<PAGE>
                                                                   Exhibit 10.1






                       APPLIED MOLECULAR EVOLUTION, INC.

                     2002 NEW EMPLOYEE STOCK INCENTIVE PLAN




                       ADOPTED BY THE BOARD OF DIRECTORS
                              ON DECEMBER 11, 2002
<PAGE>
                                TABLE OF CONTENTS

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<S>                                                                         <C>
SECTION 1.  ESTABLISHMENT AND PURPOSE.....................................    1

SECTION 2.  DEFINITIONS...................................................    1
   (a)    "Affiliate".....................................................    1
   (b)    "Award".........................................................    1
   (c)    "Board of Directors"............................................    1
   (d)    "Change in Control".............................................    1
   (e)    "Code"..........................................................    2
   (f)    "Committee".....................................................    2
   (g)    "Company".......................................................    2
   (h)    "Consultant"....................................................    2
   (i)    "Employee"......................................................    2
   (j)    "Exchange Act"..................................................    2
   (k)    "Exercise Price"................................................    2
   (l)    "Fair Market Value".............................................    3
   (m)    "ISO"...........................................................    3
   (n)    "Nonstatutory Option" or "NSO"..................................    3
   (o)    "Offeree".......................................................    3
   (p)    "Option"........................................................    3
   (q)    "Optionee"......................................................    3
   (r)    "Outside Director"..............................................    3
   (s)    "Parent"........................................................    3
   (t)    "Participant"...................................................    3
   (u)    "Plan"..........................................................    3
   (v)    "Purchase Price"................................................    3
   (w)    "Restricted Share"..............................................    3
   (x)    "Restricted Share Agreement"....................................    3
   (y)    "SAR"...........................................................    3
   (z)    "SAR Agreement".................................................    4
   (aa)   "Service".......................................................    4
   (bb)   "Share".........................................................    4
   (cc)   "Stock".........................................................    4
   (dd)   "Stock Option Agreement"........................................    4
   (ee)   "Stock Purchase Agreement"......................................    4
   (ff)   "Stock Unit"....................................................    4
   (gg)   "Stock Unit Agreement"..........................................    4
   (hh)   "Subsidiary"....................................................    4
   (ii)   "Total and Permanent Disability"................................    4

SECTION 3.  ADMINISTRATION................................................    4
   (a)    Committee Procedures............................................    4
   (b)    Committee Responsibilities......................................    4
</TABLE>


                                      -i-
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<TABLE>
<S>                                                                          <C>
SECTION 4.  ELIGIBILITY...................................................    6
   (a)    General Rule....................................................    6
   (b)    Limitation On Grants............................................    6

SECTION 5.  STOCK SUBJECT TO PLAN.........................................    6
   (a)    Basic Limitation................................................    6
   (b)    Additional Shares...............................................    6
   (c)    Dividend Equivalents............................................    7

SECTION 6.  RESTRICTED SHARES.............................................    7
   (a)    Restricted Stock Agreement......................................    7
   (b)    Payment for Awards..............................................    7
   (c)    Vesting.........................................................    7
   (d)    Voting and Dividend Rights......................................    7

SECTION 7.  OTHER TERMS AND CONDITIONS OF AWARDS OR SALES.................    7
   (a)    Duration of Offers and Nontransferability of Rights.............    7
   (b)    Purchase Price..................................................    8
   (c)    Withholding Taxes...............................................    8
   (d)    Restrictions on Transfer of Shares..............................    8

SECTION 8.  TERMS AND CONDITIONS OF OPTIONS...............................    8
   (a)    Stock Option Agreement..........................................    8
   (b)    Number of Shares................................................    8
   (c)    Exercise Price..................................................    8
   (d)    Withholding Taxes...............................................    8
   (e)    Exercisability and Term.........................................    8
   (f)    Nontransferability..............................................    9
   (g)    Exercise of Options Upon Termination of Service.................    9
   (h)    Effect of Change in Control.....................................    9
   (i)    Leaves of Absence...............................................    9
   (j)    No Rights as a Stockholder......................................    9
   (k)    Modification, Extension and Renewal of Options..................    9
   (l)    Restrictions on Transfer of Shares..............................   10
   (m)    Buyout Provisions...............................................   10

