10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                             

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, Washington	98102
(Address of principal executive offices)	(Zip Code)

(206) 442-6600

(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock outstanding at October 28, 2005: 65,629,048 shares.

ZYMOGENETICS, INC.

Quarterly Report on Form 10-Q

For the quarterly period ended September 30, 2005

TABLE OF CONTENTS

		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
a)	Balance Sheets	3
b)	Statements of Operations	4
c)	Statements of Cash Flows	5
d)	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18
PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 6.	Exhibits	19
SIGNATURE		20

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ZYMOGENETICS, INC.

BALANCE SHEETS

(in thousands)

(unaudited)

	September 30, 2005			December 31, 2004
Assets
Current assets
Cash and cash equivalents	$	170,010		$	117,308
Short-term investments		208,049			207,690
Receivables
Related party		152			2,612
Trade		1,634			2,213
Interest and other receivables		1,610			1,453
Prepaid expenses		2,679			3,234
Total current assets		384,134			334,510
Property and equipment, net		71,099			71,960
Other assets		6,135			5,714
Total assets	$	461,368		$	412,184
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	2,839		$	3,867
Accrued liabilities		9,855			11,104
Deferred revenue		12,501			22,178
Total current liabilities		25,195			37,149
Lease obligations		66,504			66,085
Deferred revenue		18,486			26,485
Other noncurrent liabilities		3,966			3,915
Commitments and contingencies
Shareholders’ equity
Common stock, no par value, 150,000 shares authorized, 65,595 and 57,574 issued and outstanding at September 30, 2005 and December 31, 2004, respectively		701,581			572,564
Non-voting common stock, no par value, 30,000 shares authorized		—			—
Deferred stock compensation		(221	)		(2,966	)
Accumulated deficit		(352,731	)		(289,789	)
Accumulated other comprehensive loss		(1,412	)		(1,259	)
Total shareholders’ equity		347,217			278,550
Total liabilities and shareholders’ equity	$	461,368		$	412,184

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

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ZYMOGENETICS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenues
Royalties
Related party	$	732		$	2,567		$	3,129		$	5,753
Other		932			841			2,753			2,428
Option fee
Related party		1,875			1,875			5,625			5,625
Other		784			—			2,353			—
License fees and milestone payments
Related party		2,268			6,450			7,805			8,851
Other		907			203			5,802			3,320
Total revenues		7,498			11,936			27,467			25,977
Operating expenses
Research and development (includes noncash stock-based compensation expense of $477, $1,162, $2,224 and $3,807, respectively)		22,979			28,125			73,398			72,678
General and administrative (includes noncash stock-based compensation expense of $50, $328, $502 and $4,015, respectively)		5,646			5,086			17,490			17,168
Total operating expenses		28,625			33,211			90,888			89,846
Loss from operations		(21,127	)		(21,275	)		(63,421	)		(63,869	)
Other income (expense)
Investment income		2,671			1,150			6,120			3,501
Interest expense		(1,895	)		(1,882	)		(5,668	)		(4,979	)
Other, net		—			5			27			(18	)
Net other income (expense)		776			(727	)		479			(1,496	)
Net loss	$	(20,351	)	$	(22,002	)	$	(62,942	)	$	(65,365	)
Basic and diluted net loss per share	$	(0.33	)	$	(0.41	)	$	(1.06	)	$	(1.23	)
Weighted-average number of shares used in computing net loss per share		62,371			53,762			59,317			53,225

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

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ZYMOGENETICS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2005			2004
Operating activities
Net loss	$	(62,942	)	$	(65,365	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		4,720			4,003
Net (gain) loss on disposition of property and equipment		(29	)		6
Noncash milestone revenue		(500	)		—
Noncash stock-based compensation		2,726			7,822
Net realized loss on short-term investments		446			28
Amortization of premium on short-term investments		960			2,100
Changes in operating assets and liabilities
Receivables		2,882			(326	)
Prepaid expenses and other assets		634			(1,160	)
Accounts payable		(565	)		994
Accrued liabilities		(1,249	)		4,444
Deferred revenue		(17,676	)		(5,785	)
Deferred lease obligations		419			454
Other noncurrent liabilities		51			239
Net cash used in operating activities		(70,123	)		(52,546	)
Investing activities
Purchases of property and equipment		(4,297	)		(13,428	)
Purchases of short-term investments		(206,582	)		(206,074	)
Proceeds from sale of property and equipment		4			23
Proceeds from sale and maturity of short-term investments		204,665			187,141
Net cash used in investing activities		(6,210	)		(32,338	)
Financing activities
Net proceeds from issuance of common stock		126,614			10,215
Construction advance from landlord		—			6,943
Proceeds from exercise of stock options		2,421			3,114
Net cash provided by financing activities		129,035			20,272
Net increase (decrease) in cash and cash equivalents		52,702			(64,612	)
Cash and cash equivalents at beginning of period		117,308			97,576
Cash and cash equivalents at end of period	$	170,010		$	32,964
Supplemental disclosures
Cash paid for interest	$	5,668		$	4,979
Noncash financing activities:
Other noncash reductions to property and equipment, net	$	463		$	1,847
Noncash settlement of notes receivable	$	—		$	725
Noncash settlement of interest receivable	$	—		$	22

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

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ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

1. Basis of presentation

The accompanying unaudited financial statements of ZymoGenetics, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position and results of operations as of and for the periods indicated. Operating results for such periods are not necessarily indicative of the results that may be expected for the full year or for any future period.

The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2004.

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 and disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Net loss per share

Basic and diluted net loss per share has been computed based on net loss and the weighted-average number of common shares outstanding during the applicable period. The Company has excluded all outstanding options to purchase common stock as such shares are antidilutive for all periods presented.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss	$	(20,351	)	$	(22,002	)	$	(62,942	)	$	(65,365	)
Weighted-average shares used in computing basic and diluted net loss per share		62,371			53,762			59,317			53,225
Basic and diluted net loss per share	$	(0.33	)	$	(0.41	)	$	(1.06	)	$	(1.23	)
Antidilutive securities not included in net loss per share calculation:
Options to purchase common stock		11,831			10,308			11,831			10,308

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3. Short-term investments

Short-term investments consisted of the following at September 30, 2005 (in thousands):

	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
Type of security:
Commercial paper and money market	$	5,485	$		$	(34	)	$	5,451
Corporate debt securities		56,539		5		(317	)		56,227
Asset-backed securities		108,456		12		(787	)		107,681
U.S. government and agency securities		37,981				(289	)		37,692
Foreign government securities		1,000				(2	)		998
	$	209,461	$	17	$	(1,429	)	$	208,049
Maturity date:
Less than one year	$	107,592						$	107,117
Due in 1-3 years		101,869							100,932
	$	209,461						$	208,049

The Company’s management has concluded that unrealized losses are temporary, as the duration of the decline in the value of the investments has been short; the extent of the decline, both in dollars and percentage of cost is not severe; and the Company has the ability and intent to hold the investments until at least substantially all of the cost of the investments is recovered.

4. Stock compensation

As permitted by the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123) as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (SFAS 148), the Company has elected to follow Accounting Principles Board Opinion 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. Under APB 25, compensation expense is based on the excess, if any, of the estimated fair value of its stock at the date of grant over the exercise price of the option. Deferred compensation is amortized over the vesting period of the individual options, using the straight-line method.

The following table illustrates the effect on net loss and loss per share as if the fair value based method prescribed by SFAS 123 had been applied to all outstanding and unvested awards for the three and nine-month periods ended September 30 (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss as reported	$	(20,351	)	$	(22,002	)	$	(62,942	)	$	(65,365	)
Add:          employee stock-based compensation under APB 25 included in reported net loss		527			1,490			2,726			4,596
Add:          employee stock-based compensation related to the repayment of loans to purchase common stock included in reported net loss		—			—			—			3,226
Deduct:    employee stock-based compensation expense determined under the fair value method		(4,578	)		(3,932	)		(14,117	)		(11,629	)
Net loss, pro forma	$	(24,402	)	$	(24,444	)	$	(74,333	)	$	(69,172	)
Basic and diluted net loss per share, as reported	$	(0.33	)	$	(0.41	)	$	(1.06	)	$	(1.23	)
Basic and diluted net loss per share, pro forma	$	(0.39	)	$	(0.45	)	$	(1.25	)	$	(1.30	)

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5. Comprehensive loss

For the three and nine months ended September 30, 2005, total comprehensive loss was $20.8 million and $63.1 million, respectively. For the three and nine months ended September 30, 2004, total comprehensive loss was $21.7 million and $66.8 million, respectively. Comprehensive loss is composed of net loss and unrealized gains and losses on short-term investments. The net change in accumulated other comprehensive loss for the nine months ended September 30, 2005 was $153,000, reflecting a increase in net unrealized losses on short-term investments due to increasing interest rates.

6. Financing transaction

In August 2005, the Company issued 7.5 million shares of common stock, raising net proceeds of $126.6 million.

7. Reclassification

Certain amounts in the financial statements have been reclassified to conform to the current period’s presentation. The reclassifications had no impact on net loss, shareholders’ equity or cash flows as previously reported.

8. Recent accounting pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires instead that such transactions be accounted for using a fair-value-based method. Disclosure of the effect of expensing the fair value of equity compensation is currently required under existing literature (see Note 4 to the financial statements). In March 2005, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 107, Share-Based Payment, which expresses views of the SEC Staff about the application of SFAS 123(R). In April 2005, the SEC adopted a new rule that amends the compliance date for SFAS 123(R) to the beginning of the next fiscal year that begins after June 15, 2005. Accordingly, the Company will be required to begin expensing amounts related to employee stock options effective January 1, 2006. The adoption of SFAS 123(R) will have a material impact on the Company’s results of operations. The process of evaluating the option valuation methods and adoption transition alternatives available under SFAS 123(R) has begun, but is not completed. Accordingly, the Company is not able to provide an estimate of the amount by which its net loss will increase after SFAS 123(R) is adopted.

In June 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections-a replacement of APB No.20 and FAS No.3. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will apply the provisions of this statement effective January 1, 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This report 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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price” as well as those discussed elsewhere in this report. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward looking. When used in this document, the words “believes,” “expects,” “anticipates,” “intends,” “plans” and similar expressions, are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

Business Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing therapeutic protein based products for the treatment of human diseases. The process for taking one of our discoveries to the marketplace is long, complex and very costly. It is difficult to predict the time it will take to commercialize any given product candidate, but it would not be unusual to span ten years or more and cost hundreds of millions of dollars. It is also a business of attrition; it is expected that, for the industry as a whole, less than 20% of the drug candidates entering human clinical trials will actually make it to the marketplace. For the products that do make it, particularly for those that address previously unmet medical needs, the markets can be significant, with a number of successful products selling in excess of $1 billion per year.

An important element of our strategy is that we intend to maintain all or a significant share of the commercial rights to a number of our products in North American markets. As a result, we will be required to pay a significant portion of the development costs for these product candidates. A second important element of our strategy is that we are developing a broad portfolio of product candidates to give our company more opportunities to be successful. We currently have three product candidates in clinical development and expect to add additional proteins to this portfolio in the future. Thus, we are paying a significant portion of development costs for several potential products. Assuming these product candidates progress through clinical development successfully, the cost of clinical trials are expected to increase significantly.

Our most significant financial challenges are to obtain adequate funding to cover the cost of product development, and to control spending and direct it toward product candidates that will create the most value for the company’s shareholders over the long term. It can be a complex and highly subjective process to establish the appropriate balance between cash conservation and value generation. There are a number of important factors that we consider in addressing these challenges, including the following:

• the nature, timing and magnitude of financing transactions, which would typically involve issuance of equity or equity-based securities;

9

• the nature and timing of product development collaborations, which would typically provide for funding of a portion of the respective product development costs, as well as bring in near-term potential revenues in the form of upfront fees and milestone payments;

• the breadth of product development programs, i.e. the number of potential disease indications for which a product candidate is tested in clinical trials;

• the number of products in our development portfolio and the decision to move new product candidates into clinical development; and

• periodic assessments of the relative capital requirements, risk and value of each of our product candidates.

We expect that it will be several years or more before we can generate enough product-related revenues to reach cash flow breakeven. In the interim, revenues from existing relationships will help to defray our expenses, but additional funding will be required, the amount of which could be significant. We may decide to enter into additional product development collaborations, which would reduce our funding requirements. We may also generate funding through licensing of patents that are not relevant to our product development programs.

It is likely that we will continue to look for opportunities to raise equity capital as a primary means of funding our company over the next several years. The equity markets for biotechnology stocks have tended to experience long cycles during which the sale of equity securities has been extremely difficult. It is not possible to predict the timing or length of these cycles. As a result, many biotechnology companies, including ours, have adopted an opportunistic strategy of raising equity capital when it is available. We believe this strategy is important to minimizing the financial risks to our company and our shareholders. Consistent with our strategy, in August 2005, we issued 7.5 million shares of common stock raising net proceeds of $126.6 million.

Results of Operations

Revenues

Our revenues consist of royalties, option fees, license fees and milestone payments. The recognition of these revenues, in particular license fees and milestone payments, can fluctuate significantly from quarter to quarter. For the year 2005, we continue to expect that our total revenues will slightly exceed those reported for the year 2004. However, certain milestones could be achieved by licensees in the fourth quarter of 2005 that would result in our total revenues increasing by up to 20% for the full year.

Royalties. We earn royalties on sales of certain products subject to license agreements with Novo Nordisk, our former parent and current owner of approximately 33% of our outstanding common stock, and several other companies. Royalties generated from underlying human insulin sales have decreased in 2005 to $667,000 and $2.7 million for the three and nine-month periods ended September 30, 2005, respectively, as compared to $2.1 million and $4.9 million for the corresponding periods in 2004, due to patent expirations in certain countries and unfavorable changes in foreign exchange rates. We expect this trend to continue, and expect total 2005 royalty revenue to be in the range of $7 million to $8 million. We have opportunities to earn royalties in the future under other existing license agreements, but we cannot be certain when, or if, products will be sold subject to those licenses.

Option fees. We recognized $2.7 million and $8.0 million of option fee revenues for the three and nine-month periods ended September 30, 2005, respectively, as compared to $1.9 million and $5.6 million for the corresponding periods in 2004. The increases represent the recognition of deferred revenue related to a strategic alliance with Serono entered into during the fourth quarter of 2004. The $1.9 million per quarter recorded in both years represents the annual option fee of $7.5 million from Novo Nordisk under an option and license agreement, pursuant to which we have granted an option to license certain rights to proteins that we discover. We will receive the final payment under the agreement in November 2005.

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License fees and milestone payments. Revenues from license fees and other up-front payments are recognized over the period we are contractually required to provide other rights or services that represent continuing obligations. From period to period, license fees and milestone payments can fluctuate substantially based on the completion of new licensing or collaborative agreements and the achievement of development related milestones. The decrease of $3.5 million for the quarter ended September 30, 2005, as compared to the corresponding period in 2004, is primarily due to the recognition of revenue for several milestone payments earned in the prior year period. The effect of this decline in milestone revenue was partially offset by the recognition of deferred revenue related to the licenses of rFXIII to Novo Nordisk and certain other proteins to Serono, all of which were entered into during the fourth quarter of 2004.

The increase for the nine-month period ended September 30, 2005, as compared to the nine-month period in 2004, is primarily due to a one-time, lump sum license fee received and earned from Eli Lilly and Company in the first quarter of 2005 for a license to certain Protein C patents, and the recognition of deferred revenue related to the Novo Nordisk and Serono licenses. This increase was partially offset by the decline in milestone payments described above.

Expenses

Research and development. Research and development expense has been our most significant expense to date, consisting primarily of salaries and benefit expenses, costs of consumables, facility costs and contracted services. Research and development expense, net of cost reimbursements, decreased by 18% for the quarter ended September 30, 2005 compared to the corresponding quarter in 2004, but has increased 1% for the nine-month period ended September 30, 2005 as compared to the corresponding period in 2004. The decrease for the three-month period largely resulted from a significant reduction in rhThrombin contract manufacturing costs. In the third quarter of 2004, there was an ongoing campaign to adapt the manufacturing process to commercial scale and supply product for Phase 3 clinical testing. The next rhThrombin manufacturing campaign, in support of the planned product license application and commercial launch, is not scheduled to begin until late 2005. The addition of approximately 50 employees between September 30, 2004 and September 30, 2005 who are focused on product development led to higher salaries and benefits costs for both the three and nine-month periods. In addition, we have experienced a significant increase in consumable costs in the nine-month period to supply our recently completed pilot-scale manufacturing facility. These trends are shown in the following table (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Salaries and benefits	$	11,040		$	9,593		$	32,917		$	28,619
Consumables		2,685			2,601			9,785			6,752
Facility costs		1,570			1,442			4,682			4,111
Contracted services		6,604			12,629			22,539			27,231
Depreciation and amortization		1,295			1,241			3,864			3,391
Noncash stock-based compensation		477			1,162			2,224			3,807
Subtotal		23,671			28,668			76,011			73,911
Cost reimbursement from collaborators		(692	)		(543	)		(2,613	)		(1,233	)
Net research and development expense	$	22,979		$	28,125		$	73,398		$	72,678

We anticipate that research and development expense will increase in the foreseeable future as we continue to advance, and potentially expand, our internal product development programs. For the full year 2005, we expect that our research and development expenses will increase by less than 10% compared to 2004.

General and administrative. General and administrative expense consists primarily of salaries and benefit expenses, professional fees and other corporate costs. Expense increased 11% and 2% for the three

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and nine months ended September 30, 2005, respectively, as compared to the corresponding periods in 2004. The increases were primarily due to increased head count and external costs partially offset by a decrease in noncash stock-based compensation. A significant part of the expense increases related to increased strategic marketing activities in support of our product development programs, especially rhThrombin. General increases in headcount costs and professional fees also contributed to the expense increases. We anticipate that our general and administrative requirements will continue to increase to support our development programs as they advance towards commercialization. For the full year 2005, we expect an increase in general and administrative expense; however, net of the decline in noncash stock-based compensation, 2005 expense is only expected to be slightly higher than in 2004.

Noncash stock-based compensation. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires instead that such transactions be accounted for using a fair-value-based method. Disclosure of the effect of expensing the fair value of equity compensation is currently required under existing literature (see Note 4 to the financial statements). SFAS 123(R) will become effective for fiscal years beginning after June 15, 2005. Accordingly, we will be required to begin expensing amounts related to employee stock options effective January 1, 2006. The adoption of SFAS 123(R) will have a material impact on our results of operations. We have begun, but not completed, the process of evaluating the option valuation methods and adoption transition alternatives available under SFAS 123(R). Accordingly, we are not able to provide an estimate of the amount by which our net loss will increase after SFAS 123(R) is adopted.

Other income (expense)

Investment income. Investment income is generated primarily from investment of our cash reserves in investment grade, fixed-income securities. There are three primary factors affecting the amount of investment income that we report: amount of cash reserves invested, the effective interest rate, and the amount of gains or losses recognized. Investment income increased significantly for the three and nine-month periods ended September 30, 2005 as compared to the corresponding periods in 2004, largely due to increases in the effective interest rate realized and higher average amounts of cash reserves invested. The following table shows how each of these factors affected investment income for the following (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Weighted average amount of cash reserves	$	343,462		$	257,493		$	311,570		$	272,592
Effective interest rate		0.80	%		0.46	%		2.11	%		1.29	%
Investment income before gains and losses		2,737			1,184			6,566			3,529
Net losses on sales of investments		(66	)		(34	)		(446	)		(28	)
Investment income, as reported	$	2,671		$	1,150		$	6,120		$	3,501

Interest expense. We have accounted for a sale-leaseback transaction completed in October 2002 as a financing transaction. Under this method of accounting, an amount equal to the net proceeds of the sale is considered a long-term interest bearing liability. Rent payments under the leases are considered to be payments toward the liability and are allocated to principal and interest. Interest expense was relatively constant for the three-month period in 2005 and 2004, but increased to $5.7 million for the nine-month period ended September 30, 2005 as compared to $5.0 million for the corresponding period in 2004. The increase resulted from additional lease obligations of approximately $15 million effective upon completion of our facility expansion project in mid-2004.

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Liquidity and Capital Resources

As of September 30, 2005, we had cash, cash equivalents and short-term investments of $378.1 million, which we intend to use to fund our operations and capital expenditures over the next several years. These cash reserves are held in a variety of investment-grade, fixed-income securities, including corporate bonds, commercial paper and money market instruments. We believe that our existing cash resources should provide sufficient funding for the next several years. If we complete additional collaborative development transactions, which would generate both revenues and cost reductions, these cash resources would fund our company over a longer period of time.

Cash flows from operating activities. The amount of cash used to fund our operating activities generally tracks our net losses, with the following exceptions:

• noncash expenses, such as depreciation and amortization, gain or loss on sale or disposal of assets, and noncash stock-based compensation, which do not result in uses of cash;

• noncash milestone revenues, which were paid to the company in the form of equity securities;

• net realized gains and losses and amortization of premium on short-term investments, which are reflected as sources of cash from investing activities upon maturity or sale of the respective investments;

• changes in receivables, which generally represent temporary timing differences between the recognition of certain revenues and the subsequent receipt of cash payments;

• changes in deferred revenue, which reflect the difference in timing between the receipt of cash from option fees, license fees and other upfront payments and the subsequent recognition of these amounts as revenue over the period we are contractually required to provide other rights or services that represent continuing obligations; and

• changes in other assets and liabilities, which generally represent temporary timing differences between the recognition of certain expenses and their payment.

Generally, with the exception of changes in deferred revenue, we do not expect these items to generate material year-to-year fluctuations in the relationship between our net loss and the amount of net cash used in operating activities. Substantial license or upfront fees may be received upon the date we enter into new licensing or collaborative agreements and be recorded as deferred revenue. For example, in 2004 upon the execution of a strategic alliance agreement with Serono and a license agreement with Novo Nordisk, we recorded $36.2 million of deferred revenue, which will be recognized as revenue over the next approximately five years. For the nine months ended September 30, 2005, we recognized $17.7 million of deferred revenue from these and other transactions, causing our cash used in operating activities to be higher than our corresponding net loss. The timing of additional deferred revenue transactions is expected to be irregular and, thus, has the potential to create fluctuations in the relationship between our net loss and the amount of cash used in operating activities.

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Cash flows from investing activities. Our most significant use of cash in investing activities is for capital expenditures. We expend a certain amount each year on routine items to maintain the effectiveness of our business, e.g., to adopt newly developed technologies, expand into new functional areas, adapt our facilities to changing needs and/or replace obsolete assets. In addition, we have used cash to purchase land and expand our facilities. The following table shows the amount of cash going toward each of these types of capital expenditures for the nine months ended September 30 (in thousands):

	2005		2004
Routine equipment/facility expenditures	$	3,852	$	4,043
Expansion of R&D facility, including pilot scale manufacturing plant		445		9,385
Total	$	4,297	$	13,428

The R&D facility expansion project was partially funded by an allowance from our landlord, which is reflected as cash flow from financing activities. The project began in April 2003 and construction was completed in mid-2004. We expect to spend approximately $6 million in 2005 on routine capital equipment and facility projects.

Cash flows from investing activities also reflect large amounts of cash used to purchase short-term investments and received from the sale and maturity of short-term investments. These amounts primarily relate to shifts between cash and cash equivalents and short-term investments. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider these cash flows to be important to an understanding of our liquidity and capital resources.

Cash flows from financing activities. In August 2005, we received net proceeds of $126.6 million from a follow-on offering of 7.5 million shares of common stock. In May 2004, we entered into a stock purchase agreement with Amgen, Inc. under which we received net proceeds of approximately $10 million. As part of the agreement for the expansion of our R&D facility, our landlord provided us an allowance of approximately $15 million to be applied toward the cost of this project. We received $6.9 million through the quarter ended June 2004, which represented the final installment of construction advance payments from our landlord.

We expect to incur substantial additional costs as we continue to advance and expand our product development programs. We expect these expenditures to increase over the next several years, particularly if the outcomes of clinical trials are successful and our product candidates continue to advance. 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. 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:

• results of research and development programs;

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

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

• costs associated with the expansion of our facilities.

Over the next several years we expect 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 equity-based 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

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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

At September 30, 2005 we are contractually obligated to make payments as follows (in thousands):

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Building lease obligations	$	124,903	$	7,289	$	15,353	$	16,445	$	85,816
Operating leases		10,592		1,483		3,260		3,456		2,393
Development contracts		13,257		12,244		1,013		—		—
Total	$	148,752	$	21,016	$	19,626	$	19,901	$	88,209

The building lease obligations, which resulted from the sale-leaseback financing transaction, reflect the reset of the lease terms to 15 years beginning May 2004. Operating lease terms range from one to ten years. We have certain renewal provisions at our option, which are not reflected in the above table, for the building leases and the operating leases. In September 2005, we entered into two additional operating leases for office space within the same building as our previous operating leases. The lease terms expire in January 2012. The development contracts include the production of registration lots of rhThrombin, which may also be used for commercial purposes.

Recent Development

Our Senior Vice President of Technical Operations, Mark D. Young, recently announced his intention to retire effective April 1, 2006. We have begun the process to recruit and hire his replacement. In September 2005, Nicole Onetto joined the Company as our Senior Vice President and Chief Medical Officer.

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

A summary of important factors that may affect our business, our results of operations and our stock price follows. You should refer to our Annual Report or Form 10-K for the year ended December 31, 2004 for a more thorough discussion of these factors. The risks and uncertainties identified below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the risks identified in the factors below actually occur, our business, financial condition and operating results could be materially adversely affected.

Product Development Risks

• We have limited experience in developing products.

• Any failure or delay in commencing or completing clinical trials for 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.

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

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• Because we currently have only limited capabilities to manufacture materials for clinical trials and no capability for commercial scale manufacturing, 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 may not be successful in developing internal manufacturing capabilities or complying with applicable manufacturing regulations.

• 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.

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

Technological Risks

• Our bioinformatics-based discovery strategy is unproven, and genes or proteins we have discovered may have no commercial value.

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

Intellectual Property Risks

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

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

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

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

• 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.

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

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

General Business Risks

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

• 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.

• Novo Nordisk and Serono have substantial rights to license proteins we discover, which may limit our ability to pursue other collaboration or licensing arrangements or maximize the benefit from our discoveries.

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

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Financial and Market Risks

• We anticipate incurring additional losses and may not achieve profitability.

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

Industry Risks

• 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.

• Our product candidates, even if approved by the FDA or foreign regulatory agencies, may not achieve market acceptance among hospitals, insurers or patients.

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

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

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

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

Other Risks

• Our stock price may be volatile.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is primarily 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 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, all of which mature within three years, we believe that we are not subject to any material market risk exposure. We have no material foreign currency exposure, nor do we hold derivative financial instruments.

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Item 4. 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-15(e) and 15d-15(e)) as of the end of the period covered by this report, have concluded that as of such date our disclosure controls and procedures were effective. No change in our internal control over financial reporting occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(b) Use of Proceeds from Sale of Registered Securities

Our Registration Statement under the Securities Act of 1933 (File No. 333-69190) relating to our initial public offering, was declared effective by the SEC on January 31, 2002. From the effective date of the offering through September 30, 2005, we have invested the net proceeds from the offering in a variety of investment grade, fixed income securities, including corporate bonds, commercial paper and money market instruments.

Item 6. Exhibits

Exhibit Number
10.1	Employment Agreement, dated August 9, 2005 between ZymoGenetics, Inc. and Nicole Onetto.
10.2*	Collaborative Data Sharing and License Agreement dated August 11, 2005, between ZymoGenetics, Inc. and Novo Nordisk A/S.
10.3	Addendum to Office Lease Agreement, dated September 29, 2005, between ZymoGenetics, Inc. and 1144 Eastlake LLC.
10.4	Office Sub-Lease Agreement, dated September 29, 2005, between ZymoGenetics, Inc. and ConocoPhillips Company.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZYMOGENETICS, INC.
Date: November 2, 2005	By:	/s/ James A. Johnson
		James A. Johnson
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and Authorized Officer)

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EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

This AGREEMENT, dated August 9, 2005, is between ZymoGenetics, Inc., a Washington corporation (“Company”) and Nicole Onetto (“Executive”).

1. Employment. Company will employ Executive and Executive will accept employment as Sr. Vice President, Chief Medical 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 Executive Vice President – Research & Development of the Company. Executive shall perform the duties of her position faithfully, diligently and competently to the best of her ability, and, except as provided in this Section 2, shall devote her full business time to her employment. Executive shall perform such other duties as are assigned to her by the Executive Vice President – Research & Development, the President, or the Board of Directors of the Company. Executive may devote reasonable periods of time to (a) engaging in personal investment activities, (b) serving on the Board of Directors or Scientific Advisory Board of other corporations with the consent of the Compensation Committee of the Board, if such service would not otherwise be prohibited by Section 7 hereof (it is understood and agreed the Executive may continue to serve as a member of the Board of Directors of ImmunoGen and the Scientific Advisory Board of Proacta), and (c) engaging in charitable or community service activities, so long as none of the foregoing additional activities materially interfere with Executive’s duties under this Agreement.

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, given “Notice of Termination” (as defined below). 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) At any time, with or without “Cause” (as defined below) upon giving Notice of Termination.

(b) By Executive

Executive may terminate her 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 2 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 her duties during such period. Such a reduction in duties shall not constitute “Good Reason” (as defined below) 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 hereunder shall be the date on which such 30-day period expires.

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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.

