reinstated. If Landlord does
transfer ownership within 18 months of its original notice to Tenant to any
unrelated third party, Tenant's Right of First Offer shall automatically
terminate and be of no further force or effect for that or any subsequent sale
of any property demised by this Lease or the Steam Plant Lease. All of Tenant's
rights under this Section are personal to Tenant and may not be assigned,
pledged or transferred to any third party. Notwithstanding the foregoing, such
rights may be assigned or transferred to Tenant's Affiliate (Section 13.2).
Tenant also agrees that its rights provided for in this Section shall not apply
(a) so long as any Event of Default exists hereunder at the time Landlord's
notice was otherwise required to be given to Tenant, in which event Landlord may
proceed to negotiate and consummate a sale free of such right, (b) to any lease,
mortgage or encumbrance of the Premises or other transfer of less than fee
simple title thereto or any portion thereof, (c) to any transfer of any kind of
any portion or all of the membership interests in Landlord, or (d) to any
conveyance of the Premises or any portion thereof to (i) any entity that
controls, is controlled by or under the common control with Landlord or any of
their respective affiliates, or (ii) any entity in condemnation or in lieu of
condemnation, or (iii) any judicial or nonjudicial foreclosure or deed in lieu
of a judicial or nonjudicial foreclosure, and Tenant's right of first offer
shall automatically terminate with respect to the Premises or any portion
thereof which are conveyed pursuant to part (ii) or (iii) of this Section.

                                       23



21.  ACCESS BY LANDLORD

     21.1 Access. Subject to the terms and provisions of this Section 21, Tenant
shall permit Landlord and its employees and authorized agents, consultants,
contractors, and representatives (with Landlord, the "Landlord Representatives")
to enter upon the Premises during normal business hours to inspect, examine, and
show the Premises for lease (during the last 12 months of the Term), financing
or sale, or to cure an Event of Default pursuant to Section 15.7 (generally,
"Inspections"); provided, however, Landlord may enter the Premises during other
hours when it is reasonably necessary to either address an emergency or an Event
of Default. This right specifically excludes the right to obtain proprietary
information relating to Tenant's business operations. Hazardous Materials tests
and responses are specifically limited by Sections 15.7 and 19.5.

     21.2 Conditions to Entry. At least 2 business days prior to entering the
Premises or conducting any Inspections, Landlord shall (a) give Tenant oral or
written notice of the times and dates it wishes to do so, (b) make arrangements
with Tenant to have the Landlord Representatives to be accompanied by a
representative of Tenant ("Tenant's Representative"), and (c) cause each
Landlord Representative (other than the Landlord) accessing the Premises to sign
an "Access and Confidentiality Agreement" in the form attached as Exhibit C or
such other form reasonably acceptable to Tenant. The advance notice agreed upon
shall apply in emergencies and following a default; provided that Tenant
promptly delivers to Landlord reasonable assurances that such emergency or
default is being adequately and diligently addressed (and for Hazardous
Materials, so long as Tenant delivers and confirms compliance with its Response
Plan). All Inspections shall be in accordance with all applicable Laws and
regulations. Tenant agrees to make reasonable efforts to cause Tenant's
Representatives to be available for such purposes during normal business hours.
Tenant agrees that Landlord shall have no liability for any breach of an Access
and Confidentiality Agreement by anyone other than Landlord except to the extent
of Landlord's indemnity set forth in Section 21.5 below.

     21.3 Inspection Costs. Except for any salary to be paid to Tenant's
Representatives or as otherwise stated in this Lease or when necessitated by an
Event of Default, Landlord shall bear the cost of all Inspections.

     21.4 Inspection Obligations. (a) In conducting any Inspections, Landlord
Representatives shall: (i) not materially interfere with the use of the Premises
by any occupant; (ii) not materially interfere with the operation and
maintenance of the Premises or any construction on the Premises; (iii) not
damage any part of the Premises or personal property located at the Premises;
(iv) not injure or otherwise cause bodily harm to any Tenant's Representative or
any other person or entity or their respective employees, agents, contractors,
representatives, guests, or invitees; (iv) at Tenant's request, provide Tenant
with complete and accurate copies of all of the third-party reports and
assessments of the Premises that are not proprietary to Landlord (collectively
"Inspection Reports"); and (v) provide Tenant with copies of any Inspection
Reports which provide information relating to Tenant's obligations under this
Lease. No Landlord Representative will conduct any invasive Inspections which
damage the Premises, unless such Inspections are (1) otherwise permitted by this
Lease, (2) required by any governmental entity, (3) subject to Section 21.2, and
except as restricted under Section 15.7, reasonably necessary in connection with
a release or potential release of Hazardous Materials or there exists a
reasonable belief that Environmental Requirements have been violated and such
access and testing is conducted only by Landlord Representatives who are
appropriately qualified as experts; or (4) are otherwise reasonably necessary
and Landlord has first obtained Tenant's consent, which consent will not be
unreasonably withheld. For Inspections relating to Hazardous Materials, the
terms of Section 19.5 shall also apply. If the Premises are damaged during an
Inspection, Landlord will immediately repair such damage and restore the
Premises, pursuant to Section 21.5 below. Tenant acknowledges and agrees that
Landlord shall have no responsibility for the accuracy or completeness of any
such report or assessment or the suitability thereof for use by any person other
than Landlord.

          (b) Landlord and all Landlord Related Parties, including their
respective partners, members, officers, directors, and attorneys will treat as
confidential the information disclosed to them by Tenant or discovered on
account of or pursuant to Landlord's Inspections (which information is disclosed

                                       24



orally, in writing or in visual or electronic form, and including any
observations, knowledge, information, reports (written or oral), tests, or
studies (together with the results of such studies and tests) obtained by or
provided to Landlord or any Landlord Related Parties regarding the Premises,
whether in connection with the Inspections, or otherwise, but shall not include
information known by Landlord or Landlord Related Parties prior to any
disclosures by Tenant or any Inspections or any other information that is
generally known or available to the public) (the "Information"), giving it at
least the same care as Landlord's own confidential information, and make no use
of any such Information except in connection with (a) verifying Tenant's
compliance with the terms of this Lease, (b) disclosing the condition of the
Premises in connection with a sale, financing or lease of the Premises, or (c)
to the extent required by court or legal requirements (which may include SEC
regulations, NYSE and NASDAQ requirements). In addition, and except as required
by applicable law, neither Landlord nor Tenant shall make or agree to any press
releases in which the other party is identified without the prior written
consent of the other party, and when such consent is given, the information
disclosed and the persons to whom it is disclosed shall be limited to such
releases. To the extent that the terms, provisions, and obligations of this
Section 21, are inconsistent with the other provisions of this Lease, the terms
of this Section 21 will control, but subject to limitations stated in Section
16.3. This Section 21.4(b) is not applicable to any Landlord Related Party who
is also a Landlord Representative (Section 21.2) who executes a Access and
Confidentiality Agreement pursuant to Section 21.2.

         21.5 Indemnification and Repair. Landlord hereby agrees to indemnify,
defend (with counsel reasonably acceptable to Tenant), and hold Tenant and its
officers, directors, successors, and assigns harmless from and against any and
all liens, claims, causes of action, liabilities, demands, suits, obligations,
losses, penalties, costs, and expenses (including reasonable attorneys' fees)
(generally, "Damages") including without limitation Damages for any actual
physical damage to the Premises or any injury to persons, all to the extent
caused by or in connection with the entry onto the Premises by a Landlord
Representative or an act of a Landlord Representative in connection with the
Inspections; provided, however, that Landlord's indemnity hereunder shall be
limited to actual, direct damages only and shall not include (a) any
consequential damages, or (b) any damages to the extent resulting from (i) the
acts or omissions of any Tenant's Representative, or (ii) the discovery of any
condition of the Premises that existed prior to Landlord's entry thereon (a
"Pre-Existing Condition"), except that such indemnity shall apply to the extent,
and only to the extent, such Pre-Existing Condition is directly exacerbated,
aggravated, or worsened by the entry onto the Premises by an Landlord
Representative or an act of an Landlord Representative in connection with the
Inspections. In addition, Landlord shall promptly repair any physical damage to
the Premises caused by any Landlord Representative (including without limitation
damage relating to an Inspection) and shall promptly restore the Premises to the
condition in which it existed prior to such entry; provided, however, that
Landlord shall have no obligation to repair any damage caused by the acts or
omissions of any Tenant's Representative or to remediate, remove, contain,
abate, or control any Pre-Existing Condition, except to the extent, and only to
the extent, necessary to restore the Pre-Existing Condition to the condition in
which it existed prior to such entry. As an example only, if a Landlord
Representative should cause a limited and confined release of asbestos while
taking a sample of ceiling materials within the Premises, Landlord's sole
obligation would be to remove, control and abate any released asbestos,
indemnify and defend Tenant for any personal injury Damages claimed relating to
the release, and to re-seal the ceiling materials where the sample was taken;
Landlord would have no further obligation to remediate, remove, contain, abate,
control, or take any further action whatsoever with respect to the asbestos
contained in the sampled or any other ceiling materials. Landlord's obligations
under this Section 21 shall survive termination of the Lease; provided that
Tenant will only have two years from the expiration or termination of this Lease
to commence an action against Landlord under this Section.

         21.6 Building Signage. Landlord hereby agrees not to modify or require
any changes to the current signage at the Premises, and further agrees that
during the Term, Tenant shall have the sole right to designate the name of the
Premises', but subject to Landlord's consent, which will not be unreasonably
withheld (e.g., the "Earl Davie Building"). Tenant's right under this Section
21.6 are personal to Tenant and Tenant may not Transfer (Section 13.1) such
rights, except to Tenant's Affiliates (Section 13.2).

                                       25



22.  CONTESTS

     22.1 Notice. Notwithstanding the provisions of this Lease which require
Tenant pay certain amounts to third parties ("Third Party Payments") on or
before the date due (Sections 3.4, 4.3 and 6), Tenant shall not be required to
(i) pay any Third Party Amounts, (ii) comply with any Law, or (iii) discharge or
remove any lien arising out of Tenant, so long as Tenant contests, in good faith
and at its expense, the existence, the amount or the applicability or validity
thereof, and by appropriate proceedings so long as during the pendency thereof
Tenant takes any necessary steps to prevent (A) the collection of, or other
realization upon, the claim so contested, (B) the sale, forfeiture or loss of
any of the Premises, or the Rent to satisfy the same, (C) any interference with
the use or occupancy of any of the Premises, and (D) the cancellation of any
insurance Tenant is required to carry pursuant to Section 9.

     22.2 Conditions. In no event shall Tenant pursue any contest in such manner
that exposes Landlord to (i) criminal liability, penalty or sanction, or (ii)
defeasance of its interest in the Premises.

     22.3 Hold Harmless. Tenant agrees that each contest shall be promptly and
diligently prosecuted to a final conclusion, except that Tenant shall have the
right to attempt to settle or compromise such contest through negotiations;
provided that if such contest is not concluded and all amounts for which Tenant
is liable are not paid prior to the expiration of this Lease, then Tenant agrees
that its obligation to diligently pursue or settle such contest and its
liability for such unpaid amounts shall survive the expiration of this Lease.
Tenant shall pay and save Landlord harmless against any and all losses,
judgments, decrees and costs (including all attorneys' fees and expenses) in
connection with any such contest and shall, promptly after the final
determination of such contest, fully pay and discharge the amounts which shall
be levied, assessed, charged or imposed or be determined to be payable therein
or in connection therewith, together with all penalties, fines, interest, costs
and expenses thereof or in connection therewith, and perform all acts the
performance of which shall be ordered or decreed as a result thereof.

23.  ESTOPPEL CERTIFICATE. Each party shall at any time and from time to time
upon not less than 20 days written notice from the other and without charge,
execute and deliver to the other an estoppel certificate in the form of Exhibit
J.

24.  EXPANSION

     24.1 Overview. Tenant shall have the right in its sole discretion, but no
obligation, to expand the Earl Davie Building to the north as described in the
schematic design included in the revised basis of design dated August 30, 2002
(the "Basis of Design") prepared by MBT Architecture ("MBT") provided to
Landlord by Tenant (the "Expansion"). The schematic design is included in
Exhibit H. Tenant will be primarily responsible for the design and construction
of the Expansion with limited oversight by Landlord. Prior to commencing the
Expansion, Landlord and Tenant shall appoint one or more individuals in a
written notice to the other which will authorize and enable the recipient to
communicate with such individual or each of them with respect to all matters
involving the Expansion, and all payments, notices, directions, agreements,
waivers and other actions made by or to any such individuals shall be
conclusively those of that party without the necessity for the other party to
inquire into or ascertain such individual's authority. Beginning in 2001 and
continuing through the present, Tenant has been planning the Expansion. This
work has included engaging MBT to work on the preliminary design, working with
the City of Seattle ("City") and the Washington State Department of
Transportation ("WSDOT") regarding acquiring the necessary land for the
Expansion, initiating discussions with community groups regarding mitigation
issues, and consulting with Turner Construction ("Turner") on project
construction planning, cost estimates, identification of recommended
subcontractors, and other preconstruction work, and with Clark, Richardson &
Biskup Consulting Engineers ("CRB") on project engineering. Based on their work
to date on the Expansion, Tenant anticipates continuing to work with MBT, CRB
and Turner on the development of the Expansion. All contracts with third party
contractors, architects and service providers in connection with permitting,
designing and constructing the Expansion and all permits and designs, plans and
specifications therefor shall be subject to Landlord's approval and the
contracts shall include provisions such that the plans, specifications and
design shall be the sole property of Landlord.

                                       26



         24.2 Land. The Expansion will be located to the north of the Earl Davie
Building, on a combination of the existing undeveloped land included in the
Premises and property to be acquired in connection with the vacation of the
portion of Bellevue Avenue East lying easterly of Eastlake Avenue East, all
approximately as shown on the drawing attached as Exhibit K. If Tenant elects to
go forward with the Expansion, then upon approval of the vacation ordinance by
the City Council, the southwesterly half of the vacated road would attach to the
land described on Exhibit A to this Lease and become owned by Landlord by
operation of law. If Tenant does not elect to go forward with the Expansion,
then the Expansion Land (as defined below) will not become owned by the Landlord
or attached to the land described on Exhibit A. If Tenant elects to discontinue
its acquisition of the Expansion Land, it shall give prompt written notice
thereof to Landlord and Landlord shall have the right to pursue the vacation and
acquisition, in which event the Expansion Land shall not be added to this Lease.
Tenant shall make available to Landlord such reports, applications, surveys and
studies as it may have with respect to the acquisition of the Expansion Land and
Landlord shall reimburse Tenant for its actual third party out of pocket costs
incurred to obtain the same to the extent such deliveries result in out of
pocket savings to Landlord. Tenant's goal, which has been discussed with WSDOT
and the City but not yet fully agreed upon, is to have the City vacate the
street and for Tenant to acquire from WSDOT the majority of the northeasterly
half of the vacated street that would otherwise become part of WSDOT's property.
The property acquired from WSDOT shall be transferred to Landlord by WSDOT or
Tenant. As part of that acquisition, Tenant has offered to transfer to WSDOT the
small parcel Tenant acquired from King County and enabling WSDOT to retain as an
access way to its southerly parcel. Tenant anticipates continuing these
discussions to reach formal agreements with the City and WSDOT with the final
result of acquiring the property necessary for the Expansion (the "Expansion
Land"). The costs incurred in this process are part of the Expansion Costs
described below. Following acquisition of the Expansion Land as a result of
Tenant's efforts, Landlord and Tenant agree to execute an amendment to this
Lease modifying Exhibit A to include the Expansion Land. As improvements are
constructed on the Expansion Land, the improvements shall automatically be owned
by Landlord, included within the Premises, and subject to all of the terms of
the Lease, including Tenant's liability for Additional Rent and its indemnities
herein that relates thereto, except Base Rent shall be adjusted as and in the
amount specified in Section 24.10.