SECTION 9.  PAYMENT FOR SHARES............................................   10
   (a)    General Rule....................................................   10
   (b)    Surrender of Stock..............................................   10
   (c)    Services Rendered...............................................   10
   (d)    Cashless Exercise...............................................   10
   (e)    Exercise/Pledge.................................................   10
   (f)    Promissory Note.................................................   10
   (g)    Other Forms of Payment..........................................   11

SECTION 10. STOCK APPRECIATION RIGHTS.....................................   11
   (a)    SAR Agreement...................................................   11
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<TABLE>
<S>                                                                          <C>
   (b)    Number of Shares................................................   11
   (c)    Exercise Price..................................................   11
   (d)    Exercisability and Term.........................................   11
   (e)    Effect of Change in Control.....................................   11
   (f)    Exercise of SARs................................................   11
   (g)    Modification or Assumption of SARs..............................   11

SECTION 11. STOCK UNITS...................................................   12
   (a)    Stock Unit Agreement............................................   12
   (b)    Payment for Awards..............................................   12
   (c)    Vesting Conditions..............................................   12
   (d)    Voting and Dividend Rights......................................   12
   (e)    Form and Time of Settlement of Stock Units......................   12
   (f)    Death of Recipient..............................................   13
   (g)    Creditors' Rights...............................................   13

SECTION 12. PROTECTION AGAINST DILUTION...................................   13
   (a)    Adjustments.....................................................   13
   (b)    Dissolution or Liquidation......................................   13
   (c)    Reorganizations.................................................   13

SECTION 13. DEFERRAL OF AWARDS............................................   14

SECTION 14. LEGAL AND REGULATORY REQUIREMENTS.............................   15

SECTION 15. WITHHOLDING TAXES.............................................   15
   (a)    General.........................................................   15
   (b)    Share Withholding...............................................   15

SECTION 16. NO EMPLOYMENT RIGHTS..........................................   15

SECTION 17. DURATION AND AMENDMENTS.......................................   15
   (a)    Term of the Plan................................................   15
   (b)    Right to Amend or Terminate the Plan............................   15
   (c)    Effect of Amendment or Termination..............................   16

SECTION 18. EXECUTION.....................................................   16
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                       APPLIED MOLECULAR EVOLUTION, INC.

                     2002 NEW EMPLOYEE STOCK INCENTIVE PLAN

             Adopted by the Board of Directors on December 11, 2002

SECTION 1. ESTABLISHMENT AND PURPOSE.

         The Plan was adopted by the Board of Directors effective December 11,
2002. The purpose of the Plan is to promote the long-term success of the Company
and the creation of stockholder value by (a) supporting the recruitment and
retention of new non-officer Employees, (b) encouraging such Employees to focus
on critical objectives, and (c) linking such Employees directly to stockholder
interests through increased stock ownership. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Stock Units,
Options (which shall only include Nonstatutory Options) or SARs.

SECTION 2. DEFINITIONS.

         (a)      "Affiliate" shall mean any entity other than a Subsidiary, if
the Company and/or a Parent and/or one of more Subsidiaries own not less than
fifty percent (50%) of such entity.

         (b)      "Award" shall mean any award of an Option, a SAR, a Restricted
Share or a Stock Unit under the Plan.

         (c)      "Board of Directors" shall mean the Board of Directors of the
Company, as constituted from time to time.