(b) In the event this Agreement is not extended as provided in clause 3(a)(1) or if Company terminates Executive’s employment without Cause, Executive shall be entitled to receive termination payments equal to twelve (12) months annual base salary. 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 below) 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 her 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, her 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.

(c) If Executive is terminated by either Company or any Successor Company for Cause, Executive shall not be entitled to receive any of the benefits set forth in this Section 4.1, other than those set forth in clause (a) above.

(d) “Successor Company” means the surviving company, the successor company or its parent, as applicable, in connection with a Company Transaction. “Company Transaction” means consummation of either (i) a merger or consolidation of the Company with or into any other company, entity or person or (ii) a sale, lease, exchange or other transfer in one transaction or a series of related transactions undertaken with a common purpose of all or substantially all the Company’s then

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outstanding securities or all or substantially all the Company’s assets; provided, however, that a Company Transaction shall not include a Related Party Transaction. “Related Party Transaction” means (i) a merger or consolidation of the Company in which the holders of the outstanding voting securities of the Company immediately prior to the merger or consolidation hold at least a majority of the outstanding voting securities of the Successor Company immediately after the merger or consolidation; (ii) a sale, lease, exchange or other transfer of the Company’s assets to a majority-owned subsidiary company; (iii) a transaction undertaken for the principal purpose of restructuring the capital of the Company, including but not limited to, reincorporating the Company in a different jurisdiction or creating a holding company; or (iv) a corporate dissolution or liquidation.

4.2 Termination by Executive

In the case of the termination of Executive’s employment by Executive for Good Reason, 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 her 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).

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

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d) the failure of Company to obtain a satisfactory agreement from any Successor Company to assume and perform the obligations under this Agreement within thirty (30) calendar days after the consummation of a merger, consolidation, sale or similar transaction;

e) following a “Change in Control” (as defined in subsection 4.6 hereof), the Executive ceases to hold the position of Senior Vice President, Chief Medical Officer of the Successor Company; or

f) even if there is no Change in Control, the Company enters into a merger, partnership or similar transaction, which results in a person other than the Executive becoming Senior Vice President, Chief Medical Officer of the new combined entity.

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.

4.6 Change in Control

As used herein, a “Change in Control” shall mean:

a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as

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amended (the “Exchange Act”)) (a “Person”), other than any one or more Series B Investor (as defined in the ZymoGenetics Series B Preferred Stock Purchase Agreement October 20, 2000), either directly or indirectly through one or more affiliated entities (collectively “Series B Purchasers”), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection 4.6(a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or (B) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B), and (C) of subsection 4.6(b); or

b) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding (1) any one or more Series B Purchasers, (2) any corporation resulting from such Business Combination, or (3) any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 50% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of

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directors of the corporation resulting from such Business Combination were members of the incumbent board of the Company at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

c) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

5. Compensation and Fringe Benefits.

(a) The Company shall, during the Term of Employment, pay to the Executive as compensation for the performance of her duties and obligations a salary of $340,000 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. Such benefits include, but are not limited to, those benefits enumerated in that certain Offer Letter to Executive, dated July 21, 2005, and incorporated herein by reference.

(c) The Company shall pay to the Executive as compensation a one-time net signing bonus of $100,000, payable on the first regular pay period following the Executive’s employment.

(d) Stock Options

(i) Executive has been granted a ten-year stock option under the Company’s 2001 Stock Incentive Plan which allows Executive to purchase 200,000 shares of the Company’s common stock.

(ii) Executive shall be eligible to receive future grants of stock options pursuant to the Company’s stock-based bonus program; and

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

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(iv) If Executive’s employment is terminated on or after a Change in Control (as defined in subsection 4.6 above), Executive’s stock options, restricted stock and performance shares shall fully vest on the date of termination.

(e) 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-ennially 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.

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 her 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 her 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 $500,000); or

(ii) For any research institution whose research efforts pertain to the same products manufactured or marketed by the Company during Executive’s

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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 $500,000), 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 she is a general or limited partner, consultant or employee, or a corporation or association of which she 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.

Said twelve (12) months’ period shall commence on the day on which the Executive actually leaves her 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 by Executive. Company may assign its rights hereunder to a Successor Company. All the terms and provisions of this Agreement

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shall be binding upon and shall inure to the benefit and be enforceable by the parties hereto and their respective successors and permitted assignees.

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 of any rights or remedies.

11. Arbitration. Any controversies or claims arising out of or relating to this Agreement shall be finally and fully settled by arbitration of 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 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

President, Chief Executive Officer and Chairman

ZymoGenetics, Inc.

1201 Eastlake Avenue East

Seattle, WA 98102

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To the Executive:

Nicole Onetto, M.D.

Sr. Vice President, Chief Medical Officer

ZymoGenetics, Inc.

1201 Eastlake Avenue East

Seattle, WA 98102

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

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 August 9, 2005, 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, its 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 provision 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.

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ZYMOGENETICS, INC.
By:	/s/ Bruce L.A. Carter
	Dr. Bruce L.A. Carter, President, Chief Executive Officer and Chairman
EXECUTIVE:
/s/ Nicole Onetto
Nicole Onetto, M.D.

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EX-10.2

Exhibit 10.2

COLLABORATIVE DATA SHARING AND CROSS-LICENSE AGREEMENT

FOR IL-21 PROTEIN

by and between

ZymoGenetics, Inc.

and

Novo Nordisk A/S

Effective Date: August 11, 2005

“[    *    ]” = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment.

CONFIDENTIAL INFORMATION REDACTED VERSION

Collaborative Data Sharing and Cross-License Agreement for IL-21 Protein

This Collaborative Data Sharing Agreement for IL-21 Protein (“Agreement”) is effective as of August 11, 2005 (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 (“ZGEN”), and Novo Nordisk A/S, a Danish corporation having a principal place of business at Novo Alle, DK-2880, Bagsvaerd, Denmark (“NN”).

WHEREAS, ZGEN and NN are parties to a certain Restated License Agreement for IL-21 effective as of January 1, 2003;

WHEREAS, ZGEN and NN are parties to a certain Collaborative Agreement for IL-21 effective as of December 14, 2002;

WHEREAS, ZGEN filed an IND with the FDA for a product containing the IL-21 Protein on March 2, 2004;

WHEREAS, ZGEN and NN are parties to a certain Agreement to Exchange Clinical Data for IL-21 Protein effective as of March 3, 2004;

WHEREAS, ZGEN and NN are parties to a certain Agreement to Exchange Process Development Data for IL-21 Protein effective as of March 3, 2004;

WHEREAS, NN filed a CTN with the TGA for a product containing the IL-21 Protein on August 13, 2004; and

WHEREAS, ZGEN and NN intend to perform separate (and possibly joint) research, non-clinical, clinical and development activities for products incorporating the IL-21 Protein, and are interested in having certain access and certain rights to each other’s data, results, intellectual property and other information generated from said research, non-clinical, clinical and development activities pursuant to the terms of this Agreement;

NOW THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

ARTICLE 1

Definitions

SECTION 1.1. “Adverse Event” or “AE” means: an Adverse Event as defined under applicable Agency regulations.

SECTION 1.2. “Affiliate” means, with respect to a party, any other business entity which directly or indirectly controls, is controlled by or is under common control with the party. The direct or indirect ownership of at least fifty percent (50%) or, if smaller, the maximum allowed by applicable law, of the voting securities of a business entity or of an interest in the assets,

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profits or earnings of a business entity shall be deemed to constitute control of the business entity. For the avoidance of doubt, ZGEN and NN are not Affiliates of each other.

SECTION 1.3. “Agency” means: the FDA, EMEA or foreign equivalent of either.

SECTION 1.4. “Approval” means: any approval, registration, license or authorization from any Regulatory Authority required for the clinical trials or the marketing of a Product, including, without limitation, an approval, registration, license or authorization granted in connection with any Regulatory Submission.

SECTION 1.5. “Assigning Party” as used herein shall have the meaning set forth in SECTION 11.1.

SECTION 1.6. “Background Intellectual Property” means: intellectual property, including patents, patent applications and know-how, Controlled by either party or its Affiliates that (a) a party makes available to the other party during the Term and that the parties mutually agree in writing shall be considered to be “Background Intellectual Property”; or (b) is actually used (including foreign counterparts of any patents or patent applications) by or on behalf of either party in the performance of Shared Activities under this Agreement in connection with Common Products as licensed in Article 6; provided, however, that the term “Background Intellectual Property” shall not include Prior Intellectual Property, IL-21 Global Patents and IL21 Global Know-How.

SECTION 1.7. “BLA” means: a biologics license application or product license application filed with an Agency pursuant to the Agency’s regulations, including all amendments and supplements to the application, and any equivalent foreign filing with a Regulatory Authority.

SECTION 1.8. “CEO” means: chief executive officer.

SECTION 1.9. “CIOMS” means: the Council for International Organizations of Medical Sciences pursuant to the World Health Organization or the United States equivalent thereof.

SECTION 1.10. “Claim(s)” as used herein shall have the meaning set forth in SECTION 8.1.

SECTION 1.11. “Clinical Data Sharing Agreement” means: the Agreement to Exchange Clinical Data for IL-21 Protein effective as of March 3, 2004, between ZGEN and NN, which is being superseded and terminated by this Agreement, parts and definitions from which, as of the Effective Date, are being incorporated in this Agreement.

SECTION 1.12. “Collaborative Agreement” means: the Collaborative Agreement for IL-21 effective as of December 14, 2002, between ZGEN and NN.

SECTION 1.13. “Common Product” means: a Product having as an active agent the IL-21 Protein identified as [    *    ]. The parties may modify, supplement or change the definition of Common Product and may add a Unique Product to the definition of Common Product by amendment to this Agreement.

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SECTION 1.14. “Confidential Information” means: information disclosed pursuant to this Agreement including, but not limited to, 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 or its Affiliates, such as DNA sequences, amino acid sequences, vectors, cells, substances, formulations, techniques, methodology, equipment, plans, data, reports, know-how, assay results, preclinical studies and clinical trials and the results thereof, patent positioning and business plans, including negative developments.

SECTION 1.15. “Controls” and “Controlled” mean: the entity referenced has the ability to exploit and to license or sublicense the right to exploit the referenced technology or rights, without (assuming the timely payment of all applicable royalties) violating the terms of any agreement or other arrangement between the entity referenced and a third party; provided, however, that the entity referenced will not be deemed to “Control” the referenced technology or rights if the party to receive a license or sublicense thereto under this Agreement does not agree in writing, after disclosure of the third-party agreement or other arrangement, to be responsible for and pay any amounts coming due under such agreement or other arrangement that result from or are attributable to such party’s use of the technology or rights (unless the parties otherwise agree pursuant to SECTION 3.6 with respect to non-royalty-based payments); provided, further, the entity referenced has disclosed the existence and terms of such third-party agreement or other arrangement promptly upon request or when it has become apparent that such technology or rights will most likely be used by such party receiving the license or sublicense hereunder.

SECTION 1.16. “CRO” means: contract research organization.

SECTION 1.17. “CTN” means: a Clinical Trial Notification or its foreign equivalent.

SECTION 1.18. “EMEA” means: the European Medicines Evaluation Agency or any successor agency thereto.

SECTION 1.19. “Evaluation” as used herein shall have the meaning set forth in SECTION 3.1(d).

SECTION 1.20. “FDA” means: the United States Food and Drug Administration or any successor agency thereto.

SECTION 1.21. “Force majeure” as used herein shall have the meaning set forth in SECTION 11.5.

SECTION 1.22. “GMP” means: current Good Manufacturing Practices or its foreign equivalent.

SECTION 1.23. “Guiding Principles” as used herein shall have the meaning set forth in SECTION 2.1.

SECTION 1.24. “ICH” means: current International Conference on Harmonization or its foreign equivalent.

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SECTION 1.25. “IL-21 Gene” means: the polynucleotide sequence identified in [    *    ], and all species, fragments and modifications of such polynucleotide sequence that are disclosed in such application or any patents or patent applications included in an IL-21 Related Patent as defined in the Restated License Agreement or Appendix D or developed or discovered by a party or its Affiliates prior to or during the Term.

SECTION 1.26. “IL-21 Global Know-How” means: all inventions, discoveries, know-how, methodologies, technology, data and tangible materials (including nucleic acids, peptides, vectors, proteins, cells, cell lines, transgenic and knock-out animals, and the like) that are IL-21 Clinical Data Exchange Know-How as defined in the Clinical Data Sharing Agreement or that: (a) relate to an IL-21 Gene, IL-21 Protein or Common Product; (b) were invented, discovered, developed or otherwise generated by or for a party or its Affiliates during the Term; and (c) are Controlled by a party or its Affiliates during the Term; except the party’s Prior Intellectual Property or information and data from clinical studies after Product Approval unless such studies are required by a Regulatory Authority or constitute safety information required under SECTIONS 4.3 and 4.4. For the avoidance of doubt, information, data and materials related to Non-Clinical and clinical development activities, process development or manufacturing of Products that are not Common Products are not included in the term “IL-21 Global Know-How.”

SECTION 1.27. “IL-21 Global Patent Rights” means: (a) the patents and patent applications set forth in Appendix D appended hereto; (b) patents and patent applications Controlled by a party or its Affiliates that claim an invention with a date of conception prior to the Term (but not including Prior Patent Rights) or during the Term and that specifically recites as a claim element (i) an IL-21 Gene, IL-21 Protein or Product, (ii) a process, formulation and/or mixture comprising an IL-21 Gene, IL-21 Protein or Product, (iii) a method of making or manufacturing an IL-21 Protein or Product or (iv) a method of using an IL-21 Gene, IL-21 Protein or Product; (c) all divisional or continuation (in whole or in part) applications of the applications in described in (a) and (b); (d) all patents issuing from the applications described in (a), (b) and (c); and (e) all extensions, supplemental protection certificates (including any form of patent term extensions), reissues, reexaminations, substitutions or renewals of the patents described in (d). Notwithstanding the foregoing, if any portion of any application or patent described above does not specifically recite an IL-21 Gene, IL-21 Protein or Product as a claim element, then such portion of the application or patent is expressly excluded from the term “IL-21 Global Patent Rights” but only to the extent that such portion does not claim an IL-21 Gene, IL-21 Protein or Product. For the avoidance of doubt, IL-21 Global Patent Rights shall include Joint IL-21 Global Patent Rights.

SECTION 1.28. “IL-21 Global Plan” means: the combined IL-21 Plans to be undertaken by NN, ZGEN and their Affiliates. The parties are planning to undertake clinical studies of the Common Product to achieve Product Approval; however, unless post-approval clinical studies are required by a Regulatory Authority as a condition of Product Approval, clinical studies beyond those studies required for Product Approval shall not be included in the IL-21 Global Plan without further written agreement between the parties.

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SECTION 1.29. “IL-21 Plan” means: individual work plans by each party and its Affiliates including its portion of the joint work plan for the Shared Activities for which such party and its Affiliates are responsible, comprising all activities in researching and developing Products during the Term, including process development, manufacturing and pursuing Regulatory Approvals. The current work plans of the parties and their Affiliates are appended to this Agreement as Appendix A (IL-21 Plan for NN), Appendix B (IL-21 Plan for ZGEN) and Appendix C (IL-21 Plan for Shared Activities). It is contemplated that the parties may update Appendices A, B and C on a yearly basis to reflect updates and significant changes in work plans.

SECTION 1.30. “IL-21 Protein” means: the protein identified in [    *    ] and any protein encoded by an IL-21 Gene and all species, fragments and modifications of such polypeptide sequence that are disclosed in such application or any patents or patent applications included in an IL-21 Related Patent as defined in the Restated License Agreement or Appendix D or developed or discovered by a party or its Affiliates prior to or during the Term.

SECTION 1.31. “IMPD” means: an Investigational Medicinal Product Dossier application or its foreign equivalent.

SECTION 1.32. “IND” means: an Investigational New Drug application or its foreign equivalent.

SECTION 1.33. “Joint IL-21 Global Patent Rights” means: all IL-21 Global 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 5.1, the parties have equal, undivided ownership interests in Joint IL-21 Global Patent Rights.

SECTION 1.34. “JPT” means: a joint IL-21 project team formed by NN and ZGEN to operate in accordance with ARTICLE 3.

SECTION 1.35. “JSC” means: a joint IL-21 steering committee formed by ZGEN and NN to operate in accordance with ARTICLE 3.

SECTION 1.36. “Label” means: the parts of an Agency approved official description of a drug product which include drug name and composition, indication, intended patient population, administration and dosing, general instructions for use, and instructions for use in special patient populations (including, e.g., pediatrics, geriatrics, pregnancy, hepatic/renal impairment, etc.) for the purposes of SECTION 3.10.

SECTION 1.37. “Litigating Party” as used herein shall have the meaning set forth in SECTION 5.7.

SECTION 1.38. “MAA” means: a Marketing Authorization Application or its foreign equivalent.

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SECTION 1.39. “MeDRA” means: the Medical Dictionary for Regulatory Activities.

SECTION 1.40. “MedWatch” means: the Safety Information and Adverse Event Reporting Program known as MedWatch pursuant to the FDA or the foreign equivalent thereof.

SECTION 1.41. “Narrative Summary” as used herein shall have the meaning set forth in SECTION 4.4.

SECTION 1.42. “Non-Clinical” means: activities supporting a clinical trial or a Regulatory Submission, including, but not limited to, animal safety and efficacy studies, animal studies supporting an IND or IMPD, human disease tissue sample studies supporting an IND or IMPD, toxicology, pharmacokinetic and pharmacodynamic studies.

SECTION 1.43. “NA” means: Canada, Mexico and the United States of America and its territories and possessions.

SECTION 1.44. “Pivotal Study” means: a human clinical trial that demonstrates the statistical efficacy and safety of a Product and that is the final stage of clinical testing prior to and in support of the filing of a BLA or MAA, whether constituting a phase II or III trial in the United States or a similar trial in other jurisdictions.

SECTION 1.45. “Prior Intellectual Property” means: (i) IL-21-Related IP as defined in the Restated License Agreement; (ii) IL-21 Program Know-How and IL-21 Program Patent Rights (including Joint IL-21 Program Patent Rights) as defined in the Collaborative Agreement; and (iii) IL-21 Process Development Patent Rights and IL-21 Process Development Know How as defined in the Process Development Agreement.

SECTION 1.46. “Prior Patent Rights” means: (i) IL-21-Related Patents as defined in the Restated License Agreement; (ii) IL-21 Program Patent Rights (including Joint IL-21 Program Patent Rights) as defined in the Collaborative Agreement; and (iii) IL-21 Process Development Patent Rights as defined in the Process Development Agreement. For the avoidance of doubt, IL-21 Clinical Data Exchange Patent Rights (as defined in the Clinical Data Sharing Agreement) are not included in the term “Prior Patent Rights” and are included in the definition of “IL-21 Global Patent Rights.

SECTION 1.47. “Process Development Agreement” means: the Agreement to Exchange Process Development Data for IL-21 Protein effective as of March 3, 2004, between ZGEN and NN.

SECTION 1.48. “Product” means: a product that incorporates an IL-21 Protein as an active agent.

SECTION 1.49. “Product Approval” means: the Approval from any Regulatory Authority on a Product specifically granted in connection with the Regulatory Submission of a BLA or MAA.

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SECTION 1.50. “Regulatory Authority” means: any federal, national, multinational, state, provincial, or local regulatory agency, department, bureau, or other governmental entity with authority over clinical trials, safety, marketing, pricing and/or sale of any Product, including, but not limited to, the FDA in the United States, the EMEA in Europe and the TGA in Australia.

SECTION 1.51. “Regulatory Submission” means: the submission to the relevant Regulatory Authority of an appropriate application seeking Approval, registration, license or authorization of any Product, including, but not limited to, any relevant marketing authorization application, supplementary application or variation thereof, BLA, MAA, IND, IMPD or equivalent foreign application.

SECTION 1.52. “Respective Territory” means: RoW with respect to NN and NA with respect to ZGEN.

SECTION 1.53. “RoW” means: all countries of the world, except those within NA.

SECTION 1.54. “Restated License Agreement” means the Restated License Agreement for IL-21 effective as of January 1, 2003 between ZGEN and NN.

SECTION 1.55. “Revised Appendices” as used herein shall have the meaning set forth in SECTION 3.1(e).

SECTION 1.56. “Secondary Party” as used herein shall have the meaning set forth in SECTION 5.8.

SECTION 1.57. “Serious Adverse Event” or “SAE” means: a Serious Adverse Event as defined under applicable Agency regulations.

SECTION 1.58. “Shared Activities” means: those specifically identified activities shared between the parties and including the budget and apportionment of activities between the parties as approved in writing by the JSC. The IL-21 Plan including Shared Activities is appended to this Agreement as Appendix C.

SECTION 1.59. “Sponsor” means: a party who received the written approval of the other party to conduct Sponsored Clinical Trials in the other party’s Respective Territory.

SECTION 1.60. “Sponsored Clinical Trials” means: those specifically identified clinical trials for Common Products which have been approved pursuant to SECTION 4.12 to be conducted by the Sponsor.

SECTION 1.61. “Sublicensee” means: a third party to whom a party has extended rights that it received or reserved under this Agreement. For the avoidance of doubt, a Territorial Commercialization Partner is a Sublicensee.

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SECTION 1.62. “Term” means: the period from the Effective Date of this Agreement through the earlier of the following dates: (i) date on which this Agreement expires or (ii) the date on which this Agreement is terminated.

SECTION 1.63. “Territorial Commercialization Partner” means: a Sublicensee to whom a party has extended certain commercialization rights that it received or reserved under this Agreement including the right to develop, promote, market, offer to sell, import, export, distribute, sell or have sold Products as part of a co-marketing agreement, co-commercialization agreement, strategic partnership, joint venture relationship or the like with a party.

SECTION 1.64. “TGA” means: the Australian Therapeutic Goods Administration or any successor agency thereto.

SECTION 1.65. “Unique Product” means: A Product that is not a Common Product and that has been demonstrated with supportive experimental data to be biologically different from any Common Product (i) [    *    ], (ii) [    *    ], and (iii) for use in [    *    ] with any Common Product. The parties may add a Unique Product to the definition of Common Product by amendment to this Agreement. For the avoidance of doubt, a Unique Product, upon becoming a Common Product, shall cease to be a Unique Product.

Where words and phrases are used herein in the singular, such usage is intended to include the plural forms where appropriate to the context and vice versa. The words “including,” “includes” and “such as” are used in a non-limiting sense and have the same meaning as “including without limitation” and “including, but not limited to.” Herein” means anywhere in this Agreement. “Hereunder”, “Hereinafter” and “hereto” mean under or pursuant to any provision of this Agreement.

ARTICLE 2

Scope of the Collaboration

SECTION 2.1. Guiding Principles. The parties intend to conduct their relationship pursuant to this Agreement in accordance with the following principles (“Guiding Principles”):

(a) With respect to research by the parties or their Affiliates relating to IL-21 Protein or a Product:

(i) disclosure and sharing of all research plans and results;

(ii) collaborative and open discussion between the parties; and

(iii) royalty free license to the intellectual property resulting from such research pursuant to SECTION 5.2;

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(b) With respect to all Non-Clinical and clinical development by the parties or their Affiliates of the Common Product:

(i) disclosure and sharing of all development plans and results;

(ii) collaborative and open discussion between the parties;

(iii) royalty free license to the intellectual property resulting from such development pursuant to SECTION 5.2; and

(iv) disclosure and sharing of safety information for the lifetime of the Common Product.

(c) With respect to all Non-Clinical and clinical development by the parties or their Affiliates of Products that are not the Common Product:

(i) disclosure and sharing of all development plans;

(ii) disclosure and sharing of summaries of development results, excluding data related to Non-Clinical and clinical development activities, process development and manufacturing; and

(iii) royalty free license to certain intellectual property resulting from such development pursuant to SECTION 5.2.

(d) With respect to a prospective Territorial Commercialization Partner: [    *    ] the Territorial Commercialization Partner [    *    ], including [    *    ] IL-21 Gene, IL-21 Protein or Common Product [    *    ] Territorial Commercialization Partner and its Affiliates. As an example of [    *    ] Territorial Commercialization Partner will [    *    ] prospective Territorial Commercialization Partner to [    *    ], and, if necessary, the parties will discuss any amendments to this Agreement that may cause the prospective Territorial Commercialization Partner to participate.

ARTICLE 3

Governance, Reporting and Activities

SECTION 3.1. Governance of Collaboration. NN and ZGEN shall establish the following in collaboration under this Agreement:

(a) Joint IL-21 Steering Committee. The parties shall form the JSC consisting of three (3) members from each party. Each party may change its own JSC members from time to time. ZGEN and NN shall have co-leadership in the JSC. Where JSC approval is required, the JSC shall operate by consensus with each party having a single vote. The JSC will be responsible for monitoring the performance of the IL-21 Global Plan by the parties and soliciting and discussing input, feedback and comment thereon. The JSC will discuss changes or additions to the Common Product by a party, make recommendations to each party’s senior

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management regarding such party’s Common Product or IL-21 Plan, approve Evaluations pursuant to SECTION 3.1(d), and approve all Shared Activities and changes or additions to Shared Activities. The JSC will resolve any disputes with respect to Shared Activities, joint publications, and will enforce timely data exchange pursuant to this Agreement. The JSC will be the principle means by which the parties coordinate and discuss their IL-21 Plans at a senior management level. The JSC will implement and facilitate the Guiding Principles and the terms of this Agreement. Disputes that cannot be resolved at the level of the JSC shall be subject to the dispute resolution procedures pursuant to SECTION 11.7.

(b) Joint IL-21 Project Team. The parties shall form the JPT consisting of a project director from each party and members from the project groups of each party who represent patent, research and discovery, Non-Clinical, clinical, regulatory, marketing and product supply matters with respect to the Common Product. Additional members may also be added or subtracted with the approval of the JSC. Each party shall choose its own JPT members and project director, who may be changed from time to time by the appointing party. The JPT shall operate by consensus with each party having a single vote. Each project director will serve as a primary contact and will coordinate reporting and activities under the IL-21 Global Plan, may attend JSC meetings, and will monitor the tasks and timelines. All planned research and development activities under the IL-21 Global Plan will be reviewed and discussed by the JPT. Any material changes to the IL-21 Global Plan will be brought to the JSC by the project directors for consideration and discussion. The project directors shall periodically review the performance of JPT members, monitor and convey public disclosure strategies under SECTION 3.4 for the Common Product, ensure review of joint publications under SECTION 3.5, record updates and changes in the IL-21 Global Plan and establish operating principles and procedures for the JPT and sub-teams. Any sub-teams shall operate by consensus with each party having a single vote, and shall report to the JPT. The project directors may identify and propose tasks and activities in furtherance of the IL-21 Global Plan that may be shared between the parties as prospective Shared Activities. In addition, the project directors will recommend to the JSC proposed IL-21 Plans for prospective Shared Activities including a budget and proposed apportionment of such activities between the parties consistent with SECTION 3.1(c). The project directors will implement and facilitate the Guiding Principles and the terms of this Agreement. Any disputes that may arise at the JPT level may be brought to the JSC for review.

(c) Apportionment of Tasks and Activities between the Parties. Each party is solely responsible for its activities under its IL-21 Plan. The JSC will in writing approve Shared Activities, budget and apportionment thereof between the parties with a view to balancing resources over time, striving to reduce duplication of effort, optimizing resources and time, providing a mechanism for cost sharing on a

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[    *    ] basis (considering FTE and external costs), and distributing between the parties an equitable share of work when practical.

(d) Annual Evaluation of IL-21 Global Plan. On a yearly basis, as part of its review of the IL-21 Global Plan, the JSC will review and evaluate the activities of each party to be performed under its IL-21 Plan for the upcoming year, and after considering each party’s contributions for the prior year and earlier years, assess the adequacy of the overall contribution of each party toward furthering the aims of this Agreement (“Evaluation”). To the extent that a party has documentation, the types of information that may be used as part of the Evaluation include: (i) [     *    ]; (ii) [    *     ]; (iii) [    *    ] conducted, with special emphasis on [    *    ] which have lead to [    *    ] in both parties’ territories; (iv) [    *    ]; (v) [    *    ] for IL-21 Global Patent Rights; (vi) [    *    ] for IL-21 Global Patent Rights; (vii) contribution to [    *    ] of IL-21 Protein and Products; (viii) [    *    ]; (ix) [    *    ]; (x) [    *    ] on a party’s IL-21 Plan including [    *    ]; (xi) [    *    ]; (xii) [    *    ]; (xiii) IL-21 Proteins with [    *    ]; and (xiv) such other criteria as may be mutually agreed upon by the JSC. The JSC’s Evaluation and approval thereof (such approval not to be unreasonably withheld) will be recorded in its minutes or other document approved by the JSC. In addition, the JSC shall explicitly identify in the approved Evaluation those Pivotal Studies and activities intended to develop a Unique Products of each party that are considered balanced with the contributions of the other party.

(e) Material Changes and Updates in Plan. The JSC shall be apprised at least quarterly in writing by the project directors of any material changes and updates to the IL-21 Global Plan, including, but not limited to, either party adding to, changing, or halting specific activities under its IL-21 Plan. On a yearly basis, Appendices A, B and C will be modified (“Revised Appendices”) to reflect such changes and updates to the IL-21 Global Plan, which shall be signed and dated by or on behalf of the JSC. The Revised Appendices shall serve as the IL-21 Global Plan for the next year.