         24.3 Design. As noted above, Tenant has engaged MBT to do preliminary
design and engineering work for the Expansion. Landlord has received and
approved the proposal dated July 3, 2002 from MBT and a proposal dated August
26, 2002 from CRB for continuing work on the Expansion. Following this
preliminary work, Tenant, in consultation with Landlord, will negotiate a
contract with MBT for the balance of the engineering and design work for the
Expansion (the "Design Contract"). CRB's work under its current contract will be
substantially completed prior to the Commencement Date. CRB may perform
additional consulting engineering work if requested by Tenant. Within 5 business
days after receipt of the proposed Design Contract and any amendments thereto,
Landlord shall either provide its approval or provide detailed comments on
changes required to obtain its approval. Landlord will not unreasonably withhold
its approval of the Design Contract, and any amendments thereto. Tenant's
obligations include diligently enforcing the Design Contract and warranties and
bringing defects to Landlord's attention in a timely manner. Tenant shall
defend, indemnify and hold Landlord harmless from and against any and all
claims, liability and damages arising from its actions as "Owner" under the
Design Contract. The design must result in the Premises conforming to the
Function Requirements and Use Requirements applicable following completion of
the Expansion.

         24.4 Plans and Specifications. Pursuant to the Design Contract, MBT has
prepared the Basis of Design and Landlord has approved the Basis of Design. MBT
will prepare construction drawings and specifications (the "Proposed Plans").
The Proposed Plans shall be submitted to Landlord for its review and approval.
Landlord will not unreasonably withhold its approval of the Proposed Plans and
after receipt of same will either approve them or disapprove them within 15
business days after receipt giving specific comments regarding what changes
would be required to obtain Landlord's approval. If the Proposed Plans do not
vary from the Basis of Design already approved by Landlord, then Landlord shall
be required to approve the Proposed Plans. The plans and specifications approved
by Landlord are referred to herein as the "Final Plans." Following Landlord's
approval of the Final Plans, Tenant will continue to work with MBT and Turner to
optimize the plans and construction, which will result in

                                       27



subsequent changes to the Final Plans. Tenant shall notify Landlord promptly
upon its actual knowledge of a Material Departure from the Final Plans; and
Tenant must also present all Material Departures from the Final Plans to
Landlord for its approval, together with a revised plan from MBT detailing the
Material Departure(s). Landlord will respond within 5 business days of
Landlord's receipt of such request. "Material Departure" shall mean a change
which (a) materially adversely affects the quality of materials or construction
below the quality of the development of the original Premises ("Existing
Standard"), or (b) departs in any respect from the Function Requirements or the
Use Requirements applicable after completion of the Expansion. Landlord will
cooperate with Tenant regarding any changes to the Final Plans required by
governmental authorities during the permitting process. Copies of all changes
shall be concurrently provided to Landlord. Landlord shall have no obligations
with respect to the accuracy or adequacy of any Proposed or Final Plans or the
extent the same comply with applicable Laws.

         24.5 Construction Contract. Tenant has selected Turner Construction as
the contractor for the Expansion (the "Project Contractor") and Landlord has
approved that selection. Tenant, in consultation with Landlord, will negotiate a
contract with Project Contractor for the Expansion (the "Construction
Contract"). The Construction Contract shall be subject to Landlord's approval,
which shall not be unreasonably withheld. Within 5 business days after receipt
of the final Construction Contract to be executed by Tenant and Project
Contractor, Landlord shall either provide its approval or provide detailed
comments on changes required in order to obtain its approval. Upon Landlord's
approval of the Construction Contract, Tenant will sign the Construction
Contract as Owner. Tenant shall be required to obtain Landlord's approval of all
Material Change Orders, and the standards for the granting or withholding of
Landlord's approval shall be consistent with the following: "Material Change
Orders" shall mean any change orders which (a) reduce the quality of materials
or construction below the Existing Standard, (b) departs from the Function
Requirements or the Use Requirements, or (c) amends the Construction Contract.
In addition, Tenant shall provide to Landlord for its approval, which shall not
be unreasonably withheld, any change orders which represent changes in the scope
of the project. Landlord will provide its approval (or disapproval with detailed
reasons therefor) within 5 business days for a "change of scope" change order,
defined as a change order that involves a cost increase or decrease of $250,000
or more, and within 3 business days for all others. Landlord's approval will not
be required for field directive changes. Tenant will defend, indemnify and hold
Landlord harmless from and against any and all claims, liability and damages
arising from its actions as "Owner" under the Construction Contract and
warranties.

         24.6 Permits and Approvals/Diligence. Tenant shall be responsible for
obtaining all governmental permits and approvals for the Expansion and the cost
incurred in connection therewith shall be included in Expansion Costs. Tenant
will promptly provide Landlord with copies of all permits and approvals. Tenant
shall also be an agent of Landlord for the limited purpose of pursuing and
obtain all necessary approvals for the Expansion, including discussions and
negotiations with governmental authorities, and applying for permits and
approvals. Landlord shall cooperate with Tenant in all respects in connection
with obtaining the permits and approvals, which cooperation may include entering
into mitigation agreements with the associated costs included in Expansion Costs
and execution and delivery of applications, permits and other instruments
required to obtain the permits and approvals. If Tenant obtains the necessary
permits and elects to proceed with construction of the Expansion, Tenant shall
use commercially reasonable efforts to cause such construction to be promptly
commenced and diligently pursued and to be accomplished in compliance with all
applicable Laws and regulations. Tenant shall defend, indemnify and hold
Landlord harmless from and against all claims, liability and damages relating to
any failure to pay any permit fees or breach of the terms of any permit.

         24.7 Other Consultants. Tenant shall have the right to engage other
specialists and consultants of its choice as necessary or appropriate in order
to complete the Expansion. Tenant shall enter into these contracts directly with
the applicable third parties and such contracts shall contain corresponding
indemnification and insurance requirements. Tenant shall enforce the contracts
and warranties, and other obligations of such specialists and consultants.

                                       28




         24.8     Budget/Allowance.

                  24.8.1 Budget/Costs. As used herein, "Expansion Costs" shall
mean and include all out of pocket hard and soft costs incurred in the
Expansion, including land acquisition (including the cost of purchasing the
Expansion Land and the parcel from King County, and related mitigation costs),
design, development, construction and permitting and other predevelopment costs.
Expansion Costs shall not include any costs of purchasing, leasing of Removable
Equipment (other than construction equipment) or installing any Removable
Equipment (other than construction equipment) or any other property that will
not become immediately owned by Landlord. Tenant has provided to Landlord a
preliminary budget for the Expansion Costs (the "Budget") and will periodically
provide to Landlord updated Budgets reflecting current cost and monthly cash
flow projections. As of the date hereof, the current total Budget for Expansion
Costs is approximately $23,141,000.00, and the amount incurred to date is
approximately $500,000.

                  24.8.2 Calculation of Allowance. Landlord shall provide an
allowance equal to $330 times the net increase in the square footage of rentable
area in the Premises as a result of the Expansion (the "Allowance") to be
applied toward the Expansion Costs. Initially, the estimated amount of the
Allowance shall be determined by using the estimated net increase in rentable
square footage expected to result from the construction shown in the permit
drawings, as measured by Burgess Weaver Design Group ("Burgess"). Upon
completion of the Expansion, either party may elect to require that a jointly
selected architect (the "Approved Architect") measure the entire building,
including the constructed Expansion, and the final Allowance (and rent
adjustment required by Section 24.10), shall be based on the net increase in
rentable square footage shown by that measurement, with an adjustment between
the parties so that Landlord has funded the final Allowance and Tenant has paid
the balance. If neither party so elects to require measurement of the completed
building, then the Allowance and the Rent Adjustment under Section 24.10 shall
be derived from the Burgess measurement based on the permit drawings. The
increase in rentable area shall be calculated in accordance with applicable BOMA
standards (ANSI/BOMA Z65.1 1996) ("BOMA Standards"), as applied by Burgess,
which excluded major vertical penetrations, stairs, elevators and major
mechanical shafts; as shown on Exhibit I.

                  24.8.3 Funding of Allowance. The Allowance shall be applied
only to (a) Expansion Costs incurred by Tenant, (b) the Oversight Fee (Section
24.9), and (c) any construction period interest (described below). Tenant shall
have the option of either paying the Expansion Costs out of its own funds as the
Expansion goes forward and being reimbursed from the Allowance upon substantial
completion of the Expansion, as evidenced by the issuance of a temporary
certificate of occupancy therefor, or having Landlord fund the payment of
Expansion Costs from the Allowance as they are incurred. Tenant shall make this
election by written notice to Landlord no later than 30 days prior to
commencement of construction of the Expansion, which shall be deemed to occur
when grading begins under a valid grading permit. To the extent that Tenant
elects to draw funds from the Allowance prior to the Expansion Rent Commencement
Date, the amounts drawn shall accrue construction period interest at 3% over the
Prime Rate, reset as of the first of each calendar month, from the date of
disbursement until the Expansion Rent Commencement Date and which interest shall
be paid monthly from the Allowance. The availability of and Landlord's
obligations to fund the Allowance shall be conditioned upon commencement of
construction of the Expansion by January 1, 2005. Any provision in this Lease to
the contrary notwithstanding, no portion of the Allowance shall be disbursed so
long as any Event of Default exists and Landlord's obligation to disburse the
Allowance shall terminate altogether if the Expansion is not begun by January 1,
2005. Landlord may also cause the disbursements to be made subject the same to
such certifications, lien waivers, retentions and other conditions as are
commonly imposed by commercial construction lenders when disbursing a
construction loan (i.e. AIA G702, G703). Advances shall not be made more than
once each month, and no retention need be disbursed until Landlord has received
a certificate of substantial completion (AIA Form G704) signed by the Expansion
architect, contractor and Tenant and to which the final punch list of incomplete
items is attached. Landlord may withhold 150% of the estimated cost of the
punchlist items until Landlord has received (a) evidence acceptable to Landlord
that all of said punch list items have been completed, (b) final lien waivers
from all contractors, principal subcontractors, and principal material
suppliers, and (c) such other documentation and certifications as Landlord may
reasonably require of Contractor. If the Allowance has not been entirely
disbursed to

                                       29



Tenant by January 1, 2006, Landlord may elect to disburse the then remaining
balance of the Allowance to Tenant on January 1, 2006 or at any time thereafter,
in advance of or upon Tenant's application therefor and in advance of or upon
the corresponding costs becoming due and payable, and upon such disbursement,
the above construction period interest shall begin to accrue on those funds.
Accrual of construction period interest shall automatically cease on the
Expansion Rent Commencement Date.

                  24.8.4 Funding of Excess. The Expansion Costs are currently
projected to exceed the Allowance. All Expansion Costs that are not covered by
the Allowance shall be paid by Tenant from its own funds as and when due. As the
design, engineering and predevelopment work proceeds, the Budget will be
adjusted and will more accurately reflect the likely total cost of the
Expansion. So long as no Event of Default then exists and the Expansion has
begun by January 1, 2005, Landlord will disburse the Allowance to pay Expansion
Costs as reimbursements are applied for, and/or construction draws presented not
more frequently than once per month, so long as the total amount disbursed to
date does not exceed total estimated Allowance times the then percentage
completion of the Expansion as determined by MBT.

                  24.8.5 Processing of Allowance Disbursements. Each application
by Tenant for a disbursement from the Allowance shall be supported by the
applicable supporting documentation reasonably acceptable to Landlord. Payment
will be made by Landlord on the application within 20 days after receipt of the
application and supporting documentation; provided that the construction draw
requests shall be processed within the time period required by the Construction
Contract (approved by Landlord) and the draw requests will be accompanied by the
documentation required by such Construction Contract, including lien releases
and such other documentation as is customarily required by a commercial
construction lender on a typical construction loan.

                  24.8.6 Shell Space. Notwithstanding the provisions of this
Section 24.8, Tenant agrees that on completion of the Expansion, not more than
the space described as "shell" on Exhibit H shall be left in shell condition.
The shell space shall be finished within the Function Tolerances for the
Premises stated in Section 8.5, and with no more than 1,000 rentable square feet
improved for use as office space, within 4 years from the date of the last
disbursement of the Allowance unless Landlord otherwise consents in writing. If
improvements to the shell space are not completed within such 4 year period it
will not be a default hereunder so long as Tenant posts an LOC in the form
attached as Exhibit D for $1,000,000.00 by the end of the said 4-year period
until such improvements are completed by Tenant. The LOC shall be returned to
Tenant when (a) Tenant completes the shell build out as required hereunder, (b)
Landlord accepts the same as having complied with Tenant's obligations under
this section, and (c) Tenant provides Landlord with final lien waivers and
evidence of payment for all of the costs and expenses incurred to do so. If the
shell build out required hereunder is not completed by the expiration or earlier
termination of this Lease, Landlord will have the right to draw down on such LOC
upon such expiration or termination and retain such proceeds as liquidated
damages for such failure to complete. During the pendency of this Lease the LOC
will otherwise be subject to the same terms and conditions as those that are
applicable to the Security Deposit, to the extent not inconsistent with this
Section 24.8.6.

         24.9     Landlord Oversight Fee. Landlord's primary objective in the
oversight of the Expansion will be to monitor and protect its investment. Such
oversight will include but will not necessarily be limited to the following
customary services: plan review, periodic construction inspections, monthly draw
and invoice review, lien release adherence and title search as necessary,
monthly disbursement of proceeds, travel and other associated expenses. Landlord
shall be given full access to the construction site and all design, development
and construction documentation in order to perform its oversight. Out of the
Allowance, Landlord shall be entitled to collect an oversight fee (the
"Oversight Fee") which shall be equal to its actual time and expenses; but not
to exceed a total of $25,000 for the Expansion, which sum shall be payable
whether or not the Expansion is pursued to completion. The Oversight Fee shall
be due on the Expansion Rent Commencement Date.

         24.10    Rent for Expansion. Only if Tenant elects at its sole option
to build the Expansion, then commencing (the "Expansion Rent Commencement Date")
on the earlier of (a) July 1, 2006 or (b) the

                                       30



date a temporary or permanent certificate of occupancy is issued for the
Expansion, the Base Rent shall be increased by an amount equal to the net
increase in rentable area of the Premises times the Applicable Rate, divided by
12. The net increase in square footage of rentable area shall be determined
pursuant to Section 24.8.2. The "Applicable Rate" shall be as follows, selected
based on the Expansion Rent Commencement Date: (a) $32.18/rsf from the Lease
Commencement Date for the first 12 months of the Term and any partial month in
which the Lease Commencement Date occurs, (b) $33.3063/rsf for the second 12
month period in the Term, (c) $34.4720/rsf for the third 12 month period in the
Term, (d) $35.6785/rsf for the fourth 12 month period in the Term, and (e)
$36.9273/rsf for the fifth 12 month period in the Term. The Base Rent, increased
as described in this Section 24.10, shall continue as increased until the next
annual Rent Adjustment Date. On that date and continuing thereafter, the then
Base Rent (as increased to reflect the Expansion as described above) shall
increase by 3.5% and shall thereafter continue to increase by 3.5% each year,
subject to adjustment at the commencement of any Renewal Term.

         24.11    Extension of Initial Term. As of the Expansion Rent
Commencement Date, the Initial Term of this Lease shall be extended to a date
which is 180 months from the Expansion Rent Commencement Date. Such extension
will not affect the Lease extension rights described in Section 2.2 above, and
the first Renewal Term, if exercised, will commence on expiration of the Initial
Term, extended as described in this paragraph. Within 30 business days after the
Expansion Rent Commencement Date, the parties hereto shall enter into an
Amendment to this Lease in the form attached hereto as Exhibit M stating the
Expansion Rent Commencement Date, the new Base Rent, and the extended expiration
date of the Initial Term.

         24.12    As-Built Documents/Closeout Package. Within 30 business days
after receipt of the project "closeout package" from Turner and prior to
Landlord's disbursement of the final draw or retainage, Tenant will provide to
Landlord (a) a complete set of as-built plans for the Expansion, (b) a complete
set of all of the permit applications and permits, property studies and
evaluations, soils and environmental assessments and other studies Tenant has
obtained in connection with the Expansion (excluding those of a proprietary
nature that relate to Tenant's business and processes), (c) an ALTA/ACSM land
survey showing the boundaries of the Expansion Land, the location of the
Expansion improvements, and all easements, setback areas and encroachments
within the Expansion Land and such other matters as are required by the insurer
issuing Landlord's title insurance supplement, (d) copies of the temporary, and
any permanent, certificate of occupancy for the Expansion, (e) all warranties
provided under contracts signed by Tenant, and (f) a supplement to Landlord's
title insurance policy issued in connection with its acquisition of the Premises
which (i) is in an extended form with the same endorsements issued with the
original policy, (ii) adds the Expansion Land to the description of the insured
property, (iii) increases the policy amount by the amount of the Expansion
Costs, and (iv) insures Landlord as the sole holder of fee simple title to the
Expansion Land and improvements thereon subject to no exceptions other than the
liens for nondelinquent real property taxes and assessments, non-monetary
encumbrances arising out of the vacation of Bellevue Avenue that do not include
encroachments over boundary lines, easements or setbacks, except for
non-material encroachments similar to those existing with the original Earl
Davie Building and for which Landlord receives at Tenant's expense a forced
removal endorsement to Landlord's title insurance, and which are not
inconsistent with the Use Requirements, and such other matters as are reasonably
acceptable to Landlord. Tenant shall deliver the items referred to in (a) and
(b) above without charge and shall pay for the costs of the survey and the
premium for the standard portion of Landlord's title policy supplement and
Landlord shall pay for the extended coverage and endorsements therein.