         (d)      "Change in Control" shall mean the occurrence of any one of
the following events:

                  (i)      A change in the composition of the Board of
         Directors, as a result of which fewer than one-half of the incumbent
         directors are directors who either:

                           (A)      Had been directors of the Company
                  twenty-four (24) months prior to such change; or

                           (B)      Were elected, or nominated for election, to
                  the Board of Directors with the affirmative votes of at least
                  a majority of the directors who had been directors of the
                  Company twenty-four (24) months prior to such change and who
                  were still in office at the time of the election or
                  nomination; or

                  (ii)     Any "person" (as such term is used in sections 13(d)
         and 14(d) of the Exchange Act) who by the acquisition or aggregation of
         securities, is or becomes the beneficial owner, directly or indirectly,
         of securities of the Company representing fifty percent (50%) or more
         of the combined voting power of the Company's then outstanding
         securities ordinarily (and apart from rights accruing under special
         circumstances) having the right to vote at elections of directors (the
         "Base Capital Stock"); except that any


                                      -1-
<PAGE>
         change in the relative beneficial ownership of the Company's securities
         by any person resulting solely from a reduction in the aggregate number
         of outstanding shares of Base Capital Stock, and any decrease
         thereafter in such person's ownership of securities, shall be
         disregarded until such person increases in any manner, directly or
         indirectly, such person's beneficial ownership of any securities of the
         Company. For purposes of this Subsection (ii), the term "person" shall
         not include an employee benefit plan maintained by the Company.

                  (iii)    The consummation of a merger or consolidation of the
         Company with or into another entity or any other corporate
         reorganization, if persons who were not Shareholders of the Company
         immediately prior to such merger, consolidation or other reorganization
         own immediately after such merger, consolidation or other
         reorganization fifty percent (50%) or more of the voting power of the
         outstanding securities of each of (A) the continuing or surviving
         entity and (B) any direct or indirect parent corporation of such
         continuing or surviving entity.

                  (iv)     The sale, or transfer or other disposition of all or
         substantially all of the Company's assets.

Notwithstanding any other provision of this Section 2(d), the term "Change in
Control" shall not include a transaction the sole purpose of which is (a) to
change the state of the Company's incorporation or (b) to form a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.

         (e)      "Code" shall mean the Internal Revenue Code of 1986, as
amended.

         (f)      "Committee" shall mean the committee designated by the Board
of Directors, which is authorized to administer the Plan under Section 3 hereof.

         (g)      "Company" shall mean Applied Molecular Evolution, Inc., a
Delaware corporation.

         (h)      "Consultant" shall mean a consultant or advisor who provides
bona fide services to the Company, a Parent or a Subsidiary as an independent
contractor. Service as a Consultant shall be considered employment for all
purposes of the Plan, except for purposes of Section 4(a).

         (i)      "Employee" shall mean any individual who is a common-law
employee of the Company, a Parent or a Subsidiary.

         (j)      "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.

         (k)      "Exercise Price" shall mean, in the case of an Option, the
amount for which one Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of a SAR, shall mean an amount, as specified in the applicable SAR
Agreement, which is subtracted from the Fair Market Value of one Share in
determining the amount payable upon exercise of such SAR.


                                      -2-
<PAGE>
         (l)      "Fair Market Value" shall mean (i) the closing price of a
Share on the principal exchange which the Shares are trading, on the date on
which the Fair Market Value is determined (if Fair Market Value is determined on
a date which the principal exchange is closed, Fair Market Value shall be
determined on the last immediately preceding trading day), or (ii) if the Shares
are not traded on an exchange but are quoted on the Nasdaq National Market or a
successor quotation system, the closing price on the date on which the Fair
Market Value is determined, or (iii) if the Shares are not traded on an exchange
or quoted on the Nasdaq National Market or a successor quotation system, the
fair market value of a Share, as determined by the Committee in good faith. Such
determination shall be conclusive and binding on all persons.

         (m)      "ISO" shall mean an incentive stock option described in Code
section 422.

         (n)      "Nonstatutory Option" or "NSO" shall mean a stock option that
is not an ISO.

         (o)      "Offeree" shall mean an individual to whom the Committee has
offered the right to acquire Shares under the Plan (other than upon exercise of
an Option).

         (p)      "Option" shall mean a Nonstatutory Option granted under the
Plan and entitling the holder to purchase Shares.