(f) Meetings. The JSC and JPT shall hold periodic meetings as follows:

(i) The JSC shall hold meetings at least two (2) times per year in person. The JSC meetings should shortly follow JPT meetings. Copies of all materials presented at such meetings shall be exchanged within fifteen (15) days after the meeting. The JSC shall keep accurate meeting minutes, with this responsibility alternating between the parties. Such minutes shall be exchanged between the parties promptly after the meeting.

(ii) The JPT shall hold meetings at least three (3) times per year in person or by videoconference, with at least two (2) such meetings in person. The JPT shall keep accurate meeting minutes, with this responsibility

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alternating between the parties. Such minutes shall be exchanged between the parties promptly after the meeting.

SECTION 3.2. Limited Cost Sharing. The parties do not contemplate a sharing of costs for the activities under each party’s respective IL-21 Plan and each party shall individually bear the costs for its respective activities. From time to time, in the interest of expediting time and cost efficiency, the JSC may approve cost sharing between the parties for Shared Activities in accordance with SECTION 3.1(c). An accounting and balancing between the parties of costs for Shared Activities will occur quarterly at the end of March, June, September and December.

SECTION 3.3. Reports and Data. The project directors will follow the progress of the parties’ activities under the IL-21 Global Plan and shall be responsible for submitting bi-annual presentations or written reports to the JSC, which shall include the results of the JPT meetings, updates on progress under the IL-21 Global Plan, any material changes to each party’s respective IL-21 Plan, inventions for which IL-21 Global Patent Rights may be sought, significant Non-Clinical and clinical plans, significant process development plans, manufacturing and supply plans for the Common Product, projected timelines for Products and other material information for the JSC to consider that is related to this Agreement. The parties and each of their Affiliates shall keep true, complete and accurate records with respect to Shared Activities and their clinical development progress under the IL-21 Global Plan. In addition, the parties shall cause each of its Territorial Commercialization Partners and Sublicensees to keep true, complete and accurate records with respect to Shared Activities and progress under the IL-21 Global Plan.

The parties shall establish procedures to ensure that the parties exchange on a timely basis all necessary information to be provided under this Agreement. In addition, the following reports and information shall be exchanged between the parties:

(a) General Reporting and Data Exchange for Research Activities.

(i) Research Updates. Each party shall provide the other periodic written updates on the planned, ongoing and completed research activities and results under its respective IL-21 Plan. Such updates may be provided in JPT and JSC meeting minutes, presentations and reports exchanged between the parties.

(ii) Delivery of Raw Data upon Request by a Party. Upon the reasonable written request of one party (“Requestor”) to the other party (“Provider”), the Provider shall provide to the Requestor within [    *    ] after the date of the request, raw data from the specific research experiments and activities performed by the Provider and its Affiliates under the IL-21 Plan during the Term. The information that will be included in such raw data and the format by which such data will be exchanged will be determined in good faith and agreed upon by the parties.

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(iii) Final Research Report. After the completion of all research activities under its respective IL-21 Plan, each party shall provide the other party a final written report, as soon as reasonably possible and in no event later than [    *    ] after completion of the research activities. Such final report shall include all additional reports not previously provided to the other party.

(b) Reporting and Data Exchange for Non-Clinical Development Activities.

(i) Quarterly Non-Clinical Reports. The parties shall exchange on a quarterly basis concurrent with the quarterly clinical reports in SECTION 3.3(c)(i), a written summary of their respective planned, ongoing and completed Non-Clinical studies for Common Products.

(ii) Final Non-Clinical Study Reports and Post-Study Delivery of Raw Data. After the completion of each Non-Clinical study for a Common Product each party shall provide the other party (with respect to completed Non-Clinical studies) a copy of the final study report including the supportive raw data, as soon as reasonably possible. In the event that a submission is made to Regulatory Authorities, the copy of the final report shall be submitted no later than [    *    ] of submission to each applicable Regulatory Authority.

(c) Reporting and Data Exchange for Clinical Development Activities.

(i) Quarterly Clinical Reports. The parties shall exchange on a quarterly basis, by the last day of March, June, September and December of each calendar year, a written summary of their respective planned, ongoing and completed clinical studies and data for Common Products. Each summary shall include the items in Appendix E.

(ii) Clinical Trial Reports and Post-Study Delivery of Raw Data. After the completion of each clinical trial for a Common Product, each party shall provide to the other party (with respect to completed clinical trials):

(A) a report, as soon as reasonably possible and in no event later than [    *    ] of submission to each applicable Regulatory Authority, that includes a copy of the report as submitted to the Regulatory Authority. Such report should be submitted no later than [    *    ] after the last patient’s last visit according to the protocol, or the study report is received from a party’s respective third-party clinical research organization, whichever is later; and

(B) raw data from each clinical trial of a Common Product as soon as reasonably possible following database lock but no later than [    *    ]

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after the clinical trial reports described in this SECTION 3.3(c)(ii). In the event a party thereafter updates its data on such a clinical trial, the updated data shall be transferred to the other party within [    *    ] from the update. The information that will be included with the raw data, and the format by which such data will be exchanged, will be determined in good faith and agreed upon by the parties.

(iii) Reports and Data for Sponsored Clinical Trials. For the avoidance of doubt, the reporting and data exchange obligations of SECTION 3.3(c) with respect to Common Products shall also apply to Sponsored Clinical Trials.

(d) Requests for Expedited Data Exchange. A party may reasonably request the other party to provide such raw data described in SECTIONS 3.3(b)(ii), 3.3(c)(ii)(B), 3.3(c)(iii) within an expedited timeframe for such raw data that directly supports key results. Such request shall be in writing, and shall include an explanation and compelling rationale for early transfer of such raw data. Upon such request, the expedited timeframe shall be agreed upon by the parties following acceptance of the request by the non-requesting party (such acceptance not to be unreasonably withheld). In general, such expedited timeframe would not exceed [    *    ].

(e) Reports for Products that are not Common Products. For Products other than Common Products, summaries of data and information from Non-Clinical and clinical development activities related to any such Product shall be provided to the other party after the completion of each clinical trial for such Product. Each party shall provide the other party a summary of the report submitted to its respective Regulatory Authorities for such Product, as soon as reasonably possible and in no event later than [    *    ] after such submission. Such report should be provided no later than [    *    ] after the last patient’s last visit according to the protocol, or the study report is received from a party’s respective third-party clinical research organization, whichever is later. For the avoidance of doubt, Non-Clinical and clinical development raw data and manufacturing raw data will not be exchanged between the parties with respect to Products that are not Common Products unless otherwise agreed by the parties.

SECTION 3.4. Public Disclosure Strategies. Every six (6) months the parties shall exchange their strategies for public disclosure related to the IL-21 Protein and development activities for the Common Product. The parties shall keep each other informed of material changes to such strategy and identify the expected publications, presentations and other such public disclosures within the next six (6) months. Notwithstanding the above, neither party nor its Affiliates shall make any public disclosure regarding the other party’s activities under this Agreement (to the extent the activities have not been publicly disclosed by the other party) without the prior written consent of such party. In addition, each party shall cause each of its Territorial Commercialization Partners and Sublicensees to not make any public disclosure regarding the

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other party’s activities under this Agreement (to the extent the activities have not been publicly disclosed by the other party) without the prior written consent of the other party.

SECTION 3.5. Joint Publications. The parties will each be free to publish the results of their respective activities under their respective IL-21 Plans. In the event that the parties wish to jointly publish results under the IL-21 Global Plan or to publish the results of Shared Activities, such publication will acknowledge the contribution, authorship and materials from each party, where applicable. Each party shall furnish the other party with copies of all proposed joint oral, written, graphic or electronic public disclosures. Each party may review such proposed joint disclosure for a period not to exceed [    *    ] prior to submission for publication or presentation to ensure that its Confidential Information is not inadvertently disclosed. In order to fully protect the rights of both parties, any contemplated joint publication or other joint public disclosure containing the details of an invention, whether or not patentable, may be withheld for an additional period of [    *    ] or until a patent application is filed thereon, whichever is first in time.

SECTION 3.6. Agreements with Third Party Commercial Use Fees. Each party shall be free to enter agreements during the Term that may subject a Product to third party commercial use fees, including royalties, within its Respective Territory and at its sole cost; provided, however, that each party shall in writing promptly notify the other party of its intent to enter such an agreement that may subject a Product to such fees in the other party’s Respective Territory. Where a worldwide agreement containing third party commercial use fees [    *    ] of a Product, the parties will [    *    ] obtaining such an agreement [    *    ], including a [    *    ] such third party commercial use fees [    *    ]. Likewise, in the event intellectual property acquired by license or otherwise from a third party becomes Background Intellectual Property licensed to the other party hereunder, the parties will discuss in good faith the allocation of any payments owed in the future to the third party that relate to such Background Intellectual Property and that are in addition to customary royalties payable to the third party that are the responsibility of the party selling a Product.

SECTION 3.7. Data Sharing under Third Party Agreements. Each party shall seek to provide that data related to the IL-21 Protein and Common Product that is generated through third party research agreements, CRO agreements and material transfer agreements entered into after the Effective Date can be shared with the other party pursuant to the terms of this Agreement; provided however, each party shall ensure that data related to Shared Activities that is generated through third party research agreements, CRO agreements and material transfer agreements entered into after the Effective Date can be shared with the other party pursuant to the terms of this Agreement.

SECTION 3.8. Diligence Obligations for Shared Activities. Subject to SECTION 9.6, the parties shall use commercially reasonable efforts to timely perform activities and tasks for Shared Activities under the IL-21 Plan. In the event one party identifies a risk of, or if a party experiences, an unreasonable deviation with regard to time lines and/or the budget of Shared Activities, the JSC shall in good faith discuss corrective actions. Failure to use commercially

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reasonable efforts to timely perform activities and tasks may result in breach of this Agreement pursuant to SECTION 9.5.

SECTION 3.9. Termination of IL-21 Plan. Each party shall have the right to terminate its IL-21 Plan (or parts thereof) and its activities (other than Shared Activities) related thereto at its sole discretion at any time. The party terminating its IL-21 Plan shall provide the other party with written notice of such expected termination [    *    ] prior to termination of any major clinical activities. Except for obligations pursuant to SECTION 9.6 for terminating Shared Activities, neither party shall be liable to the other party for terminating its IL-21 Plan, in whole or in part.

SECTION 3.10. Initial Product Approval or Label Expansion at Expense of Other Party. A party shall not gain initial Product Approval nor expand its Label on a Common Product based solely on the data and results of a Pivotal Study for the Common Product that was not approved as part of an Evaluation and was performed by and at the sole expense of the other party without written notice and reasonable compensation to the other party. The party wishing to gain initial Product Approval or expand its Label shall provide written notice to the other party no later than [    *    ] prior to the submission of such Label expansion to a Regulatory Authority in its Respective Territory. Reasonable compensation shall include reimbursement of [    *    ] the costs [    *    ] supporting the Label, or other such compensation as mutually agreed upon by the parties. Notwithstanding the above, where a Pivotal Study of one party was explicitly balanced in writing with the contributions of the other party in an approved Evaluation, gain of initial Product Approval or Label expansion based upon such Pivotal Study shall be deemed reasonably compensated, and neither party shall be liable to the other party for expanding its Label thereon.

SECTION 3.11. Unique Product at Expense of Other Party. The party whose Unique Product becomes a Common Product shall be entitled to reasonable compensation that shall include reimbursement of [    *    ] the costs of activities supporting the Unique Product up to the time it is approved as a Common Product by amendment to this Agreement, or other such compensation as mutually agreed upon by the parties; provided however, where data and results supporting a Unique Product of one party were explicitly balanced in writing with the contributions of the other party in an approved Evaluation, the party whose Unique Product becomes a Common Product shall be deemed reasonably compensated, and neither party shall be liable to the other party therefor.

ARTICLE 4

Clinical and Regulatory Affairs

SECTION 4.1. Ownership of Approvals and Regulatory Submissions. Each party shall own all Approvals and Regulatory Submissions filed by such party with respect to any Product.

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SECTION 4.2. Regulatory Matters.

(a) Respective Territory. Each party shall independently oversee, monitor and coordinate all regulatory actions, communications, filings and submissions, including supplements and amendments thereto, with each applicable Regulatory Authority with respect to its Products in its Respective Territory and, with respect to Sponsored Clinical Trials, in the other party’s Respective Territory.

(b) Information. The parties shall establish procedures to ensure that the parties exchange on a timely basis all necessary information to enable each party to comply with all regulatory obligations applicable to its Common Products, including, but not limited to, filing updates or supplements with Regulatory Authorities, pharmacovigilance filings, manufacturing supplements and investigator notifications to Regulatory Authorities. Each party shall provide the other prompt notification of any significant regulatory event, including a clinical trial hold or Approval of a Common Product.

SECTION 4.3. Safety Data Exchange. Each party shall monitor safety information for its respective clinical trials and shall notify the other party regarding its SAE reports for the Common Product in clinical activities. Each party shall timely deliver to the other party a copy of each SAE report on any SAEs that they may submit or are required to submit to any Regulatory Authority in its Respective Territory by fax, encrypted e-mail or uploaded to a secure joint web site. For SAEs reported to Regulatory Authorities from studies related to the Common Product reported to NN, NN shall provide ZGEN with a standardized CIOMS form by fax, encrypted e-mail or uploaded to a secure joint web site. For all SAEs from studies related to the Common Product reported to ZGEN, ZGEN shall provide NN with a standardized MedWatch form by fax, encrypted e-mail or uploaded to a secure joint web site. For fatal and life-threatening SAEs, each party shall provide notice to the other party within three (3) calendar days of first receipt of the SAE by the party and provide a copy of the report to be submitted to its respective Regulatory Authority as soon as reasonably possible, and in no event later than ten (10) calendar days after notice to the other party. For all other SAEs, each party shall provide prompt notice to the other party and shall provide the other party a copy of the report in the form of the report to be submitted to its respective Regulatory Authority as soon as reasonably possible and in no event later than ten (10) calendar days after notice to the other party. Moreover, each party shall provide the other party reasonable assistance related to such SAEs, if so requested and if required by a Regulatory Authority, at no out of pocket expense to the non-requesting party.

SECTION 4.4. Animal Data Safety Exchange. Each party shall monitor safety information for its respective animal studies and shall promptly notify the other party regarding any finding from tests in laboratory animals for the Common Product that suggests a significant risk to a human subject including findings of mutagenicity, teratogenicity, or carcinogenicity from such animal studies. Each party shall provide a description of each such finding by fax, encrypted e-mail or uploaded to a secure joint web site. For such findings to be reported to Regulatory Authorities related to the Common Product, each party shall provide a summary describing the

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findings and context thereof sufficient to understand the data, along with supportive documentation and data (“Narrative Summary”) in the form to be submitted to its respective Regulatory Authority by fax, encrypted e-mail or uploaded to a secure joint web site as soon as reasonably possible and in no event later than ten (10) calendar days after notice to the other party. Moreover, each party shall provide the other party reasonable assistance related to such findings, if so requested and if required by a Regulatory Authority, at no out of pocket expense to the non-requesting party.

SECTION 4.5. Right to Submit Information Exchanged. Each party grants the other party the right to submit to Regulatory Authorities any data licensed under this Agreement. In the event a party is submitting the other party’s data to a Regulatory Authority, the parties shall establish procedures requiring review by the non-submitting party prior to submission of that party’s data to Regulatory Authorities.

SECTION 4.6. Data Protection. In the performance of its obligations and exchange of data hereunder, the parties agree to comply with any applicable federal, state and local laws and regulations, including all applicable federal, state and local laws and regulations relating to the privacy of patient health information, including, but not limited, to the Standards for Individually Identifiable Health Information, 45 C.F.R. parts 160 and 164; the EU Data Protection Directive and any other applicable national laws related to the privacy of patient health information.

SECTION 4.7. Regulatory Meetings. Each party shall be responsible for interfacing, corresponding and meeting with the applicable Regulatory Authorities. However, in order to keep each party informed, each party shall provide the other party copies of all conference summaries with Regulatory Authorities as well as minutes from face to face meetings with respect to the Common Product as soon as they are available.

SECTION 4.8. Regulatory Correspondence. Each party shall provide the other party copies of all correspondence received from or submitted to the applicable Regulatory Authorities with respect to its Common Product. Each party shall, as soon as reasonably possible and in no event later than fifteen (15) days after receipt or submission of such correspondence, provide the other party with a copy of such correspondence.

SECTION 4.9. Clinical Investigator Meetings. Each party shall provide the other party copies of meeting minutes from clinical investigator meetings with respect to its Common Product.

SECTION 4.10. Clinical Advisory Board Meetings. Each party shall provide the other party copies of meeting minutes from clinical advisory board meetings with respect to the Common Product. Moreover, each party shall invite a single representative of the other party to attend all such clinical advisory board meetings, unless such meeting includes information not related to the Common Product. In the event such meeting includes information not related to Common Product, the organizing party in its sole discretion can decide not to invite a representative from the other party. From time to time the parties may agree to have joint clinical advisory board meetings relating to the Common Product wherein both parties will share equally in costs and

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participation. The organizing party shall be responsible for ensuring that appropriate confidentiality agreements are in place.

SECTION 4.11. Assistance and Cooperation. Each party shall render such reasonable assistance to the other party with respect to Common Products as follows:

(a) to enable the other party to comply with any law applicable to the other party’s Common Product. Such assistance shall include, but is not limited to, promptly notifying the other party of any action by or notification from any Regulatory Authority or other governmental authority which: (i) raises any material concerns regarding the safety or efficacy of the Common Product or (ii) indicates or suggests a potential material liability for either party to third parties arising in connection with the Common Product;

(b) to aid in Regulatory Submissions and Product Approval in its Respective Territories if needed;

(c) in response to communications and inquiries from Regulatory Authorities. The parties shall work cooperatively and allow review and comment, as necessary in regulatory matters, including, but not limited to, Regulatory Submissions and Product Approval;

(d) to allow access and aid in the inspection of sites if required by a Regulatory Authority. Each party shall provide the other party reasonable assistance, and. the parties shall work cooperatively and allow review and comment, as necessary in such regulatory inspections; and

(e) in response to requests and questions related to the other party’s data exchanged under this Agreement.

Such reasonable assistance, may include promptly exchanging necessary data and information, executing documents, providing reports and summaries and performing such other acts as may be reasonably necessary in connection with achieving (a) through (e) above. Cooperation under this SECTION shall be conducted with the guidance of the JSC, JPT or appropriate sub-committee if any. The assistance provided under to this SECTION shall be performed at the requesting party’s sole expense and shall include external costs as well as personnel and other reasonable internal costs incurred by the assisting party, unless otherwise agreed by the parties.

SECTION 4.12. Access to Other Party’s Respective Territory for Clinical Trials. A party may seek access to the other party’s Respective Territory for clinical trials for a Common Product as a Sponsor, provided that: (a) the prospective Sponsor receives approval from the other party to [    *    ] in other party’s Respective Territory; and (b) the prospective Sponsor provides to the other party written notice of intent including (i) a letter of intent to Sponsor, (ii) a trial synopsis of the clinical trials to be performed, (iii) proposed follow-on clinical trials, (iv) [    *    ] for the clinical trials, (v) specific [    *    ], (vi) desired [    *    ] for the clinical trials, (vii) proposed

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[    *    ] for the clinical trials and (viii) agreement to [    *    ] when [    *    ] in the Respective Territory of the other party. Moreover, such notice shall occur no later than three (3) months prior to the proposed start date of the clinical trials. Permission to conduct Sponsored Clinical Trials may be granted only upon written approval by the other party in its sole discretion within sixty (60) days of receipt of the written notice of intent pursuant to this SECTION. Such written approval by the other party shall identify the specific Sponsored Clinical Trials that are approved. The Sponsor shall be solely responsible for all costs associated with Sponsored Clinical Trials. In the event that related follow-on or modified clinical trials including same indication, patient sample and therapeutic principle(s) are required in addition to the approved Sponsored Clinical Trials, such related clinical trials shall require additional notice to and approval from the other party pursuant to this SECTION, such approval not to be unreasonably withheld. Such related follow-on or modified clinical trials may be considered unreasonable if, for example, they would [    *    ] for any [    *    ] of the non-sponsoring party in its Respective Territory.

SECTION 4.13. Rights of a Non-Sponsoring Party in Regulatory Interactions Surrounding Sponsored Clinical Trials in Its Respective Territory. With respect to Sponsored Clinical Trials:

(a) Regulatory Meetings. Each non-sponsoring party shall have the right to have a single representative attend all material and pre-arranged meetings, and telephone discussions between the representative(s) of the Sponsor and applicable Regulatory Authorities with respect to Common Products in territories in which they are Sponsors.

(b) Regulatory Correspondence. Each Sponsor shall allow the non-sponsoring party to review and comment on drafts of any material correspondence, including meeting minutes, received from or submitted to the applicable Regulatory Authorities with respect to the Common Product in territories in which they are Sponsors; such comments shall be given due consideration by the Sponsor. Prior to a Regulatory Submission, the Sponsor shall discuss with the non-sponsoring party the information to be submitted to the applicable Regulatory Authorities related to the Sponsored Clinical Trials;

(c) Clinical Investigator Meetings. Each Sponsor shall allow the non-sponsoring party to have one representative attend every clinical investigator meeting related to its Sponsored Clinical Trials; and

(d) Clinical Advisory Board Meetings. Each Sponsor shall provide the non-sponsoring party copies of meeting minutes from clinical advisory board meetings with respect to its Sponsored Clinical Trials. Moreover, each party shall invite a single representative of the other party to attend all such clinical advisory board meetings, unless such meeting includes information not related to Common Product. In the event such meeting includes information not related to the Common Product, the organizing party in its sole discretion can decide not to invite a representative from the other party.

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ARTICLE 5

Rights to IL-21 Protein Intellectual Property

SECTION 5.1. 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 Global Plan shall vest in and be owned by such party or its Affiliates, subject to any licenses granted under this Agreement. Each party shall have an equal, undivided interest in all Joint IL-21 Global Patent Rights and all inventions for which Joint IL-21 Global Patent Rights may be sought.

SECTION 5.2. Cross License. Subject to the terms of this ARTICLE 5, each party hereby grants the other party an exclusive, royalty-free, fully paid up license (including the right to sublicense) under the IL-21 Global Patent Rights and IL-21 Global Know-How that it or its Affiliates Control 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 and IL-21 Protein in the Respective Territory of the other party; provided, however, that the foregoing license for IL-21 Global Know-How shall become non-exclusive on a country-by-country basis after all IL-21 Global Patent Rights covering the Product or IL-21 Protein in the country expire. Each party hereby grants the other party a non-exclusive, royalty-free, fully paid up license under its IL-21 Global Patent Rights, IL-21 Global Know-How, and Prior Patent Rights to perform Sponsored Clinical Trials in the granting party’s Respective Territory. The parties agree to execute any documents necessary to give effect to the foregoing, if required by applicable law.

SECTION 5.3. Reservation of Right. Each party reserves for itself, its Affiliates, Territorial Commercialization Partners and Sublicensees, from the exclusive license it granted in SECTION 5.2, the non-exclusive right to use in the other party’s Respective Territory the IL-21 Global Patent Rights and IL-21 Global Know-How licensed to the other party under SECTION 5.2 for research with respect to the IL-21 Gene and IL-21 Protein and for manufacturing of Products, so long as any Product resulting from such manufacturing is not sold in countries of the other party’s Respective Territory when the license granted pursuant to SECTION 5.2 is exclusive. For the avoidance of doubt, the foregoing reservation of right does not include the right to promote, market, offer to sell, import, export, distribute, sell and have sold Products in the other party’s Respective Territory.

SECTION 5.4. Patent Prosecution. Each party shall promptly disclose to the other party the conception or reduction to practice of inventions for which IL-21 Global Patent Rights may be sought. Each party shall be solely responsible, at its discretion, for the filing and prosecution worldwide of any and all patent applications that it Controls that are included in the IL-21 Global Patent Rights (including opposition and interference proceedings) and for the maintenance of any patents issuing thereon; provided, however, that ZGEN shall be the party designated to control the filing, prosecution, issuance and maintenance of all Joint IL-21 Global 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, NN shall promptly reimburse ZGEN for the reasonable costs associated with any Joint

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IL-21 Global Patent Rights in its Respective Territory. ZGEN will provide NN with an annual estimate of reasonable out-of-pocket costs for Joint IL-21 Global Patent Rights to be incurred after the Effective Date. NN shall have the right to review and comment on such estimate, and ZGEN shall consider in good faith any comments from NN regarding steps that might be taken to reduce reasonable out-of-pocket costs, provided that all final decisions regarding such out-of-pocket costs shall be mutually agreed upon by ZGEN and NN patent contacts. If ZGEN expects the amount of reasonable out-of-pocket costs to exceed the annual estimate by ten percent (10%), ZGEN shall promptly inform NN, and the parties shall meet to discuss and consider utilization of internal resources in order to minimize such out-of-pocket costs. ZGEN and NN patent contacts shall mutually approve any revised estimate before payment is due hereunder, such approval not to be unreasonably withheld. Disputes that cannot be resolved at the level of the ZGEN and NN patent contacts shall be subject to the dispute resolution procedures pursuant to SECTION 11.7. With respect to IL-21 Global 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. Notwithstanding the foregoing, all final decisions regarding the filing and prosecution of patents and patent applications associated with any Joint IL-21 Global Patent Rights shall be mutually agreed upon between the parties.

SECTION 5.5. Abandonment of IL-21 Global Patent Rights. With respect to the IL-21 Global 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, within sixty (60) days from receipt of notice, for prosecuting or maintaining such patents or patent applications at its expense and in the name of the responsible party. The responsible party shall not be responsible for any costs relating to such patents or patent applications that are incurred more than sixty (60) days after receipt of notice by the other party. Upon request 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 5.6. Notice of Infringement and Conference. Each party shall promptly notify the other party in writing of any alleged or threatened infringement of any claim in the IL-21 Global Patent Rights exclusively licensed hereunder. Upon receipt of such written notice, the parties shall confer regarding all available evidence of infringement or attack, and the manner of addressing such infringement or attack. The parties may agree to pursue the matter jointly.

SECTION 5.7. Party Has First Right in Respective Territory. Unless the parties agree otherwise, the party whose exclusive license rights hereunder to the IL-21 Global Patent Rights are allegedly being infringed shall have the first right, but not the obligation, to initiate and control any action, including cease and desist letters and lawsuits, at its expense, to enforce the

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claims of any IL-21 Global Patent Rights against the alleged infringer to the extent the IL-21 Global Patent Rights have been exclusively licensed hereunder to the party for its Respective Territory. The party exercising this first right (the “Litigating Party”) shall notify the other party of the Litigating Party’s decisions regarding such infringement and shall keep the other party reasonably apprised of the progress of the matter. Unless the other party joins such suit, as described below, the Litigating Party shall have the right to retain all damages awarded for such infringement. The other party shall have the right, at its own expense, to join any legal proceeding initiated by the Litigating Party regarding any such IL-21 Global Patent Right in the Respective Territory of the Litigating Party; it is understood, however, that the Litigating Party shall have sole control over any issues or matters pertaining to the validity or scope of any claims in the IL-21 Global Patent Rights exclusively licensed to it for its Respective Territory. If the other party does join such suit, then out of any damages awarded with respect to such infringement, the parties have an equal right to recover their expenses for the proceeding; then the Litigating Party shall have the right to retain any damages remaining. If the other party does not voluntarily join such suit and in the event that other party is an indispensable party required to be joined as a party in such infringement action involving the Litigating Party, the other party hereby agrees to waive any objections to such joinder on the grounds of standing, personal jurisdiction, venue and/or forum non conveniens, provided the Litigating Party shall promptly reimburse other party for all costs associated with such joinder.

SECTION 5.8. Secondary Right. If within sixty (60) days after the conference described in SECTION 5.6, the Litigating Party has not taken any action in its Respective Territory to stop such infringement, the other party shall, at its sole discretion, have the right to take legal action regarding such infringement (the “Secondary Party”), as the Secondary Party deems necessary and desirable, at its expense. If the Secondary Party initiates legal proceedings hereunder, the other party shall have the right to join such suit, at its own expense. If the law governing any proceeding brought by the Secondary Party under this SECTION requires the other party to join such proceeding, then the other party shall be represented by the Secondary Party’s legal counsel, at the Secondary Party’s expense. If the Secondary Party’s counsel is unable to represent the other party because of a bona fide conflict of interest, then the other party may engage other competent legal counsel, reasonably acceptable to the Secondary Party, to represent the other party in such proceeding, at the Secondary Party’s expense. If the other party elects not to use the Secondary Party’s counsel for any reason other than a bona fide conflict of interest, then the other party may engage competent legal counsel of its own choosing, at the other party’s expense. The Secondary Party shall not enter into a settlement or consent judgment or other voluntary and final disposition of any proceeding brought pursuant to this SECTION without the other party’s prior written consent, which shall not be unreasonably withheld or delayed. If the Secondary Party unilaterally elects to discontinue any proceeding instituted under this SECTION (other than as part of a settlement), the Secondary Party shall give the other party reasonable prior notice of such election. The other party may elect to continue such proceedings in its sole name, under its sole control and at its own expense; if the other party so elects, the Secondary Party shall reasonably cooperate, at no out-of-pocket expense to the Secondary Party, in all actions reasonably necessary to transfer control of the proceedings from the Secondary Party to the other party. The Secondary Party shall indemnify, defend and hold the other party and its

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respective directors, officers, employees and agents harmless from any and all claims, damages or other obligations arising out of or resulting from any claim or legal proceedings instituted by the Secondary Party under this SECTION; provided that the foregoing indemnity shall not apply to the extent the other party incurs claims, damages or obligations because the other party elected to continue the proceedings in its own name as described above. Unless the other party voluntarily joins such suit, as described above, the Secondary Party shall have the right to retain all damages awarded. If the other party does voluntarily join such suit, then out of any damages awarded, the parties have an equal right to recover their expenses for the proceeding; then the Secondary Party shall have the right to retain any damages remaining. If the other party does not voluntarily join such suit and in the event that other party is an indispensable party required to be joined as a party in such infringement action involving the Secondary Party, other party hereby agrees to waive any objections to such joinder on the grounds of standing, personal jurisdiction, venue and/or forum non conveniens, provided the Secondary Party shall promptly reimburse other party for all costs associated with such joinder.