         24.13    Encumbrance. Landlord shall have no obligation to grant a
security interest in its real or personal property to secure third party loans
to Tenant for the Expansion.

         24.14    Development Disclaimer/Assignment of Rights. Except to the
extent that Landlord requires that particular materials or construction methods
be employed over Tenant's written objection made within 5 business days after
Tenant is given notice describing the same, and then only with regard to those
objected to materials or methods, Landlord shall have no liability for any
alleged defects in the design, materials or construction of the Expansion or the
failure of the Expansion to conform to any

                                       31



applicable plans, Laws or regulations or to be suitable for Tenant's purposes
and Tenant shall look solely to its own consultants, architects, contractors and
suppliers with respect thereto. Landlord, with regard to those Expansion
contracts entered into by it as principal, and Tenant with regard to those
Expansion contracts entered into by it as principal, agrees to enforce all of
their respective rights as principal under those contracts and agreements (the
"Expansion Contracts") to the extent necessary to enable Tenant to comply with
its construction, maintenance and repair obligations under this Lease and to
enable the parties to obtain the benefits of the Expansion Contracts. Upon
expiration or termination of this Lease, Tenant will assign back to Landlord any
remaining rights it holds under the Expansion Contracts with regard to future
performance.

         24.15    Expansion Without Allowance. If, for any reason, Tenant
develops the Expansion but does not obtain the Allowance from Landlord, the
Expansion shall be included in the Premises, owned by Landlord and subject to
all of the requirements of this Lease, except that there shall be no increase in
Base Rent as described in Section 24.10 above to reflect the Expansion and the
determination of the fair market rental value of the Premises under Section 2.3
shall exclude the value of the Expansion.

         24.16    Disputes. Landlord and Tenant agree that in the event of any
dispute over any approval or consent required by this Section 24 they shall make
a diligent and good faith effort to resolve the same without resort to
arbitration or litigation. In the event they are unable to resolve such dispute,
Landlord's good faith decisions shall be controlling to the extent they relate
to the Expansion's exterior appearance, structural components and building
shell, and Tenant's good faith decisions shall be controlling with respect to
the building systems and the manner in which the interior of the Expansion is
configured, fixtured and furnished.

25.      PARKING AT STEAM PLANT. In the Steam Plant Lease, Landlord's affiliate
has granted Tenant the right to utilize up to 49 parking stalls which are
located in the Lake Union Steam Plant property at 1201 Eastlake Avenue East and
have been specifically covenanted and reserved for Tenant; provided that Tenant
shall make commercially reasonable efforts to minimize or eliminate the need for
Tenant to utilize such parking.

26.      CROSS DEFAULTS. At Tenant's option, Landlord (or its affiliate) and
Tenant may be parties to a $3,000,000 line of credit loan ("Line of Credit
Loan") which will be documented by the forms attached to the fourth amendment to
the Purchase Agreement, with such forms executed upon Tenant's election to draw
on the Line of Credit Loan. Regardless of the actual date of execution of the
Line of Credit Loan documents, the maturity date thereunder shall be five years
from the Effective Date. As provided in Section 15.2, any Event of Default under
the Line of Credit Loan or the Steam Plant Lease (Section 15.2) shall be an
Event of Default hereunder and any default under this Lease shall be a default
under the Steam Plant Lease and the Line of Credit Loan.

27.      MISCELLANEOUS

         27.1     Tenant's Obligations Unconditional. Tenant acknowledges and
agrees that except as otherwise specifically stated in this Lease it shall be
absolutely and unconditionally obligated to pay all Rent and all of the costs
and expenses that relate to the ownership, occupancy, use, maintenance,
insurance, repair, restoration, replacement, and remediation of the Premises and
all utilities and other services provided thereto and taxes and installments of
assessments levied thereon during the Initial Term and any Renewal Term and for
those portions of installments of assessments to the extent they accrued during
the Term of this Lease, even if they are payable thereafter and to take such
other actions at its sole expense as are required to comply with all existing
and future Laws with respect thereto and such obligations shall not be subject
to abatement, offset or impairment for any cause or reason whatsoever. Except as
otherwise stated in this Lease, nothing in this Section 27.1 is intended to
require Tenant to pay or reimburse Landlord for (a) those taxes and assessments
excluded from Tenant's obligations in Section 6.2, (b) Landlord's internal costs
and expenses, (c) Landlord's third party out of pocket expenses, or (d) any
Hazardous Materials remediation costs in excess of those agreed upon by the
parties in Section 19 above.

                                       32



         27.2     Additional Definitions. "Landlord" as used in this Lease shall
include the original Landlord hereunder, its successors, and if this Lease shall
be validly assigned, shall also include Landlord's assignees. "Tenant" shall
include the original Tenant hereunder, its successors, and if this Lease shall
be validly assigned or sublet, shall include also Tenant's assignee or sublessee
as to premises covered by such assignment or sublease. References to "Tenant's
knowledge" shall refer to the actual personal knowledge of any one or more of
the officers of Tenant, not the actual or constructive knowledge of any other
employee, agent, officer, director or other representative of Tenant and shall
in no case impose upon Tenant any duty or obligation to investigate or verify
the information. References herein to "Law" shall mean any governmental statute,
ordinance, rule or regulation now in force or which may hereafter be enacted,
promulgated or modified and any easement, reservation, restriction or covenant
now or hereafter recorded against the Premises or any portion thereof to the
extent applicable to the particular matter at issue (collectively "CC&Rs"),
excluding CC&Rs to the extent that they are created without Tenant's consent
after the Effective Date and that they interfere with Tenant's use of the
Premises or cause Tenant to incur additional cost. References to "including" or
"includes" shall mean "includes, without limitation" and "including, but not
limited to." References to "business days" shall mean Monday through Friday,
excluding federal and national bank holidays. If any time period is to expire on
a date which is not a business day, the time period shall be extended to the
next business day.

         27.3     Notices. Any notice or consent required to be given by or on
behalf of either party to the other shall be in writing and given by mailing
such notice or consent by either (i) one business day after sending by an
overnight courier service when deposited with the courier in time for delivery
the next business day or otherwise on the next business day thereafter, or (ii)
2 business days after deposit with the United States Post Office by registered
or certified mail, return receipt requested, as evidenced by the date of the
postmark thereon, or (iii) on the day transmitted via facsimile if completed in
time for receipt by 12:00 p.m. recipient's time on a business day or otherwise
on the next business day thereafter (provided that facsimile notice is only
effective if notice is also delivered pursuant to Sections 27.3(i) or (ii) the
next business day following the transmission of the facsimile notice); addressed
to the other party as follows:

         If to Landlord:                    ARE-1208 Eastlake Avenue, LLC
                                            135 N. Los Robles Ave., Ste. 250
                                            Pasadena, CA 91101
                                            Attn: Corporate Secretary
                                            Telephone:  (626) 578-0777
                                            Fax:  (626) 578-0770

                  With a copy to:           Stoel Rives LLP
                                            Attn: David H. Rockwell
                                            600 University Street, Suite 3600
                                            Seattle, WA 98101-3197
                                            Telephone:  (206) 386-7694
                                            Fax:  (206) 386-7500

         If to Tenant:                      ZymoGenetics, Inc.
                                            Attn: Chief Financial Officer
                                            1201 Eastlake Avenue E.
                                            Seattle, WA 98102
                                            Telephone:  (206) 442-6600
                                            Fax: (206) 442-6808

                  With a copy to:           Real Property Law Group, PLLC
                                            Attn:  Cynthia Thomas
                                            1218 Third Avenue, Suite 1900
                                            Seattle, WA 98101
                                            Telephone:  (206) 625-1717
                                            Fax:  (206) 374-2782

                                       33



or to such other addresses as the parties may designate in writing by the means
above described.

In addition to the foregoing, any notice Tenant gives to Landlord which in any
manner relates to any Alterations or the Expansion shall be given to:

                       Alexandria Real Estate Equities, Inc.
                       9820 Willow Creek Road
                       Suite 440
                       San Diego, CA 98131
                       Attn:  Senior Vice President, Construction & Development
                       Telephone: (858) 530-8190
                       Fax: (858) 530-8191

The time period in which to respond to any notice or consent shall commence to
run on the date on which such notice is deemed effective as stated above. Any
notices of the same matter that are required by or given in connection with this
Lease, the Steam Plant Lease, the Purchase Agreement or the Line of Credit Loan
need be given once to a party and not duplicated for each such contract.

         27.4     Survival. The obligations of each party applicable to time
periods prior to the termination or expiration of this Lease shall survive
termination or expiration of this Lease, including each party's right to
indemnification and defense from claims arising from matters occurring prior to
termination even though the claim is asserted after termination.

         27.5     No Oral Agreements. It is expressly agreed between Landlord
and Tenant that there is no verbal understanding or agreement which in any way
changes the terms, covenants and conditions herein set forth, and that no
modification of this Lease shall be effective unless made in writing and duly
executed by the authorized officers of the necessary parties or party and
consented to by Landlord's mortgagee, if any. Landlord and Tenant hereby agree
that all prior or contemporaneous oral understandings, agreements or
negotiations relative to the leasing of the Premises are merged into this Lease.

         27.6     No Waiver. The failure of Landlord or Tenant to insist, in one
or more instances, upon the strict performance by Tenant or Landlord of any of
the provisions of this Lease shall not be construed as a waiver of any right or
remedy available for any future breach of such provisions. Receipt by Landlord
of Rent with knowledge of the breach of any provisions hereof shall not be
deemed a waiver of any right or remedy available for such breach.

         27.7     Time of Essence.  Time is of the essence of this Lease.

         27.8     Waiver of Common Law. Tenant waives any of the following
rights, to the extent they exist now or will exist in the future under
Law (including common law): the right to terminate this Lease, any right to
offset amounts due against Rent, and/or any right to make repairs at the expense
of Landlord. Landlord waives any statutory landlord's lien against Tenant's
personal property, including its Removable Equipment.

         27.9     Legal Expense. If either party incurs any third party out of
pocket costs or expenses, including those of a collection agency and any
attorneys' fees, to collect any sum which is past due hereunder, the defaulting
party shall reimburse the nondefaulting party therefor, with or without
litigation. If any action, arbitration or proceeding (including any appeal
thereof) is brought by either party to enforce its rights under this Lease or to
collect a judgment against the other arising from this Lease ("Action"), the
unsuccessful party therein shall pay all enforcement costs incurred by the
prevailing party therein, including reasonable attorneys' fees and costs.

         27.10    Governing Law/Venue/Waiver of Jury. This Lease shall be
performed, construed and enforced in accordance with the laws of the State of
Washington and the parties agree that venue shall lie

                                       34



in King County, Washington. Landlord and Tenant each unconditionally waives any
right to trial by jury to resolve any claim, action or demand asserted in
connection with any matter arising in connection with this Lease.

         27.11    Force Majeure. Except as specifically provided otherwise
herein, and except for the periods during which either party may cure a default
hereunder the time periods for Landlord's or Tenant's performance hereunder
(except for the payment of money) shall be extended for periods of time during
which the non-performing party's performance is prevented due to circumstances
beyond the party's control, including, without limitation, strikes, embargoes,
newly imposed governmental regulations, inclement weather and other acts of God,
war or other strife (collectively "Force Majeure"). Notwithstanding the
foregoing, a Force Majeure may apply to certain Events of Default pursuant to
Section 15.2.

         27.12    Headings. The headings used in this Lease are for convenience
only and shall not have any bearing or meaning with respect to the content or
context of this instrument.

         27.13    Holding Over. Tenant shall have no right to retain possession
of the Premises beyond the expiration or earlier termination of the Lease. If
Tenant holds over after the expiration of the Term, with the express consent of
Landlord, such tenancy shall be from month-to-month only, and not a renewal
hereof or an extension for any further Term, and such month-to-month tenancy
shall be subject to each and every term, covenant and agreement contained
herein; provided, however, that Tenant shall pay as rent during any holding over
period, an amount equal to 150% of the Base Rent payable immediately preceding
the expiration of the Term plus all Additional Rent. Nothing in this Section
shall be construed as a consent by Landlord to any holding over by Tenant and
Landlord expressly reserves the right to require Tenant to surrender possession
of the Premises upon the expiration of the Term or upon the earlier termination
thereof and to assert any remedy in law or equity to evict Tenant and/or collect
damages in connection with such holding over.

         27.14    Rights Are Cumulative. All rights, powers and privileges
conferred hereunder upon the parties shall be cumulative, but not restricted to
those given by law.

         27.15    Severability. If any term or provision of this Lease shall be
held invalid or unenforceable to any extent, the remaining terms, conditions and
covenants of this Lease shall not be affected thereby and each of said terms,
covenants and conditions shall be valid and enforceable to the fullest extent
permitted by law, unless an essential purpose of this Lease would be defeated by
loss of the invalid or unenforceable provision.

         27.16    Interpretation. This Lease has been fully negotiated and no
provision shall be construed for or against either Tenant or Landlord, and this
Lease shall be interpreted in accordance with its general tenor in an effort to
reach an equitable result. Whenever words such as "herein," "hereunder," etc.,
are used in this Lease, they shall mean and refer to this Lease in its entirety
and not to any specific section, paragraph or other part of this Lease.

         27.17    Brokers. The Staubach Company represents Tenant and
Insignia/Kidder Mathews represents Landlord. Each party shall be responsible for
paying any commissions or fees due to its broker and shall hold the other party
harmless from any claims for commissions or finders fees due from any other
third parties claiming to have been engaged by that party.

         27.18    Counterparts. This Lease may be executed in counterparts
which, when taken together, will comprise a single original agreement. Facsimile
signatures shall be binding upon transmission.

                                       35



IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed as of
the day and year first written above.

                       LANDLORD:
                       ARE-1208 Eastlake Avenue, LLC,
                        a Delaware limited liability company

                         By: ALEXANDRIA REAL ESTATE EQUITIES, L.P.
                            a Delaware limited partnership,
                            its managing member

                              By: ARE-QRS CORP., a Maryland corporation,
                              general partner

                                     By: /s/ Peter J. Nelson
                                        ----------------------------------------
                                      Peter J. Nelson, Chief Financial Officer


                       TENANT:
                       ZYMOGENETICS, INC.
                       a Washington corporation

                       By: /s/ James A. Johnson
                          ---------------------------------------
                            James A. Johnson
                             Senior Vice President - Chief Financial Officer

EXHIBITS:

Exhibit A:  Legal Description
Exhibit B:  Title Encumbrances
Exhibit C:  Access and Confidentiality Agreement
Exhibit D:  Letter of Credit
Exhibit E:  Pledge Agreement
Exhibit F:  Custodial Agreement
Exhibit G:  Fixed Equipment
Exhibit H:  Use and Function of Leased Space
Exhibit I:  BOMA Measurement of Earl Davie Building (before and after Expansion)
Exhibit J:   Estoppel
Exhibit K:  Site Plan of Expansion
Exhibit L:  Fair Market Value Determination
Exhibit M:  Amendment to Lease for Expansion

                                       36



STATE OF CALIFORNIA       )
                          ) ss.
COUNTY OF LOS ANGELES     )

         I certify that I know or have satisfactory evidence that PETER J.
NELSON is the person who appeared before me, and said person acknowledged that
he signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the Chief Financial Officer of ARE-QRS, CORP.,
a Maryland corporation, which is the General Partner of ALEXANDRIA REAL ESTATE
EQUITIES, L.P., a Delaware limited partnership, which is the Managing Member of
ARE-1208EASTLAKE AVENUE, LLC, to be the free and voluntary act of such party for
the uses and purposes mentioned in this instrument.