         (q)      "Optionee" shall mean an individual or estate who holds an
Option or SAR.

         (r)      "Outside Director" shall mean a member of the Board of
Directors who is not a common-law employee of the Company, a Parent or a
Subsidiary. Service as an Outside Director shall be considered employment for
all purposes of the Plan, for purposes Section 4(a).

         (s)      "Parent" shall mean any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. A corporation that attains the status of a
Parent on a date after the adoption of the Plan shall be a parent commencing as
of such date.

         (t)      "Participant" shall mean an individual or estate who holds an
Award.

         (u)      "Plan" shall mean this 2002 New Employee Stock Incentive Plan
of Applied Molecular Evolution, Inc., as amended from time to time.

         (v)      "Purchase Price" shall mean the consideration for which one
Share may be acquired under the Plan (other than upon exercise of an Option), as
specified by the Committee.

         (w)      "Restricted Share" shall mean a Share awarded under the Plan.

         (x)      "Restricted Share Agreement " shall mean the agreement between
the Company and the recipient of a Restricted Share which contains the terms,
conditions and restrictions pertaining to such Restricted Share.

         (y)      "SAR" shall mean a stock appreciation right granted under the
Plan.


                                      -3-
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         (z)      "SAR Agreement" shall mean the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her SAR.

         (aa)     "Service" shall mean service as an Employee, Consultant or
Outside Director.

         (bb)     "Share" shall mean one share of Stock, as adjusted in
accordance with Section 9 (if applicable).

         (cc)     "Stock" shall mean the Common Stock of the Company.

         (dd)     "Stock Option Agreement" shall mean the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her Option.

         (ee)     "Stock Purchase Agreement" shall mean the agreement between
the Company and an Offeree who acquires Shares under the Plan which contains the
terms, conditions and restrictions pertaining to the acquisition of such Shares.

         (ff)     "Stock Unit" shall mean a bookkeeping entry representing the
equivalent of one Share, as awarded under the Plan.

         (gg)     "Stock Unit Agreement" shall mean the agreement between the
Company and the recipient of a Stock Unit which contains the terms, conditions
and restrictions pertaining to such Stock Unit.

         (hh)     "Subsidiary" shall mean any corporation, if the Company and/or
one or more other Subsidiaries own not less than fifty percent (50%) of the
total combined voting power of all classes of outstanding stock of such
corporation. A corporation that attains the status of a Subsidiary on a date
after the adoption of the Plan shall be considered a Subsidiary commencing as of
such date.

         (ii)     "Total and Permanent Disability" shall mean that the Optionee
is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or which has lasted, or can be expected to last, for a
continuous period of not less than twelve (12) months.

SECTION 3. ADMINISTRATION.

         (a)      Committee Procedures. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board of Directors. The Board of
Directors shall designate one of the members of the Committee as chairman. The
Committee may hold meetings at such times and places as it shall determine. The
acts of a majority of the Committee members present at meetings at which a
quorum exists, or acts reduced to or approved in writing by all Committee
members, shall be valid acts of the Committee.

         (b)      Committee Responsibilities. Subject to the provisions of the
Plan, the Committee shall have full authority and discretion to take the
following actions:


                                      -4-
<PAGE>
                  (i)      To grant Awards under the Plan on such terms and
         conditions to be determined by the Committee subject to the terms and
         conditions of the Plan;

                  (ii)     To interpret the Plan and to apply its provisions;

                  (iii)    To adopt, amend or rescind rules, procedures and
         forms relating to the Plan;

                  (iv)     To authorize any person to execute, on behalf of the
         Company, any instrument required to carry out the purposes of the Plan;

                  (v)      To determine when Shares are to be awarded or offered
         for sale and when Options are to be granted under the Plan;

                  (vi)     To select the Offerees and Optionees;

                  (vii)    To determine the number of Shares to be offered to
         each Offeree or to be made subject to each Option;

                  (viii)   To prescribe the terms and conditions of each award
         or sale of Shares, including (without limitation) the Purchase Price,
         the vesting of the award (including accelerating the vesting of awards)
         and to specify the provisions of the Stock Purchase Agreement relating
         to such award or sale;