SECTION 5.9. Cooperation. In any legal proceeding conducted under this ARTICLE 5, 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 5.10. Affiliates, Territorial Commercialization Partners and Sublicensees. Each party shall require its Affiliates, Territorial Commercialization Partners, and Sublicensees to comply with this ARTICLE 5.

SECTION 5.11. Inventorship. Inventorship for IL-21 Global Patent Rights shall be determined in good faith in accordance with United States patent laws (Title 35, United States Code). All determinations of such inventorship shall be documented to ensure that divisional or continuation patent applications reflect appropriate inventorship.

ARTICLE 6

Rights to Background Intellectual Property

SECTION 6.1. Ownership of Background Intellectual Property. Nothing in this Agreement shall affect the ownership by either party of any Background Intellectual Property owned by or in the possession of a party, whether existing as of the Effective Date or created, generated or developed after the Effective Date by or on behalf of a party or its Affiliated outside of the IL-21 Global Plan and not constituting IL-21 Global Patent Rights or IL-21 Global Know-How.

SECTION 6.2. Cross License. Each party hereby grants to the other party a [    *    ] license (with a right to sublicense solely to Affiliates and Territorial Commercialization Partners so long as they remain Affiliates or Territorial Commercialization Partners) under the granting party’s Background Intellectual Property to make, have made, conduct research, develop (including clinical development), use, sample, promote, manufacture, market, sell, offer to sell, have sold,

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distribute, import and export Common Products in the Respective Territory of the other party. Each party hereby grants to the other party a [    *    ] license (with a right to sublicense solely to Affiliates and Territorial Commercialization Partners so long as they remain Affiliates or Territorial Commercialization Partners) under the granting party’s Background Intellectual Property to perform Sponsored Clinical Trials in the granting party’s Respective Territory.

SECTION 6.3. Grant of Right to Manufacture. Each party hereby grants to the other party a [    *    ] license (with a right to sublicense solely to Affiliates and Territorial Commercialization Partners so long as they remain Affiliates or Territorial Commercialization Partners) under the granting party’s Background Intellectual Property to make Common Products in the granting party’s Respective Territory for sale in the other party’s Respective Territory. For the avoidance of doubt, the foregoing grant does not include the right to promote, market, offer to sell, import, export, distribute, sell and have sold Common Products in the granting party’s Respective Territory.

ARTICLE 7

Confidentiality

SECTION 7.1. Confidentiality Obligation. Except as otherwise authorized under this Agreement, during the Term and for a period of [    *    ] 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 shall survive the termination of this Agreement.

SECTION 7.2. 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, or to any Regulatory Authorities as is reasonably required for regulatory filings or the reporting of Serious Adverse Events or Adverse Events. Furthermore, the obligations of SECTION 7.1 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;

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(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.

SECTION 7.3. Disclosure of Confidential Information to Third Party Contractors, Consultants, Affiliates, Territorial Commercialization Partners, Sublicensees and CROs. Each party shall have the right to disclose the other party’s Confidential Information to third-party contractors, consultants, Affiliates, Sublicensees, Territorial Commercialization Partners, prospective Sublicensees and Territorial Commercialization Partners, and CROs provided that such Confidential Information is disclosed under an obligation of confidentiality that is no less stringent than that described in this ARTICLE 7; and provided that neither party shall have the right to disclose the other party’s Confidential Information that constitutes the other party’s IL-21 Plan, or data or safety information related to clinical trials on the Common Product to such third-party contractors, consultants, or CROs without the prior written notification to the other party.

SECTION 7.4. Correspondence Between Parties is Confidential. For the avoidance of doubt, the following includes, but is not limited to, information that shall be considered Confidential Information of the disclosing party: (i) reports or other documents made solely by one party for its purposes under its IL-21 Plan and given to the other party under this Agreement; (ii) minutes from meetings and correspondence with a party’s respective Regulatory Authorities; (iii) minutes from a party’s clinical investigator meetings; and (iv) minutes from a party’s clinical advisory board meetings. The following includes, but is not limited to, information that shall be considered Confidential Information of both parties: (i) minutes from meetings held by the JPT and JSC; (ii) reports or other documents made jointly by the parties; and (iii) reports or other documents related to Shared Activities.

ARTICLE 8

Indemnification

SECTION 8.1. Indemnification by NN. NN will indemnify, hold harmless and defend ZGEN and its directors, officers, employees and agents against all actions, suits, proceedings, claims, demands and prosecutions (hereinafter a “Claim”) that may be brought or instituted, and all judgments, damages, liabilities, costs and expenses ( including, but not limited to, any attorneys’ fees) resulting directly there from, arising out of the performance by NN under this Agreement and its exercise of its license rights under this Agreement, including its use or the use by its Affiliates and sublicensees of the IL-21 Global Patent Rights, IL-21 Global Know-How and Background Intellectual Property licensed to it. NN’s obligations under this SECTION will arise

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only if ZGEN (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. In the event such a Claim is brought, ZGEN shall render, at NN’s cost and expense, all reasonable assistance requested by NN in defending such Claim. NN’s obligations under this SECTION shall not apply to the extent that the Claim arose from the gross negligence or willful misconduct of ZGEN (or its directors, officers, employees or agents).

SECTION 8.2. Indemnification by ZGEN. ZGEN will indemnify, hold harmless and defend NN, and its directors, officers, employees, and agents against all Claims that may be brought or instituted, and all judgments, damages, liabilities, costs and expenses ( including, but not limited to, any attorneys’ fees) resulting directly there from, arising out of the performance by ZGEN under this Agreement and its exercise of its license rights under this Agreement, including its use or the use by its Affiliates, Territorial Commercialization Partners and Sublicensees of the IL-21 Global Patent Rights, IL-21 Global Know-How and Background Intellectual Property licensed to it. ZGEN’s indemnification obligations under this SECTION will arise only if NN (i) notifies ZGEN promptly after it becomes aware of a Claim; (ii) permits ZGEN to control the defense and settlement, at ZGEN’s expense, of any such Claim; and (iii) does not settle any such Claim without the prior written approval and consent of ZGEN, which consent shall not be unreasonably withheld. In the event such a Claim is brought, NN shall render, at ZGENS’s cost and expense, all reasonable assistance requested by ZGEN in defending such Claim. ZGEN’s obligations under this SECTION shall not apply to the extent that the Claim arose from the gross negligence or willful misconduct of NN (or its directors, officers, employees or agents).

SECTION 8.3. Insurance. Each party shall maintain and cause its Affiliates, Territorial Commercialization Partners and Sublicensees to maintain, to the extent possible, appropriate product liability insurance with respect to the development, manufacture and sale of Products in such amount as each party customarily maintains with respect to sales of its other products. Each party shall maintain and cause its Affiliates, Territorial Commercialization Partners and sublicensees to maintain, to the extent possible, such insurance for so long as it continues to manufacture or sell Products, and thereafter for so long as each party customarily maintains insurance with respect to sales of its other products.

ARTICLE 9

Term and Termination

SECTION 9.1. Term and Expiration. This Agreement shall become effective on the Effective Date. Unless terminated earlier, this Agreement shall expire on the later of the following dates: (i) the date on which the last planned activity under the IL-21 Global Plan is completed; or (ii) the expiration date of the last to expire of the IL-21 Global Patent Rights.

SECTION 9.2. Termination At Will. Each party shall have the right to terminate this Agreement at any time at its sole discretion. The terminating party shall provide the other party with written notice of a planned termination [    *    ] prior to actual termination.

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Notwithstanding the above, Shared Activities of the terminating party shall be subject to wind down provisions pursuant to the third sentence of SECTION 9.6.

SECTION 9.3. Termination of Restated License Agreement. If the Restated License Agreement is terminated for any reason, this Agreement and all licenses granted to NN under ARTICLES 5 and 6 shall automatically and immediately terminate and NN shall return to ZGEN all materials containing any of ZGEN’s Background Intellectual Property, IL-21 Global Patent Rights and IL-21 Global Know-How (except for Joint IL-21 Global Patent Rights). Upon such termination, ZGEN shall automatically be granted a [    *    ] license (with a right to sublicense solely to Affiliates and Territorial Commercialization Partners so long as they remain Affiliates or Territorial Commercialization Partners) in the RoW under the Background Intellectual Property, IL-21 Global Patent Rights and IL-21 Global Know-How which NN or its Affiliates Control. In addition, if requested in writing by ZGEN, NN shall document such automatic grant and/or negotiate in good faith with ZGEN an exclusive license (with right to sublicense) to the IL-21 Global Patent Rights and IL-21 Global Know-How which NN or its Affiliates Control.

SECTION 9.4. Termination for Insolvency. Each party shall have the right to terminate this Agreement: (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.

SECTION 9.5. Termination for Material Breach. If either party is in material breach of this Agreement (including failure to meet diligence, reporting or costs owed but not paid), the other party shall have the right to provide written notice of its election to terminate this Agreement, along with an explanation of the material breach. If the non-terminating party has not cured such material breach within [    *    ] after the date of such written notice this Agreement shall terminate upon expiration of such [    *    ] period. Notwithstanding the above, Shared Activities of the terminating party shall be subject to wind down provisions pursuant to the third sentence of SECTION 9.6.

SECTION 9.6. Termination of Shared Activities. A party may terminate its Shared Activities for any reason. Termination of Shared Activities does not automatically result in termination of this Agreement. In the event either party elects to terminate its Shared Activities, the Shared Activities of the terminating and non-terminating parties shall be pursued and funded by the parties to a reasonable and mutually agreed stopping point for up to [    *    ] following notice in order to provide reasonable wind down of such Shared Activities. In addition, for Non-Clinical and clinical development activities only, the non-terminating party may request permission from the terminating party to assume the terminating party’s responsibilities for such Shared Activities in the terminating party’s Respective Territory to the extent such Shared Activities were planned to be performed in such Respective Territory (such permission not to be unreasonably withheld); upon such permission, the parties shall cooperate and make reasonable

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efforts to transfer contracts to the non-terminating party that are required for the assuming the terminating party’s responsibilities for such Shared Activities. For the avoidance of doubt, such Shared Activities by the non-terminating party shall remain part of the non-terminating party’s IL-21 Plan. In addition, such Shared Activities of the terminating party shall be subject to wind down provisions pursuant to the third sentence of this SECTION. Notwithstanding the above, nothing under this SECTION grants a license to the non-terminating party 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 and IL-21 Protein in the Respective Territory of the other party.

SECTION 9.7. Mutual Agreement. The parties shall have the right to terminate this Agreement upon mutual agreement in writing.

SECTION 9.8. Effect of Expiration or Termination. Except as expressly stated herein, expiration or termination of this Agreement shall not relieve the parties of any obligations accruing prior to such expiration or termination, including, but not limited to, the obligation to provide data, information and documentation generated prior to the date of termination and to deliver reports incorporating such information and documentation. In addition to any provision that expressly provides for its survival, any accrued obligations and the provisions of ARTICLES 1, 5 (subject to SECTION 9.3), 6 (subject to SECTION 9.3), 7, 8 and 11 and SECTIONS 3.3(a)(ii), 3.3(a)(iii), 3.3(b)(ii), 3.3(c)(ii), 3.3(c)(iii), 3.3(d), 3.5, 3.9, 3.10, 4.2(a) (with respect to Sponsored Clinical Trials), 4.3, 4.4, 4.11 (d), 4.12 (fifth, sixth, and seventh sentences), 4.13(a) and (b), 10.3 and 10.4 shall survive the expiration or termination of this Agreement. For the avoidance of doubt, in the event of termination under SECTIONS 9.2, 9.5, and 9.7, licenses and reservations granted under SECTIONS 5.2, 5.3, 6.2 and 6.3 are limited to IL-21 Global Patent Rights and IL-21 Global Know-How, and Background Intellectual Property that claim an invention, were invented, discovered, developed or otherwise generated by or for a party or its Affiliates, a party makes available, or is actually used as the case may be prior to the date of such termination (except with respect to Shared Activities subject to wind down). In the event a party (the “First Party”) terminates this Agreement pursuant to SECTION 9.2 or the other party (the “Second Party”) terminates this Agreement pursuant to SECTION 9.3, 9.4 or 9.5 and the First Party has not progressed a Common Product to the same level as the Second Party at the time of termination, then the First Party shall be obligated to continue to provide reports and information to the Second Party pursuant to SECTION 3.3 with respect to its Common Product until it has provided the same type of reports and information that the Second Party has provided under SECTION 3.3 with respect to its Common Product to the extent that the data and information is considered balanced with the contributions of the Second Party pursuant to the IL-21 Global Plan at the time of such termination, which reports and information or inventions and discoveries arising from such activities by the First Party shall be included in Global Patent Rights and IL-21 Global Know-How, and in and to the extent applicable to Background Intellectual Property. Expiration or termination shall not affect any party’s ability to seek any other remedies available at law.

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ARTICLE 10

Representations and Warranties

SECTION 10.1. Representations, Warranties and Covenants of NN. NN represents and warrants to and covenants with ZGEN 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 enter into any agreements, contracts or other arrangements that would prevent NN from meeting its obligations or adversely impact ZGEN’s rights under this Agreement; and

(g) NN will comply with all applicable laws, regulations and guidelines in connection with the performance of NN’s obligations under this Agreement; and

(h) As of the Effective Date, Appendix D Part 1 identifies all patents and patent applications in NA that are not NN’s Prior Patent Rights, are Controlled by NN or its Affiliates and specifically recites as a claim element (i) an IL-21 Gene, IL-21 Protein or Product, (ii) a process, formulation and/or mixture comprising an IL-21 Gene, IL-21 Protein or Product, (iii) a method of making or manufacturing an IL-21 Protein or Product or (iv) a method of using an IL-21 Gene, IL-21 Protein or Product. In the event additional patents and patent applications are identified by NN after the Effective Date that should have been included in Appendix D Part 1, Appendix D Part 1 shall be promptly updated by NN.

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SECTION 10.2. Representations, Warranties and Covenants of ZGEN. ZGEN represents and warrants to and covenants with NN that:

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

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

(c) ZGEN 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 ZGEN, 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) ZGEN will not during the Term enter into any agreements, contracts or other arrangements that would prevent ZGEN from meeting its obligations or adversely impact NN’s rights under this Agreement;

(g) ZGEN will comply with all applicable laws, regulations and guidelines in connection with the performance of ZGEN’s obligations under this Agreement; and

(h) As of the Effective Date, Appendix D Part 2 identifies all patents and patent applications in the RoW that are not ZGEN’s Prior Patent Rights, are Controlled by ZGEN or its Affiliates and specifically recites as a claim element (i) an IL-21 Gene, IL-21 Protein or Product, (ii) a process, formulation and/or mixture comprising an IL-21 Gene, IL-21 Protein or Product, (iii) a method of making or manufacturing an IL-21 Protein or Product or (iv) a method of using an IL-21 Gene, IL-21 Protein or Product. In the event additional patents and patent applications are identified by ZGEN after the Effective Date that should have been included in Appendix D Part 2, Appendix D Part 2 shall be promptly updated by ZGEN.

SECTION 10.3. Warranty Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO THEIR RESEARCH AND DEVELOPMENT PROGRAMS, IL-21 GENE, IL-21 PROTEIN, IL-21 GLOBAL PLANS, IL-21 PLANS, IL-21 GLOBAL PATENT RIGHTS, IL-21 GLOBAL KNOW-HOW, BACKGROUND INTELLECTUAL PROPERTY, PRIOR

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INTELLECTUAL PROPERTY, PRODUCTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT. EACH PARTY HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT AND PATENTABILITY WITH RESPECT TO ANY AND ALL OF THE FOREGOING.

SECTION 10.4. Limited Liability. EXCEPT IN THE CASE OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER NN NOR ZGEN 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 11

Miscellaneous

SECTION 11.1. 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 a party (“Assigning Party”) to an Affiliate, the Affiliate’s rights under this Agreement shall terminate once it ceases being an Affiliate of the Assigning Party (however, its rights may be reassigned back to the Assigning Party at the time it ceases being an Affiliate of the Assigning Party). 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.

SECTION 11.2. 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 Territorial Commercialization Partners, 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 11.3. Public Announcements. Except as otherwise may be required by law or regulation, 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, such approval not to be unreasonably withheld or delayed. However, the parties shall have the right to disclose or announce information concerning the existence and general nature of this Agreement, provided that disclosure of the details of this Agreement that constitute Confidential Information of the other party or its Affiliates shall only be made under an obligation confidentiality consistent with ARTICLE 7.

SECTION 11.4. 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

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of any of the foregoing, unless the express written permission of such other party has been obtained.

SECTION 11.5. 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 11.6. 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 11.7. Dispute resolution. The parties shall attempt to resolve through good faith discussions any dispute between the parties that arises under this Agreement that cannot be resolved by the JSC. All such disputes shall, upon receipt of written notice from one party to the other regarding the existence and nature of the dispute, first be referred to each party’s CEO or to their authorized representative. If they are unable to resolve a dispute within thirty (30) days after the initial meeting between the CEOs, then the dispute may be referred to alternative dispute resolution in Chicago, Illinois in accordance with the rules and procedures of the International Centre for Dispute Resolution; provided that arbitrators shall be experts in the field of biotechnology. Notwithstanding the above, the alternative dispute resolution process pursuant to this SECTION shall be non-binding and shall not prohibit either party from pursuing at any time any other legal right, power or remedy, including bringing an action or suit in a court of law.

SECTION 11.8. 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 11.9. 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, including the Clinical Data Sharing Agreement which as of Effective Date is hereby terminated. 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. For the avoidance of doubt, this Agreement does not supersede the Restated License Agreement, Collaborative Agreement or Process Development Agreement.

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SECTION 11.10. 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 Allé
	DK-2880 Bagsvaerd
	Denmark
	Attn: Chief Scientific Officer & Executive Vice President
	Research & Development
	Facsimile: +45 4442 7280
With a copy to:	Novo Nordisk Legal Department
	Novo Allé
	DK-2880 Bagsvaerd
	Denmark
	Facsimile: +45 4498 0670
	and
	Senior Vice President, Discovery
	Novo Allé
	DK-2880 Bagsvaerd
	Denmark
	Facsimile: 45 4444 4565:
If to ZGEN:	ZymoGenetics, Inc.
	1201 Eastlake Avenue East
	Seattle, WA 98102
	Attn: Senior 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 11.11. 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.

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SECTION 11.12. 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 11.13. 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 11.14. 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, the parties agree that they 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 11.15. Compliance with GMP and ICH Practices. In performance of this Agreement, each party shall comply with all regulatory requirements as set out by a Regulatory Authority in its Respective Territory. However, if a Regulatory Authority in the other party’s Respective Territory has different GMP and/or ICH requirements, a party shall seek to comply with, but shall not be obliged to fulfill, such different GMP and/or ICH requirements in its Respective Territory.

SECTION 11.16. Obligations of a Territorial Commercialization Partner or Sublicensee. Any Territorial Commercialization Partner or other Sublicensee receiving a sublicense of a party’s rights under ARTICLE 5 and/or 6 shall not be subject to the obligations under any other provisions of this Agreement (including for example, the provisions of ARTICLES 3 and 4), other than the obligations of confidentiality under to ARTICLE 7 and providing indemnification for Claims arising from its exercise of rights pursuant to ARTICLE 8 or obligations that may be assumed pursuant to SECTION 2.1(d).

SECTION 11.17. 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.]

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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	Date: 8/11/05
	Bruce L.A. Carter
	President and CEO
Novo Nordisk A/S
By:	/s/ MADS KROGSGAARD THOMSEN	Date: 8/8/05
	Mads Krogsgaard Thomsen
	Executive Vice President, Research & Development and CSO

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EX-10.3

Exhibit 10.3

ADDENDUM TO

OFFICE LEASE AGREEMENT

1. PARTIES. The “Parties” to this Addendum to Office Lease Agreement (“Addendum”) are:

1.1. 1144 Eastlake LLC, a Washington limited liability company (“Landlord”), and

1.2. ZymoGenetics, Inc., a Washington corporation (“Tenant”).

2. BACKGROUND. Landlord and Tenant previously entered into a lease (the “Lease”) as of the 9^th day of November, 2001, which Lease is hereby incorporated by this reference. Capitalized terms in this Addendum shall be given the same meaning as in the Lease unless defined otherwise in this Addendum. By virtue of options provided in the Lease, Tenant previously has expanded its leased Premises to include the fourth (4^th) floor of the Building as well as the originally leased fifth (5^th) floor of the Building; prior to the effectiveness of this Addendum, Tenant is leasing Thirty One Thousand One Hundred Ninety Four (31,194) square feet of Rentable Area (“RSF”) at the rents and on the terms specified in the Lease. The current RSF of the Building is Eighty One Thousand Five Hundred Twenty Four (81,524). Tenant now wishes to further increase its leased Premises as provided in this Addendum.

3. IMMEDIATE ADDITION TO PREMISES.

3.1. Increased Premises. The Lease is hereby amended, effective immediately, to add to the definition of the Premises the Rentable Area, as defined in the Lease, of the first (1^st) and second (2^nd) floors of the Building as depicted on the floor plan attached as Exhibit A to this Addendum (the “Immediate Addition”). The Parties agree that the Immediate Addition consists of Seven Thousand Eight Hundred Forty Two (7,842) RSF. Tenant accepts the Immediate Addition Premises in their current condition subject only to Landlord’s agreement to provide the Tenant Allowance.

3.2. Immediate Addition Base Rent. The Base Rent for the Immediate Addition (which is in addition to all other sums payable under the Lease) shall be:

Period	Annual NNN Rate Per Square Foot
From commencement of Base Rent payment obligation through December 31, 2006	$15.50 per RSF
January 1, 2007 through December 31, 2007	$16.04 per RSF
January 1, 2008 through December 31, 2008	$16.60 per RSF
January 1, 2009 through December 31, 2009	$17.19 per RSF
January 1, 2010 through December 31, 2010	$17.79 per RSF
January 1, 2011 through December 31, 2011	$18.41 per RSF
January 1, 2012 through January 31, 2012	$19.05 per RSF

PAGE 1 OF 9

3.3. Early Entry and Commencement of Base Rent. Tenant may enter and commence alterations to the Immediate Addition portion of the Premises at any time from and after the date of this Addendum. Despite any such early entry, and despite any earlier occupancy of the Immediate Addition by Tenant for purposes of operating Tenant’s business from such premises, Tenant’s obligation to pay Base Rent on account of the Immediate Addition shall commence on December 1, 2005 as to the 2^nd Floor portion of the Immediate Addition; and May 1, 2006 as to the first (1^st) floor portion of the Immediate Addition. For the purposes of this section, the RSF of the First Floor Immediate Addition shall be deemed to be 2,327 RSF and the RSF of the Second Floor Immediate Addition shall be deemed to be 5,515 RSF.

3.4. Immediate Addition Pro Rata Share. Tenant’s total Pro Rata Share as defined in the Lease (which is in addition to all other sums payable under the Lease) shall be increased on account of the Immediate Addition such that the Pro Rata Share shall be approximately a total forty seven and 88/100s percent (47.88%),as calculated pursuant to Lease Section 1.2, for so long as the Immediate Addition and the 4^th and 5^th floors are part of Tenant’s Premises.

3.5. Commencement of Additional Rent. Tenant’s obligation to pay Additional Rent on account of the Immediate Addition and the related increase in Tenant’s Pro Rata Share shall commence on the earlier to occur of (i) the date on which Tenant first occupies a portion of the Immediate Addition for the conduct of Tenant’s business (as opposed to entry for purposes of alterations) or (ii) December 1, 2005 as to the 2^nd Floor portion of the Immediate Addition or May 1, 2006 as to 1^st Floor portion of the Immediate Addition.

3.6. Landlord Work and Tenant Improvement Allowance. For purposes of the Immediate Addition this Section shall apply in lieu of Lease Exhibit D. Landlord shall have no obligation to perform any Landlord’s Work in or on account of the Immediate Addition or this Addendum. Tenant shall provide Landlord with Tenant’s plans for alterations to the Premises, which are subject to Landlord’s approval, which will not be unreasonably delayed, conditioned or withheld. Within 30 days of Tenant’s delivery to Landlord of reasonable evidence of lien free completion of approved alterations to the Premises, Landlord shall reimburse Tenant its costs related to such alterations, up to a maximum of Thirty Dollars ($30.00) per square foot of Rentable Area contained in the Immediate Addition (the “Tenant Allowance”).

3.7. Leasing Commission. Landlord shall pay a commission of Forty Three Thousand Dollars ($43,000) to The Staubach Company, who represents the Tenant, on account of the addition of the Immediate Addition to the leased Premises which commission shall be payable one-half on mutual execution of this Addendum and one-half upon commencement of payment of Base Rent by Tenant.

3.8. No Renewal Rights. Despite any term of the Lease to the contrary, Tenant shall have no right or option to elect to extend or otherwise renew the Lease as to the Immediate Addition. This shall not, however, affect Tenant’s Options to Renew otherwise provided for in the Lease.

PAGE 2 OF 9

3.9. Parking. Tenant agrees to further rent, beginning on earlier of the date Tenant starts paying Rent for the Immediate Addition or the date of Tenant’s first occupancy of the Immediate Addition for the operation of Tenant’s business, and continuing for the Term of the lease of the Immediate Addition, from Landlord and Landlord agrees to rent to Tenant the use, on a non-exclusive basis, of 4 parking stalls in the Building on the same terms as provided in section 30 of the Lease; the market rate rent per parking stall currently is One Hundred Twenty Dollars ($120) per month. Tenant agrees that the parking spaces provided for in this section shall define the number of spaces that Tenant shall be entitled to use on account of the Immediate Addition rather than the formula stated in section 30.1 of the Lease.

3.10 Permitted Use. In addition to general business office and uses customarily incidental thereto, Tenant may use a portion of the Immediate Addition on the First Floor of the Building to operate a deli, coffee shop and/or sandwich shop, subject to Tenant’s compliance with all applicable laws.

3.11 Security Deposit. Upon execution of this Addendum, Tenant shall increase the Security Deposit by Fifteen Thousand Three Hundred Twenty Seven Dollars ($15,327) on account of the Immediate Addition. Such increase shall only apply for so long as Tenant leases this Immediate Addition portion of the Premises.

3.12 Lobby Wall Restoration. Notwithstanding anything to the contrary in the Lease or this Addendum, it is acknowledged that a portion of the First Floor Immediate Addition may be operated as a deli, coffee shop and/or sandwich shop, consistent with Section 3.10 above. Tenant has the right under the Lease and this Addendum to continue or terminate such use in its sole discretion, so long as Tenant (i) uses such Premises as otherwise permitted pursuant to Section 3.10 above; and (ii) if such use as a deli, coffee shop and/or sandwich shop is discontinued by Tenant then, on at least 45 days advance written notice from Landlord, Tenant shall permit the Landlord at Landlord’s sole expense to enter into the First Floor Immediate Addition Premises and construct a partition wall so as to separate the Premises from the Building’s lobby area. Landlord agrees to construct such partition at the northwestern corner of the space also defined as the lobby partition within the small interior vestibule immediately adjacent to the right of the main entry into the building lobby. Tenant represents this as an area which will not interrupt or interfere with the balance of the Premises. Landlord will construct such partition without unreasonably interfering with Tenant’s operations within the Premises.

4. DEFERRED ADDITION TO PREMISES.

4.1 Increased Premises. The Lease is hereby further amended, effective immediately, to further add to the definition of the Premises the Rentable Area, as defined in the Lease, of the second (2^nd) floors of the Building as depicted on the floor plan attached as Exhibit B to this Addendum (the “Deferred Addition”). While this amendment of the Lease shall be deemed effective immediately, the rights and obligation of the Parties as to the Deferred Addition shall commence only on the date on which the lease of the current occupant of the Deferred Addition terminates, whether by agreement between Landlord and such other tenant or otherwise, the current tenant vacates the space and it is delivered to Tenant (“Deferred Addition Commencement Date”). Tenant accepts the Deferred Addition Premises in their condition as of the date of this Addendum, reasonable wear and tear excepted. Upon

PAGE 3 OF 9

the occurrence of the Deferred Addition Commencement Date, the Parties agree to sign a memorandum, substantially in the form as attached hereto, confirming such occurrence.