         DATED: October 15, 2002
               --------------------

                                     /s/ Teresa A. Flores
                                    -------------------------------------
                                    (Signature of Notary Public)

                                         Teresa A. Flores
                                    -------------------------------------
                                    (Printed Name of Notary Public)

                                    My Appointment expires: 6-24-05
                                                           --------------

STATE OF WASHINGTON       )
                          ) ss.
COUNTY OF KING            )

         I certify that I know or have satisfactory evidence that James A.
Johnson is the person who appeared before me, and said person acknowledged that
he/she signed this instrument, on oath stated that he/she was authorized to
execute the instrument and acknowledged it as the Senior Vice President - Chief
Financial Officer of ZYMOGENETICS, INC. to be the free and voluntary act of such
party for the uses and purposes mentioned in this instrument.

         DATED: October 16, 2002
               --------------------

                                     /s/ Carol A. Alto
                                    -------------------------------------
                                    (Signature of Notary Public)

                                         Carol A. Alto
                                    -------------------------------------
                                    (Printed Name of Notary Public)

                                    My Appointment expires: 3-7-06
                                                           --------------

                                       37



                                    EXHIBIT A
                                LEGAL DESCRIPTION

Earl Davie Building (Parcel B)

LOTS 4 AND 5, BLOCK 4, FRANCE'S ADDITION TO THE CITY OF SEATTLE, ACCORDING TO
THE PLAT THEREOF, RECORDED IN VOLUME 1 OF PLATS, PAGE(S) 195, IN KING COUNTY,
WASHINGTON;

EXCEPT PORTION THEREOF CONDEMNED IN KING COUNTY SUPERIOR COURT CAUSE NUMBER 8064
FOR EASTLAKE AVENUE EAST; AND

LOTS 5, 6 AND 7, BLOCK 13, EAST PARK ADDITION TO THE CITY OF SEATTLE, ACCORDING
TO THE PLAT THEREOF, RECORDED IN VOLUME 8 OF PLATS, PAGE(S) 83, IN KING COUNTY,
WASHINGTON;

EXCEPT ANY PORTION THEREOF CONDEMNED IN KING COUNTY SUPERIOR COURT CAUSE NUMBER
8064 FOR EASTLAKE AVENUE EAST.

                                       A-1



                                    EXHIBIT B
                              CURRENT ENCUMBRANCES

EXCEPTIONS AND RESERVATIONS CONTAINED IN DEED FROM THE STATE OF WASHINGTON,
WHEREBY THE GRANTOR EXCEPTS AND RESERVES ALL OIL, GASES, COAL, ORES, MINERALS,
FOSSILS, ETC., AND THE RIGHT OF ENTRY FOR OPENING, DEVELOPING AND WORKING THE
SAME AND PROVIDING THAT SUCH RIGHTS SHALL NOT BE EXERCISED UNTIL PROVISION HAS
BEEN MADE FOR FULL PAYMENT OF ALL DAMAGES SUSTAINED BY REASON OF SUCH ENTRY.

     RIGHT OF STATE OF WASHINGTON OR ITS SUCCESSORS, SUBJECT TO PAYMENT OF
     COMPENSATION THEREFOR, TO ACQUIRE RIGHTS OF WAY FOR PRIVATE RAILROADS, SKID
     ROADS, FLUMES, CANALS, WATER COURSES OR OTHER EASEMENTS FOR TRANSPORTING
     AND MOVING TIMBER, STONE, MINERALS AND OTHER PRODUCTS FROM THIS AND OTHER
     PROPERTY, AS RESERVED IN DEED REFERRED TO ABOVE.

RELEASE OF DAMAGE AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS, INC. AND: CITY OF SEATTLE
RECORDED: APRIL 25, 1997
RECORDING NUMBER: 9704251301
RELEASING CITY OF SEATTLE FROM ALL FUTURE CLAIMS FOR DAMAGES RESULTING FROM:
PERMISSION TO OCCUPY DEDICATED STREET AREA ON EASTLAKE AVENUE EAST FROM NELSON
PLACE ON THE SOUTH, 155 FEET TO BELLEVUE AVENUE ON THE NORTH; ON NELSON PLACE
FROM EASTLAKE AVENUE EAST ON THE WEST, 105 FEET EAST TO THE POINT OF TERMINATION
BY ERECTING AND MAINTAINING THEREIN A SHORING SYSTEM WITH EXTERIOR TIEBACKS.

AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS, INC.AND: CITY OF SEATTLE
RECORDED: MAY 1, 1997
RECORDING NUMBER: 9705011660
REGARDING: TRANSPORTATION MANAGEMENT PLAN

AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS AND: CITY OF SEATTLE
RECORDED: MAY 9, 1997
RECORDING NUMBER: 9705090214
REGARDING: MAINTENANCE OF DRAINAGE CONTROL FACILITY

RELEASE OF DAMAGE AGREEMENT AND THE TERMS AND CONDITIONS THEREOF:
BETWEEN: ZYMOGENETICS AND: CITY OF SEATTLE
RECORDED: NOVEMBER 19, 1997
RECORDING NUMBER: 9711190862
RELEASING CITY OF SEATTLE FROM ALL FUTURE CLAIMS FOR DAMAGES RESULTING FROM:
SOIL MOVEMENT BY REASON OF OR ARISING OUT OF ISSUANCE OF THE PERMIT(S) BY THE
CITY FOR DEVELOPMENT ON THE PROPERTY.

RIGHT TO MAKE NECESSARY SLOPES FOR CUTS OR FILLS UPON PROPERTY HEREIN DESCRIBED
AS CONDEMNED IN KING COUNTY SUPERIOR COURT CAUSE NUMBER 49286.

MATTERS DISCLOSED BY UNRECORDED SURVEY BY BUSH, ROED & HITCHINGS, INC., DATED
JUNE 2, 2002, JOB NO. 96189.09.

                                       B-1



NON-DELINQUENT TAXES AND ASSESSMENTS WHICH ARE NOT SHOWN AS EXISTING LIENS BY
THE RECORDS OF ANY TAXING AUTHORITY THAT LEVIES TAXES OR ASSESSMENTS ON REAL
PROPERTY OR BY THE PUBLIC RECORD.

GENERAL TAXES AND RELATED CHARGES PAYABLE THEREWITH, IF ANY, FOR 2002, A LIEN
NOW PAYABLE, BUT NOT YET DELINQUENT.

                                       B-2



                                    EXHIBIT C
                      ACCESS AND CONFIDENTIALITY AGREEMENT

     This ACCESS AND CONFIDENTIALITY AGREEMENT (this "Agreement") is executed
effective as of the date indicated below, by undersigned ("Contractor") for the
benefit of ZYMOGENETICS, INC., a Washington corporation ("ZGI").

     A.   ZGI owns certain real property and improvements commonly known as 1201
and 1208 Eastlake Avenue East in Seattle, Washington (the "Property").

     B.   ZGI is the tenant and _______________________________.("ARE") is the
landlord under those certain Leases dated _______________________, 2002 for the
Property (the "Leases"). Pursuant to Section 21 of each of the Leases, Landlord
has various rights of access to the Property and a corresponding right to extend
that right of access to its agents, consultants, contractors and
representatives.

     C.   ARE requested that ZGI allow Contractor to enter the ________________
Property (the "Subject Property") for the following purpose:
_____________________________________ (the "Access Purpose").

                                    AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Contractor agrees and acknowledges as follows:

     1.   Purpose. Subject to the terms and provisions of this Agreement and the
Leases, Contractor, as ARE's agent, will be entering upon the Subject Property
to perform the Access Purpose at ARE's request and direction.

     2.   Conditions to Entry. Contractor's access to the Property will be
limited to regular business hours. At least 2 business days prior to entering
onto or into the Subject Property, Contractor shall contact ZGI's
representative, Scott Anderson at (206) 442-6747 or Cecil Weight at (206)
442-6689 who will make arrangements to have the Contractor accompanied by a ZGI
representative ("ZGI Representative"). Contractor must be accompanied by a ZGI
Representative at all times Contractor is on the Subject Property, and all of
Contractor's activities shall be in accordance with all applicable Laws and
regulations.

     3.   Costs. Contractor is engaged by ARE. ARE is not acting as ZGI's agent
and ZGI is not liable to pay Contractor for any services provided by Contractor
to ARE.

     4.   Inspection Obligations. While on the Subject Property and while
performing the Access Purpose, Contractor shall: (a) not interfere with the use
of the Subject Property by any occupant; (b) not interfere with the operation
and maintenance of the Subject Property or any construction on the Subject
Property; (c) not damage any part of the Subject Property or personal property
located at the Subject Property owned or held by any person or entity; (d) not
injure or otherwise cause bodily harm to any ZGI Representative or any other
person or entity; (e) maintain comprehensive general liability (occurrence)
insurance covering any accident arising in connection with the presence of the
Contractor on the Subject Property in an amount not less than $2,000,000,
evidence of such insurance shall name ZGI as an additional insured and be
delivered to the ZGI Representative prior to accessing the Subject Property; (f)
not permit any liens to attach to the Subject Property by reason of Contractor's
work; and (g) not conduct any invasive activities, unless Contractor confirms in
advance that ZGI has consented to each such invasive inspection.

                                       C-1



     5.   Confidentiality. Contractor and all of Contractor's partners, members,
officers, directors, and attorneys (collectively the "Contractor Parties") will
treat as confidential all the information disclosed to them by ZGI and/or ARE or
discovered in connection with its access to the Subject Property (whether
information is disclosed orally, in writing or in visual or electronic form, and
including any observations, knowledge, information, reports (written or oral),
tests, or studies (together with the results of such studies and tests) obtained
by or provided to any of the Contractor Parties regarding the Subject Property,
whether in connection with the Inspections, Contractor's review of the due
diligence materials delivered or made available to Contractor, or otherwise, but
not including information known by Contractor prior to any disclosures by ZGI
and/or ARE or any information that is generally known or available to the
public) (the "Information"), giving it no less care than Contractor's own
confidential information, and make no use of any such Information except in
connection with its engagement by ARE and subject to the limitations on ARE's
use of the Information pursuant to Section 21.4 of the Leases, or to the extent
required by court or legal requirements (which may include SEC regulations, NYSE
and NASDAQ requirements). Contractor will not record any memorandum disclosing
this Agreement.

     If Contractor receives any Information from ZGI, it will return originals
and all copies of Information to ZGI immediately upon request (except for the
copy delivered to ARE). In addition, and except as required by applicable law,
Contractor shall not issue any release, make any statement to, or confirm or
deny any statement made by the media without both ZGI and ARE's advance written
consent, which may be withheld in their sole and absolute discretion.

     6.   Indemnification and Repair. Contractor hereby agrees to indemnify,
defend (with counsel acceptable to ZGI), and hold ZGI and its officers,
directors, successors, and assigns harmless from and against any and all liens,
claims, causes of action, liabilities, demands, suits, obligations, losses,
penalties, costs, and expenses (including reasonable attorneys' fees)
(generally, "Damages"), including without limitation, Damages for any actual
physical damage to the Subject Property or any injury to persons, all to the
extent caused by or in connection with the entry onto the Subject Property by a
Contractor Party or an act of a Contractor Party; provided, however, that
Contractor's indemnity hereunder shall not include any Damages to the extent
resulting from the acts or omissions of any ZGI Representative; and provided
further, if there are any liens arising from or relating to Contractor's entry
or any other activity of the Contractor Parties relating to the Subject
Property, then Contractor will cause such liens to be removed from the Subject
Property within 10 business days after notice thereof, and if Contractor fails
to timely perform, then ZGI shall thereafter have the right but not the
obligation to pay the amount claimed on the lien and collect from Contractor all
costs incurred in removing the lien, including attorney's fees. In addition,
Contractor shall promptly repair any physical damage to the Subject Property
caused by any Contractor Party. ZGI will only have two years from the last date
of Contractor's access to the Subject Property to commence an against Contractor
under this Section.

     7.   No Right of Contribution from ARE. Contractor agrees that if it
breaches its rights hereunder and such breach results in a payment to ZGI, then
Contractor will not have any right to seek contribution or reimbursement from
ARE.

     8.   Entire Agreement. This Agreement reflects the entire Agreement between
Contractor and ZGI, and there are no other agreements, oral or written, between
Contractor and ZGI regarding the Subject Property. This Agreement can be amended
only by written agreement signed by both ZGI and Contractor.

     9.   Survival. This Agreement, and the terms, covenants, and conditions
herein contained, shall inure to the benefit of and be binding upon the heirs,
personal representatives, successors, and assigns of each of the Contractor and
ZGI. Contractor agrees that all of the Contractor Parties' access to the Subject
Property is subject to this Agreement.

     10.  Governing Law, Legal Expenses. This Agreement will be construed,
performed, and enforced in accordance with the laws of the State of Washington.
Supplementing ZGI's rights under Section 6 above, if any action, arbitration or
proceeding (including any appeal thereof) is brought by ZGI to enforce its
rights under this Agreement or to collect a judgment against Contractor arising
from this

                                       C-2



Agreement, the unsuccessful party therein shall pay all enforcement costs
incurred by the prevailing party therein, including reasonable attorneys' fees
and costs.

     11.  Notice. For purposes of this Agreement only, any notice (including
written notice) required by this Agreement may be provided either to:

     ZGI:                         ZYMOGENETICS, INC.
                                  Attn: Chief Financial Officer
                                  1201 Eastlake Avenue East
                                  Seattle, WA 98121
                                  Telephone: (206)442-6600
                                  Facsimile: (206)442-6608

     Contractor:                  see address below signature


     IN WITNESS WHEREOF, Contractor has executed this Agreement effective as of
_______________, 2002.

Contractor:

_____________________________________

a____________________________________


By:__________________________________

Name:________________________________
Title:_______________________________
Notice Address:______________________
_____________________________________
Fax:_________________________________
Telephone:___________________________

                                       C-3



                                    EXHIBIT D
                                LETTER OF CREDIT

                      IRREVOCABLE STANDBY LETTER OF CREDIT

PLACE AND DATE OF ISSUE:          CREDIT NUMBER: ___________
____________________[PLACE]       DATE AND PLACE OF EXPIRY: ___________ [DATE]
____________________[DATE]        IN ____________________[PLACE]

BENEFICIARY:                      APPLICANT: [TENANT]
__________________________        ___________________________
__________________________        ___________________________
__________________________        ___________________________


Up to an aggregate amount of ____________________ US DOLLARS (US$____________).

Dear Sirs:

We hereby issue in your favor this Standby Letter of Credit which is available
by your drafts at sight drawn on [ISSUER], at [OFFICE OF ISSUER] and accompanied
by one of the following documents:

     1.   Your notarized signed written certification, stating substantially the
          following (all blank spaces shall be completed by Beneficiary):

               In reference to [ISSUER] Letter of Credit No. ____________, we
               hereby certify and affirm that an event has occurred which
               entitles [BENEFICIARY] to draw on this Letter of Credit pursuant
               to that certain lease dated [LEASE DATE] between [BENEFICIARY],
               "Landlord," and [TENANT] "Tenant."

               We hereby irrevocably instruct [ISSUER] to pay the sum of $
               _______ Such sum shall be paid directly to [BENEFICIARY] at
               ___________________________________.


               IN WITNESS WHEREOF, the undersigned has executed and delivered
               this Certificate as of the ____ day of _______________, 200__.

                           __________________________,


                           By: _______________________________
                                 Name:
                                 Title:

     2.   Your notarized signed written certification, notarized, stating
          substantially the following (all blank spaces shall be completed by
          Beneficiary):

               In reference to [ISSUER] Letter of Credit No. ________ we hereby
               certify that this Letter of Credit is to expire within 30
               business days and Tenant has not provided a renewal of this
               Letter of Credit or an acceptable security replacement after 5
               business days notice as required by that certain Lease dated
               [LEASE DATE] between [BENEFICIARY], "Landlord," and [TENANT]
               "Tenant."

               We hereby irrevocably instruct [ISSUER] to pay the sum of
               $__________ directly to [BENEFICIARY] at
               _______________________________ ____________________.

                                       D-1



               IN WITNESS WHEREOF, the undersigned has executed and delivered
               this Certificate as of the ____ day of _______________, 200___.