                  (ix)     To prescribe the terms and conditions of each Option,
         including (without limitation) the Exercise Price, the vesting or
         duration of the Option (including accelerating the vesting of the
         Option), and to specify the provisions of the Stock Option Agreement
         relating to such Option;

                  (x)      To amend any outstanding Stock Purchase Agreement or
         Stock Option Agreement, subject to applicable legal restrictions and to
         the consent of the Offeree or Optionee who entered into such agreement;

                  (xi)     To prescribe the consideration for the grant of each
         Option or other right under the Plan and to determine the sufficiency
         of such consideration;

                  (xii)    To determine the disposition of each Option or other
         right under the Plan in the event of an Optionee's or Offeree's divorce
         or dissolution of marriage;

                  (xiii)   To determine whether Options or other rights under
         the Plan will be granted in replacement of other grants under an
         incentive or other compensation plan of an acquired business;

                  (xiv)    To correct any defect, supply any omission, or
         reconcile any inconsistency in the Plan, any Stock Option Agreement or
         any Stock Purchase Agreement; and

                  (xv)     To take any other actions deemed necessary or
         advisable for the administration of the Plan.


                                      -5-
<PAGE>
All decisions, interpretations and other actions of the Committee shall be final
and binding on all Offerees, all Optionees, and all persons deriving their
rights from an Offeree or Optionee. No member of the Committee shall be liable
for any action that he or she has taken or has failed to take in good faith with
respect to the Plan, any Option, or any right to acquire Shares under the Plan.

         Subject to the requirements of applicable law, the Board of Directors
or the Committee may designate one or more persons other than members of the
Committee to be delegated the authority to carry out the responsibilities of the
Committee, and the Board of Directors or the Committee may prescribe such
conditions and limitations for such delegation of authority to such persons as
it may deem appropriate, including, but not limited to setting the maximum
number of Shares that may be issued to any Employee pursuant to an Award and the
maximum aggregate number of Shares that may be issued pursuant to Awards granted
by such designated person or persons on behalf of the Company.

SECTION 4. ELIGIBILITY.

         (a)      General Rule. Only new non-officer Employees of the Company or
a Subsidiary shall be eligible for the grant of Awards, provided that prior to
the grant of the Awards, such persons were not previously employed by the
Company, a Parent, a Subsidiary or an Affiliate, and such Award is essential as
an inducement to the individual's entering into an employment agreement or
relationship with the Company or a Subsidiary so as to satisfy the requirements
of NASD Rule 4350(i) or any successor rule thereto.

         (b)      Limitation On Grants. No Employee shall be granted an Award
pursuant to which he or she may receive more than fifty thousand (50,000)
Shares.

SECTION 5. STOCK SUBJECT TO PLAN.

         (a)      Basic Limitation. Shares offered under the Plan shall be
authorized but unissued Shares or treasury Shares. The maximum aggregate number
of Shares issuable pursuant to Awards under the Plan shall not exceed two
hundred thousand (200,000) Shares, including the Shares which become available
pursuant to Subsection (b) below, plus those described in subsection (c) below.
The limitation of this Section 5(a) shall be subject to adjustment pursuant to
Section 12.

         (b)      Additional Shares. If Restricted Shares or Shares issued upon
the exercise of Options are forfeited, then such Shares shall again become
available for Awards under the Plan. If Stock Units, Options or SARs are
forfeited or terminate for any other reason before being exercised, then the
corresponding Shares shall again become available for Awards under the Plan. If
Stock Units are settled, then only the number of Shares (if any) actually issued
in settlement of such Stock Units shall reduce the number available under
Section 5(a) and the balance shall again become available for Awards under the
Plan. If SARs are exercised, then only the number of Shares (if any) actually
issued in settlement of such SARs shall reduce the number available in Section
5(a) and the balance shall again become available for Awards under the Plan.