4.2 Deferred Addition Base Rent. Provided the Deferred Addition Commencement Date has occurred (it being understood that no amounts shall be due Landlord from Tenant in connection with the Deferred Addition during any time when Tenant is subleasing the Deferred Addition from its current tenant, except where Landlord has notified Tenant that the current tenant has defaulted and failed to pay rent for such space, in which case, pursuant to the sublease relating thereto, Tenant will pay its rent directly to Landlord), the Base Rent for the Deferred Addition (which is in addition to all other sums payable under the Lease) shall be:

Period	Annual Rate Per Square Foot
October 1, 2005 through November 30,2005 (if applicable)	$0 per Square Foot of Rentable Area (“RSF”)
December 1, 2005 through December 31, 2006 (if applicable)	$23.45 per RSF (fully serviced)
January 1, 2007 through December 31, 2007 (if applicable)	$24.45 per RSF (fully serviced)
January 1, 2008 through October 31, 2008 (if applicable)	$25.45 per RSF (fully serviced)
November 1, 2008 through December 31, 2008	$16.60 per RSF (NNN)
January 1, 2009 through December 31, 2009	$17.19 per RSF (NNN)
January 1, 2010 through December 31, 2010	$17.79 per RSF (NNN)
January 1, 2011 through December 31, 2011	$18.41 per RSF (NNN)
January 1, 2012 through January 31, 2012	$19.05 per RSF (NNN)

In the event that the Deferred Addition Commencement Date has not occurred as of any of the time periods described in this section, no Base Rent shall be due from Tenant on account of the Deferred Addition until the actual delivery of the vacant space by Landlord to Tenant or November 1, 2008, whichever is earlier.

PAGE 4 OF 9

4.3 Commencement of Base Rent. Tenant’s obligation to pay Base Rent on account of the Deferred Addition shall commence on the Deferred Addition Commencement Date.

4.4 Deferred Addition Pro Rata Share. Upon the later of November 1, 2008 or the Deferred Addition Commencement Date, Tenant’s total Pro Rata Share (which is in addition to all other sums payable under the Lease) shall be increased on account of the Deferred Addition to an estimated total of Fifty Six and 63/100s percent (56.63%), as calculated pursuant to Lease Section 1.2, for so long as the Immediate Addition and the Deferred Addition are part of the Tenant’s Premises.

4.5 Commencement of Additional Rent. Tenant’s obligation to pay Additional Rent on account of the Deferred Addition and the related increase in Tenant’s Pro Rata Share shall commence on the Deferred Addition Commencement Date.

4.6 Landlord Work and Tenant Improvement Allowance. Landlord shall have no obligation to provide any Tenant Improvement Allowance or to perform any Landlord’s Work in or on account of the Deferred Addition or this Addendum.

4.7 Leasing Commission. Landlord shall have no obligation to pay any commission on account of the addition of the Deferred Addition to the leased Premises.

4.8 No Renewal Rights. Despite any term of the Lease to the contrary, Tenant shall have no right or option to elect to extend or otherwise renew the Lease as to the Deferred Addition.

4.9 Parking. If Tenant sublets the Deferred Addition from its present tenant, then such sublease will include an agreement relating to the use of 14 parking stalls in the Building for the term of such sublease and Tenant shall not be liable to pay Landlord any amount for such spaces, except in instances of the sublessor’s default, in which case the rent payment made directly to Landlord shall be deemed to include rent for such stalls, as further addressed in Section 4.2 above. In addition, if the Deferred Addition Commencement Date occurs prior to November 1, 2008, then the rent stated above in Section 4.2 for such period includes, without any additional charge, rent for the use, on a non-exclusive basis, of 14 parking stalls in the Building. Tenant agrees to further rent, beginning on the later of Deferred Addition Commencement Date or November 1, 2008 and continuing for the Term of the lease of the Deferred Addition, from Landlord and Landlord agrees to rent to Tenant the use, on a non-exclusive basis, of 14 parking stalls in the Building on the same terms as provided in section 30 of the Lease at the market rate rent per parking stall. Tenant agrees that the parking spaces provided for in this section shall define the number of space that Tenant shall be entitled to use on account of the Deferred Addition rather than the formula stated in section 30.1 of the Lease.

4.10 Security Deposit. Tenant shall not be obligated to increase the Security Deposit on account of the Deferred Addition.

4.11 Sublease Consent. In the event that Tenant enters into an agreement with the current occupant of the Deferred Addition on terms acceptable to Tenant and such occupant, Landlord agrees to provide its consent to such sublease so long as such sublease does not modify or otherwise affect the obligations of such other occupant under its lease with Landlord.

PAGE 5 OF 9

5. GENERAL TERMS.

5.1 Reaffirmation. Except to the extent the Lease has been expressly modified in this Addendum, the Parties reaffirm the Lease and agree the Lease remains in full force and effect without other modification.

5.2 Execution. This Addendum may be executed in several counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts shall together constitute the same instrument.

LANDLORD:
1144 Eastlake LLC, a Washington limited liability company
By:	/s/ John S. Teutsch	,
	its authorized agent
TENANT:
ZymoGenetics, Inc., a Washington corporation
By:	/s/ James A. Johnson
Name	James A. Johnson
Title:	Senior Vice President & Chief Financial Officer

PAGE 6 OF 9

LANDLORD ACKNOWLEDGMENT

STATE OF WASHINGTON	)
COUNTY OF KING	)	ss:

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that John S. Teutsch, personally known to me to be the authorized agent of 1144 Eastlake LLC, a Washington limited liability company, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth.

GIVEN under my hand and official seal this 29^th day of September, 2005.

/s/ Jennifer Venzke

Notary Public

Jennifer Venzke

Printed Name

Residing at: Seattle, WA

My Commission Expires: 2/19/09

TENANT ACKNOWLEDGMENT

STATE OF WA	)
COUNTY OF King	)	ss:

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that James A. Johnson, personally known to me to be the authorized agent of ZymoGenetics, Inc., a Washington corporation, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

/s/ Carol A. Alto

Notary Public

Carol A. Alto

Printed Name

Residing at: Seattle, WA

My Commission Expires: 3/7/06

PAGE 7 OF 9

Memorandum

1144 Eastlake LLC, a Washington limited liability company, and ZymoGenetics, Inc., a Washington corporation, hereby confirm the occurrence of the Deferred Addition Commencement Date, as defined in the Addendum to Office Lease Agreement on September 29, 2005.

LANDLORD:
1144 Eastlake LLC, a Washington limited liability company
By:	/s/ John S. Teutsch	,
	its authorized agent
TENANT:
ZymoGenetics, Inc., a Washington corporation
By:	/s/ James A. Johnson
Name	James A. Johnson
Title:	Senior Vice President & Chief Financial Officer

PAGE 8 OF 9

LANDLORD ACKNOWLEDGMENT

STATE OF WASHINGTON	)
COUNTY OF KING	)	ss:

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that John S. Teutsch, personally known to me to be the authorized agent of 1144 Eastlake LLC, a Washington limited liability company, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth.

GIVEN under my hand and official seal this 29th day of September, 2005.

/s/ Jennifer Venzke

Notary Public

Jennifer Venzke

Printed Name

Residing at: Seattle, WA

My Commission Expires: 2/19/09

TENANT ACKNOWLEDGMENT

STATE OF WA	)
COUNTY OF King	)	ss:

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that James A. Johnson, personally known to me to be the authorized agent of ZymoGenetics, Inc., a Washington corporation, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

/s/ Carol A. Alto

Notary Public

Carol A. Alto

Printed Name

Residing at: Seattle, WA

My Commission Expires: 3/7/06

PAGE 9 OF 9

EX-10.4

Exhibit 10.4

LANDLORD’S CONSENT TO SUBLEASE

This Agreement is made as of September 22, 2005, among (“Landlord”), Teutsch Partners, Conoco Phillips Company, a Delaware corporation (“Tenant”), and Zymogenetics, (“Subtenant”).

RECITALS:

A. Pursuant to a Lease dated as of September 19, 2003 (the “Lease”), between Landlord and Tenant, Tenant is leasing from Landlord certain premises (the “Premises”) situated on the 2nd floor of the building (the “Building”) currently known as the 1144 Eastlake Building, located at 1144 Eastlake Ave. East, Seattle WA.

B. Pursuant to a Sublease in the form attached to this Agreement as Exhibit A (the “Sublease”), Tenant has agreed to sublease to Subtenant a portion of the Premises, as more particularly described in the Sublease.

C. Pursuant to the terms of the Lease, Tenant must obtain the prior written consent of Landlord to any sublease of all or any portion of the Premises. Landlord is prepared to consent to the Sublease on the terms and conditions of this Agreement.

AGREEMENT:

Landlord hereby consents to the Sublease, subject to the following terms, covenants and agreements of the parties, and in consideration of such consent, Tenant and Subtenant agrees as follows:

1. Neither the Sublease nor this Agreement shall be construed to relieve Tenant of any liabilities or obligations whatsoever under the lease. Tenant shall continue to be fully and primarily liable for the full performance of all obligations of the tenant under the Lease.

2. Subtenant and Tenant acknowledge and agree the Sublease and all of Subtenant’s rights thereunder shall be subject and subordinated in all respects to the Lease. If the Lease terminates or is terminated prior to the expiration of the term of the Sublease, the Sublease also shall terminate; provided, however, at Landlord’s sole option, following a termination of the Lease, the Sublease shall remain in full force and effect, in which event Subtenant shall attorn to Landlord and recognize Landlord as Subtenant’s landlord under the Sublease, upon the terms and conditions and at the rental rate specified in the Sublease, and for the then remaining term of the Sublease, except Landlord shall not be bound by any provision of the Sublease which in any way increases Landlord’s duties, obligations or liabilities to Subtenant beyond those owed to tenant under the Lease. Subtenant shall execute and deliver at any time and from time to time upon the request of landlord, any instruments which may be necessary or appropriate to evidence such attornment. Landlord shall not in any event (i) be liable to Subtenant for any act, omission or breach of the Sublease by Tenant, (ii) be subject to any offsets or defenses which Subtenant might have against Tenant, (iii) be bound by any rent or additional rent which Subtenant might have paid in advance to Tenant, or (iv) be bound to honor any rights of Subtenant in and to any

security or other deposits paid by Subtenant pursuant to the Lease except to the extent Tenant has turned over such security or other deposits to Landlord. If Tenant is in default under the terms of the Lease, Landlord shall have the right to take all actions available to Landlord under the Lease and by law, including but not limited to the right to commence an unlawful detainer action against Tenant and Subtenant.

3. Whenever the Lease gives Landlord a right of involvement, such as a right to approve, consent, cooperate or decide, Landlord shall have such right with respect to both Tenant and Subtenant. If Landlord and Tenant disagree over any decision requiring both of their consents or approvals, Landlord’s decision shall control. For example, the Lease requires Landlord’s prior consent to any alterations or additions to the Premises. If Subtenant desires to make alterations or additions to the Premises, it must obtain the prior consent of both Landlord and Tenant.

4. Tenant will pay Landlord’s attorneys’ fees in reviewing the Sublease and preparing this Agreement, not to exceed $1,500.00.

5. The indemnity and other agreements contained in the Sublease (or incorporated therein by reference) shall apply with equal force and effect between Subtenant and Landlord (with Subtenant indemnifying Landlord in accordance with the terms of the Sublease), and Landlord shall be named as an additional insured on any insurance maintained by Subtenant under the Sublease.

6. This Agreement shall not relieve Tenant of its obligation to obtain Landlord’s consent to (a) any further sublease of all or part of the Premises, or (b) any assignment of the Lease; nor shall the Sublease or this Agreement be construed as conferring upon Subtenant any right to further sublease the Premises or assign its rights under the Sublease in either case without Landlord’s consent.

7. A failure by Tenant or Subtenant to comply with any of the terms or conditions of this Agreement shall constitute a default under the Lease. If any party to this Agreement commences an action or other legal proceeding to enforce performance of any of the terms or provisions hereof or of the Lease, the prevailing party in such action or proceeding shall, in addition to such other relief as it may obtain, be entitled to recover from the other parties all of its costs incurred, including reasonable attorneys’ fees, in any such action or proceeding or any appeal from any order, award or judgment therein.

8. In addition to Landlord’s rights under this Agreement, the Lease, at law or in equity, if Tenant is in default under any of the terms or provisions of the Lease, Landlord may elect to receive directly from Subtenant all sums due or payable to Tenant by Subtenant pursuant to the Sublease, and upon receipt of written notice from Landlord to do so, Subtenant shall thereafter pay Landlord any sums becoming due or payable under the Sublease. Tenant hereby consents to such direct payment and authorizes and directs Subtenant to comply with any notice given by Landlord to Subtenant pursuant to the proceeding sentence. Neither the service of such written notice nor the receipt and acceptance of such direct payments shall cause Landlord to be deemed to have assumed any of Tenant’s duties, obligations and/or liabilities to Subtenant under the Sublease, nor shall such event impose upon the Landlord the duty or obligation to accept an attornment by Subtenant following a termination of the Lease.

9. Any options to extend the Lease, rights of first refusal to lease additional space or right to expand the Premises may not be exercised by or for the benefit of Subtenant.

10. Subtenant and Tenant shall not amend or modify the Sublease without Landlord’s prior written consent.

11. This Agreement shall be binding and inure to the benefit of the parties and their respective successors and assigns, subject, however, to all restrictions on assignment and subletting contained in the Lease or in this Agreement. In the event of any litigation or other legal proceeding between the parties to enforce or interpret this Agreement, the unsuccessful party or parties shall pay to the prevailing party or parties, all costs, expenses and reasonable attorneys’ fees incurred by the prevailing party or parties, whether such fees and expenses are incurred in trial court, on appeal, in bankruptcy court or in any other legal proceeding.

Dated as of the day and year first above written.

LANDLORD:
Teutsch Partners (1144 Eastlake, LLC)
	By	/s/ John S. Teutsch
		John S. Teutsch
TENANT:
Conoco Phillips Company
Delaware Corporation
	By	/s/ Tim R. Thompson
		Tim R. Thompson
		[Print Name and Title]

SUBTENANT:
Zymogenetics
By	/s/ James A. Johnson
	James A. Johnson, Sr. VP & CFO
	[Print Name and Title]

SUBLEASE AGREEMENT

THIS AGREEMENT (hereinafter referred to as the “Sublease”) is made and entered into as of the          day of September 2005, between ConocoPhillips Company, a Delaware corporation, (hereinafter referred to as “Sublessor”) and ZymoGenetics, Inc., a Washington corporation, (hereinafter referred to as “Sublessee”).

W I T N E S S E T H:

WHEREAS, Sublessor desires to sublease its interest in a portion of the “Premises”, as defined in the Prime Lease (as such term is hereinafter defined), to Sublessee; and

WHEREAS, Sublessee desires to sublease the Sublease Premises from Sublessor upon the terms and conditions contained herein.

NOW, THEREFORE, for good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged by said parties, the parties hereto do hereby agree as follows:

1. Sublease Premises. Sublessor hereby leases to Sublessee and Sublessee hereby leases from Sublessor approximately 7,128 rentable square feet of space on the 2nd floor (currently identified as Suite 201) of 1144 Eastlake Building (the “Building”) which is located at 1144 Eastlake Avenue E, Seattle, Washington 98109, as shown on the floor plan, less the area shown hatched in black, attached hereto as Exhibit “A” and made a part hereof (the “Sublease Premises”) for a term of 37 months, commencing on the later of October 1, 2005 or the date Sublessor delivers the Sublease Premises to Sublessee (the “Commencement Date”)-and ending at 11:59 p.m. on October 31, 2008, regardless of the actual Commencement Date, (hereinafter sometimes referred to as the “Sublease Term”), unless sooner terminated as hereinafter provided, and subject to the contingencies specified in Article 14 hereof. Sublessee agrees that the Sublease Commencement Date shall be the later of October 1, 2005, or the date of actual delivery of the Sublease Premises to Sublessee. Sublessor and Sublessee further agree that if the Commencement Date is later than October 1, 2005, Sublessee’s payment of Monthly Rental and Additional Rent in the amounts applicable for the specific period of time on the actual Commencement Date as reflected in the rent schedule shown below in Article 2(a) and Article 2(c) shall be payable on or before the actual date of commencement. Upon the request of either party or Prime Lessor, Sublessor and Sublessee shall execute a Commencement Date Certificate in the form attached hereto as Exhibit “C.”

(b) Late or Early Delivery. In the event Sublessor is unable to deliver possession of the Premises at the commencement of the term, Sublessor shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable but Sublessee shall not be liable for rent until such time as Sublessor offers to deliver possession of the Premises to Sublessee, but the term hereof shall not be extended by such delay. If Sublessee, with Sublessor’s and Prime Lessor’s consents, takes possession prior to the commencement of the term, Sublessee shall do so subject to all the covenants and conditions hereof except for the payment of Monthly Rent and Additional Rent which shall be free from such prior date to the commencement of the term until October 1, 2005 which Monthly Rent and Additional Rent thereafter shall be as reflected in the rent schedule shown below in Article 2.

2. Rent; Security Deposit; Parking.

(a) Sublessee agrees to pay to Sublessor at the address Sublessor designates herein, or at such other place as Sublessor may designate in writing, without demand, counterclaim, deduction or setoff, in legal tender, base rental for the Sublease Term payable in monthly base rental installments (“Monthly Rental”) as follows:

Date/Term	Monthly Installment of Base Rent		Yearly Rental Rate Per Rentable Square Foot
10-01-05 to 11-30-05	$	0.00	$	0.00
12-01-05 to 10-31-06	$	13,929.30	$	23.45
11-01-06 to 10-31-07	$	14,523.30	$	24.45
11-01-07 to 10-31-08	$	15,117.30	$	25.45

Sublessee shall pay the Monthly Rental and any other sum due hereunder as rent, whether or not designated as rent, to ConocoPhillips Company, ATTN: Tax ID 91-1144498, 21064 Network Place, Chicago, IL 60673-1210. The reference “Tax ID 91-1144498” shall to be inserted on all rental checks. Sublessee shall pay the Monthly Rental in advance not later than the 1st day of every month during the Sublease Term. Notwithstanding the above, concurrently with its execution hereof, Sublessee has paid to Sublessor the first month’s rent due under this Sublease.

Notwithstanding the foregoing, if Sublessee receives a notice from the Prime Lessor that the Sublessor has defaulted on its monetary obligations under the Prime Lease, then from and after that date Sublessee receives such notice, regardless of any subsequent cure of such default, Sublessee shall have the right but not the obligation to deliver all subsequent Monthly Rental and Additional Rent accruing hereunder directly to the Prime Lessor for Sublessor’s account (or to continue to pay Sublessor directly).

(b) The Base Year for the Sublease shall be 2005.

(c) Sublessee shall pay monthly as “Additional Rent” the Sublessee’s Pro Rata Share of Expenses, Taxes and Insurance, as defined in Article 4.2 of the Prime Lease that exceeds the Base Year Operating Costs as defined therein. The Sublessee’s Pro Rata Share is estimated in Article 1.4 of the Prime Lease as 8.92% or as modified by the Prime Lessor. Any cap (currently at 5%) on such expenses stated in the Prime Lease’s paragraph 4.2 shall apply to this Sublease as well.

(d) Sublessor and Sublessee agree that there shall be no initial security deposit required. Sublessor reserves the right to demand, and Sublessee agrees to pay, a deposit of $20,000 should Sublessee default per the terms of Article 10 below, if such default is not cured within the applicable notice and cure period. Upon notice to Sublessee by Sublessor, the following language shall be added language to the Sublease:

“Sublessee shall pay to Sublessor $20,000.00 as security for Sublessee’s payment of Monthly Rental and performance of its other obligations under this Sublease and any renewals or extensions of this Sublease. If Sublessee defaults in its payment of Monthly Rental or performance of its other obligations under this Sublease, Sublessor may use all or part of the security deposit for the payment of Monthly Rental or any other amount in default, or for the payment of any other amount that Sublessor may spend or become obligated to spend by reason of Sublessee’s default, or for the payment to Sublessor of any other loss or damage that Sublessor may suffer by reason of Sublessee’s default. If Sublessor so uses any portion of the security deposit, Sublessee will restore the security deposit to its original amount within five (5) days after written demand from Sublessor. Sublessor will not be required to keep the security deposit separate for its own funds and Sublessee will not be entitled to interest on the security deposit. The security deposit will not be a limitation on Sublessor’s damages or other rights under this Sublease, or a payment of liquidated damages, or an advance payment of the Monthly Rental. Upon expiration of the Sublease Term or earlier termination of this Sublease the security deposit shall be returned to Sublessee within a reasonable amount of time after such termination, reduced by such amounts as may be required by Sublessor to remedy defaults on the part of Sublessee in the payment of Monthly Rental, to repair damage to the Sublease Premises and the Building caused by Sublessee, its agents, employees, invitees and licensees and to clean the Sublease Premises.”

(e) At no additional charge to Sublessee, Sublessee shall be entitled to the use, on a non-exclusive basis, fourteen (14) parking stalls in the Building and the non-exclusive use of three (3) additional parking stalls located either in the Building or in surface parking lots in the vicinity of the Building. Use of such parking stalls shall be upon such terms and conditions and subject to such reasonable rules and regulations as

Prime Lessor or Sublessor may publish from time to time and otherwise strictly in accordance with and subject to the terms and conditions of Article 30 of the Prime Lease (but without any requirement that Sublessee pay the amounts stated therein for such stalls) as such amounts are included in the Monthly Rental as stated in Article 2 above.

3. Subordinate to Prime Lease, Sublessor Covenants.

(a) That certain so-called Office Lease entered into as of the 19^th day of September, 2003 by and between Sublessor, as tenant therein, and 1144 Eastlake LLC, as landlord therein (“Prime Lessor”), pursuant to which Sublessor leases and occupies approximately 7,128 rentable square feet of space on the 2nd floor of the Building (the “Premises”), is herein referred to as the “Prime Lease”. The Sublease Premises is comprised of the entire Premises. A copy of the Prime Lease, including all amendments and exhibits thereto is attached hereto as Exhibit “B” and made a part hereof. Sublessee acknowledges that it is familiar with the terms of the Prime Lease. In the event of any termination of the Prime Lease, this Sublease shall automatically terminate and Sublessor shall have no further liability to Sublessee. Except as may be inconsistent with the terms hereof, and subject to Sublessor performing its covenants stated in Article 3(b) below, all the terms, covenants, restrictions and conditions in the Prime Lease contained as of the date of this Sublease, shall be applicable to this Sublease with the same force and effect as if the Sublessor were the “lessor” under the Prime Lease (except with respect to Prime Lessor’s obligations to provide services under the Prime Lease, as to which Section 6 hereof shall prevail) and Sublessee were the “lessee” thereunder; and in the case of any breach hereof by Sublessee, Sublessor shall have all the rights against Sublessee as would be available to Prime Lessor against Sublessor as “lessee” under the Prime Lease. This Sublease is in all respects subject to and subordinate to the terms and conditions of the Prime Lease. Except as expressly contradicted by the terms of this Sublease, Sublessee agrees to be bound by all of the covenants, restrictions, terms and conditions of the Prime Lease in its use and occupancy of the Sublease Premises, and Sublessee covenants and agrees to perform all obligations of Sublessor arising under the Prime Lease during the term of this Sublease, and to refrain from violating or breaching any of the terms, covenants, restrictions and conditions of the Prime Lease.

(b) Sublessor hereby covenants and agrees for the Sublessee’s benefit as follows:

(i) To timely pay all Base Rent, Additional Rent and any other amounts due to Prime Lessor or otherwise under the Prime Lease;

(ii) Sublessor hereby waives irrevocably its Extension Rights under the Prime Lease at Article 1.5(c), covenants not to exercise such rights and agrees that the Prime Lessor may rely upon its statement in this subsection as a complete waiver;

(iii) Not to voluntarily cause, permit or consent to the termination or alternation of the Prime Lease, without first obtaining Sublessee’s consent which consent shall not be unreasonably withheld.

(iv) Sublessee shall and may peacefully have, hold and enjoy the Sublease Premises free from any person claiming a right thereto through Sublessor, subject to the terms of this Sublease and the Prime Lease, provided Sublessee pays the Monthly Rental and Additional Rent and fully performs all of its covenants and agreements;

(v) To deliver, as soon as practicable via facsimile, copies of all notices it receives from the Prime Lessor relating to the Sublease Premises, this Sublease or otherwise under the Prime Lease; and

(vi) Upon request by Sublessee, if reasonably determined necessary by Sublessee to establish privity of contract or other standing to compel Prime Lessor to perform, Sublessor will agree join as a co-plaintiff or co-petitioner with Sublessee in any action against Prime Lessor concerning a breach of Prime Lessor’s obligations under the Prime Lease; provided, however, that as a condition concurrent with Sublessor’s agreement to join in such action, Sublessee agrees (A) to reimburse Sublessor

immediately upon demand as Additional Rent, all of Sublessor’s expenses, including attorney’s fees, in connection with such action; (B) that by virtue of making a request for joinder, Sublessee has agreed to indemnify, defend and hold Sublessor harmless, for any of Sublessor’s claims, losses, costs, expenses and/or damages arising from or relating to Sublessee’s actions under this Subsection 3(b)(vi), including, but not limited to attorney’s fees and costs.

4. Insurance. Sublessee shall maintain at all times during the term of this Sublease, at its sole expense, comprehensive general liability insurance against claims for bodily injury, personal injury, and property damage occurring on, in or about the Sublease Premises in the amount of $10,000,000 per occurrence and shall name Sublessor and Prime Lessor as additional insureds. Sublessee shall also maintain, at its sole expense, physical damage insurance, on all of its personal property, including removable trade fixtures, located in the Sublease Premises and on all additions and leasehold improvements in the Sublease Premises. Such insurance shall be written on an “all risks” of physical loss or damage basis, for the full replacement cost value new without deduction for depreciation of the covered items and in amounts that meet any coinsurance clauses of the policies of insurance and shall include a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage coverage. All such insurance policies shall comply with all requirements of the Prime Lease, and shall be maintained with an insurance company licensed in the State of Washington with a Best’s rating of “A-VIII” or better in Best’s Insurance Guide. Sublessee shall deliver the certificate(s) of all such insurance prior to the commencement date of this Sublease and upon request, at any time thereafter. The insurance certificates shall provide that such insurance shall not be cancelled or materially adversely amended without at least thirty (30) days prior written notice to Sublessor and Prime Lessor. Sublessee agrees to have any and all physical damage coverage and all material damage insurance that will either include in the policy a right of Sublessee to waive subrogation without affecting the insureds’ rights to recover under the policy, or endorsed with the following subrogation clause: “This insurance shall not be invalidated should the insurer waive in writing prior to a loss any or all right of recovery against any party for loss occurring to the property described herein.” Sublessee hereby expressly waives all rights of recovery which it might otherwise have against Sublessor or Prime Lessor, for any loss or damage to personal property to the extent that such loss is covered, or would be covered by the insurance, required by this Article 4, if it were in effect. Sublessee shall further cause its insurers to waive any right of subrogation that they might otherwise have against Sublessor or Prime Lessor. Should premiums paid by the Sublessor or Prime Lessor increase due to Sublessee’s operations, the contents within the Sublease Premises or improvements made to the Sublease Premises, Sublessee shall promptly pay the increased amount of the premium upon request to Sublessor or Prime Lessor, respectively.

5. “As Is” Condition; Use; Alterations. Sublessee shall assume all of Sublessor’s obligations in Article 8 of the Prime Lease and shall take the Sublease Premises on an “as is” basis, subject to Sublessor delivering the Sublease Premises with the equipment listed on attached Exhibit “DD” (the “Sublease Premises FF&E”). As used herein “as is” means the condition the Sublease Premises and the Sublease Premises FF&E are in as of the execution date of this Sublease, subject to ordinary wear and tear. Sublessee’s taking possession of any portion of the Sublease Premises with such Sublease Premises FF&E shall be conclusive evidence against Sublessee that such portion of the Sublease Premises was in a good order and satisfactory condition when Sublessee took possession. No promise of Sublessor to alter, remodel, repair or improve the Sublease Premises and no representation respecting the condition of the Sublease Premises or the Building or any portion thereof have been made by Sublessor to Sublessee except as otherwise provided above in this Article 5. SUBLESSOR HEREBY EXPRESSLY DISCLAIMS AND NEGATES, AND SUBLESSEE HEREBY WAIVES, ALL WARRANTIES OF ANY KIND OR TYPE WHATSOEVER WITH RESPECT TO THE SUBLEASED PREMISES, THE SUBLEASE PREMISES FF&E, THE BUILDING, OR ANY IMPROVEMENTS LOCATED THEREON, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING BY WAY OF DESCRIPTION BUT NOT LIMITATION ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, CONDITION OR SAFETY. SUBLESSEE EXPRESSLY

AGREES THAT NEITHER SUBLESSOR, NOR ANYONE ACTING FOR OR ON BEHALF OF THE SUBLESSOR, HAS MADE ANY REPRESENTATION, WARRANTY, STATEMENT OR PROMISE, EXPRESS OR IMPLIED, TO SUBLESSEE CONCERNING THE QUALITY, VALUE, PHYSICAL ASPECTS OR CONDITIONS OF THE SUBLEASED PREMISES, THE SUBLEASE PREMISES FF&E, THE BUILDING OR ANY IMPROVEMENTS LOCATED THEREON, OR ANY OTHER MATTER WITH RESPECT THERETO, AND THAT SUBLESSEE HAS NOT RELIED UPON ANY REPRESENTATION, WARRANTY, STATEMENT OR PROMISE. SUBLESSEE AGREES THAT IT HAS MADE A PERSONAL INSPECTION OF THE SUBLEASED PREMISES, THE SUBLEASE PREMISES FF&E, THE BUILDING, AND ANY BUILDINGS AND OTHER IMPROVEMENTS LOCATED THEREON AND IS IN ALL RESPECTS SATISFIED WITH THE CONDITION AND FITNESS THEREOF AND ACCEPTS THE SAME “AS IS”, “WHERE IS” AND WITH ALL FAULTS, IN ITS PRESENT CONDITION AND STATE OF REPAIR. THE PARTIES ACKNOWLEDGE AND AGREE THAT DISCLAIMERS OF THE WARRANTIES CONTAINED IN THIS SECTION ARE “CONSPICUOUS” DISCLAIMERS FOR THE PURPOSES OF ANY APPLICABLE LAW, RULE OR ORDER. SUBLESSOR DOES NOT WARRANT EITHER EXPRESSLY OR IMPLIEDLY THE CONDITION OR FITNESS OF THE PROPERTY SUBLEASED HEREUNDER, ANY SUCH WARRANTY BEING HEREBY EXPRESSLY NEGATIVED. The Sublease Premises shall be used and occupied by Sublessee solely for the purpose of general office uses and for no other purpose. Sublessee covenants and agrees that it will, at its expense, comply with all laws, ordinances, orders, directions, requirements, rules and regulations of all governmental authorities (including federal, state, county and municipal authorities), now in force or which may hereafter be in force, which shall impose any duty upon Prime Lessor, Sublessor or Sublessee with respect to the use, occupancy or alteration of the Sublease Premises and of all insurance bodies applicable to the Sublease Premises and to the Sublessee’s use or occupancy thereof. Sublessee shall not use or permit the use of the Sublease Premises in any manner that will tend to create waste or a nuisance or to disturb other tenants of the Building or that will violate any of the terms or provisions of the Prime Lease.