                           __________________________,



                           By: _______________________________
                                 Name:
                                 Title:

This Letter of Credit may be drawn in whole or in part from time to time to the
aggregate of its face amount.

This Letter of Credit is transferable. Transfer of this Letter of Credit is
subject to our receipt of beneficiary's instructions in the form attached hereto
as Exhibit A accompanied by the original Letter of Credit and amendment(s) if
any, costs or expenses of such transfer shall be for the account of the
beneficiary.

We hereby agree with the beneficiary that documents presented to our office in
compliance with the terms and conditions of this letter of credit will be duly
honored as specified herein.

This Letter of Credit is subject to the International Standby Practices 1998,
ICC Publication No. 590. [or other convention selected by Issuer]

All inquiries and/or correspondence pertaining to this Letter of Credit must be
in writing and directed to the attention of _____________________, telephone
number _____________________ at the above mentioned address and must
specifically refer to this Letter of Credit No. ____________________.

                                 Very truly yours,
                                 [ISSUER]

                                 By: _________________________
                                       Authorized Signature
                                       Title:

                                       D-2



                                    EXHIBIT A

                 REQUEST FOR ENTIRE TRANSFER OF LETTER OF CREDIT
                        WITHOUT SUBSTITUTION OF INVOICES

{Issuer}
________________________       Letter of Credit No.________
ADDRESS
________________________


TO:  [Issuer]

We request you to transfer all of our rights as beneficiary under the Letter of
Credit referenced above to a second beneficiary named below:

________________________________________________________________________________
NAME OF SECOND BENEFICIARY
________________________________________________________________________________
ADDRESS

By this transfer, all our rights as the original beneficiary, including all
rights to make drawings under the Letter of Credit, go to the second
beneficiary. The second beneficiary shall have sole rights as beneficiary,
whether existing now or in the future, including sole rights to agree to any
amendments, including increases or extensions or other changes. All amendments
will be sent directly to the second beneficiary without the necessity of consent
by or notice to us.

We enclose the original letter of credit and any amendments. Please indicate
your acceptance of our request for the transfer by endorsing the letter of
credit and send it to the second beneficiary with your customary notice of
transfer.

__   Enclose is our check for $_________________

__   You may debit my/our account No. __________

We also agree to pay you on demand any expenses which may be incurred by you in
connection with this transfer.

The signature and title below conform with those shown in our files as
authorized to sign for the beneficiary. Policies governing signature
authorization as required for withdrawals from customer accounts shall also be
applied to the authorization of signatures on this form.

__________________________________
NAME OF BENEFICIARY


__________________________________
NAME OF AUTHORIZED SIGNER AND TITLE

__________________________________
AUTHORIZED SIGNATURE

                                       D-3



- ----------------------------------    Date:______________________________

________________________________
NAME OF BANK

________________________________
AUTHORIZED SIGNATURE AND TITLE


- ----------------------------------

                                       D-4




                                    EXHIBIT E
                                PLEDGE AGREEMENT

                        SECURITY DEPOSIT PLEDGE AGREEMENT

         THIS SECURITY DEPOSIT PLEDGE AGREEMENT (the "Agreement"), dated as of
_______________, 20__, is between ZYMOGENETICS, INC, a Washington corporation
("Tenant"), and ____________________________, a _______________ ("Landlord").

         The parties hereto agree as follows:

1.       Definitions

         For purposes of this Agreement, the following terms have the meanings
set forth below:

         "Collateral" has the meaning specified in Section 5.

         "Collateral Securities" means fixed income securities that meet the
following requirements:

         (a) are rated AA or A1 or better by Standard & Poor's Rating Group;
         (b) are freely transferable without restriction of any kind (including
any restrictions that may be imposed under federal or state securities laws);
and
         (c) have remaining maturities of not more than 2 years.

         "Control Account" means the account established by Tenant in its name
at _________________ or such other brokerage firm or bank as Landlord may
reasonably approve, which account is subject to the terms and conditions of the
Control Account Agreement.

         "Control Account Agreement" means the "Security, Custodian and Control
Account Agreement" in substantially the form of EXHIBIT A hereto, which is
entered into with respect to the Control Account.

         "Event of Default" has the meaning specified in Section 8.

         "Lease" means the "Lease" between Tenant and Landlord dated
______________, 2002, as now or hereafter amended, relating to_____________
[street address], Seattle, Washington.

         "Market Value" means, as of any date of determination, the market value
of the Collateral Securities then held in the Control Account, as reflected, at
Landlord's option, as of the end of a business day in the Wall Street Journal or
other any nationally recognized business publication of similar stature
containing the current bid and asked prices for securities traded on a major
exchange in the United States or on the most recently monthly account statement
delivered to Landlord and Tenant pursuant to the Control Account Agreement.

2.       Purpose

         This Agreement is for the purpose of securing the prompt payment and
performance in full when due, whether at stated maturity, by acceleration or
otherwise, of Tenant's obligations (the "Obligations") with respect to the
security deposit (the "Security Deposit") that are detailed in Section 7 of the
Lease. The amount of the Security Deposit which is to be covered by the
Collateral described in this Agreement is $______________ and is referred to
herein as the "Required Balance."

3.       Collateral Securities

         As collateral for the Obligations throughout the term of the Lease,
Tenant will pledge to Landlord, and grant Landlord, a perfected, first priority
security interest in, Collateral Securities held in the Control

                                       E-1



         Account with a Market Value at all times equal to the Required Balance.
A list of the initial Collateral Securities pledged by Tenant and held in the
Control Account is attached to this Agreement as EXHIBIT B.

4.       Control Account

         Subject to the terms of the Agreement and the Control Account
Agreement, the Collateral Securities pledged by Tenant pursuant to this
Agreement shall at all times be held in the Control Account. The maintenance,
disposition and transfer of the Control Account and all Collateral Securities
held therein shall at all times be subject to the terms of the Agreement and the
Control Account Agreement.

5.       Grant of Perfected First Lien Security Interest

         Throughout the term of the Lease, as security for the Obligations,
Tenant hereby delivers, pledges, grants, transfers, assigns and sets over to
Landlord, and hereby grants to Landlord a continuing perfected first lien
security interest in, the following (the "Collateral"):

         (a)      All Collateral Securities, cash and other assets held in the
                  Control Account;
         (b)      The Control Account;
         (c)      All securities entitlements and financial assets relating to
                  the foregoing; and
         (d)      All proceeds and products of any of the foregoing held in the
                  Control Account.

6.       Consent Rights, Trading Rights and Payments in Respect of the
Collateral

         (a)      So long as no Event of Default has occurred and is continuing,
Tenant shall be entitled (i) to exercise (but not in a manner inconsistent with
this Agreement or the Control Account Agreement) all consent or other voting
rights with respect to the Collateral Securities, (ii) to receive and retain all
regularly scheduled payments of interest or dividends in respect of the
Collateral Securities or (iii) to substitute at any time during the term of the
Lease the Collateral Securities with other Collateral Securities, provided
Landlord obtains a perfected first priority security interest in the substitute
Collateral Securities prior to the release of the pledged Collateral Securities
and provided that Market Value of all Collateral Securities after the
substitution is equal to or greater than the Required Balance. Upon such
substitution, release and withdrawal of such released assets from the Control
Account, such released assets will no longer be subject to a security interest
in favor of Landlord and, unless subsequently re-deposited into the Control
Account, will no longer be "Collateral": within the meaning of this Agreement.

         (b)      If an Event of Default (as defined in the Lease) has occurred
and is continuing, Landlord shall be entitled (i) to exercise all consent or
other voting rights with respect to the Collateral Securities, (ii) to any and
all rights of sale, conversion, exchange, subscription, withdrawal and any other
rights, privileges or options pertaining to the Collateral as if Landlord were
the absolute owner thereof and (iii) to receive and retain, as additional
Collateral hereunder, any and all interest, dividends or other payments at any
time and from time to time paid on the Collateral; provided, however, that prior
to any exercise by Landlord of any of the preceding rights with respect to the
Collateral Securities, Landlord agrees to provide Tenant 3 business days' prior
written notice of its intent to exercise its rights to the Collateral.

         (c)      Any principal amount at any time paid in respect of the
Collateral Securities (whether at the acceleration thereof, as a scheduled or
mandatory sinking fund payment, in redemption or prepayment thereof or at the
maturity thereof) shall constitute part of the Collateral and shall be held in
the Control Account until reinvested as provided in the Collateral Account
Agreement. If for any reason Tenant should receive any such payment of principal
in respect of the Collateral Securities, Tenant shall receive and hold the same
in trust, for the benefit of Landlord, and shall promptly deposit such payment
(or, at Tenant's option, substitute Collateral Securities) in the Control
Account.

                                       E-2



7.       Representations, Warranties and Covenants by Tenant

         (a)      Tenant represents that the execution, delivery and performance
of this Agreement does not violate any agreement to which it is bound or any law
or regulation applicable to Tenant, and that it has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder.

         (b)      Tenant represents that it is the sole beneficial owner of the
Collateral Securities and the proceeds thereof free and clear of any security
interest or other encumbrance other than the first priority security interest
created favor of Landlord pursuant to and in accordance with this Agreement and
Tenant will not create or permit to exist any other security interest or other
encumbrance against the Collateral. Tenant further represents, except as
permitted under this Agreement and the Control Account Agreement, that for the
term of this Agreement it will not sell, convey, transfer or otherwise dispose
of any of the Collateral Securities.

         (c)      Tenant represents that this Agreement and delivery of the
Collateral into the Collateral Account creates a valid, perfected, and first
priority security interest in the Collateral in favor of Landlord, and all
actions necessary to achieve such perfection have been duly taken.

         (d)      Tenant represents that this Agreement and delivery of the
substitute Collateral Securities into the Collateral Account pursuant to clause
(iii) of Section 6(a) will create a valid, perfected, and first priority
security interest in the substitute Collateral in favor of Landlord, and all
actions necessary to achieve such perfection, upon delivery to the Custodian,
will have been duly taken.

         (e)      Tenant at all times will cause the Control Agreement to remain
in full force and effect and will cause the Collateral Securities to be held in
the Control Account.

         (f)      Upon demand by Landlord, Tenant will permit inspection of the
Collateral Securities by Landlord.

         (f)      Tenant at all times will cause the Market Value of Collateral
Securities held in the Control Account to equal or exceed the Required Balance.
If, at any time, the Market Value of Collateral Securities held in the Control
Account is less than the Required Balance, Tenant shall immediately cause to be
deposited in the Control Account additional Collateral Securities with a Market
Value sufficient to cause the aggregate Market Value of all Collateral
Securities then held in the Collateral Account to equal or exceed the Required
Balance.

8.       Liability

         Tenant shall indemnify the financial institution party to the Control
Account Agreement for any and all costs and expenses, and attorney's fees and
court costs, which directly result from any sale of Collateral Securities and
the withdrawal of the settlement proceeds thereof (not to exceed the amount of
the Security Deposit Amount) authorized by Landlord to fulfill any of Tenant's
Obligations; provided, however, that nothing in this indemnification provision
shall operate or be construed to limit Tenant's rights against Landlord under
the terms of the Lease or Landlord's rights against Tenant thereunder. Tenant
shall indemnify and defend, with counsel reasonably acceptable to Landlord,
Landlord's right, title and first priority security interest in the Collateral
and Substitute Collateral. After Landlord delivers a Notice of Exclusive Control
to the financial institution party to the Control Account Agreement, (a)
Landlord may liquidate or sell all or any part of the Collateral in a
commercially reasonable manner and whether or not the value of any of the
Collateral is rising, falling or holding, and (b) Landlord is not required to
exercise any right, option or privilege arising from or relating to the
Collateral. The provisions of this section shall survive expiration or
termination of this Agreement or any determination that this Agreement or any
portion is void or voidable.

                                       E-3



9.       Assignment and Amendment

         (a)      This Agreement may not be amended without the prior written
consent of both parties.

         (b)      This Agreement may not be assigned by either party without the
prior written consent of the other party; provided, however, that:

    (i) Landlord may, at any time, and without notice to or the necessity of
    obtaining Tenant's consent, assign to any financial institution providing a
    loan to Landlord in connection with the property subject of the Lease
    (together with any such financial institution's successors or assigns, the
    "Lender") all of its rights under, and interest in, this Agreement. Within
    one (1) business day after making any such assignment, Landlord shall
    deliver to Tenant written notice of the assignment and a copy of the
    instrument of assignment. Upon receipt by Tenant of the aforementioned
    notice, Lender shall thereafter succeed to all of the rights and privileges
    of Landlord and shall be subject to the same obligations, terms, conditions
    and restrictions applicable to Landlord under the terms of this Agreement,
    provided that after Lender sends Custodian a Lender Notice of Exclusive
    Control pursuant to Section 10(b) of the Control Account Agreement, Lender
    shall also be subject to the same obligations (including indemnification
    obligations arising from and after the date of the Lender Notice of
    Exclusive Control) as Landlord. Lender will not be liable for any act,
    omission or breach by Landlord of any obligation under this Agreement or the
    Control Account Agreement which occurs prior to the date of the Lender
    Notice of Exclusive Control and will, upon any sale or transfer by Lender of
    its interest in the property and the Lease, automatically be released and
    discharged from any and all liability thereafter accruing under this
    Agreement or the Control Account Agreement; and

    (ii) If Landlord assigns its interest in the Lease, whether voluntarily or
    through involuntary assignment or transfer such as bankruptcy or
    foreclosure, such assignment will automatically and without further action
    or notice to Tenant, cause an assignment of Landlord's rights in this
    Agreement and the Collateral to the assignee and upon the assignee's
    assumption of Landlord's obligations under the Lease (including Landlord's
    obligations with respect to this Agreement and the Collateral), Landlord
    will thereafter accrue no further liability for the return of the
    Collateral. Upon request of either party, Landlord and Tenant agree to
    execute such documents as may be necessary or desirable to reflect or better
    confirm such assignment, assumption and/or release.

10.      Waivers

         A waiver by either party of a breach of any provision of this Agreement
shall not constitute a waiver of any subsequent breach of such provision or of
any other provision hereof. Failure of either party to enforce at any time or
from time to time any provision of this Agreement shall not be construed as a
waiver thereof.

11.      Severability

         Each provision of this Agreement is intended to be severable from the
others so that if any provision or term hereof is illegal or invalid for any
reason whatsoever, such illegality or invalidity shall not affect the validity
of the remaining provisions and terms hereof.

12.      Governing Law: Successors Bound

         This Agreement shall be construed in accordance with the internal laws
of the State of Washington, determined without regard to conflicts of law.
Subject to all the terms and provisions hereof, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Each party hereto consents to submit to the jurisdiction
of the courts of the State of Washington and of the United States of America
located in King County, Washington for any action, suit or proceeding arising
out of or relating to this Agreement. Each party further waives any objection to
the laying of venue of any such action, suit or proceeding in such courts, and
further agrees

                                       E-4



not to plead or claim in any such court that any such action, suit or proceeding
has been brought in an inconvenient forum.

13.      Notices

         All notices must be in writing and must be sent by personal delivery,
United States registered or certified mail (postage prepaid) or by an
independent overnight courier service, addressed to the addresses specified
below or at such other place which is not a post office box as either party may
designate to the other party by written notice given in accordance with this
section. Notices given by mail are deemed effective within 3 business days after
the party sending the notice deposits the notice with the United States Post
Office. Notices delivered by courier are deemed effective on the next business
day after the day the party delivering the notice timely deposits the notice
with the courier for overnight (next day) delivery.

If to Tenant:                               ZymoGenetics, Inc.
                                            Attn: Chief Financial Officer
                                            1201 Eastlake Avenue E.
                                            Seattle, WA 98121
                                            Telephone: (206) 442-6600
                                            Fax: (206) 442-6608

                  With a copy to:           Real Property Law Group, PLLC
                                            Attn:  Cynthia Thomas
                                            1218 Third Avenue, Suite 1900
                                            Seattle, WA 98101
                                            Telephone: (206) 625-1717
                                            Fax: (206) 374-2782

If to Landlord:                             ___________________________
                                            Attn: _____________________
                                            ___________________________
                                            ___________________________
                                            Telephone: ________________
                                            Fax: ______________________

                  With a copy to:           Stoel Rives LLP
                                            Attn:  David H. Rockwell
                                            600 University Street, Suite 3600
                                            Seattle, WA 98101-3197
                                            Telephone: (206) 386-7694
                                            Fax: (206) 386-7500

14.      Entire Agreement

         This Agreement, together with the Lease and the Control Account
Agreement, embody the entire agreement and understanding between the parties
pertaining to the subject matters hereof and thereof, and supersedes any prior
agreements, understandings, negotiations, representations and discussions,
whether oral or written, of the parties, pertaining to such subject matters. The
parties acknowledge that they have all participated in the drafting of this
Agreement, and that they all have been represented by legal counsel of their own
choosing and the language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning, and not strictly for or
against any of the parties.