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         (c)      Dividend Equivalents. Any dividend equivalents paid or
credited under the Plan shall not be applied against the number of Restricted
Shares, Stock Units, Options or SARs available for Awards, whether or not such
dividend equivalents are converted into Stock Units.

SECTION 6. RESTRICTED SHARES

         (a)      Restricted Stock Agreement. Each grant of Restricted Shares
under the Plan shall be evidenced by a Restricted Stock Agreement between the
recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.

         (b)      Payment for Awards. Subject to the following sentence,
Restricted Shares may be sold or awarded under the Plan for such consideration
as the Committee may determine, including (without limitation) cash, cash
equivalents, full-recourse promissory notes, past services and future services.
To the extent that an Award consists of newly issued Restricted Shares, the
Award recipient shall furnish consideration with a value not less than the par
value of such Restricted Shares in the form of cash, cash equivalents, or past
services rendered to the Company (or a Parent or Subsidiary), as the Committee
may determine.

         (c)      Vesting. Each Award of Restricted Shares may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. The
Committee may include among such conditions the requirement that the performance
of the Company or a business unit of the Company for a specified period of one
or more years equal or exceed a target determined in advance by the Committee. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. The Committee
may determine, at the time of granting Restricted Shares of thereafter, that all
or part of such Restricted Shares shall become vested in the event that a Change
in Control occurs with respect to the Company as well as the terms for such
vesting.

         (d)      Voting and Dividend Rights. The holders of Restricted Shares
awarded under the Plan shall have the same voting, dividend and other rights as
the Company's other stockholders. A Restricted Stock Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends received
in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.

SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES.

         (a)      Duration of Offers and Nontransferability of Rights. Any right
to acquire Shares under the Plan (other than an Option) shall automatically
expire if not exercised by the Offeree within thirty (30) days after the grant
of such right was communicated to him or her by the Committee. Such right shall
not be transferable and shall be exercisable only by the Offeree to whom such
right was granted.


                                      -7-
<PAGE>
         (b)      Purchase Price. The Purchase Price shall be determined by the
Committee at its sole discretion. The Purchase Price shall be payable in one of
the forms described in Sections 9(a), (b) or (c).

         (c)      Withholding Taxes. As a condition to the purchase of Shares,
the Offeree shall make such arrangements as the Committee may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such purchase.

         (d)      Restrictions on Transfer of Shares. Any Shares awarded or sold
under the Plan shall be subject to such special forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the
Committee may determine. Such restrictions shall be set forth in the applicable
Stock Purchase Agreement and shall apply in addition to any general restrictions
that may apply to all holders of Shares.

SECTION 8. TERMS AND CONDITIONS OF OPTIONS.

         (a)      Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. Options may
be granted in consideration of a reduction in the Optionee's other compensation.
A Stock Option Agreement may provide that a new Option will be granted
automatically to the Optionee when he or she exercises a prior Option and pays
the Exercise Price in a form described in Section 9.

         (b)      Number of Shares. Each Stock Option Agreement shall specify
the number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 12.

         (c)      Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under any Option shall be determined by the
Committee at its sole discretion. The Exercise Price shall be payable in one of
the forms described in Sections 9.

         (d)      Withholding Taxes. As a condition to the exercise of an
Option, the Optionee shall make such arrangements as the Committee may require
for the satisfaction of any federal, state or local withholding tax obligations
that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Committee may require for the satisfaction of any
federal, state or local withholding tax obligations that may arise in connection
with the disposition of Shares acquired by exercising an Option.

         (e)      Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option. A Stock Option Agreement may provide for accelerated exercisability in
the event of the Optionee's death, disability, or retirement or other events and
may provide for expiration prior to the end of its term in the event of the
termination of the Optionee's Service. Options may be awarded in combination
with SARs, and such an Award may provide that the Options will not be
exercisable unless the related SARs are


                                      -8-
<PAGE>
forfeited. Subject to the foregoing in this Section 8(e), the Committee at its
sole discretion shall determine when all or any installment of an Option is to
become exercisable and when an Option is to expire.