Any alterations, additions or improvements desired by Sublessee shall be at Sublessee’s sole cost and expense and must be first approved in writing by Sublessor and Prime Lessor, with the requirements for approvals, the standards and timetables therefore as set forth and pursuant to the provisions stated in the Prime Lease at Article 9.3 therein, but including both Sublessor and Prime Lessor as approving parties, when applicable. Any such additions, alterations or modifications shall be carried out by Sublessee, at its own expense, in accordance with the provisions of the Prime Lease. Sublessee shall indemnify and hold harmless Sublessor and Prime Lessor from any and all costs, expenses, claims or liabilities, incurred in connection with the installation by Sublessee of any additions, alterations or modifications to or of the Sublease Premises, except to the extent done at the direction of the Sublessor or Prime Lessor.

6. Services. Notwithstanding anything to the contrary contained herein, the only services or rights to which Sublessee is entitled hereunder are those to which Sublessor is entitled to as “lessee” under the Prime Lease and that for all such services and rights Sublessee will look to Prime Lessor under the Prime Lease. Except as expressly setforth in Article 3(b) above, nothing contained in this Sublease shall in any way obligate Sublessor to perform any act required to be performed by the Prime Lessor under the Prime Lease, nor shall Sublessor incur any liability of Sublessee by virtue of the Prime Lessor’s failure to perform any act required of it or Prime Lessor’s failure to give any consent under the Prime Lease. Sublessor agrees to use reasonable efforts to cause Prime Lessor to provide the services required of Prime Lessor under the Prime Lease.

7. No Acts. Sublessee shall neither do nor permit anything to be done which would cause the Prime Lease to be terminated or forfeited or any claims to accrue to the benefit of Prime Lessor by reasons of any right of termination or forfeiture reserved or vested in Prime Lessor under the Prime Lease, or any rights to damages accruing to or for the benefit of Prime Lessor under the Prime Lease, and Sublessee shall indemnify and hold Sublessor harmless from and against all loss, cost, damage or expense, including,

but not limited to, attorneys’ fees and court costs, incurred by Sublessor by reason of any default on the part of Sublessee by reason of which the Prime Lease may be terminated or forfeited, or any claim shall accrue to the benefit of or for Sublessor under the Prime Lease. Sublessee agrees to indemnify, defend, protect and hold Sublessor harmless from and against any and all claims, demands, actions, suits, judgments, decrees, orders, liabilities, or expenses including reasonable attorneys’ fees and disbursements arising out of or on account of any damage or injuries, including wrongful death sustained or claimed to have been sustained to any person or property in or upon the Sublease Premises by any person whatsoever unless the same shall result directly and exclusively from the gross negligence or intentional misconduct of Sublessor. Sublessor shall not be liable for damage to person or property sustained by Sublessee or any other person, however such damage may have been caused, except to the extent resulting from the Sublessor’s gross negligence or intentional misconduct.

8. Surrender. Upon the termination or expiration of this Sublease at any time and for any reason, Sublessee will immediately quit and peacefully surrender possession of the Sublease Premises and Sublessee agrees to return the Sublease Premises in the same condition as they existed at the date of Sublessee’s occupancy, except for ordinary wear and tear and except for alterations and improvements approved by Sublessor and Prime Lessor, and Sublessee shall remove all of its personal property therefrom. If Sublessee remains in possession of the Sublease Premises after the end of the term of this Sublease with the prior consent of Sublessor, and the Prime Lease is still in effect, then Sublessee will occupy the Sublease Premises as a tenant from month to month, subject to all conditions, provisions and obligations of this Sublease in effect on the last day of the term. If Sublessee remains in possession of the Sublease Premises after the end of the term of this Sublease without the consent of Sublessor, and the Prime Lease is still in effect, then Sublessee shall indemnify Sublessor against all claims, losses, costs, expenses, and damages arising therefrom.

9. No Assignment. Except as otherwise expressly provided herein, Sublessee shall not assign this Sublease or any interest hereunder or further sublet all or any part of the Sublease Premises, or permit the use of the Sublease Premises by any party other than Sublessee and the employees of Sublessee, without the prior written consent of Sublessor and Prime Lessor in each instance, which will not be unreasonably withheld, conditioned or delayed, all in accordance with the terms and conditions of Article 12 of the Prime Lease. Sublessee shall not permit Sublessee’s interest in this Sublease to be vested in any third party by operation of law or otherwise. In the event such consent is obtained, any rents or other consideration received under any such proposed sublease which exceed the rent as defined in this Sublease or any consideration for an assignment shall be paid to Sublessor as and when received by Sublessee. For purposes of this Article 9, an assignment of this Sublease shall be deemed to occur upon any change in the ownership of Sublessee as described in Article 12 of the Prime Lease, provided however that Sublessee shall be permitted to transfer this Sublease or its interest in the Sublease Premises without obtaining Sublessor or Prime Lessor’s consent for those transfers described in the Prime Lease’s Article 12.4.

10. Default. The following events shall be deemed to be events of default by Sublessee under this Sublease:

(a) Sublessee shall fail to pay any installment of rent hereby reserved as and when the same shall become due if the failure continues for three (3) business days after written notice to Sublessee (“Monetary Default). Sublessor may, at its sole option, invoke the provisions of Article 2(d) above regardless or whether or not a Monetary Default is cured;

(b) Sublessee shall fail (other than a Monetary Default) to comply with any term, provision or covenant of the Prime Lease or this Sublease and shall not cure such failure within thirty (30) days after written notice thereof to Sublessee. However, if Sublessee’s failure to comply cannot reasonably be cured within thirty (30) days, Sublessee shall be allowed additional time as is reasonably necessary to cure the failure so long as: (1) Sublessee commences to cure the failure within thirty (30) days, and (2) Sublessee diligently pursues a course of action that will cure the failure and bring

Sublessee back into compliance with the Prime Lease and the Sublease. However, if Sublessee’s failure to comply creates a hazardous condition, the failure must be cured immediately upon notice to Sublessee;

(c) Sublessee shall become insolvent, or shall make a transfer in order to defraud creditors or shall make an assignment for the benefit of creditors or admits in writing its inability to pay its debts when due;

(d) Sublessee shall file a petition under any section or chapter of the National Bankruptcy Act, as amended, or under any similar law or statute of the United States or any state thereof; or Sublessee shall be adjudged bankrupt or insolvent in proceedings filed against Sublessee thereunder;

(e) A receiver or trustee shall be appointed for all or substantially all of the assets of Sublessee not removed or dismissed within sixty (60) days;

(f) Sublessee shall otherwise cause Sublessor to be in default under the Prime Lease.

(g) Sublessee shall abandon the entire Sublease Premises.

Upon the occurrence of any such events of default, which is not cured within the applicable notice and cure periods stated above, Sublessor shall have all the Landlord rights set forth in Article 20 of the Prime Lease and Sublessee shall be deemed “Tenant” for all purposes therein and herein.

10A. Sublessor Default.

(a) If Sublessor breaches any covenant or agreement of this Sublease, then and in such event Sublessee shall have the remedies set forth in Article 21 of the Prime Lease as if Sublessee was the Tenant and Sublessor was the Landlord as those terms are used therein. The limitation of liability for Landlord contained in Article 21 of the Prime Lease shall not apply to this Sublease.

(b) To its knowledge, Sublessor represents and warrants to Sublessee that (i) neither Sublessor or Landlord is in breach of or in default under the Prime Lease and no event has occurred that, with notice and/or lapse of time, would constitute a breach or default by Sublessor or Prime Lessor under the Prime Lease, and (ii) a true, correct, and complete copy of the Prime Lease as in effect on the Effective Date is attached hereto as Exhibit “B”.

11. Force Majeure. Sublessor and Sublessee shall not be liable for delay caused by strikes, riots, acts of God, national emergencies, acts of public enemy, civil insurrection, difficulty in obtaining materials or any other causes beyond Sublessor’s or Sublessee’s control (except insufficiency of funds) in performing any of the covenants required hereunder to be performed by Sublessor and Sublessee, except the payment of rent and other sums to be paid by Sublessee hereunder.

12. Default Rate. Sublessor and Sublessee further agree that in the event Sublessee at any time during the Sublease Term is in default in the payment of rent, Sublessor shall have the right to charge interest at the rate of eighteen percent (18%) per annum or the highest rate allowed by law, whichever is lower (the “Default Rate”), commencing on the sixth (6th) day after rent is due and continuing until rental payments are current. Sublessee hereby agrees to pay said interest upon notification by Sublessor.

13. Indemnity. Sublessee agrees that, to the extent not expressly prohibited by law, Sublessor and Prime Lessor, and their respective officers, agent and employees, shall not be liable for nor shall rent abate as a result of, any direct or consequential damage (including damage claimed for actual or constructive eviction) either to person or property, sustained by Sublessee or by other persons, due to the Building or any part thereof or any appurtenances thereof becoming out of repair, or due to any act or neglect of any tenant or occupant of the Building, or any other person. To the fullest extent permitted by law, Sublessee shall protect, indemnify and hold Sublessor and

Prime Lessor and their respective officers, agents, servants and employees harmless from and against any and all loss, costs, damages, claims, liabilities and expenses (including, without limitation, court costs and attorneys’ fees) of whatever nature arising from (i) injury to persons or damage to property on the Sublease Premises or in or about the Building arising out of or in connection with Sublessee’s use or occupancy of the Sublease Premises or Sublessee’s activities in the Building, or arising from any act or negligence of Sublessee, or its agents, contractors, servants, employees or invitees, or (ii) failure of Sublessee to perform its obligations under this Sublease, including those provisions of the Prime Lease incorporated herein by reference.

14. Consent of Prime Lessor. This Sublease and the obligations of both parties hereunder, are conditioned upon the written consent of Prime Lessor under the Prime Lease. This Sublease and any modifications or amendments thereof shall not take effect and be binding upon Sublessor until Sublessor obtains the written consent of Prime Lessor. Sublessor shall not be liable to Sublessee for any delay in delivering the Sublease Premises to Sublessee beyond the commencement date.

15. Notices. Any notice or demand which either party may or must give to the other hereunder shall be in writing and shall be deemed delivered when personally delivered or deposited in the United States mail, postage prepaid, certified with return receipt requested, addressed to the parties hereto at the respective addresses set out opposite their names below, or at such other address as they have hereafter specified by written notice:

Sublessor:

ConocoPhillips Company

ATTN: Marilynn Jackson

Plaza Office Building, 830C

Bartlesville, OK 74004

Office: 918-661-0993

Fax: 918-662-2226

Email: marilynn.l.jackson@conocophillips.com

With a copy to:

ConocoPhillips Company

ATTN: Randy Booth

1232 Park Street, Suite 300

Paso Robles, CA 93446

Office: 805-226-2641

Fax: 805-239-4410

Email: randy.w.booth@conocophillips.com

Sublessee:

ZymoGenetics, Inc.

ATTN: Shinko Campos, VP Operations

1144 Eastlake Avenue E., Suite 201

Seattle, WA 98109

Office: 206-442-6620

Fax: 206-442-6608

Email: shc@zgi.com

16. Brokerage. Grubb & Ellis Company, 601 Union Street, Suite 1400, Seattle, WA 98101 (“Sublessor’s Agent”) has acted as agent for Sublessor in this transaction. The Staubach Company, 2025 First Avenue, Suite 1212, Seattle, WA 98121 (“Sublessee’s Agent”) has acted as agent for Sublessee in this transaction. Sublessor and Sublessee hereby covenant and agree to one another that no brokerage fees or commissions are due any other Brokerage with respect to or in conjunction with this Sublease. Sublessor and Sublessee hereby indemnify one another, and hold one another harmless, from and against all loss, cost, damage or expense, including but not limited to, attorneys’ fees and court costs incurred by a party hereto as a result of any claims for brokerage fees or commissions due which are made by, through or under the other party hereto except those due Sublessor’s Agent by Sublessor per a separate agreement and except those due Sublessee’s Agent by Sublessor of a fee equal to $1.00 per square foot per year based on the sublease term.

17. Service of Process. Sublessee hereby appoints, as its agent to receive service of all dispossessory or restraint proceedings and notices thereunder, and all notices required under this Sublease, the person in charge of the Sublease Premises at the time of occupying said Sublease Premises; and if no person is in charge of, or occupying the Sublease Premises, then such service or notice may be made by attaching the same on the main entrance of the Sublease Premises and mailing a copy thereof to Sublessee’s last known address or any other address which Sublessee may have requested that notices be mailed by written notice to Sublessor.

18. No Other Agreements. All prior understandings and agreements between the parties are merged within this Sublease which alone fully and completely sets forth the understanding of the parties hereto. This Sublease may not be changed or terminated in any manner other than by an agreement in writing, executed by the party against whom enforcement of the change or termination is sought.

19. Binding Effect. This Sublease shall inure to the benefit of and be a burden upon Prime Lessor, Sublessor and Sublessee and their respective transferees, successors and permitted assigns, subject, in the case of Sublessee, to the provisions of Section 9 hereof.

20. Governing Law. This Sublease shall be governed by and interpreted in accordance with the laws of the State of Washington and the parties hereby consent to the jurisdiction and venue of the King County Superior Court, in Seattle, Washington.

21. Miscellaneous.

(a) Rights Reserved by Sublessor.

(i) Sublessor may enter the Sublease Premises at reasonable times during normal business hours, on twenty-four (24) hours’ advance notice to Sublessee for the purpose of inspecting the Sublease Premises. Sublessor shall at all times be accompanied by Sublessee’s agents and shall not be permitted access to those areas containing confidential or trade secret information. Sublessee shall conduct such inspections so as to minimize the inconvenience or disturbance to Sublessee in its business. Prime Lessor’s entry to the Sublease Premises shall be governed by the Prime Lease.

(ii) If Sublessee breaches any covenant or condition of this Sublease and as a result of such breach Sublessor shall be in default under the terms of the Lease, Sublessor may, after the expiration of any applicable notice and cure period, and thereafter upon notice to Sublessee (except that no notice need be given in cases of emergency), to cure such breach at Sublessee’s expense. The cost of such cure shall be deemed Additional Rental payable hereunder on demand.

(b) Jointly Prepared Document. This Sublease is the result of prior negotiations, agreements and understandings of the parties hereto and is to be construed as the jointly prepared product of the parties hereto.

(c) Conflict. In the event of a conflict between the terms of this Sublease and the terms of Prime Lease as to and between the parties hereto, the terms of this Sublease shall control.

(d) Time. Time is of the essence of this Sublease.

(e) Severability. If any term or provision of this Sublease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Sublease, or the application of such term or provision to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby and each remaining term or provision of this Sublease shall be valid and enforced to the fullest extent permitted by law.

(g) Captions. The captions used herein are for identification only and are not a part of this Sublease.

IN WITNESS WHEREOF, the Sublessor, Sublessee and Prime Lessor have duly fixed their names on the dates indicated below but effective as of the date first above written.

“SUBLESSOR”:
CONOCOPHILLIPS COMPANY
By:	/s/ Tim R. Thompson
Typed/Printed Name:	Tim R. Thompson
Title:	Attorney In Fact
Date:	9-27-05
Federal Tax ID Number:	73-0400345
“SUBLESSEE”:
ZYMOGENETICS, INC.
By:	/s/ James A. Johnson
Typed/Printed Name:	James A. Johnson
Title:	Sr VP & CFO
Federal Tax ID Number:	91-1144498
Date:	9.23.05

The undersigned, being the Prime Lessor under the Prime Lease, hereby consents to the foregoing Sublease and to the terms and provisions contained therein.

“PRIME LESSOR”
1144 EASTLAKE LLC a Washington limited partnership
By:	J&J Eastlake LLC
	a Washington limited liability company, its Manager
By:	/s/ John S. Teutsch
Title:	Managing Member
Date:	9-29-05

SUBLESSEE’S ACKNOWLEDGMENT

STATE OF WASHINGTON	§
	§
COUNTY OF KING	§

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that James A. Johnson, personally known to me to be the authorized agent of ZymoGenetics, Inc., a Washington corporation, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

Notary Public	/s/ Carol A. Alto
Printed Name	Carol A. Alto
Residing at	Seattle, WA
My Commission Expires	3.7.06

[Notary Seal]

SUBLESSOR’S ACKNOWLEDGMENT

STATE OF CALIFORNIA	§
	§
COUNTY OF SAN LUIS OBISPO	§

On                      before me, Tracey R. Gutierrez, Notary Public, personally appeared Tim R. Thompson, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that which the person acted, executed the instrument.

WITNESS my hand and official seal.

Notary Public

/s/ Tracey R. Gutierrez

Tracey R. Gutierrez

[Notary Seal]

PRIME LESSOR’S ACKNOWLEDGMENT

STATE OF WASHINGTON	§
	§
COUNTY OF KING	§

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that John Teutsch, personally known to me to be the authorized agent of 1144 Eastlake LLC, a Washington limited liability company, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth.

GIVEN under my hand and official seal this 30^th day of September, 2005.

Notary Public	/s/ Mai Huynh	[Notary Seal]
Printed Name	Mai Huynh
Residing at:	Covington, WA
My Commission Expires:	3-19-09

OFFICE LEASE AGREEMENT

This Office Lease Agreement (the “Lease”) is made and entered into as of the 19^th day of September, 2003, (“Effective Date”) by and between, 1144 Eastlake LLC, a Washington limited liability company (“Landlord”), and Conoco Phillips Company, a Delaware corporation (“Tenant”).

1. Basic Lease Information.

1.1 “Property” shall mean the building (“Building”) and associated real property located at 1144 Eastlake Avenue, Seattle, Washington and legally described on Exhibit A-Z “Building” is the structure located on the Property.

1.2 “Premises” shall mean the Rentable Area, as defined below, of the portion of the second (2nd) floor of the Building as depicted on the floor plan attached as Exhibit A-1 to this Lease. The “Rentable Area of the Premises” is approximately seven thousand one hundred twenty-eight (7,128) rentable square feet, and the Rentable Area of the Building is approximately seventy-nine thousand eight hundred sixty-eight (79,888) rentable square feet. “Rentable Area” shall have the same meaning as set forth in the 1996 “BOMA Standard Method for Measuring Floor Area in Office Buildings” (American National Standard ANSI/BOMA Z65.1-1996) (“BOMA Measurement”). Tenant hereby accepts the above Rentable Areas. Landlord may remeasure the Rentable Area of the Premises and/or Building Prior to the Commencement Date.

1.3 “Base Rent”: (“Month” refers to the applicable period through the full calendar month)

Period	Monthly Base Rent
Commencement Date through Month 12
Month 13 through Month 24
Month 25 through Month 36
Month 37 through Month 48
Month 49 through Month 60

1.4 “Tenant’s Pro Rata Share” is estimated to be eight and 92/100 percent (8.92%), but is subject to change if Landlord remeasures the Premises or Building as described in Section 1.2.

1.5 “Term”:

(a) The “Term” shall be a period of Sixty (60) calendar months, plus any partial month in which the Commencement Date occurs. The Term shall commence on the date (“Commencement Date”) that is the first to occur of the following events (i) seven (7) days following the date on which Landlord notifies Tenant that Landlord’s Work (defined in Exhibit C) is substantially complete, (ii) the date on which Tenant takes possession or commences beneficial occupancy of the Premises. or (iii) if substantial completion of Landlord’s Work is delayed due to Tenant’s failure to perform its obligations under this Lease, then seven (7) days following the date determined by Landlord as the date upon which Landlord’s Work would have been substantially completed, but for Tenant’s failure to perform. Unless terminated early in accordance with this Lease the Term shall end Sixty (60) calendar months after the Commencement Date (the “Termination Date”), provided however if the Lease commences on any day other than the first of the month the Lease shall terminate Sixty (60) calendar months after the last day of the month in which the Lease commenced. Landlord shall use commercially reasonable efforts to complete Landlord’s Work prior to November 1, 2003.

(b) Notwithstanding the foregoing, Tenant shall have a one time right to terminate this Lease as of the end of the thirty-sixth (36^th) full calendar month of the Term by giving Landlord written notice at least six (6) months prior to such data; provided that Tenant shall pay Landlord, at least ten (10) days prior to the date of such early termination, an amount equal to the sum of (i) the unamortized tenant improvement expenditures (including without limitation permits, design, construction costs, etc.) made by Landlord to prepare the Premises for Tenant, (ii) the unamortized leasing commissions paid by Landlord with respect to this Lease, and (iii) an amount equal to twelve (12) months of Base Monthly Rent at the rates applicable to the twelve (12) months immediately following the date of early termination. As used herein, the “unamortized” portion of an expenditure means the amount remaining after amortization of the expenditure over the first thirty-six (36) months of the Lease Term, assuming that the entire expenditure was to be amortized over the sixty (60) month term in equal monthly installments with interest at ten percent (10%) per annum.

CONOCO PHILLIPS, 1144 EASTLAKE LEASE	PAGE 1
	SEPTEMBER 12, 2003

(c) Tenant is granted the right (“Extension Right”) to extend the term of this Lease beyond the Termination Date of the initial Term for one period of sixty (60) months (the “Extended Term”). Tenant may not exercise its Extension Right if it is then in default beyond any applicable cure period or if it has ever been in default beyond any applicable cure period more than two (2) times in any twelve (12) month period. Tenant may exercise its Extension Right by delivering written notice thereof to Landlord not later than nine (9) months prior to the expiration of the initial term. In the Extended Term, all terms and conditions of this Lease shall apply except (i) there shall be no additional renewal terms; (ii) the Base Monthly Rent for the Extended Term shall be the then prevailing Fair Market Rent, provided that in no event shall the Base Monthly Rent for the Extended Term be less than the Base Monthly Rent for the last month of the initial term; (iii) parking rates during the Extended Term shall be at the than-prevailing rates for the Building; and (iv) the Base Year and Base Year Operating Expenses shall be reset to the calendar year in which falls the first day of the Extended Term.

Extension Rights shall apply to all of the Premises than under lease to Tenant. Tenant’s Extension Right is personal and may not be exercised by any assignee or sublessee other than an affiliate of Tenant or a successor by merger or consolidation.

The term “Fair Market Rent” for the purposes of this Lease shall mean the annual amount per rentable square foot that Landlord has accepted in current, new comparable transactions in the Building for comparable space, for a comparable period of time, with improvements comparable to those existing in the Premises on the date Tenant exercises its Extension Right (or with such restoration as Tenant would be required to make upon termination of the Lease, if such would increase the Fair Market Rent) from non-expansion, non-renewal and non-equity tenants, or if there are not a sufficient number of current comparable transactions in the Building, what a willing, comparable, new, non-expansion, non-renewal, non-equity tenant would pay, and a willing, comparable landlord of a comparable building would accept under the transaction as further defined above.

If Landlord and Tenant are not able to agree on the Fair Market Rent for the Extended Term within thirty (30) days after Tenant’s notice of election to renew, then such Fair Market Rent shall be determined as follows. Landlord and Tenant shall each select an appraiser with at least ten years experience in the Seattle commercial market. If the two appraisers are unable to agree within ten (10) days after their selection, they shall select a similarly qualified third appraiser (the “Neutral Appraiser”). Within twenty (20) days after selection of the Neutral Appraiser, the three appraisers shall simultaneously exchange determinations of Fair Market Rent. If the lowest appraisal is not less than ninety percent (90%) if the highest appraisal, then the three appraisals shall be averaged and the result shall be the Fair Market Rent. If the lowest appraisal is less than ninety percent (90%) of the highest appraisal, then the Fair Market Rent shall be deemed the rent set forth in the appraisal submitted an appraiser appointed by a party that is closest in dollar amount to the appraisal submitted by the Neutral Appraiser.

1.6 “Base Year”: calendar year 2004.

1.7 Security Deposit: None.

1.8 “Permitted Use”: General business office for energy company.

1.9 “Notice Addresses”: Notices shall be sent to the parties at the following addresses:

Tenant:
Prior to occupancy:
	Conoco Phillips Company 1500 North Priest Drive Tempe, Arizona 85281 Attn: Ernie Vituccl Phone: (602) 728-7452 Fax: (602) 728-5313
	With a copy to:
	ConocoPhillips P.O. Box 7500 Bertlesville, OK 74005-7500 Attn: Bill Sealy Phone: (918) 661-0505 Fax: (918) 661-7772
Landlord:	1144 Eastlake LLC
	c/o JSH Properties Attn: Diane Decker 14900 Interurban Ave. South, Suite 210 Seattle, WA 98168

CONOCO PHILLIPS, 1144 EASTLAKE LEASE	PAGE 2
	SEPTEMBER 12, 2003

Rent (defined in Section 4.1) is payable to the order of Landlord at its notice address, or at such other address as Landlord may specify from time to time by written notice given in accordance with Section 27.

1.10 “Business Day(s)” are Monday through Friday (and Saturday mornings) of each week, exclusive of New Year’s Day, President’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (“Holidays”). Landlord may designate additional Holidays, provided that the additional Holidays are commonly recognized by other office buildings in the area where the Property is located.

1.11 “Landlord Work” means the work, if any, that Landlord is obligated to perform in the Premises pursuant to Exhibit C.

1.12 “Law(s)” means all applicable statutes, codes, ordinances, orders, rules and regulations of any municipal or governmental entity.

1.13 “Normal Business Hours” for the Property are 7:00 A.M. to 6:00 P.M. on Business Days and 8:00 A.M. to 12:00 noon on Saturdays.

1.14 “Property” includes the Building and the parcel(s) of land on which it is located and other Improvements serving the Building, if any, and the parcel(s) of land on which they are located.

1.15 “Class A” building, or office building, as used in this Lease, shall mean first-class commercial office buildings of the type which are located in the South Lake Union area, and which are reasonably comparable in age and available amenities to the Building which is the subject of this Lease.

2. Lease Grant. Landlord leases the Premises to Tenant and Tenant leases the Premises from Landlord , together with the right in common with others to use any portions of the Property that are designated by Landlord for the common use of tenants and others, such as common corridors, elevator foyers, restrooms, vending areas, parking areas, sidewalks and lobby areas (the “Common Areas”).

3. Possession; Acceptance of Condition of Premises.

3.1 Landlord shall use commercially reasonable efforts to furnish Tenant with the right to enter and access the Premises one (1) week prior to the Commencement Date, for purposes of installing furniture and cabling. If Tenant enters and accesses the Premises prior to the Commencement Date for the such purpose, such early entry and access shall be subject to all of the terms and conditions of this Lease, but Tenant will not be obligated to pay Base Rent or a Pro Rate Share of Expenses, Taxes or Insurance until the Commencement Date. Tenant and Landlord agree to cooperate with each other in making mutually acceptable arrangements for such early entry and access by Tenant and to cooperate with Landlord’s contractor during the period of any such early entry and access so as not to interfere with Landlord’s performance of Landlord’s Work. Landlord’s operations in the Building or the quiet enjoyment of other occupants of the Building.

3.2 Except as provided elsewhere in this Lease, and subject to Landlord’s promise to perform “Landlord’s Work” as described in Exhibit C, attached hereto and made a part hereof, Tenant accepts the Premises in its “as-is, where-is” condition.

3.3 The occurrence of the Commencement Date prior to the completion in full of all work required to be performed by Landlord as provided herein shall not relieve Landlord of its obligation thereafter to complete Landlord’s Work in a reasonable, timely and workmanlike manner.