15.      Further Assurances

         Tenant shall, upon the request of Landlord, execute and deliver such
other instruments and take and cause to be taken such further actions as may be
reasonably necessary or reasonably appropriate to

                                       E-5



carry out the provisions and purposes of this Agreement, and specifically to
continue the creation, attachment and perfection of the security interest
granted hereunder.

         IN WITNESS WHEREOF, Tenant and Landlord have caused this Agreement to
be executed by their proper corporate officers as of the day and year first
above written.

                                            TENANT

                                            ZymoGenetics, Inc.
                                            a Washington corporation

                                            By________________________________
                                               Name:________________________
                                               Title:_______________________


                                            LANDLORD:

                                            _________________________,
                                            a _____________________


                                            By________________________________
                                               Name:________________________
                                               Title:_______________________

                                       E-6



                                    EXHIBIT F
                               CUSTODIAL AGREEMENT

                            ACCOUNT CONTROL AGREEMENT

         THIS ACCOUNT CONTROL AGREEMENT (this "Agreement") is made and entered
into as of the _____________day of _________________, 200_, by and among UNION
BANK OF CALIFORNIA, N.A., a national banking association ("Securities
Intermediary'), ___________________________________, a
___________________("Customer"), and ____________________________________, a
_________________________________________("Secured Party").

                                    RECITALS:

         A. Pursuant to a Personal Custody Agreement, dated _______________,
200_ (the "Account Agreement"), by and between Customer and Securities
Intermediary, Customer has established a securities account, bearing Account No.
_________ _______________________ (the "Account"), with Securities Intermediary.

         B. Pursuant to a ____________________________ , dated
__________________, 200_ (the "Security Agreement"). Customer has granted to
Secured Party a security interest in certain personal property of Customer,
including without limitation (i) the Account, (ii) all securities entitlements,
investment property and other financial assets now or hereafter credited to the
Account, (iii) all of Customer's rights in respect of the Account, such
securities entitlements, investment property and other financial assets, and
(iv) all products, proceeds and revenues of and from any of the foregoing
personal property (collectively, the "Collateral").

         C. Securities Intermediary, Customer and Secured Party are entering
into this Agreement in order to perfect Secured Party's security interest in the
Account by means of control.

                                   AGREEMENT:

In consideration of the foregoing recitals, Securities Intermediary, Customer
and Secured Party hereby agree as follows:

1. All terms used in this Agreement which are defined in the Commercial Code of
the state whose law governs this Agreement ("Commercial Code") but are not
otherwise defined herein shall have the meanings assigned to such terms in the
Commercial Code, as in effect on the date of this Agreement.

2. Upon receipt of a fully executed and acknowledged Notice of Exclusive
Control, substantially in the form attached as Exhibit A, Securities
Intermediary will comply with all entitlement orders originated by Secured Party
with respect to the Collateral, or any portion of the Collateral, without
further consent by Customer.

3. Securities Intermediary hereby represents and warrants (a) that the records
of Securities Intermediary show that Customer is the sole owner of the
Collateral, (b) that Securities Intermediary has not been served with any notice
of levy or received any notice of any security interest in or other claim to the
Collateral, or any portion of the Collateral, other than Secured Party's claim
pursuant to this Agreement, and (c) that Securities Intermediary is not
presently obligated to accept any entitlement order from any person with respect
to the Collateral, except for entitlement orders that Securities Intermediary is
obligated to accept from Secured Party under this Agreement and entitlement
orders that Securities Intermediary, subject to the provisions of Section 5
below, is obligated to accept from Customer.

                                       F-1



4. Without the prior written consent of Secured Party, Securities Intermediary
will not enter into any agreement by which Securities Intermediary agrees to
comply with any entitlement order of any person other than Secured Party or,
subject to the provisions of Section 5 below, Customer, with respect to any
portion or all of the Collateral. Securities Intermediary shall promptly notify
Secured Party and Customer if any person requests Securities Intermediary to
enter into any such agreement or otherwise assert or seeks to assert a lien,
encumbrance or adverse claim against any portion or all of the Collateral.

5. Except as otherwise provided in this Section 5, Securities Intermediary may
allow Customer to effect sales, trades, transfers and exchanges of Collateral
within the Account, but will not, without the prior written consent of Secured
Party, allow Customer to withdraw any Collateral from the Account (other than
withdrawals consisting solely of ordinary cash dividends or interest income).
Securities Intermediary acknowledges that Secured Party reserves the right, by
delivery of a fully executed and acknowledged Notice of Exclusive Control to
Securities Intermediary, to prohibit Customer from effecting any further
withdrawals (including withdrawals of ordinary cash dividends and interest
income), sales, trades, transfers or exchanges of any Collateral held in the
Account. Further, upon receipt of such fully executed and acknowledged Notice of
Exclusive Control, Securities Intermediary hereby agrees from thereafter to
comply with any and all written instructions delivered by Secured Party to
Securities Intermediary and from thereafter has no obligation to and will not,
investigate the reason for any action taken by Secured Party, the amount of any
obligations of Customer to Secured Party, the validity of any of Secured Party's
claims against or agreements with Customer, the existence of any defaults under
such agreements, or any other matter.

6. Customer hereby irrevocably waives any rights Customer may have under the
Account Agreement to the extent such rights are inconsistent with the provisions
of this Agreement, and hereby irrevocably authorizes Securities Intermediary to
comply with all instructions and entitlement orders delivered by Secured Party
to Securities Intermediary.

7. Securities Intermediary will not attempt to assert control, and does not
claim and will not accept any security or other interest in any part of the
Collateral, and Securities Intermediary will not exercise, enforce or attempt to
enforce any right of setoff against the Collateral, or otherwise charge or
deduct from the Collateral any amount whatsoever, except for any right
Securities Intermediary may have to collect account maintenance or similar fees
under the Account Agreement.

8. Securities Intermediary and Customer shall not amend, supplement or otherwise
modify the Account Agreement (including, without limitation the choice of law
provision and provisions providing for treatment of property held in the Account
as a financial asset) in any respect without Secured Party's prior written
consent.

9. Securities Intermediary shall not terminate the Account, and shall not permit
Customer to terminate the Account, without Secured Party's prior written
consent.

10. This Agreement shall remain in full force and effect until Securities
Intermediary receives written notice of its termination given by Secured Party.

11. Securities Intermediary and Customer hereby agree that any property held in
the Account shall be treated as a financial asset under such section of the
Commercial Code as corresponds with Section 8-102 of the Uniform Commercial
Code, notwithstanding any contrary provision of any other agreement to which
Securities Intermediary may be a party.

12. Securities Intermediary is hereby authorized and instructed, and hereby
agrees, to send to Secured Party at its address set forth in Section 18 below,
concurrently with the sending thereof to Customer, duplicate copies of any and
all monthly Account statements or reports issued or

                                       F-2



sent to Customer with respect to the Account. In addition, Securities
Intermediary shall (i) issue a confirmation or safekeeping receipt to both
Customer and Secured Party for each transaction made on the Account; and (ii)
upon request will provide Secured Party with information on the Account and the
financial assets held therein, and will provide Customer with a copy of any
information provided to Secured Party.

13. This Agreement does not create any obligation or duty on the part of
Securities Intermediary other than those expressly set forth herein. Secured
Party and Customer hereby acknowledge that Securities Intermediary has no
obligation to monitor the value of the Collateral for Secured Party or Customer.

14. Secured Party and Customer hereby agree, jointly and severally, to indemnify
and hold harmless Securities Intermediary from and against any and all losses,
liabilities, demands, claims, expenses and attorneys' fees which Securities
Intermediary may incur or suffer if all or any portion of the Collateral is
found to be fraudulent in nature or otherwise worthless or invalid for any
reason excepting only such losses, liabilities, demands, claims, expenses and
attorneys' fees which result solely from the gross negligence or willful
misconduct of Securities Intermediary.

15. Any forbearance or failure or delay by Secured Party in exercising any right
hereunder shall not be deemed a waiver thereof and any single or partial
exercise of any right shall not preclude the further exercise thereof. This
Agreement may be amended only in writing signed by all parties hereto.

16. Notwithstanding the terms of any other agreement, the parties hereto agree
that this Agreement shall be governed under and in accordance with the laws of
the State of California and, for purposes of this Agreement, such state shall be
deemed to be Securities Intermediary's jurisdiction.

17. This Agreement constitutes the entire agreement among Securities
Intermediary, Customer and Secured Party with respect to the subject matter
hereof, and all prior communications, whether verbal or written, between any of
the parties hereto with respect to the subject matter hereof shall be of no
further effect or evidentiary value.

18. Any notice or other communication provided for or allowed hereunder shall be
effective only when given by one of the following methods and addressed to the
respective party at its address provided below (or at such other address as the
party changing its address shall notify the others as provided herein) and shall
be considered to have been validly given (a) upon delivery, if delivered
personally, (b) upon receipt, if mailed, first class postage prepaid with the
United States Postal Service, (c) on the next business day, if sent by overnight
courier service of recognized standing, and (d) upon telephoned confirmation of
receipt, if telecopied:

If to Securities Intermediary:
Union Bank of California, N.A.

________________________
________________________
________________________

If to Secured Party:

________________________
________________________
________________________

If to Customer:

________________________
________________________
________________________

                                       F-3



19. To the extent that the terms or conditions of this Agreement are
inconsistent with the Account Agreement or any other document, instrument or
agreement between Securities Intermediary and Customer, the terms and conditions
of this Agreement shall prevail.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.

"Securities Intermediary"                 "Customer"             "Secured Party"

{Signature blocks to be inserted}

                                       F-4



                                    EXHIBIT A
                                       TO
                            ACCOUNT CONTROL AGREEMENT

                       Form of Notice of Exclusive Control

                                ____________, __
TO:      [Name and address of Custodian]
         _______________________________
         _______________________________
         _______________________________

         Re:    Notice of Exclusive Control--Account No. __________ (the
"Account")

Dear Sir/Madam:

         Pursuant to the provisions of the Account Control Agreement dated as of
___________, among the undersigned as Secured Party, ZymoGenetics, Inc. as
Customer and you as Securities Intermediary (the "Agreement"), the undersigned
hereby gives notice of the exercise of exclusive control over the Account due to
the occurrence and continuance of an Event of Default under the security
agreement between Customer and the undersigned. Subject to the provisions of the
Agreement, you are hereby notified that from this date forward you are
instructed to comply only with entitlement orders for the Account issued by the
undersigned.

         In accordance with the Agreement, you are hereby notified to cease
complying with entitlement orders or other directions concerning the Account or
the Financial Assets therein, or from making any withdrawals from the Account,
if such directions, orders or requests are originated by Customer or its
representatives.

         The undersigned hereby affirms and certifies under penalty of perjury
that three (3) business days prior to the date hereof it has given notice to
Customer that it is in default under the security agreement, that Customer has
not cured such default, and such notice informed Customer that the undersigned
intended to exercise its remedies under the Agreement.

         All capitalized terms used herein without definition have the same
meanings as are ascribed to such terms in the Agreement.

                                            Very truly yours,

                                            ________________________________

                                            By______________________________
                                               Name:________________________
                                               Title:_______________________

                                       F-5



STATE OF _____________     )
                           ) ss.
COUNTY OF ___________      )

I certify that I know or have satisfactory evidence that _______________________
is the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the _________________________ of
_______________________, to be the free and voluntary act of such party for the
uses and purposes mentioned in this instrument.
DATED: ________________________.

                                      __________________________________________
                                      (Signature of Notary Public)

                                      __________________________________________
                                      (Printed Name of Notary Public)

                                      My Appointment expires: __________________

                                       F-6




                                    EXHIBIT G
                                 FIXED EQUIPMENT

        Equipment No.                           Description
        -------------                           -----------
AD-1                             AIR DRYER, REFRIGERATED
AHU-1A                           AIR HANDLING UNIT, LAB SUPPLY
AHU-1B                           AIR HANDLING UNIT, LAB SUPPLY
AHU-2A                           AIR HANDLING UNIT, LAB EXHAUST
AHU-2B                           AIR HANDLING UNIT, LAB EXHAUST
AHU-4                            AIR HANDLING UNIT, LAB SUPPLY
AHU-5A                           AIR HANDLING UNIT, LAB EXHAUST
AHU-5B                           AIR HANDLING UNIT, LAB EXHAUST
AHU-6                            AIR HANDLING UNIT, LAB SUPPLY
AHU-7A                           AIR HANDLING UNIT, LAB SUPPLY
AHU-7B                           AIR HANDLING UNIT, LAB SUPPLY
AHU-8                            AHU, OFFICE SUPPLY
AUTOCLV-010                      AUTOCLAVE, GRAVITY, STEAM
AUTOCLV-013                      AUTOCLAVE, NON-GMP
AUTOCLV-016                      AUTOCLAVE, STEAM PRESSURE, STERILIZER
BOIL-STM-N001                    BOILER, STEAM, FORCED DRAFT, 150 PSI
BOIL-STM-N002                    BOILER, STEAM, FORCED DRAFT, 150 PSI
CHILLER-001                      CHILLER, SCREW
CHILLER-002                      CHILLER, SCREW
CHILLER-004                      CHILLER, RECIRCULATING LOOP
COLD-RM-004                      COLD ROOM
COLD-RM-005                      COLD ROOM
COMPACTOR-002                    TRASH COMPACTOR, AUGER
COMP-AIR-003                     COMPRESSOR, AIR, DRY FIRE SPRINKLER SYS
COMP-AIR-004                     COMPRESSOR, AIR, LABORATORY/PROCESS
CP-N001                          PUMP, CHILLED WATER PRODUCTION
CP-N002                          PUMP, CHILLED WATER PRODUCTION
CP-N003                          PUMP, CHILLED WATER DISTRIBUTION
CP-N004                          PUMP, CHILLED WATER DISTRIBUTION
CP-N005                          PUMP, HEATING, HOT WATER
CP-N006                          PUMP, HEATING, HOT WATER
CP-N007                          PUMP, HEAT RECOVERY
CP-N008                          PUMP, LAB HOT WATER
CP-N009                          PUMP, LAB HOT WATER
CP-N010                          PUMP, HEAT RECOVERY
CP-N012                          PUMP, CONDENSATE
CP-N019                          PUMP, CONDENSATE
CP-N020                          PUMP, DOMESTIC HOT WATER
CP-N029                          PUMP, CONDENSATE
CP-N030                          PUMP, LAB HOT WATER
DOOR-ROLL-006                    DOOR, ROLLUP,LOADING DOCK,INTERIOR, NELS
DOOR-ROLL-007                    DOOR, ROLLUP, COMPACTOR,NELSON
EF-2                             FAN, EXHAUST, VIVARIUM FUME
EF-3                             FAN, EXHAUST, 2ND FLR FUME
EF-4                             FAN, EXHAUST, GARAGE
EF-5                             FAN, EXHAUST, GAS STORAGE