         (f)      Nontransferability. During an Optionee's lifetime, his or her
Option(s) shall be exercisable only by him or her and shall not be transferable.
In the event of an Optionee's death, his or her Option(s) shall not be
transferable other than by will or by the laws of descent and distribution.

         (g)      Exercise of Options Upon Termination of Service. Each Stock
Option Agreement shall set forth the extent to which the Optionee shall have the
right to exercise the Option following termination of the Optionee's Service
with the Company and its Subsidiaries, and the right to exercise the Option of
any executors or administrators of the Optionee's estate or any person who has
acquired such Option(s) directly from the Optionee by bequest or inheritance.
Such provisions shall be determined in the sole discretion of the Committee,
need not be uniform among all Options issued pursuant to the Plan, and may
reflect distinctions based on the reasons for termination of Service.

         (h)      Effect of Change in Control. The Committee may determine, at
the time of granting an Option or thereafter, that such Option shall become
vested and exercisable as to all or part of the Shares subject to such Option in
the event that a Change in Control occurs with respect to the Company as well as
the terms for such acceleration of the vesting and the right to exercise the
Option.

         (i)      Leaves of Absence. An Optionee's Service shall cease when such
Optionee ceases to be actively employed by, or a consultant or adviser to, the
Company (or any Subsidiary) as determined in the sole discretion of the Board of
Directors. For purposes of Options, Service does not terminate when an Optionee
goes on a bona fide leave of absence, that was approved by the Company in
writing, if the terms of the leave provide for continued service crediting, or
when continued service crediting is required by applicable law. Service
terminates in any event when the approved leave ends, unless such Optionee
immediately returns to active work. The Company determines which leaves count
toward Service, and when Service terminates for all purposes under the Plan.

         (j)      No Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance to him or her of
such Shares pursuant to the exercise of such Option. No adjustments shall be
made, except as provided in Section 12.

         (k)      Modification, Extension and Renewal of Options. Within the
limitations of the Plan, the Committee may modify, extend or renew outstanding
options or may accept the cancellation of outstanding options (to the extent not
previously exercised), whether or not granted hereunder, in return for the grant
of new Options for the same or a different number of Shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, impair his or her rights or
increase his or her obligations under such Option.


                                      -9-
<PAGE>
         (l)      Restrictions on Transfer of Shares. Any Shares issued upon
exercise of an Option shall be subject to such special forfeiture conditions,
rights of repurchase, rights of first refusal and other transfer restrictions as
the Committee may determine. Such restrictions shall be set forth in the
applicable Stock Option Agreement and shall apply in addition to any general
restrictions that may apply to all holders of Shares.

         (m)      Buyout Provisions. The Committee may at any time (a) offer to
buy out for a payment in cash or cash equivalents an Option previously granted
or (b) authorize an Optionee to elect to cash out an Option previously granted,
in either case at such time and based upon such terms and conditions as the
Committee shall establish.

SECTION 9. PAYMENT FOR SHARES.

         (a)      General Rule. The entire Exercise Price of Shares issued under
the Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as provided in Subsections (b)
through (g) below.

         (b)      Surrender of Stock. To the extent that a Stock Option
Agreement so provides, payment may be made all or in part by surrendering, or
attesting to the ownership of, Shares which have already been owned by the
Optionee or his or her representative for more than twelve (12) months. Such
Shares shall be valued at their Fair Market Value on the date when the new
Shares are purchased under the Plan. The Optionee shall not surrender, or attest
to the ownership of, Shares in payment of the Exercise Price if such action
would cause the Company to recognize compensation expense (or additional
compensation expense) with respect to the Option for financial reporting
purposes.

         (c)      Services Rendered. At the discretion of the Committee, Shares
may be awarded under the Plan in consideration of services rendered to the
Company or a Parent or a Subsidiary prior to the award. If Shares are awarded
without the payment of a Purchase Price in cash, the Committee shall make a
determination (at the time of the award) of the value of the services rendered
by the Offeree and the sufficiency of the consideration to meet the requirements
of Section 6(b).