4. Rent.

4.1 Payments. As consideration for this Lease, Tenant shall pay Landlord, without any setoff or deduction (except if expressly set forth in this Lease), the total amount of Base Rent and Additional Rent due for the Term. “Additional Rent” means all sums (exclusive, of Base Rent) that Tenant is required to pay Landlord. Additional Rent and Base Rent are sometimes collectively referred to as “Rent”. Tenant shall pay and be liable for all rental, sales and use taxes (out excluding income taxes), if any, imposed upon or measured by Rent under applicable Law, Base Rent and recurring monthly charges of Additional Rent shall be due and payable in advance on the first day of each calendar month without notice or demand. All other items of Additional Rent shall be due and payable by Tenant on or before thirty (30) days after billing by Landlord. All payments of Rent shall be by good and sufficient check or by other means (such as automatic debit or electronic transfer) acceptable to Landlord. If Tenant fails to pay any Item or Installment of Rent within three (3) business days after such payment is due, Tenant shall pay Landlord an administration fee equal to five percent (5)% of the past due Rent. If the Term commences on a day other than the first day of a calendar month or terminates on a day other than the last day of a calendar month, the monthly Base Rent and Tenant’s Pro Rate Share of Expenses (defined in Section 4.3) for the month shall be prorated based on the number of days in such calendar month. Landlord’s acceptance of less than the total amount of Rent due or billed shall be considered a payment on account of the

CONOCO PHILLIPS, 1144 EASTLAKE LEASE	PAGE 3
	SEPTEMBER 12, 2003

earliest Rent due. No endorsement or statement on a check or letter accompanying a check or payment shall be considered an accord and satisfaction, and either party may accept the check or payment without prejudice to that party’s right to recover the balance or pursue other available remedies. Tenant’s covenant to pay Rent is independent of every other covenant in this Lease.

4.2 Payment of Tenant’s Pro Rata Share of Expenses. Taxes and Insurance. Expenses, Taxes and insurance are collectively referred to in this Section 4.2 as “Operating Costs.” For each year following the Base Year (as defined in Section 1.6 above), Tenant shall pay Landlord as Additional Rent for Tenant’s Pro Rata Share of Operating Costs for a given calendar year to the extent the same exceed Tenant’s Pro Rata Share of Operating Costs for the Base Year (“Base Year Operating Costs”). Landlord shall annually provide Tenant with a good faith estimate of the amount by which Tenant’s Pro Rata Share of Operating Costs for each calendar year are expected to exceed the Base Year Operating Costs. On or before the first day of each month, Tenant shall pay to Landlord a monthly installment equal to one-twelfth of the amount by which Tenant’s Pro Rata Share of Operating Costs are so estimated to exceed the Base Year Operating costs. If during any consecutive twelve (12) month period of the Term, Landlord determines that its good faith estimate was incorrect by a material amount. Landlord may provide Tenant with a revised estimate during such twelve (12) month period. After its receipt of the revised estimate, Tenant’s monthly payments of Tenant’s Pro Rata Share of Operating Costs shall be based upon the revised estimate. If Landlord does not provide Tenant with such estimate by January 1 of a calendar year, Tenant shall continue to pay monthly installments based on the previous year’s estimate until Landlord provides Tenant with the new estimate. Upon delivery of the new estimate, an adjustment shall be made for any month for which Tenant paid monthly installments based on the previous year’s estimate. Tenant shall pay Landlord the amount of any underpayment within thirty (30) days after receipt of the new estimate. Any overpayment shall be refunded to Tenant within thirty (30) days or credited against the next due future installment(s) of Additional Rent.

Notwithstanding the foregoing, for purposes of calculating the amount payable by Tenant, under this Section 4.2, Expenses (with the exception of Uncontrollable Expenses (defined below)) shall not exceed for any calendar year during the Term of this Lease, other than the first calendar year, the amount of Expenses for the preceding calendar year plus five percent (5%) (compounded annually). Any increases in Expenses not recovered by Landlord due to the foregoing limitation shall be carried forward into all succeeding calendar years during the Term (subject to the foregoing limitation) until fully recouped by Landlord. The term “Uncontrollable Expenses” means expenses relating to the cost of utilities, insurance, and other uncontrollable expenses (such as, but not limited to, increases in the minimum wage which may affect the cost of service contracts).

By May 1 following the end of each calendar year, Landlord shall furnish Tenant with a statement of the actual amount of Tenant’s Pro Rata Share of Operating Costs incurred in the preceding calendar year, and the difference (“Actual Owed Amount”) between such actual amount and the Base Year Operating Costs. If the Actual Owed Amount is less than the sum of estimated payments made by Tenant during the preceding calendar year, Landlord shall apply such overpayment by Tenant against Additional Rent due or next becoming due, provided if the Term expires before the determination of the overpayment, Landlord shall refund any overpayment to Tenant after first deducting the amount of Rent due. If the Actual Owed Amount is greater than the sum of estimated payments made by Tenant during the preceding calendar year. Tenant shall pay Landlord, within thirty (30) days after its receipt of the statement of Operating Costs, any underpayment for the prior calendar year.

4.3 Expenses Defined. “Expenses” means all cost and expenses incurred by Landlord in connection with operating, maintaining, repairing, and managing the Building as a “Class A office building,” as defined herein, including, but not limited to (1) utilities, including, but not limited to utilities and lighting for areas occupied by tenants as well as Common Areas; (2) maintenance costs for performance of any Landlord’s maintenance and repair obligations hereunder for the Building located on the Property, Common Areas, Property, including, but not limited to parking facilities and landscaping, maintaining and repairing sewer main, ducts, conduits and similar items, fire protection systems, sprinkler and security alarm systems, elevators, storm and sanitary drainage systems and other utility and mechanical systems; materials and services for operation, maintenance or the security or protection of the Property including any janitorial services, pest control, HVAC service contracts, any other repair and maintenance by Landlord; (3) roof and other exterior maintenance; (4) the amortized cost (with a reasonable rate of Insurance) of capital improvements made to the Property which are for the purpose of reducing operating expense costs, or which are required to comply with any laws, rules or regulations of any governmental authority first enacted after the Commencement Date or a requirement of Landlord’s insurance carrier first enacted after the Commencement Date; (5) property management fees not exceeding market rate; (6) all sums expended in connection with any Common Areas for maintenance and repairs; (7) operation, maintenance and repair of any heating, ventilation and air conditioning system, including repair of any HVAC components or units as reasonably needed; (8) the cost of utilities

CONOCO PHILLIPS, 1144 EASTLAKE LEASE	PAGE 4
	SEPTEMBER 12, 2003

consumed on the Property if paid for by Landlord; (9) the cost of any governmentally required license, permit, or inspection for or of the Property (other than those required in connection with Landlord’s Work); (10) replacement or supplemental directional and other signage other than the initial signage installed in the Building or on the Property by Landlord as part of Landlord’s Work; and (11) and any other costs and expenses of any other kind whatsoever which are generally considered expenses in accordance with generally accepted accounting principles and which are reasonably incurred by Landlord in connection with owning, operating or maintaining the Property and any expense designated by this Lease to be an Expense. Expenses shall be “net” only and for that purpose shall be deemed reduced by the amounts or any insurance reimbursement or other reimbursement received by Landlord in connection with such expenses. In the event the average occupancy level of the Building for any year is less than one hundred percent (100%), the actual Expenses for such year shall be proportionately adjusted to reflect those costs which Landlord estimates would have been incurred, had the Building been one hundred percent (100%) occupied during such year.

The following shall not be Expenses: (1) repairs or other work occasioned by insured casualty except for the deductible portion of any insured casualty loss; (2) marketing costs including, without limitation, leasing commissions, attorneys’ fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, tenant improvement costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations, disputes and transactions with present or prospective tenants; (3) depreciation and amortization (except as set forth above); (4) interest on debt or principal payments to a Lender or rental under a ground lease; (5) costs of Landlord’s general overhead and general and administrative expense; provided this limitation shall not be construed to limit Landlord’s right to require Tenant to pay as an Expense the property management fee provided for above:- (6) specific costs incurred for the account of specific tenants only; (7) salaries of officers, executives and partners of Landlord, and salaries of Building employees to the extent allocated to properties other than the Property; (8) penalties incurred as a result of Landlord’s negligence, inability or unwillingness to make payments, or penalties incurred due to the Building not being in compliance with applicable law; (9) capital improvements, except as otherwise provided above; (10) the cost of tenant improvements; (11) costs relating to any parking garage in the Building (such as utilities, attendants, cashiers and janitorial services); (12) costs resulting from the correction of any construction or design defects in all or any portion of the Premises or Building in connection with any of Landlord’s Work; and (13) penalties due to any violation of Law by Landlord.

4.4 Taxes and Insurance Defined. “Taxes shall mean: (1) all real estate taxes and other assessments on the Property, including, but not limited to, assessments for special improvement districts and building improvement districts, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments and the Premises’ share of any real estate taxes and assessments under any reciprocal easement agreement, common area agreement or similar agreement as to the Property; (2) all personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Premises or the Property; and (3) all reasonable costs and fees incurred in connection with seeking reductions in any tax liabilities described in (1) and (2), including, without limitation, any costs incurred by Landlord for compliance, review and appeal of tax liabilities. Without limitation, Taxes shall not include any income, capital levy, franchise, capital stock, gift, estate or inheritance tax. If an assessment is payable in installments, Taxes for the year shall include the amount of the installment and any interest due and payable during that year. For all other real estate taxes, Taxes for that year shall, at Landlord’s election, include either the amount accrued, assessed or otherwise imposed for the year or the amount due and payable for that year, provided that Landlord’s election shall be applied consistently throughout the Term. If a change in Taxes is obtained for any year of the Term, then Taxes for that year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on the adjustment. “Insurance” shall mean the cost of premiums for any hazard insurance or liability insurance carried by Landlord, for the benefit of Landlord or at the expense of Landlord, on or in connection with the Property.

4.5 Intentionally Deleted.

5. Compliance with Laws; Use.

5.1 The Premises shall be used only for the Permitted Use and for no other use whatsoever. Tenant shall not use or permit the use of the Premises for any purpose which is illegal, dangerous to persons or property or which, in Landlord’s reasonable opinion, unreasonably disturbs any other occupants of the Property or unreasonably interferes with the operation of the Premises or the Property. Tenant shall comply with all Laws, including the Americans with Disabilities Act, regarding the operation of Tenant’s business and the use, condition, configuration and occupancy of the Premises. Tenant, within ten (10) days after receipt, shall provide Landlord with copies of any notices it receives regarding a violation or alleged violation of any laws relating to the use, condition, configuration or occupancy of the Premises. Tenant shall comply with the rules and regulations of the Property attached as Exhibit B and such other reasonable

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rules and regulations adopted by Landlord from time to time. Tenant shall also cause its agents, contractors, subcontractors, employees, customers, and subtenants to comply with all rules and regulations. Landlord shall enforce the rules and regulations uniformly with respect to violations thereof of which it either has been notified or otherwise has actual knowledge, and shall not knowingly discriminate against Tenant in Landlord’s enforcement of the rules and regulations.

5.2 Tenant may have access to the Premises 24 hours per day, 365 days per year after Normal Business Hours with a reasonable number of door keys and/or access cards provided by Landlord for which Landlord may impose a reasonable charge approximately Landlord’s cost.

6. Intentionally Deleted.

7. Services and Utilities.

7.1 Landlord shall furnish Tenant with the following services: (1) hot and cold water service for use in the lavatories on each floor on which the Premises are located, and for drinking purposes (provided, that Landlord shall not be required to provide special filtration or otherwise provide treatment to the available tap water in order to make it more desirable to Tenant for drinking or cooking purposes); (2) heat, ventilation and air conditioning in season during Normal Business Hours, at such temperatures and in such amounts as are standard for comparable Class A office buildings or as required by governmental authority. Tenant, upon such advance notice (which may be telephonic) as is reasonably required by Landlord, shall have the right to receive HVAC service during hours other than Normal Business Hours (Tenant shall pay Landlord’s reasonable charge for the additional service, which charge shall approximate Landlord’s actual expense in providing such additional service); (3) maintenance and repair of the Premises or Property as described in Section 9.2 and to fulfill its obligations in Section 4.3.; (4) elevator services; (5) reasonable quantities of electricity and other utilities to the Premises for general office use; (6) washing of interior and exterior surfaces of exterior windows with reasonable frequency; and (7) such other services as Landlord reasonably determines are necessary or appropriate for the Premises or the Property as a Class A office building.

7.2 Tenant’s failure to receive or any interruption or termination of, services due to the application of Laws, the failure of any equipment, the performance of repairs, improvements or alterations, or the occurrence of any event or cause (a “Service Failure”) shall not render Landlord liable to Tenant for damages, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement. Landlord shall use its commercially reasonable best efforts to correct the Service Failure as soon as possible.

8. Leasehold Improvements. All improvements to the Premises other than Tenant’s personal property and trade fixtures (collectively, “Leasehold Improvements”) shall be owned by Landlord and shall remain upon the Premises without compensation to Tenant. However, Landlord, by written notice to Tenant within thirty (30) days prior to the Termination Date, may require Tenant to remove, at Tenant’s expense, the following (the “Required Removables”): (1) Cable (defined in Section 9.1) installed by or for the exclusive benefit of Tenant and located in the Premises or other portions of the Premises or the Property; and (2) any Leasehold Improvements and Alterations that are performed by or for the benefit of Tenant (including, without limitation, internal stairways, raised floors, personal baths and showers, vaults, rolling file systems and structural alterations and modifications of any type). The Required Removables designated by Landlord shall be removed by Tenant before the Termination Date. Tenant shall repair damage caused by the installation or removal of Required Removables, if Tenants fails to remove any Required Removables or perform related repairs in a timely manner, Landlord, at Tenant’s expense, may remove and dispose of the Required Removables and perform the required repairs. Tenant, within thirty (30) days after receipt of an invoice, shall reimburse Landlord for the reasonable costs incurred by Landlord. Notwithstanding the foregoing, Tenant, at the time it requests approval for a proposed Alteration (as defined in this Lease), may request in writing that Landlord advise Tenant whether the Alteration or any portion of the Alteration will be designated as a Required Removable. Within ten (10) days after receipt of Tenant’s request, Landlord shall advise Tenant in writing as to which portions of the Alteration, if any, will be considered to be Required Removables, and if Landlord does not respond within such ten (10) day period, such Alterations will not be considered Required Removables (and, in such event, Landlord shall not have the right under the second sentence of this Section 8 to later require Tenant to remove such Alterations).

9. Repairs and Alterations.

9.1 Tenant’s Repair. Except as provided in Section 9.2, Tenant shall, at its sole cost and expense, keep the interior, non-structural portions of the Premises in good condition and repair. Tenant’s repair obligations include, without limitation, repairs to: (1) floor covering, if needed due to wear and tear; (2) interior partitions; (3) interior doors; (4) the interior side of demising walls; (5) electronic, phone and data cabling and related equipment (collectively, “Cable”) that is installed by or for the benefit of Tenant and located in the Premises and that was not part of or included in Landlord’s Work; (6) supplemental air conditioning units, hot water healers, plumbing, and similar facilities serving Tenant exclusively; and (7) Alterations performed after the Commencement Date by contractors retained by Tenant, including related HVAC balancing. All work shall be performed in

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accordance with the rules and procedures described in Section 9.3 below. If Tenant falls to make any repairs to the Premises for more than thirty (30) days after notice from Landlord (although notice shall not be required if there is an emergency), Landlord may make the repairs, and Tenant shall pay the reasonable cost of the repairs to Landlord within (30) days after receipt of an invoice, together with an administrative charge in an amount equal to ten percent (10%) of the cost of the repairs.

9.2 Landlord’s Maintenance and Repair, Landlord shall provide daily janitorial service to the Premises (exclusive of Saturdays, Sundays and holidays) including vacuuming, dusting, trash removal and such regular maintenance as is normally conducted in a comparable Class A office building in the geographical area of the Premises including but not limited to window cleaning, pest control and snow shoveling; provided that janitorial service shall not include shampooing the carpets, except for the Common Areas. Tenant shall make repairs and replacements to the Premises, common area, or Property needed because of any negligent or intentional act or omission of Tenant or Tenant’s agents, employees or invitees, except to the extent that the repairs or replacements are covered by Landlord’s Insurance. Except for the repairs and replacements that Tenant must make under the preceding sentence and in Section 9.1 regarding Tenant’s repairs. Landlord shall pay for, subject to reimbursement as an Expense if and to the extent provided in Section 4.3, and make all other repairs and replacements to the Common Area and Building, and shall maintain the Building in good condition as a Class A office building, including, but not limited to, structural parts of the Building, foundations, bearing and exterior walls (including glass), subflooring and roof (including roof membrane and skylights), electrical, plumbing and sewage systems, Cable installed as part of Landlord’s Work, gutters and down spouts, the heating, ventilating and air conditioning system, interior walls, floors, ceilings, interior and exterior doors and windows and their appurtenant sills and frames, together with all fixtures, lighting, appliances, elevators, equipment and plumbing and utility lines, and the sidewalks, grounds, landscaping, parking and loading areas. In no event shall Tenant be entitled to undertake any such maintenance or repairs, whether at the expense of Tenant or Landlord, and Tenant hereby waives the benefits of any law now or hereafter in effect which would otherwise provide Tenant with such right. The Lease and Tenant’s obligation hereunder shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease due to fire, earthquake, inclement weather or other acts of God, acts of the public enemy, riot, insurrection, governmental regulation of the sales of materials or supplies or the transportation thereof, strikes or boycotts, shortages of materials or labor, or any other cause beyond the control of Landlord.

9.3 Alterations. Tenant shall not make alterations, additions or improvements to the Premises or other portions of the Property after the Commencement Date which are not part of the initial Tenant’s Work provided for herein (collectively referred to as “Alterations”) without first obtaining the written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed. If Landlord does not respond to Tenant’s request for consent within ten (10) business days, Landlord shall be deemed to have granted its consent. However, Landlord’s consent shall not be required for any Alteration that satisfies all of the following criteria (a “Cosmetic Alteration”): (1) is of a cosmetic nature such as painting, wallpapering, hanging pictures and Installing carpeting; (2) is not visible from the exterior of the Premises or Property; (3) will not affect the systems or structure of the Property; and (4) does not require work to be performed inside the walls or above the ceiling of the Premises (other than installation of telephone, computer, data transmission, internet and other telecommunications cables and wires). However, even though consent is not required, the performance of Cosmetic Alterations shall be subject to all the other provisions of this Section 9.3. Prior to starting work, Tenant shall furnish Landlord with plans and specifications reasonably acceptable to Landlord: names of contractors reasonably acceptable to Landlord (provided that Landlord may designate specific contractors with respect to Property systems); necessary permits and approvals; and evidence of contractor’s and subcontractor’s insurance in amounts reasonably required by Landlord. Material changes to the plans and specifications must also be submitted to Landlord for its approval, which approval shall not be unreasonably withheld or delayed. Alterations shall be constructed in a good and workmanlike manner using materials of a quality that is at least equal to the quality designated by Landlord as the minimum standard for the Premises. Landlord may designate reasonable rules, regulations and procedures for the performance of work, in the Premises and, to the extent reasonably necessary to avoid disruption to the occupants of the Building, shall have the right to designate the time when Alterations may be performed. Tenant shall reimburse Landlord within thirty (30) days after receipt of an invoice for reasonable sums paid by Landlord for third party examination of Tenant’s plans for non-Cosmetic Alterations, provided that no such reimbursement shall be due with respect to Tenant’s initial Alterations in the Premises. Upon completion, Tenant shall furnish “as-built” plans (except for Cosmetic Alterations), completion affidavits, full and final waivers of lien and receipted bills covering all labor and materials. Tenant shall assure that the Alterations comply with all insurance requirements and Laws. Landlord’s approval of an Alteration shall not be a representation by Landlord that the Alteration complies with applicable Laws or will be adequate for Tenant’s use.

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10. Use of Electrical Services by Tenant.

10.1 Electricity used by Tenant in the Premises shall be paid for by Tenant through inclusion in Expenses (except as provided herein as to excess usage). Electrical service to the Premises may be furnished by one or more companies providing electrical generation, transmission and distribution services, and the cost of electricity may consist of several different components or separate charges for such services, such as generation, distribution and stranded cost charges, Landlord shall have the exclusive right to select any company providing electrical service to the Premises, to aggregate the electrical service for the Property and Premises with other buildings, to purchase electricity through a broker and/or buyers group and to change the providers and manner of purchasing electricity. In the event that any other tenant of the Building utilizes such tenants premises, or any material portion thereof, for permitted uses which cause such tenant to use electrical service in excess of that associated with general office purposes, Landlord shall provide a separate meter to such tenant and separately charge such tenant for its electrical service, so that Tenant is not required to pay for any such excess use of electrical service by another tenant as part of the Expenses.

10.2 Tenant’s use of electrical service shall not exceed, either in voltage, rated capacity, use beyond Normal Business Hours or overall load, which Landlord reasonably deems to be standard for normal office use in Class A office buildings. If Tenant requests permission to consume excess electrical service, Landlord may condition consent upon conditions that Landlord reasonably elects (including, without limitation, the installation of utility service upgrades, meters, submeters, air handlers or cooling units), and the additional usage (to the extent permitted by Law), installation and maintenance costs shall be paid by Tenant. Landlord shall have the right, at Landlord’s cost, to separately meter electrical usage for the Premises and to measure electrical usage by survey or other commonly accepted methods.

11. Entry by Landlord. Landlord, Landlord’s agents, contractors and representatives may enter the Premises to inspect or show the Premises, to clean and make repairs, alterations or additions to the Premises, and to conduct or facilitate repairs, alterations or additions to any portion of the Property, including other tenants’ premises. Except in emergencies or to provide janitorial and other Property services alter Normal Business Hours, Landlord shall provide Tenant with reasonable prior notice of entry into the Premises, which may be given orally. If reasonably necessary for the protection and safety of Tenant and its employees. Landlord shall have the right to temporarily close all or a portion of the Premises and/or the Premises to perform repairs, alterations and additions. However, except in emergencies, Landlord will not close the Premises or the Premises if the work can reasonably be completed on weekends and after Normal Business Hours. Entry by Landlord shall not constitute constructive eviction or entitle Tenant to an abatement or reduction of Rent. Any entry by Landlord and its agents and employees (including, but not limited to the janitorial company servicing the Premises), shall be conducted in compliance with reasonable confidentiality and security measures which may be required by Tenant (including, but not limited to, an escort by one of Tenant’s employees and execution of confidentiality or nondisclosure agreements) in order to protect the confidentiality and security of Tenant’s business and employees, and Landlord acknowledges and accepts that Tenant considers the entire Premises as highly confidential and Landlord would have access to the Premises only if escorted by one of Tenant’s employees.

12. Assignment and Subletting.

12.1 Except in connection with a Permitted Transfer (defined in Section 12.4 below), Tenant shall not assign, sublease, transfer or encumber any interest in this Lease or allow any third party to use all or any portion of the Premises (collectively or individually, a “Transfer”) without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Without limitation, it is agreed that Landlord’s consent shall not be considered unreasonably withheld if: (1) in the event of a proposed assignment, the proposed transferee’s financial condition does not meet Landlord’s reasonable criteria used to select Building tenants having similar leasehold obligations; (2) the use of the Premises by the proposed transferee is not substantially the same as Tenant’s use of the Premises (3) the proposed transferee is a governmental agency, or occupant of the Property with whom Landlord is then negotiating for other space in the Building; or (4) Tenant is in default after the expiration of the notice and cure periods in this lease. Tenant shall not be entitled to receive monetary damages based upon a claim that Landlord unreasonably withheld its consent to a proposed Transfer and Tenant’s sole remedy shall be an action to enforce any such provision through specific performance or declaratory judgment. Any attempted Transfer in violation of this Article shall, at Landlord’s option, be void. Consent by Landlord to one or more Transfer(s) shall not operate as a waiver of Landlord’s rights to approve any subsequent Transfers. In no event shall any Transfer or Permitted Transfer release or relieve Tenant from any obligation under this Lease.

12.2 As part of its request for Landlord’s consent to a Transfer, Tenant shall provide Landlord with financial statements for the proposed transferee (in the event of a proposed assignment), a complete copy of the proposed assignment, sublease and other contractual documents and such other information as Landlord may reasonably request. Landlord shall, by written notice to Tenant within fifteen (15) business days of its receipt of the required information and documentation, either consent to the Transfer by the

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execution of a consent agreement in a form reasonably designated by Landlord or reasonably refuse to consent to the Transfer in writing. Tenant shall pay Landlord a review fee not exceeding $1,500.00 for Landlord’s review of any Permitted Transfer or requested Transfer for its actual reasonable costs and expenses (including reasonable attorney’s fees).

12.3 Tenant shall pay Landlord fifty percent (50%) of all rent and other consideration which Tenant receives as a result of a Transfer that is in excess of the Rent payable to Landlord for the portion of the Premises and Term covered by the Transfer. Tenant shall pay Landlord for Landlord’s share of any excess within thirty (30) days after Tenant’s receipt of such excess consideration. If Tenant is in Monetary Default (defined in Section 19.1 below), Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shall receive a credit against Rent in the amount of any payments received (less Landlord’s share of any excess).

12.4 Notwithstanding anything to the contrary contained in this Lease. Tenant may assign its entire interest under this Lease to a successor to Tenant by purchase, merger, consolidation or reorganization without the consent of Landlord, provided that all of the following conditions are satisfied (a “Permitted Transfer”); (1) Tenant is not in default under this Lease beyond applicable notice and cure periods; (2) Tenant’s successor shall own all or substantially all of the assets of Tenant; (3) no material change of use of the Premises occurs; (4) Tenant shall give Landlord written notice at least fifteen (15) days prior to the effective date of the proposed purchase, merger, consolidation or reorganization; and (5) all individuals then existing as guarantors execute a reaffirmation of the guarantee provided for by this Lease, if any, which is reasonably satisfactory in substance and form to Landlord. Tenant’s notice to Landlord shall include information and documentation showing that each of the above conditions has been satisfied. If requested by Landlord in the event of an assignment, Tenant’s successor shall sign a commercially reasonable form of assumption agreement.

13. Intentionally Omitted.

14. Indemnity and Waiver of Claims.

14.1 Tenant shall not permit mechanic’s or other liens to be placed upon the Property, the Premises or Tenant’s leasehold interest in connection with any work or service done or purportedly done by or for benefit of Tenant. If a lien is so placed, Tenant shall, within ten (10) days of notice from Landlord of the filing of the lien, fully discharge the lien by setting the claim which resulted in the lien or by bonding or insuring over the lien in the manner prescribed by the applicable lien Law, unless the lien arises out of Landlord’s failure to perform Landlord’s Work in accordance with Exhibit C (In which event Landlord shall be responsible for discharging the lien). If Tenant fails to discharge the lien when Tenant is required to do so, then, in addition to any other right or remedy of Landlord. Landlord may bond or insure over the lien or otherwise discharge the lien. Tenant shall reimburse Landlord for any amount paid by Landlord to bond or insure over the lien or discharge the lien, including, without limitation, reasonable attorney’s fees (if and to the extent permitted by Law) within thirty (30) days after receipt of an invoice from Landlord.

14.2 Except to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties (defined below), Tenant shall indemnify, defend and hold Landlord, its trustees, members, principals, beneficiaries, partners, officers, directors, employees, Mortgagee(s) (as defined elsewhere in this Lease) and agents (“Landlord Related Parties”) harmless against and from all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses. Including, without limitation, reasonable attorneys’ fees and other professional fees (if and to the extent permitted by Law), which may be imposed upon, incurred by or asserted against Landlord or any of the Landlord Related Parties and arising out of or in connection with any damage or injury occurring in the Premises or any acts or omissions (including violations of Law) of Tenant, the Tenant Related Parties (defined below) or any of Tenant’s contractors or licensees.

14.3 Except to the extent such damage or loss results from the negligence or willful misconduct of Landlord or any Landlord Related Parties. Landlord and the Landlord Related Parties shall not be liable for, and Tenant waives, all claims for loss or damage to Tenant’s business or loss, then or damage to Tenant’s Property or the property of any person claiming by, through or under Tenant resulting from; (1) wind or weather; (2) the failure of any sprinkler, heating or air-conditioning equipment, any electric wiring or any gas, water or steam pipes; (3) the backing up of any pipe or drain; (4) the bursting, leaking or running of any tank, water closet, drain or other pipe; (5) water, snow or ice upon or coming through the roof, skylight, stairs, doorways, windows, walks or any other place upon or near the Property; (6) any act or omission of any party other than Landlord or Landlord Related Parties; and (7) any causes not reasonably within the control of Landlord. Tenant shall insure itself against such losses consistent with Tenant’s normal practices and procedures for insuring against such losses.

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15. Insurance.

15.1 By Tenant. Tenant shall carry and maintain the following insurance (“Tenant’s insurance”), at its sole cost and expense: (1) Commercial General Liability Insurance, written on an occurrence basis (ISO CG 00 01 01 98 or equivalent), applicable to the Premises and its appurtenances providing a minimum combined single limit of $2,000,000.00; (2) All Risk Property Insurance (ISO CP 00 10 or equivalent) on a Special Cause of Loss form (ISO CP 10 30 06 95 or equivalent), including flood and earthquake (if available at reasonable cost), and business interruption insurance, all written at 100% replacement cost value and with a replacement cost endorsement covering all of Tenant’s trade fixtures, equipment, furniture and other personal property within the Premises (“Tenant’s Property”), with any co-insurance penalties removed, and with Ordinance or Law Coverage at a limit accurately reflecting the condition of the building (CP 04 05); and (3) Worker’s Compensation as mandated by state law (which may not be self-insured) and Employer’s Liability (CG 00 01 07 98 or equivalent) In the minimum amount of $1,000,000.00. Any company writing any of Tenant’s Insurance shall have an A.M. Best rating of not less than A-VIII. All Commercial General Liability Insurance policies shall name Tenant as a named insured and Landlord (or any successor) as additional insureds, and shall be primary and non-contributory (CG 00 01 07 98 or equivalent). All policies of Tenant’s Insurance shall contain endorsements that the insurer(s) shall give Landlord and its designees at least thirty (30) days’ advance written notice of any cancellation, termination or lapse of Insurance. Tenant shall provide Landlord with a certificate of insurance evidencing Tenant’s Insurance prior to the earlier to occur of the Commencement Date or the date Tenant is provided with possession of the Premises for any reason, and upon renewals at least fifteen (15) days prior to the expiration of the Insurance coverage.