                                       G-1



EF-6                             FAN, EXHAUST, 4TH FLR TOILET EXH.
EF-7                             FAN, EXHAUST, 4TH FLR RELIEF
EF-8                             FAN, EXHAUST, 3RD FLR FUME
EF-9                             FAN, EXHAUST, GLASSWASH
ELEVATOR-003                     ELEVATOR, SERVICE, NELSON
EUH-N1                           HEATER, ELECTRICAL UNIT,WATER RM
EUH-N2                           HEATER, ELECTRICAL UNIT, 2ND FLR. MECH.
EUH-N3                           HEATER, ELECTRICAL UNIT, 3RD FLR. MECH.
EUH-N4                           HEATER, ELECTRICAL UNIT, 4TH FLR. MECH.
EUH-N5                           HEATER, ELECTRICAL UNIT, ELEVATOR MECH.
FET-N101                         HVAC FUME EXHAUST TERMINAL BOX
FET-N102                         HVAC FUME EXHAUST TERMINAL BOX
FET-N103                         HVAC FUME EXHAUST TERMINAL BOX
FET-N104                         HVAC FUME EXHAUST TERMINAL BOX
FET-N105                         HVAC FUME EXHAUST TERMINAL BOX
FET-N106                         HVAC FUME EXHAUST TERMINAL BOX
FET-N107                         HVAC FUME EXHAUST TERMINAL BOX
FILTER-HEPA-004                  FILTER,HEPA,IN-LINE
FIRE-SYS-003                     FIRE ALARM SYSTEM AT NELSON [SITE #03]
FLTR-WTR-002                     FILTER, WATER, DOMESTIC SYSTEM (SOUTH)
FLTR-WTR-003                     FILTER, WATER, DOMESTIC SYSTEM (NORTH)
GENERATOR-002                    GENERATOR, 500 KW
GET-N101                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N102                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N103                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N104                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N105                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N106                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N107                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N108                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N109                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N110                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N111                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N112                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N113                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N114                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N115                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N116                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N117                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N118                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N301                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N302                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N303                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N304                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N305                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N306                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N307                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N308                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N309                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N310                         HVAC, GENERAL EXHAUST TERMIAL BOX

                                       G-2



GET-N311                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N312                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N313                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N314                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N315                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N316                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N317                         HVAC, GENERAL EXHAUST TERMIAL BOX
GET-N318                         HVAC, GENERAL EXHAUST TERMIAL BOX
HOOD-BSC-058                     BIO SAFETY CABINET, CLASS II TYPE B2
HOOD-FUME-013                    HOOD, FUME
HOOD-FUME-023                    HOOD, FUME
HOOD-FUME-041                    HOOD, FUME, 6' CHEMGARD RADIO-ISOTOPE
HOOD-FUME-042                    HOOD, FUME, RADIO-ISOTOPE
HOOD-FUME-043                    HOOD, FUME, 4' CHEMGARD RADIO-ISOTOPE
HOOD-FUME-044                    HOOD, FUME, RADIO-ISOTOPE
HOOD-FUME-045                    HOOD, FUME, 6' CHEMGARD RADIO-ISOTOPE
HOOD-FUME-046                    HOOD, FUME, 6' CHEMGARD RADIO-ISOTOPE
HOOD-FUME-048                    HOOD, FUME
HOOD-FUME-049                    HOOD, FUME
INDICATOR-003                    INDICATOR, DIGITAL, WEIGHT
PRESS-RED-001                    H2O SUPPLY TO RABBIT WATERING SYSTEM
PUMP-HSVAC-002                   PUMP,VACUUM, HOUSE,NELSON
RO-DI-002                        WATER SYSTEM, RO-DI
RO-SYS-001                       REVERSE OSMOSIS WATER SYSTEM
SF-1                             FAN, SUPPLY, ELEVATOR SHAFT
SP-1                             PUMP, SUMP, WASTE WATER
SP-2                             PUMP, SUMP, WASTE WATER
SP-3                             PUMP, SUMP, FOOTING DRAIN
SP-4                             PUMP, SUMP, FOOTING DRAIN
SPRINK-DRY-004                   SPRINKLER, FIRE, DRY,
SPRINK-WET-002                   SPRINKLER, FIRE, WET
STEAM-GEN-001                    STEAM GENERATOR, CLEAN
STILL-001                        STILL, WATER FOR INJECTION
TANK-DA-001                      TANK, DEAERATOR, SPRAYMASTER
UPS-002                          UNINTERUPTABLE POWER SOURCE
VAV-FAN-N401                     VAV,WITH ELECTRIC HEAT,FAN POWERED
VAV-FAN-N402                     VAV,WITH ELECTRIC HEAT,FAN POWERED
VAV-FAN-N403                     VAV,WITH ELECTRIC HEAT,FAN POWERED
VAV-FAN-N404                     VAV,WITH ELECTRIC HEAT,FAN POWERED
VAV-FAN-N405                     VAV,WITH ELECTRIC HEAT,FAN POWERED
VAV-FAN-N406                     VAV,WITH ELECTRIC HEAT,FAN POWERED
VAV-FAN-N407                     VAV,WITH ELECTRIC HEAT,FAN POWERED
VAV-FAN-N408                     VAV, FAN POWERED
VAV-FAN-N409                     VAV, FAN POWERED
VAV-N101                         VAV, WITH HOT WATER REHEAT
VAV-N102                         VAV, WITH HOT WATER REHEAT
VAV-N103                         VAV, WITH HOT WATER REHEAT
VAV-N104                         VAV, WITH HOT WATER REHEAT
VAV-N105                         VAV, WITH HOT WATER REHEAT
VAV-N106                         VAV, WITH HOT WATER REHEAT

                                      G-3



VAV-N107                         VAV, WITH HOT WATER REHEAT
VAV-N108                         VAV, WITH HOT WATER REHEAT
VAV-N109                         VAV, WITH HOT WATER REHEAT
VAV-N110                         VAV, WITH HOT WATER REHEAT
VAV-N111                         VAV, WITH HOT WATER REHEAT
VAV-N112                         VAV, WITH HOT WATER REHEAT
VAV-N113                         VAV, WITH HOT WATER REHEAT
VAV-N114                         VAV, WITH HOT WATER REHEAT
VAV-N115                         VAV, WITH HOT WATER REHEAT
VAV-N116                         VAV, WITH HOT WATER REHEAT
VAV-N117                         VAV, WITH HOT WATER REHEAT
VAV-N118                         VAV, WITH HOT WATER REHEAT
VAV-N119                         VAV, WITH HOT WATER REHEAT
VAV-N120                         VAV, WITH HOT WATER REHEAT
VAV-N121                         VAV, WITH HOT WATER REHEAT
VAV-N122                         VAV, WITH HOT WATER REHEAT
VAV-N123                         VAV, WITH HOT WATER REHEAT
VAV-N124                         VAV, HOT WATER REHEAT,FAN POWERED
VAV-N125                         VAV, WITH HOT WATER REHEAT
VAV-N126                         VAV, WITH HOT WATER REHEAT
VAV-N127                         VAV, WITH HOT WATER REHEAT
VAV-N128                         VAV, WITH HOT WATER REHEAT
VAV-N129                         VAV, WITH HOT WATER REHEAT
VAV-N130                         VAV, WITH HOT WATER REHEAT
VAV-N131                         VAV, WITH HOT WATER REHEAT
VAV-N301                         VAV, WITH HOT WATER REHEAT
VAV-N302                         VAV, WITH HOT WATER REHEAT
VAV-N303                         VAV, WITH HOT WATER REHEAT
VAV-N304                         VAV, WITH HOT WATER REHEAT
VAV-N305                         VAV, WITH HOT WATER REHEAT
VAV-N306                         VAV, WITH HOT WATER REHEAT
VAV-N307                         VAV, WITH HOT WATER REHEAT
VAV-N308                         VAV, WITH HOT WATER REHEAT
VAV-N309                         VAV, WITH HOT WATER REHEAT
VAV-N310                         VAV, WITH HOT WATER REHEAT
VAV-N311                         VAV, WITH HOT WATER REHEAT
VAV-N312                         VAV, WITH HOT WATER REHEAT
VAV-N313                         VAV, WITH HOT WATER REHEAT
VAV-N314                         VAV, WITH HOT WATER REHEAT
VAV-N315                         VAV, WITH HOT WATER REHEAT
VAV-N316                         VAV, WITH HOT WATER REHEAT
VAV-N317                         VAV, WITH HOT WATER REHEAT
VAV-N318                         VAV, WITH HOT WATER REHEAT
VAV-N319                         VAV, WITH HOT WATER REHEAT
VAV-N320                         VAV, WITH HOT WATER REHEAT
VAV-N321                         VAV, WITH HOT WATER REHEAT
VAV-N322                         VAV, WITH HOT WATER REHEAT
VAV-N323                         VAV, WITH HOT WATER REHEAT
VAV-N324                         VAV, WITH HOT WATER REHEAT
VAV-N325                         VAV, WITH HOT WATER REHEAT

                                       G-4



VAV-N326                         VAV, WITH HOT WATER REHEAT
VAV-N327                         VAV, WITH HOT WATER REHEAT
WARM-RM-003                      WARM ROOM, WALK IN, 37 DEG
WASH-ACCES-001                   SPINDLE HEADERS FOR GLASS WASHER
WASH-CAGE-002                    WASHER, CAGE
WASH-GLASS-004                   WASHER, GLASSWARE
WASH-GLASS-005                   WASHER, GLASSWARE,  SUPER DRYER
WASTE-CHEM-001                   WASTE TREATMENT SYSTEM
WATER-PUR-006                    PURIFIER, WATER FILTER SYSTEM FOR BOTTLE FILLER
WFI-SYS-001                      WFI, WATER FOR INJECTION SYSTEM

                                       G-5



                                    EXHIBIT H
                        Use and Function of Leased Space

                                       H-1



                                    EXHIBIT I
                                BOMA Measurement

                                       I-1



                                   EXHIBIT J-1

                          Landlord Estoppel Certificate

         THIS LANDLORD ESTOPPEL CERTIFICATE ("Certificate"), dated as of
________ __, 2001, is executed by ____________________, a _____________
("Landlord") in favor of_____________________________, ( "Subtenant"[or other
appropriate identifier, such as "Assignee"]).

                                    RECITALS

     A. Tenant and Landlord have entered into that certain Lease Agreement dated
as of ________ ___, 20___ (together with all amendments, modifications,
supplements, guarantees and restatements thereof, the "Lease"), for a portion of
the improved real property located in the City of Seattle, County of King, State
of Washington, more particularly described on Exhibit A attached hereto ( the
"Property").

     B. Pursuant to the Lease, Landlord has agreed that upon the request of
Tenant, Landlord would execute and deliver an estoppel certificate certifying
the status of the Lease.

     C. Tenant has requested that Landlord execute this Certificate with an
understanding that Subtenant will rely on the representations and agreements
below in [subleasing space in the Premises from Tenantinsert appropriate
description of transaction] (the "Transaction").

     NOW, THEREFORE, Landlord certifies and represents to Subtenant as follows:

     1. Lease. Attached hereto as Exhibit B is a true, correct and complete copy
of the Lease, including the following amendments, modifications, supplements,
guarantees and restatements thereof, which together represent all of the
amendments, modifications, supplements, guarantees and restatements thereof:
_______________________________________________________________________________
(If none, please state "None.")

     2. Premises. Pursuant to the Lease, Tenant leases those certain premises
(the "Premises") consisting of approximately ___________ rentable square feet
within the Property, as more particularly described in the Lease. In addition,
pursuant to the terms of the Lease, Tenant has the right to use [_______ parking
spaces/the parking area] located on the Property during the term of the Lease.

     3. Full Force of Lease. The Lease has been duly authorized, executed and
delivered by Landlord, is in full force and effect has not been terminated and
constitutes a legally valid instrument, binding and enforceable against Landlord
in accordance with its terms, subject only to applicable limitations imposed by
laws relating to bankruptcy and creditor's rights.

     4. Complete Agreement. The Lease constitutes the complete agreement between
Landlord and Tenant for the Premises and the Property, except as modified by the
Lease amendments noted above (if any), has not been modified, altered or
amended.

     5. Lease Term. The term of the Lease commenced on ________ ___, 20___ and
ends on ________ ___, 20___, subject to the following options to extend:
________________________________________________________________________________
(If none, please state "None.")

     6. Purchase Rights. Tenant has no option, right of first refusal, right of
first offer, or other right to acquire or purchase all or any portion of the
Premises or all or any portion of, or interest in, the Property, except as
follows:_______________________________________________________________________

                                      J-1-1



________________________________________________________________________________
(If none, please state "None.")

     7. Rights of Tenant. Except as expressly stated in this Certificate,
Tenant:

     (a) has no right to renew or extend the term of the Lease, except as
follows: ;

     (b) has no right, title, or interest in the Premises, other than as Tenant
under the Lease or as the owner of all Removable Equipment and personal property
not identified as Fixed Equipment under the Lease.

     8. Rent.

     (a) The obligation to pay Rent under the Lease commenced on ________ ___,
20___. The Rent under the Lease is curRent, and to the best of Landlord's actual
knowledge, Tenant is not in default in the performance of any of its obligations
under the Lease.

     (b) Tenant is currently paying Base Rent under the Lease in the amount of
$________ per month. Tenant has not received and is not, presently, entitled to
any abatement, refunds, rebates, concessions or forgiveness of Rent or other
charges, free Rent, partial Rent, or credits, offsets or reductions in Rent,
except as follows:______________________________________________________________
________________________________________________________________________________
(If none, please state "None.")

     (c) There are no existing defenses or offsets against Rent due or to become
due under the terms of the Lease, and there presently is no default or other
wrongful act or omission by Landlord under the Lease or otherwise in connection
with Tenant's occupancy of the Premises, nor to the best of Landlord's actual
knowledge is there a state of facts which with the passage of time or the giving
of notice or both could ripen into a default on the part of Tenant, , except as
follows:________________________________________________________________________
________________________________________________________________________________
(If none, please state "None.")

     9. Security Deposit. Tenant's compliance with the Security Deposit
provision of the Lease (Section 7) is through a Letter of Credit in the amount
of $______ and pledged marketable securities of $________.

     10. Prepaid Rent. The amount of prepaid Rent, separate from the security
deposit, is $___________, covering the period from ________ ___, 20___ to
________ ___, 20___.

     11. Insurance. To the best of Landlord's actual knowledge, all insurance,
if any, required to be maintained by Tenant under the Lease is presently in
effect.

     12. Pending Actions. There is not pending or, to the best of Landlord's
actual knowledge, threatened against or contemplated by the Landlord, any
petition in bankruptcy, whether voluntary or otherwise, any assignment for the
benefit of creditors, or any petition seeking reorganization or arrangement
under the federal bankruptcy laws or those of any state.

     13. Tenant Improvements. As of the date of this Certificate, to the best of
Landlord's actual knowledge: Tenant has performed all obligations required of
Tenant pursuant to the Lease; no offsets, counterclaims, or defenses of Landlord
under the Lease exist against Tenant; and no events have occurred that, with the
passage of time or the giving of notice, would constitute a basis for offsets,
counterclaims, or defenses against Tenant, except as follows:___________________
__________________________________.(If none, please state "None.")

                                      J-1-2



     14. Assignments by Tenant. To the best of Landlord's actual knowledge,
Tenant has not sublet or assigned the Premises or the Lease or any portion
thereof to any sublessee or assignee. No one except Tenant and its employees
will occupy the Premises. The address for notices to be sent to Tenant is as set
forth in the Lease or is:___________________________.

     15. Reliance. Landlord makes this Certificate with the knowledge that it
will only be relied upon by Subtenant in agreeing to complete the Transaction.

     Landlord has executed this Certificate as of the date first written above
by the person named below, who is duly authorized to do so.

LANDLORD:           ___________________________________________________________,
                    a __________________________________________________________

                    By:_________________________________________________________

                             Name:______________________________________________
                             Its:_______________________________________________

                                      J-1-3



                                   Exhibit J-2
                           Tenant Estoppel Certificate

     THIS TENANT ESTOPPEL CERTIFICATE ("Certificate"), dated as of ________ __,
2001, is executed by ____________________, a _____________ ("Tenant") in favor
of_____________________________, ( "Buyer"[or other appropriate identifier, such
as "Lender"]).

                                    RECITALS

     A. Tenant and Landlord have entered into that certain Lease Agreement dated
as of ________ ___, 20___ (together with all amendments, modifications,
supplements, guarantees and restatements thereof, the "Lease"), for a portion of
the improved real property located in the City of Seattle, County of King, State
of Washington, more particularly described on Exhibit A attached hereto ( the
"Property").

     B. Pursuant to the Lease, Tenant has agreed that upon the request of
Landlord, Tenant would execute and deliver an estoppel certificate certifying
the status of the Lease.

     C. Landlord has requested that Tenant execute this Certificate with an
understanding that Buyer [Lender} will rely on the representations and
agreements below in [acquiring the Property and Landlord's interest under the
Lease] [connection with a loaninsert appropriate description of transaction]
(the "Transaction").

