UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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

Commission File Number 0-33489

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.

Explanatory Note

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

2

PART II

Item 8. Financial Statements and Supplementary Data

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

3

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors

and Shareholders of

ZymoGenetics, Inc.

In our opinion, the accompanying balance sheets and the related statements of operations, of changes in mandatorily redeemable convertible preferred stock and shareholders’ equity (deficit) and of cash flows present fairly (after the revision described in Notes 1 and 12), in all material respects, the financial position of ZymoGenetics, Inc. at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

/s/ PricewaterhouseCoopers LLP

Seattle, Washington

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

4

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.

5

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.

6

ZYMOGENETICS, INC.

STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND SHAREHOLDERS’ EQUITY (DEFICIT)

	Mandatorily redeemable convertible preferred stock					Shareholders’ equity (deficit)
						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 realizability 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.

7

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.

8

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS

1. Organization and summary of significant accounting policies

Nature of operations

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

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

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

Cash and cash equivalents

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

Short-term investments

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

Fair value of financial instruments

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

Property and equipment

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

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

9

Impairment of long-lived assets

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

Patents and licensing agreements

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

Revenue recognition

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

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

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

Research and development costs

Research and development costs are expensed as incurred.

Income taxes

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

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

Stock-based compensation

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

10

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 *		(9,890,626	)		(4,503,190	)		(469,710	)
Net loss attributable to common shareholders, pro forma *		$	(34,836,945	)	$	(58,485,362	)	$	(33,750,305	)
Basic and diluted net loss per share, as reported		$	(0.75	)	$	(4.85	)	$	(3.38	)
Basic and diluted net loss per share, pro forma *		$	(0.82	)	$	(4.94	)	$	(3.43	)

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

Other comprehensive loss

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

Use of estimates

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

Loss per share

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

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

	2002			2001			2000
Net loss attributable to common shareholders	$	(32,133,943	)	$	(57,489,524	)	$	(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

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Recent accounting pronouncements

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

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

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

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

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

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

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

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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

	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

	Estimated Fair Value		Amortized Cost
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.

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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

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.

14

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

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

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

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

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

6. Novo Nordisk stock appreciation rights

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

7. Retirement plans

Defined contribution

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

Deferred compensation plan

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

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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	$	—		$	—

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

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

16

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

December 31:

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

9. Commitments

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

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

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

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

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

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

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

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

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10. Serono S.A. agreement

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

11. Mandatorily redeemable convertible preferred stock

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

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

12. Shareholders’ equity (deficit)

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

Common stock

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

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Stock options

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

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

	Options		Weighted- Average Exercise Price		Weighted- Average Fair Value at Grant Date *
Balance, January 1, 2000	—		$	—
Granted	4,331,520			2.78	$	.74
Exercised	—			—
Canceled	(20,520	)		2.78
Balance, December 31, 2000	4,311,000		$	2.78
Granted	3,629,066		$	3.94	$	9.08
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	$	5.50
Exercised	(208,272	)		2.86
Canceled	(72,833	)		3.73
Balance, December 31, 2002	8,267,397		$	4.10

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

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

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

		Options outstanding			Options exercisable
Exercise Price		Weighted-average exercise prices	Number of options	Weighted-average remaining contractual life (in years)	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

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

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

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

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

13. Quarterly Financial Results (unaudited)

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

	Q1			Q2			Q3			Q4
Year ended December 31, 2002:
Revenue	$	5,799		$	6,960		$	5,925		$	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	)

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PART IV

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

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

3. Exhibits

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

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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.	(E)
10.30	*	Exclusive Patent License Agreement, effective December 18, 2002, between ZymoGenetics, Inc. and Aventis Behring GmbH.	(E)
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)

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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.	(E	)
10.38	Office Lease Agreement, dated October 4, 2002, between ZymoGenetics, Inc. and ARE-1208 Eastlake Avenue, LLC.	(E	)
23.1	Consent of PricewaterhouseCoopers LLP, independent auditors.
99.1	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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

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

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

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

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

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SIGNATURES

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

ZYMOGENETICS, INC.
Date: July 17, 2003	By:	/s/    BRUCE L.A. CARTER
		Bruce L.A. Carter, Ph.D. President and Chief Executive Officer

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

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CERTIFICATIONS

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

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

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

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

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

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

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

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

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

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

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

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

Date: July 17, 2003	/s/    BRUCE L.A. CARTER
	Bruce L.A. Carter President and Chief Executive Officer

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I, James A. Johnson, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: July 17, 2003	/s/    JAMES A. JOHNSON
	James A. Johnson Senior Vice President and Chief Financial Officer

26