So long as (i) there has been no assignment or subletting of all or any part of the Lease or Premises and (ii) Conoco Philips Company maintains a net worth equal to or greater than the its net worth as reflected in its annual report for calendar year 2002. Tenant may elect by written notice to Landlord to Insure its Insurance obligations under this Lease (other than worker’s Compensation) through a self-insurance retention program maintained by Conoco Philips Company with the same obligations as would have been assumed by a commercial insurance company issuing the policies described above.

15.2 By Landlord.

15.2.1 Building and Improvements. Landlord shall obtain and keep in force during the term of this Lease a policy or policies in the name of Landlord, with loss payable to Landlord and to any Lender(s), Insuring against loss or damage to the Property with such commercially reasonable deductible amount as is selected by Landlord. Such Insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If the coverage is available and commercially reasonable, Landlord’s policy or policies may insure against all risks of direct physical loss or damage (including flood and/or earthquake), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss. Such policies may also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor selected by the insurer.

15.2.2 Rental Value. Landlord also may obtain and keep in force during the term of this Lease a policy or policies in the name of Landlord, with loss payable to Landlord and any lender(s) to Landlord, insuring the loss of the full rental and other charges (including Operating Expenses) payable by all tenants of the Premises to Landlord for one year, Said insurance may provide that in the event the Lease is terminated by reason of an insured loss. The period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year’s loss of rental revenues from the date of any such loss. Said Insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected payments payable by Tenant for the next 12-month period.

15.2.3 Increases Caused by Tenant. Tenant shall pay for any increase in the premiums charged to Landlord for the Property or Common Areas if said increase is caused by Tenant’s acts, omissions, use or occupancy of the Premises.

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15.2.4 Liability for Common Areas. Landlord shall carry and maintain with respect to the Common Areas Commercial General Liability Insurance, written on a claims made basis, applicable to the Premises and its appurtenances providing a minimum combined single limit of $2,000,000.00, which shall name Landlord as a named Insured and Tenant as an additional insured. Upon Tenant’s request, Landlord shall provide Tenant with a certificate of insurance evidencing such liability insurance.

16. Subrogation. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant hereby waive, and shall cause their respective insurance carriers to waive, any and all rights of recovery, claim, action or causes of action against the other and their respective trustees, principals beneficiaries, partners, officers, directors, agents, and employees, for any loss or damage that may occur to Landlord or Tenant or any party claiming by, through or under Landlord or Tenant, as the case may be, with respect to Tenant’s Property, the Property, the Premises, any additions or improvements to the Property, or Premises, or any contents thereof, including all rights of recovery, claims, actions or causes of action arising out of the negligence of Landlord or any Landlord Related Parties or the negligence of Tenant or any Tenant Related Parties, which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by Insurance.

17. Casualty Damage.

17.1 If all or any part of the Premises are damaged by fire or other casualty, Tenant shall immediately notify Landlord in writing. During any period of time that all or a portion of the Premises is rendered untenantable as a result of a fire or other casualty, the Rent shall abate for the portion of the Premises that is untenantable and not used by Tenant. Landlord shall have the right to terminate this Lease if: (1) the Property or the Premises shall be damaged so that, in Landlord’s reasonable judgment, substantial alteration or reconstruction of the Property not covered by insurance shall be required (whether or not the Premises has been damaged) and Landlord is therefore terminating all leases in the Building; (2) Landlord is not permitted by law to rebuild the Property or the Premises in substantially the same form as existed before the fire or casualty (in which event Tenant may also terminate this Lease): (3) the Premises have been materially damaged and there is less than two(2) years of the Term remaining on the date of the casualty: (4) any Mortgages requires that such insurance proceeds be applied to the payment of the mortgage debt: or (5) a material uninsured loss to the Property or the Premises occurs. Landlord may exercise its right to terminate this Lease by notifying Tenant in writing within ninety (90) days after the date of the casualty. If landlord does not terminate this Lease, Landlord shall commence and proceed with reasonable diligence to repair and restore the Premises and the Leasehold improvements (excluding any Alterations that were performed by Tenant in violation of this Lease). However, in no event shall Landlord be required to spend more than the insurance proceeds received by Landlord. Landlord shall not be liable for any loss or damage to Tenant’s Property or to the business of Tenant resulting in any way from the fire or other casualty or from the repair and restoration of the damage. Landlord and Tenant hereby waive the provisions of any Law relating to the matters addressed in this Article, and agree that their respective rights from damage to or destruction of the Premises shall be those specifically provided in this Lease.

17.2 If all or any portion of the Premises shall be made untenantable by fire or other casualty, Landlord shall, with reasonable promptness, cause an architect or general contractor selected by Landlord to provide Landlord and Tenant with a written estimate of the amount of time required to substantially complete the repair and restoration of the Premises and make the Premises tenantable again, using standard working methods (“Completion Estimate”). If the Completion Estimate indicates that the Premises cannot be made tenantable within one hundred eighty (180) days from the date the repair and restoration is started, then regardless of anything in Section 17.1 above to the contrary, either party shall have the right to terminate this Lease by giving written notice to the other of such election within ten (10) days after receipt of the Completion Estimate.

18. Condemnation. Either party may terminate this Lease if the whole or any material part of the Premises shall be taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a “Taking”). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Property or the Premises which would leave the remainder of the Property or the Premises unsuitable for use as an office building in a manner comparable to the Property’s or the Premises use prior to the Taking. In order to exercise its right to terminate the Lease, Landlord or Tenant, as the case may be, must provide written notice of termination to the other within forty-five (45) days after the Taking. Any such termination shall be effective as of the date the physical taking of the Premises or the portion of the Property or the Premises occurs. If this Lease is not terminated, the Rentable Area of the Property, the Rentable Area of the Premises, Tenants Pro Rate Share shall, if applicable, be appropriately adjusted. In addition, Rent for any portion of the Premises taken or condemned shall be abated during the unexpired Term of this Lease effective when the physical taking of the portion of the Premises occurs. All compensation awarded for a Taking, or sale proceeds, shall be the property of Landlord, any right to receive compensation or proceeds being expressly waived by Tenant. However, Tenant may file a separate claim at its sole cost and expense for Tenant’s Property and Tenant’s reasonable relocation expenses, provided the filing of the claim does not diminish the award which would otherwise be receivable by Landlord.

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19. Events of Default. Tenant shall be considered to be in default of this Lease upon the occurrence on any of the following events of default:

19.1. Tenant’s failure to pay when due all or any portion of the Rent, if the failure continues for three (3) business days after written notice to Tenant (“Monetary Default”).

19.2 Tenant’s failure (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, if the failure is not cured within thirty (30) days after written notice to Tenant. However, if Tenant’s failure to comply cannot reasonably be cured within thirty (30) days, Tenant shall be allowed additional time as is reasonably necessary to cure the failure so long as; (1) Tenant commences to cure the failure within thirty (30) days, and (2) Tenant diligently pursues a course of action that will cure the failure and bring Tenant back into compliance with the Lease. However, if Tenant’s failure to comply creates a hazardous condition, the failure must be cured immediately upon notice to Tenant.

19.3 Tenant becomes insolvent, makes a transfer in fraud of creditors or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts when due.

19.4 Tenant’s leasehold estate is taken by process or operation of Law.

20. Remedies.

20.1 Upon any default, Landlord shall have the right without notice or demand (except as provided in Article 19) to pursue any of its rights and remedies at Law or in equity, including any one or more of the following remedies:

20.1.1 Terminate this Lease, in which case Tenant shall immediately surrender the Premises to Landlord, if Tenant fails to surrender the Premises. Landlord may, in compliance with applicable Law and without prejudice to any other right or remedy, enter upon and take possession of the Premises and expel and remove Tenant, Tenant’s Property and any party occupying all or any part of the Premises. Tenant shall pay Landlord on demand the amount of all past due Rent and other losses and damages which Landlord may suffer as a result of Tenant’s default, whether by Landlord’s inability to relet the Premises on satisfactory terms or otherwise, including, without limitation, all Costs of Reletting (defined below) and any deficiency that may arise from reletting or the failure to relet the Premises. “Costs of Reletting” shall include all costs and expenses incurred by Landlord in reletting or attempting to relet the Premises, including, without limitation, reasonable legal fees, brokerage commissions, the cost of alterations and the value of other concessions or allowance granted to a new tenant.

20.1.2 Terminate Tenant’s right to possession of the Premises and, in compliance with applicable Law, expel and remove Tenant, Tenant’s Property and any parties occupying all or any part of the Premises. Landlord may (but shall not be obligated to, except to the extent required by law) relet all or any part of the Premises, without notice to Tenant, for a term that may be greater or less than the balance of the Term and on such conditions (which may include concessions, free rent and alterations of the Premises) and for such uses as Landlord in its absolute discretion shall determine. Landlord may collect and receive all rents and other income from the reletting. Tenant shall pay Landlord on demand all past due Rent, all Costs of Reletting and any deficiency arising from the reletting or failure to relet the Premises. Landlord shall not be responsible or liable for the failure to relet all or any part of the Premises or for the failure to collect any Rent. The re-entry or taking of possession of the Premises shall not be construed as an election by Landlord to terminate this Lease unless a written notice of termination is given to Tenant.

20.1.3 In the event that Landlord shall elect to terminate this Lease under Section 20.1.1, then upon such termination Tenant shall (if it has not already done so) quit and surrender the Premises to Landlord and Landlord may recover from Tenant:

(i) The worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus

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

(iii) The worth at the time of award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus

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(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.

As used in (i) and (ii) above, the “worth at the time of award” is computed by allowing interest at 12% per annum. As used in (iii) above, the worth at the time of award” is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%.

20.2 Unless expressly provided in this Lease, the repossession or re-entering of all or any part of the Premises shall not relieve Tenant of its liabilities and obligations under the Lease. No right or remedy of Landlord shall be exclusive of any other right or remedy. Each right and remedy shall be cumulative and in addition to any other right and remedy now or subsequently available to Landlord at Law or in equity. If Landlord declares Tenant to be in default, Landlord shall be entitled to receive interest on any unpaid item of Rent at a rate equal to 12% per annum. Forbearance by Landlord to enforce one or more remedies shall not constitute a waiver of any default.

21. Landlord’s Default; Limitation of Liability. Landlord’s failure to perform or observe any of its obligations under this Lease or to correct a breach of any warranty or representation made in this Lease within thirty (30) days after receipt of written notice from Tenant setting forth in reasonable detail the nature and extent of the failure (or if more than thirty (30) days is required to cure the breach, Landlord’s failure to begin curing within the thirty (30) day period and diligently prosecute the cure to completion) shall constitute a default by Landlord. In no event shall Tenant have the right to terminate this Lease as a result of Landlord’s default and Tenant’s remedies shall be limited to damages and/or an injunction: and in no case may the Tenant withhold any Rent or claim a set-off or deduction from Rent. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) TO TENANT SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE PROPERTY AND ANY PROCEEDS THEREOF. TENANT SHALL LOOK SOLELY TO LANDLORD’S INTEREST IN THE PROPERTY AND ANY PROCEEDS THEREOF FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST LANDLORD. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S) (DEFINED IN ARTICLE 25 BELOW) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES (DEFINED IN ARTICLE 25 BELOW) ON THE PROPERTY, BUILDING OR PREMISES, NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT. IN ADDITION, TENANT ACKNOWLEDGES THAT ANY ENTITY MANAGING THE PREMISES ON BEHALF OF LANDLORD, OR WHICH EXECUTES THIS LEASE AS AGENT FOR LANDLORD, IS ACTING SOLELY IN ITS CAPACITY AS AGENT FOR LANDLORD AND SHALL NOT BE LIABLE FOR ANY OBLIGATIONS, LIABILITIES, LOSSES OR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, ALL OF WHICH ARE EXPRESSLY WAIVED BY TENANT, UNLESS DUE TO THE NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH ENTITY OR AGENT.

22. No Waiver. Either party’s failure to declare a default immediately upon its occurrence, or delay in taking action for a default shall not constitute a waiver of the default, nor shall it constitute an estoppel. Either party’s failure to enforce its rights for a default shall not constitute a waiver of its rights regarding any subsequent default. Receipt by Landlord of Tenant’s keys to the Premises shall not constitute an acceptance or surrender of the Premises.

23. Quiet Enjoyment. Tenant shall, and may peacefully have, hold and enjoy the Premises, subject to the terms of this Lease, provided Tenant pays the Rent and fully performs all of its covenants and agreements. This covenant and all other covenants of Landlord shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Premises, and shall not be a personal covenant of Landlord or the Landlord Related Parties.

24. Holding Over. If Tenant fails to surrender the Premises at the expiration or earlier termination of this Lease, occupancy of the Premises after the termination or expiration shall be that of a tenancy at sufferance. Tenant’s occupancy of the Premises during the holdover shall be subject to all the terms and provisions of this Lease and Tenant shall pay an amount (on a per month basis without reduction for partial months during the holdover) equal to one hundred seventy five percent (175%) of the sum of the Base Rent and Additional Rent due for the period immediately preceding the holdover. No holdover by Tenant or payment by Tenant after the expiration or early termination of this Lease shall be construed to extend the Term or prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise. In addition to the payment of the amounts provided above, if Landlord is unable to deliver possession of the Premises to a new tenant, or to perform improvements for a new tenant, as a result of Tenant’s holdover and Tenant fails to vacate the Premises within fifteen (15) days after Landlord notifies Tenant of Landlord’s inability to deliver possession, or perform improvements. Tenant shall be liable to Landlord for all damages, including, without limitation, consequential damages, that Landlord suffers from the holdover.

25. Subordination to Mortgages; Estoppel Certificate; Mortgagee Protection.

25.1 Subject to the terms of this Section. Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust or other lien(s) now or subsequently arising upon the

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Premises or the Property, and to renewals, modifications, refinancings and extensions thereof (collectively referred to as a “Mortgage”). The party having the benefit of a Mortgage shall be referred to as a “Mortgagee”. This clauses shall be self-operative, but upon request from a Mortgagee, Tenant shall execute and deliver a subordination agreement in favor of the Mortgagee within ten (10) business days of the request, provided that the Mortgagee shall agree, in a non-disturbance agreement, to recognize this Lease in the event of foreclosure if Tenant is not in default at such time subject to such provisions relating to the disposition or application of Insurance or condemnation proceeds as may be contained in such Mortgagee’s loan documents. Tenant agrees to execute any reasonable documents required to effectuate such subordination. In lieu of having the Mortgage be superior to this Lease, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. If requested by a successor-in-interest to all or a part of Landlord’s interest in the Lease, Tenant shall, without charge, attorn to the successor-in-interest. Landlord and Tenant shall each, within ten (10) business days after receipt of a written request from the other, execute and deliver an estoppel certificate to those parties as are reasonably requested by the other (including a Mortgagee or prospective purchaser). The estoppel certificate shall include a statement certifying that this Lease is unmodified (except as identified in the estoppel certificate) and in full force and affect, describing the dates to which Rent and other charges have been paid, representing that, to such party’s actual knowledge, there is no default for stating the nature of the alleged default) and indicating other matters with respect to the Lease that may reasonably be requested.

25.2 Tenant agrees to give any mortgagee or deed of trust holder, by certified mail, a copy of any notice of default served upon the Landlord, provided that prior to such notice Tenant has been notified in writing (by way of Notice of Assignment of Rents and Leases, or otherwise) of the addresses of such mortgagee or deed of trust holder. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders have an additional thirty (30) days within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such thirty (30) days any mortgagee or deed of trust holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings if necessary to affect such cure), in which event this Lease shall not be terminated if such remedies are being so diligently pursed.

26. Attorneys’ Fees. If either party institutes a suit against the other for violation of or to enforce any covenant or condition of this Lease, or if either party intervenes in any suit in which the other is a party to enforce or protect its interest or rights, the prevailing party shall be entitled to all of its costs and expenses, including, without limitation, reasonable attorneys’ fees.

27. Notice. If a demand, request, approval, consent or notice (collectively referred to as a “notice”) shall or may be given to either party by the other, the notice shall be in writing and delivered by hand or sent by registered or certified mail with return receipt requested, or sent by overnight or same day courier service at the party’s respective Notice Address (es) set forth in Article 1, except that if Tenant has vacated the Premises (or if the Notice Address for Tenant is other than the Premises, and Tenant has vacated such address) without providing Landlord a new Notice Address, Landlord may serve notice in any manner described in this Article or in any other manner permitted by Law. Each notice shall be deemed to have been received or given on the earlier to occur of actual delivery or the date on which delivery is refused, or, if Tenant has vacated the Premises or the other Notice Address of Tenant without providing a new Notice Address, three (3) days after notice is deposited in the U.S. mail or with a courier service in the manner described above. Either party may, at any time, change its Notice Address by giving the other party written notice of the new address in the manner described in this Article.

28. Excepted Rights. This Lease does not grant any rights to light or air over or about the Property or the Premises. Landlord excepts and reserves exclusively to itself the use of : (1) roofs, (2) telephone, electrical and janitorial closets, (3) equipment rooms. Property risers or similar areas that are used by Landlord for the provision of Property services, (4) rights to the land and improvements below the floor of the Premises, (5) the improvements and air rights above the Premises, (6) the improvements and air rights outside the demising walls of the Premises, and (7) the areas within the Premises used for the installation of utility lines and other installations serving occupants of the Property. Landlord shall also have the right to make such other changes to the Property (but not the Interior of the Premises) as Landlord deems appropriate, provided the changes do not materially affect Tenant’s ability to use or access the Premises for the Permitted Use. Landlord shall also have the right (but not the obligation) to temporarily close the Property if Landlord reasonably determines that there is an imminent danger of significant damage to the Property or of personal injury to Landlord’s employees or the occupants of the Property. The circumstances under which Landlord may temporarily close the Property shall include, without limitation, electrical interruptions, hurricanes and civil disturbances. A closure of the Property under such circumstances shall not constitute a constructive eviction nor entitle Tenant to an abatement or reduction of Rent. Landlord shall have the right at any time, without thereby creating an actual or constructive eviction or incurring any liability to Tenant therefor, to change the arrangement or location of such of the following as are not contained within the Premises or any part thereof (provided such change does not adversely affect Tenant’s use of or access to the Premises): entrances, passageways, doors and doorways, corridors, stairs, toilets and other like public service portions of the Property.

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29. Surrender of Premises. At the expiration or earlier termination of this Lease of Tenant’s right of possession, Tenant shall remove Tenant’s Property (defined in Article 15) from the Premises, and quit and surrender the Premises to Landlord, broom clean and otherwise in the condition required by this Lease. Tenant shall also be required to remove the Required Removables in accordance with Article B. If Tenant fails to remove any of Tenant’s Property within two (2) days after the termination of this Lease or of Tenant’s right to possession, Landlord, at Tenant’s sole cost and expense, shall be entitled (but not obligated) to remove and store Tenant’s Property. Landlord shall not be responsible for the value, preservation or safekeeping of Tenant’s Property. Tenant shall pay Landlord, upon demand, the expenses and storage charges incurred for Tenant’s Property. In addition, if Tenant fails to remove Tenant’s Property from the Premises or storage, as the case may be, within thirty (30) days after written notice. Landlord may deem all or any part of Tenant’s Property to be abandoned, and title to Tenant’s Property shall be deemed to be immediately vested in Landlord.

30. Parking.

30.1 Tenant agrees to further rent from Landlord and Landlord agrees to rent to Tenant the use, on a non-exclusive basis, of fourteen (14) parking stalls in the Building. As of the Commencement Date, the fee shall be Seventy-Five Dollars ($75) per parking stall per month for the first two (2) years of the Lease Term and Ninety-Five Dollars ($95) per parking stall per month for years 3, 4 and 5 of the Lease Term. Such fees shall be paid in the same manner and at the same time as Tenant’s monthly payments of Base Rent to Landlord, and are included in the Base Rent set forth in Section 1.3 above. Tenant’s use of the parking shall be subject to such reasonable rules and regulations as Landlord may determine are appropriate.

Landlord also shall obtain for Tenant’s use three (3) Additional parking stalls located either in the Building or in surface parking lots in the vicinity of the Building. Tenant shall pay Landlord for such additional three (3) stalls at the rate of One Hundred Twenty-Five Dollars ($125) per month (increasing annually at the and or each calendar year by three percent (3%) on a cumulative basis). The charges for these three (3) additional parking stalls shall be added to Tenant’s monthly payments of Base Rent. The monthly Base Rent amounts set forth in Section 1.3 above include the cost of three (3) stalls at $125 per month (escalated as set forth above).

30.2 Tenant shall cooperate and comply with any legal requirements for the dissemination of information to commuters and visitors to the Property to encourage the use of available transportation alternatives and shall offer incentives to their employees to use such alternatives and otherwise comply with any governmentally sponsored traffic management or reduction plan. Landlord shall, at its cost install a bicycle parking cage in the parking area.

31. Miscellaneous.

31.1 This Lease and the rights and obligations of the parties shall be interpreted, construed and enforced in accordance with the Laws of the State of Washington and Landlord and Tenant hereby irrevocably consent to the jurisdiction and proper venue of such state. If any term or provision of this Lease shall to any extent be invalid or unenforceable, the remainder of this Lease shall not be affected, and each provision of this Lease shall be valid and enforced to the fullest extent permitted by Law. The headings and titles to the Articles and Sections of this Lease are for convenience only and shall have no effect on the interpretation of any part of the Lease.

31.2 Tenant shall not record this Lease or a memorandum of the same without Landlord’s prior written consent.

31.3 Landlord and Tenant hereby waive any right to trial by jury in any proceeding based upon a breach of this Lease.

31.4 Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant, the period of time for the performance of such action shall be extended by the number of days that the performance is actually due to strikes, acts of God, shortages of labor or materials, war, civil disturbances and other causes beyond the reasonable control of the performing party (“Force Majeure”). However, events of Force Majeure shall not extend any period of time for the payment Rent of other sums payable by either party.

31.5 Landlord shall have the right to transfer and assign, in whole, all of its rights and obligations under this Lease and in the Premises or the Property referred to herein, and upon such transfer and transfer of the Deposit, and provided the assignee assumes in writing all of Landlord’s obligations hereunder, Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to the successor in interest of Landlord for the performance of such obligations.

31.6 Broker.

31.6.1 Tenant represents and warrants to Landlord that it has not engaged nor dealt with any broker, finder or other person who would be entitled to any commission or

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fees for the negotiation, execution, or delivery of this Lease except for Teutsch partners (“Landlord’s Broker”) and Marlanna Christlan-Griffith (Tenant’s Broker”). Landlord agrees to pay and be responsible for any commissions owing to Landlord’s Broker. Landlord agrees to pay in full satisfaction of any commission to Tenant’s Broker due from Landlord arising out of this transaction and lease a commission equal to (i) Five Dollars ($5.00) per Rantable Square Foot of the Premises, as calculated at the commencement of this Lease (subject to adjustment if the Rentable Area of the Premises is re-calculated by the Commencement Date pursuant to Section 1.2), which commission shall be payable one-half (1/2) on mutual execution of this Lease and one-half (1/2) on commencement of Tenant’s obligation to pay Base Rent. In the event of any renewal or extension of this Lease, Landlord shall have no obligation to pay any commission to Tenant’s Broker. Tenant shall indemnify, defend and hold Landlord harmless against any loss, cost, liability or expense incurred by Landlord as a result of any claim asserted by any such broker (other than Tenant’s Broker and Landlord’s Broker) on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Tenant in violation of Tenant’s warrenty in this Section.

31.6.2 Agency Disclosure. At the signing of this Lease, Landlord was represented by Landlord’s Broker. Each party signing this document confirms that the prior oral and/or written disclosure of agency was provided to such party in this transaction, as required by RCW 18.86.030 (1)(g). Landlord and Tenant, by their execution of this Lease, each acknowledge and agree that they have timely received a pamphlet on the law of real estate agency as required under RCW 18.86.030(1)(f). Tenant acknowledges that Landlord has disclosed that certain principals of Landlord are licensed real estate agents.

31.7 Tenant covenants, warrants and represents that: (1) each individual executing, attesting and/or delivering this Lease on behalf of Tenant is authorized to do so on behalf of Tenant; (2) this Lease is binding upon Tenant; and (3) Tenant is duly organized and legally existing in the state of its organization and is qualified to do business in the state in which the Premises are located. If there is more than one Tenant, or if Tenant is comprised of more than one party or entity, the obligations imposed upon Tenant shall be joint and several obligations of all the parties and entities. Notices, payments and agreements given or made by, with or to any one person or entity shall be deemed to have been given or made by, with and to all of them.

31.8 Time is of the essence with respect to Tenant’s exercise of any expansion, renewal or extension rights granted to Tenant. This Lease shall create only the relationship of landlord and tenant between the parties, and not partnership, joint venture or any other relationship. This Lease and the covenants and conditions in this Lease shall inure only to the benefit of and be binding only upon Landlord and Tenant and their successors and permitted assigns.

31.9 The expiration of the Term, whether by lapse of time or otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to accrue after the expiration or early termination of this Lease. Without limiting the scope of the prior sentence, it is agreed that Tenant’s obligations under Sections 4.1,4.2,8,14,20 and 25 shall survive the expiration or early termination of this Lease.

31.10 All understandings and agreements previously made between the parties are superseded by this Lease, and neither party is relying upon any warranty, statement or representation not contained in this Lease. This Lease may be modified only by a written agreement signed by Landlord and Tenant.

31.11 Tenant, within Fifteen (15) days after request (but not more than once per year), shall provide Landlord with a current financial statement and such other information as Landlord may reasonably request in order to create a “business profile” of Tenant and determine Tenant’s ability to fulfill its obligations under this Lease. Landlord, however, shall not require Tenant to provide such information unless Landlord is requested to produce the information in connection with a proposed financing or sale of the Property. Upon written request by Tenant, Landlord shall enter into a commercially reasonable confidentiality agreement covering any confidential information that is disclosed by Tenant.

31.12 The name of the Property may be changed by Landlord.

31.13 Tenant shall not be deemed to be a third party beneficiary of any other lease, of the Property; Landlord retains the sole right to determine, in its reasonable discretion, whether to enforce and the method of enforcement of compliance by other tenants and their employees with the terms of their respective leases including any restrictions on use and parking; the existence of any violation of any lease provision by any other tenant shall not be deemed to be a violation of this Lease by Landlord.

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31.14 Submission of this Lease for examination, even though executed by Tenant, shall not bind Landlord in any manner, and no Lease or other obligation on the part of the Landlord shall arise, until this Lease is executed and delivered by Landlord to Tenant.

32. Entire Agreement. This Lease and the following exhibits and attachments constitute the entire agreement between the parties and supersede all prior agreements and understandings related to the Premises, including all lease proposals, letters of Intent and other documents: Exhibit A-1 (Outline and Location of Premises), Exhibit A-2 (Legal Description of Property), Exhibit B (Rules and Regulations), Exhibit C (Landlord’s Work);

Landlord and Tenant have executed this Lease as of the day and year first above written.

LANDLORD:
1144 Eastlake LLC, a Washington limited liability company
	By:	J&J Eastlake LLC, a Washington limited liability company, its manager
		By:	/s/ John Teutsch
		Name:	John Teutsch
		Its:	Managing Member

TENANT:
Conoco Phillips Company, a Delaware corporation
By:	/s/ Donald C. Kaplan
Name:	DONALD C. KAPLAN
Title:	Regional Manager

Page 17

LANDLORD ACKNOWLEDGEMENT

STATE OF WASHINGTON	)
COUNTY OF KING	) ss:

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that John S. Tautsch, personally known to me to be the authorized agent of J&J Eastlake LLC, a Washington limited liability company, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses of purposes therein set forth.

GIVEN under my hand and official seal this 14^th day of September, 2003.

[Notary Seal]	/s/ Christina M. Ware
	Notary Public
	Christina M. Ware
	Printed Name
	Residing at:	Renton
	My commission Expires:	7/10/07

TENANT ACKNOWLEDGEMENT

STATE OF WASHINGTON	)
COUNTY OF KING	) ss:

I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that DONALD C. KAPLAN, personally known to me to be the authorized agent of Conoco Phillips Company, a Delaware corporation, and personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that as the authorized agent of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such managing member, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses of purposes therein set forth.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

[Notary Seal]	/s/ Karen Bernard
	Notary Public
	KAREN BERNARD
	Printed Name
	Residing at:	Kent, WA
	My Commission Expires:	11-01-05

Page 18

EX-31.1

Exhibit 31.1

CERTIFICATIONS

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

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 2, 2005

/s/ BRUCE L.A. CARTER

President and CEO

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, James A. Johnson, certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 2, 2005

/s/ JAMES A. JOHNSON

Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

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 Report of ZymoGenetics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Bruce L.A. Carter, Chief Executive Officer and James A. Johnson, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-Q 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 78o(d)); and

(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 2, 2005

/s/ Bruce L.A. Carter

Bruce L.A. Carter

Chief Executive Officer

/s/ James A. Johnson

James A. Johnson

Chief Financial Officer