     NOW, THEREFORE, Tenant certifies and represents to Buyer as follows:

     16. Lease. Attached hereto as Exhibit B is a true, correct and complete
copy of the Lease, including the following amendments, modifications,
supplements, guarantees and restatements thereof, which together represent all
of the amendments, modifications, supplements, guarantees and restatements
thereof:__
_______________________________________________________________________________.
(If none, please state "None.")

     17. Leased Premises. Pursuant to the Lease, Tenant leases those certain
premises (the "Premises") consisting of approximately ___________ rentable
square feet within the Property, as more particularly described in the Lease. In
addition, pursuant to the terms of the Lease, Tenant has the right to use
[_______ parking spaces/the parking area] located on the Property during the
term of the Lease.

     18. Full Force of Lease. The Lease has been duly authorized, executed and
delivered by Tenant, is in full force and effect has not been terminated and
constitutes a legally valid instrument, binding and enforceable against Tenant
in accordance with its terms, subject only to applicable limitations imposed by
laws relating to bankruptcy and creditor's rights.

     19. Complete Agreement. The Lease constitutes the complete agreement
between Landlord and Tenant for the Premises and the Property, except as
modified by the Lease amendments noted above (if any), has not been modified,
altered or amended.

     20. Acceptance of Premises. Tenant has accepted possession and is currently
occupying the Premises.

     21. Lease Term. The term of the Lease commenced on ________ ___, 20___ and
ends on ________ ___, 20___, subject to the following options to extend:________
(If none, please state "None.")

                                      J-2-1



     22. Purchase Rights. Tenant has no option, right of first refusal, right of
first offer, or other right to acquire or purchase all or any portion of the
Premises or all or any portion of, or interest in, the Property, except as
follows:________________________________________________________________________
________________________________________________________________________________
 (If none, please state "None.")

     23. Rights of Tenant. Except as expressly stated in this Certificate,
Tenant:

     (a) has no right to renew or extend the term of the Lease except as
follows:_______________________________________________________________________;

     (b) has no right, title, or interest in the Premises, other than as Tenant
under the Lease or as the owner of all Removable Equipment and personal property
not identified as Fixed Equipment under the Lease.

     24. Rent.

     (a) The obligation to pay rent under the Lease commenced on ________ ___,
20___. The Rent under the Lease is current, and Tenant is not in default in the
performance of any of its obligations under the Lease.

     (b) Tenant is currently paying Base Rent under the Lease in the amount of
$________ per month. Tenant has not received and is not, presently, entitled to
any abatement, refunds, rebates, concessions or forgiveness of Rent or other
charges, free rent, partial Rent, or credits, offsets or reductions in rent,
except as follows:______________________________________________________________
________________________________________________________________________________
(If none, please state "None.")

     (c) There are no existing defenses or offsets against Rent due or to become
due under the terms of the Lease, and there presently is no default or other
wrongful act or omission by Landlord under the Lease or otherwise in connection
with Tenant's occupancy of the Premises, nor is there a state of facts which
with the passage of time or the giving of notice or both could ripen into a
default on the part of Tenant, or to the best of Tenant's actual knowledge, or
could ripen into a default on the part of Landlord under the Lease, except as
follows:________________________________________________________________________
________________________________________________________________________________
(If none, please state "None.")

     25. Security Deposit. Tenant's compliance with the Security Deposit
provision of the Lease (Section 7) is through a Letter of Credit in the amount
of $______ and pledged marketable securities of $________.

     26. Prepaid Rent. The amount of prepaid Rent, separate from the Security
Deposit, is $___________, covering the period from ________ ___, 20___ to
________ ___, 20___.

     27. Insurance. All insurance, required to be maintained by Tenant under the
Lease is presently in effect.

     28. Pending Actions. There is not pending or, to the best of Tenant's
actual knowledge, threatened against or contemplated by the Tenant, any petition
in bankruptcy, whether voluntary or otherwise, any assignment for the benefit of
creditors, or any petition seeking reorganization or arrangement under the
federal bankruptcy laws or those of any state.

     29. Tenant Improvements. As of the date of this Certificate, to the best of
Tenant's actual knowledge: Landlord has performed all obligations required of
Landlord pursuant to the Lease; no offsets, counterclaims, or defenses of Tenant
under the Lease exist against Landlord; and no events have

                                      J-2-2



occurred that, with the passage of time or the giving of notice, would
constitute a basis for offsets, counterclaims, or defenses against Landlord,
except as follows:______________________________________________________________
________________________________________________________________________________
(If none, please state "None.")

     30. Assignments by Landlord. Tenant has received no notice of any
assignment, hypothecation or pledge of the Lease or rentals under the Lease by
Landlord. Tenant hereby consents to an assignment of leases and rents to be
executed by Landlord to Buyer in connection with the Transaction and
acknowledges that said assignment does not violate the provisions of the Lease.
The address for notices to be sent to Landlord is as set forth in the Lease or
is:_____________________________.

     31. Assignments by Tenant. Tenant has not sublet or assigned the Premises
or the Lease or any portion thereof to any sublessee or assignee. No one except
Tenant and its employees will occupy the Premises. The address for notices to be
sent to Tenant is as set forth in the Lease or is:_____________________________.

     32. Environmental Matters. Tenant is in compliance with the Lease and
Environmental Requirements in connection with its generation, treatment,
storage, disposal or release into the environment of any Hazardous Materials at
the Premises. Environmental Requirements and Hazardous Materials are defined by
reference to Lease Section 19.8. Concerning Lease Section 19 specifically, there
presently is no default or other wrongful act or omission by Tenant under the
Lease or otherwise in connection with Tenant's occupancy of the Premises, nor is
there a state of facts which with the passage of time or the giving of notice or
both could ripen into a default under Lease Section 19 on the part of Tenant;
except as follows:_________________________________________________. (If none,
please state "None.")

     33. Succession of Interest. Tenant agrees that, in the event Buyer succeeds
to interest of Landlord under the Lease:

     (a) Buyer shall not be bound by any amendments or modifications of the
Lease, subsequent to the date of this Certificate, made without prior consent of
Buyer which will not be unreasonably withheld, delayed or conditioned; with the
understanding that this Section 17(a) shall not longer apply if the Transaction
terminates;

     34. Reliance. Tenant makes this Certificate with the knowledge that it will
only be relied upon by Buyer in agreeing to complete the Transaction.

     Tenant has executed this Certificate as of the date first written above by
the person named below, who is duly authorized to do so.

TENANT:                     ___________________________________________________,
                            a___________________________________________________

                            By:_________________________________________________
                                    Name: ______________________________________
                                    Its:________________________________________

                                      J-2-3



                                    EXHIBIT K
                             SITE PLAN OF EXPANSION

Expansion shown with heavy black outline. Refer to Basis of Design approved by
Landlord for further detail.

                                       K-1



                                    EXHIBIT L

     Fair Market Value Determination For Premises (Lease Sections 10 and 12)

Determination of "Fair Market Value" of the Premises under paragraphs 10 and 12
of this Lease shall be made in accordance with the following procedures, which
shall be valued assuming the Premises are encumbered by the Lease and Renewal
Options, with the sum of such determinations being the Fair Market Value of the
Premises as a whole:

(a)  Fair Market Value of the Premises shall be determined by the agreement of
     two (2) appraisers (each, an "Initial Appraiser"), one of which shall be
     selected by Landlord and the other of which shall be selected by Tenant as
     set forth in this Exhibit L. Each of the parties shall concurrently
     identify in writing, an Initial Appraiser selected and retained by such
     party and specifically identify such Initial Appraiser's name, address,
     phone number and qualifications as an appraiser. Within five (5) days after
     the parties have designated their Initial Appraisers, each of Landlord and
     Tenant shall direct, in writing with a copy to the other party, its Initial
     Appraiser to work with the other party's Initial Appraiser to endeavor to
     determine and reach agreement upon the Fair Market Value of the Premises
     (including the land and the improvements), considered as encumbered by this
     Lease and its extensions, and considered as not having been the subject of
     a casualty or condemnation, as applicable, and thereafter to deliver in
     writing to Landlord and Tenant within thirty (30) days (such 30-day period,
     the "Valuation Period") the agreed-upon Fair Market Value (the "Valuation
     Notice"). The costs and expenses of each Initial Appraiser shall be paid by
     the party selecting such Initial Appraiser. If Tenant fails to identify in
     writing an Initial Appraiser as required by this Exhibit, Landlord shall
     identify an Initial Appraiser on behalf of Tenant; provided, however,
     Tenant shall be liable for the costs and expenses of such Initial Appraiser
     identified on Tenant's behalf by Landlord as if Tenant had selected such
     Initial Appraiser.

(b)  If the Initial Appraisers are not able to reach agreement upon the Fair
     Market Value within the Valuation Period, within ten (10) days after the
     end of the Valuation Period each Initial Appraiser shall deliver a written
     notice to Landlord, Tenant, and the other Initial Appraiser setting forth
     (i) such Initial Appraiser's valuation of the Fair Market Value (each, an
     "Initial Valuation") and (ii) the name, address and qualifications of a
     third appraiser selected jointly by the Initial Appraisers (the "Third
     Appraiser"). The Initial Appraisers shall, in writing with a copy to
     Landlord and Tenant, direct the Third Appraiser (or substitute Third
     Appraiser) to determine a valuation of the Fair Market Value of the
     Premises (including the land and the improvements), considered as
     encumbered by this Lease and its extensions, and considered as not having
     been the subject of a casualty or condemnation, as applicable, and to
     deliver in writing to Landlord, Tenant and the Initial Appraisers such
     valuation (the "Third Valuation") within twenty (20) days of the date of
     the written direction retaining such Third Appraiser. The Fair Market Value
     shall be the arithmetic mean of (A) the Third Valuation and (B) the Initial
     Valuation closer to the Third Valuation. If the Third Valuation is exactly
     between the two Initial Valuations, then the Fair Market Value shall be the
     Third Valuation. If the Initial Appraisers are unable to agree upon the
     designation of a Third Appraiser within the requisite time period or if the
     Third Appraiser selected does not make a valuation of the Fair Market Value
     within twenty (20) days after being directed by the Initial Appraisers,
     then such Third Appraiser or a substitute Third Appraiser, as applicable,
     shall, at the request of Landlord or Tenant, be appointed by the President
     or Chairman of the American Arbitration Association in the area in which
     the Premises exist which is the subject of the fair market valuation
     determination determined hereunder. The costs and expenses of the Third
     Appraiser (and substitute Third Appraiser and the American Arbitration
     Association, if applicable) shall be divided evenly between, and paid for
     by, Landlord and Tenant.

(c)  All appraisers selected or appointed pursuant to this Exhibit shall be
     independent qualified appraisers and shall be, at a minimum, MAI real
     estate appraisers with at least 7 years experience in appraising real
     property used for comparable "wet science" biological laboratory

                                       L-1



     and research and development facilities or such similar uses to which the
     parties agree. Such appraisers shall have no right, power or authority to
     alter or modify the provisions of this Lease, and such appraisers shall
     determine the Fair Market Value of the Premises, as applicable, considered
     as encumbered by this Lease including assuming all Extension Terms have
     been exercised by Tenant and considered as not having been the subject of a
     casualty or condemnation, as applicable.

(d)  Notwithstanding the foregoing, if Landlord and Tenant are able to agree
     upon a Fair Market Value of the Premises, Landlord and Tenant shall execute
     an agreement setting forth such agreed-upon Fair Market Value of the
     Premises, as applicable, and waiving each party's right to have the Fair
     Market Value of the Premises, as applicable, determined in accordance with
     the procedures set forth in paragraphs (a) and (b) of this Exhibit.

(e)  If Tenant elects not to make an offer to purchase the Premises under
     Sections 10 or 12 after this valuation process has been conducted, Tenant
     shall reimburse Landlord its out of pocket third party costs (including
     attorney's fees and the costs of Landlord's Initial Appraiser). and pay all
     charges assessed by the Third Appraiser.

                                       L-2



                                    EXHIBIT M
                              Lease Amendment Form

                            AMENDMENT NO. __ TO LEASE

         This AMENDMENT NO. ____ TO LEASE (this "Amendment") is entered into as
of the below date between ARE-1208 EASTLAKE AVENUE, LLC, a Delaware limited
liability company("Landlord") and ZYMOGENETICS, INC., a Washington corporation
("Tenant").

         Landlord and Tenant are parties to that certain Lease dated October
___, 2002, as amended by Amendment No. to Lease ___ dated ____________ {Note -
this would be the amendment to incorporate the additional land} (as amended, the
"Lease"). Capitalized terms not defined herein shall have the meanings set forth
in the Lease. Pursuant to Section 24 of the Lease, Tenant constructed the
Expansion and the purpose of this Amendment is to reflect the changes to the
Lease as a result of completion of the Expansion.

         Now, therefore, Landlord and Tenant agree as follows:

         1. EXPANSION RENT COMMENCEMENT DATE. The Expansion Rent Commencement
Date is _____________________, 200_. Effective on the Expansion Rent
Commencement Date: (a) the Base Rent is increased to $____________ per month,
(b) expiration date of the Initial Term of the Lease is extended to
____________________, which date is 180 months from the Expansion Rent
Commencement Date, and (c) the Security Deposit required under Section 7.1 of
the Lease is increased to $__________________.

         2. NO OTHER AMENDMENTS. Except as modified by this Amendment and by
Amendment No. ____ dated ______________, the Lease remains in full force and
effect and has not been modified or amended.

         DATED: _______________________.

                            LANDLORD:

                            ARE-1208 Eastlake Avenue, LLC,
                            a Delaware limited liability company

                            By:     ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
                                    a Delaware limited partnership,
                                    managing member

                                    By:      ARE-QRS CORP.,
                                             a Maryland corporation,
                                             general partner


                                             By:    ___________________________
                                                    Peter J. Nelson, CFO

                                       M-1



                                    TENANT:

                                    ZYMOGENETICS, INC.,
                                    a Washington corporation

                                    By _______________________________________
                                    Name:_______________________________________
                                    Title:______________________________________

STATE OF WASHINGTON                 )
                                    ) ss.
COUNTY OF KING                      )



I certify that I know or have satisfactory evidence that ______________________
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the _____________________________ of
ZymoGenetics, Inc. to be the free and voluntary act of such party for the uses
and purposes mentioned in the instrument.

Dated: _________________.

                                        ______________________________________
                                        (Signature)

                                        ______________________________________
                                        Title
                                        My appointment expires _______________

STATE OF _____________              )
                                    ) ss.
COUNTY OF ___________               )

         I certify that I know or have satisfactory evidence that Peter J.
Nelson is the person who appeared before me, and said person acknowledged that
he/she signed this instrument, on oath stated that he/she was authorized to
execute the instrument and acknowledged it as the Chief Financial Officer of
ARE-QRS Corp., general partner of Alexandria Real Estate Equities, L.P., the
Managing Member of ARE-1208 Eastlake Avenue, LLC, to be the free and voluntary
act of such party for the uses and purposes mentioned in this instrument.

         DATED: ____________________


                                              __________________________________
                                              (Signature of Notary Public)

                                              __________________________________
                                              (Printed Name of Notary Public)
                                              My Appointment expires:___________

                                       M-2

EX-23.1

                                                                    Exhibit 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS
                       ----------------------------------

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-82012) of ZymoGenetics, Inc. of our report dated
January 31, 2003, relating to the financial statements, which appears in this
Form 10-K.


PricewaterhouseCoopers LLP
Seattle, Washington
March 26, 2003

EX-99.1

                                                                    Exhibit 99.1

                            CERTIFICATION PURSUANT TO
                              18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of ZymoGenetics, Inc. (the Company) on Form
10-K for the period ended December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the Report), I, Bruce L.A. Carter, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. (S)1350, as
adopted pursuant to (S)906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780 (d)); and

          (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.



/s/  Bruce L.A. Carter
- -----------------------
Bruce L.A. Carter
Chief Executive Officer
March 25, 2003

A signed original of this writen statement, required by Section 906, has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

EX-99.2

                                                                    Exhibit 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of ZymoGenetics, Inc. (the Company) on Form
10-K for the period ended December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the Report), I, James A. Johnson, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. (S)1350, as
adopted pursuant to (S)906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780 (d)); and

          (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

  /s/ James A. Johnson
- -------------------------------------------
James A. Johnson
Chief Financial Officer
March 25, 2003

A signed original of this written statement, required by Section 906, has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.