         (d)      Cashless Exercise. To the extent that a Stock Option Agreement
so provides, payment may be made all or in part by delivery (on a form
prescribed by the Committee) of an irrevocable direction to a securities broker
to sell Shares and to deliver all or part of the sale proceeds to the Company in
payment of the aggregate Exercise Price.

         (e)      Exercise/Pledge. To the extent that a Stock Option Agreement
so provides, payment may be made all or in part by delivery (on a form
prescribed by the Committee) of an irrevocable direction to a securities broker
or lender to pledge Shares, as security for a loan, and to deliver all or part
of the loan proceeds to the Company in payment of the aggregate Exercise Price.

         (f)      Promissory Note. To the extent that a Stock Option Agreement
so provides, payment may be made all or in part by delivering (on a form
prescribed by the Company) a full-recourse promissory note. However, the par
value of the Shares being purchased under the Plan, if newly issued, shall be
paid in cash or cash equivalents.


                                      -10-
<PAGE>
         (g)      Other Forms of Payment. To the extent that a Stock Option
Agreement so provides, payment may be made in any other form that is consistent
with applicable laws, regulations and rules.

SECTION 10. STOCK APPRECIATION RIGHTS.

         (a)      SAR Agreement. Each grant of a SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.

         (b)      Number of Shares. Each SAR Agreement shall specify the number
of Shares to which the SAR pertains and shall provide for the adjustment of such
number in accordance with Section 12.

         (c)      Exercise Price. Each SAR Agreement shall specify the Exercise
Price. A SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.

         (d)      Exercisability and Term. Each SAR Agreement shall specify the
date when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. A SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may be
awarded in combination with Options, and such an Award may provide that the SARs
will not be exercisable unless the related Options are forfeited. A SAR may be
included in an Option at the time of grant or thereafter. A SAR granted under
the Plan may provide that it will be exercisable only in the event of a Change
in Control.

         (e)      Effect of Change in Control. The Committee may determine, at
the time of granting a SAR or thereafter, that such SAR shall become fully
vested and exercisable as to all Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company as well as the conditions
for the vesting and exercisability of such SAR.

         (f)      Exercise of SARs. Upon exercise of a SAR, the Optionee (or any
person having the right to exercise the SAR after his or her death) shall
receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and
cash, as the Committee shall determine. The amount of cash and/or the Fair
Market Value of Shares received upon exercise of SARs shall, in the aggregate,
be equal to the amount by which the Fair Market Value (on the date of surrender)
of the Shares subject to the SARs exceeds the Exercise Price. If, on the date
when a SAR expires, the Exercise Price under such SAR is less than the Fair
Market Value on such date but any portion of such SAR has not been exercised or
surrendered, then such SAR shall automatically be deemed to be exercised as of
such date with respect to such portion.

         (g)      Modification or Assumption of SARs. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding SARs or may
accept the cancellation of


                                      -11-
<PAGE>
outstanding SARs (whether granted by the Company or by another issuer) in return
for the grant of new SARs for the same or a different number of shares and at
the same or a different exercise price. The foregoing notwithstanding, no
modification of a SAR shall, without the consent of the Optionee, alter or
impair his or her rights or obligations under such SAR.

SECTION 11. STOCK UNITS.

         (a)      Stock Unit Agreement. Each grant of Stock Units under the Plan
shall be evidenced by a Stock Unit Agreement between the recipient and the
Company. Such Stock Units shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan.
The provisions of the various Stock Unit Agreements entered into under the Plan
need not be identical. Stock Units may be granted in consideration of a
reduction in the recipient's other compensation.

         (b)      Payment for Awards. To the extent that an Award is granted in
the form of Stock Units, no cash consideration shall be required of the Award
recipients.

         (c)      Vesting Conditions. Each Award of Stock Units may or may not
be subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events. The Committee may
determine, at the time of granting Stock Units or thereafter, that all or part
of such Stock Units shall become vested in the event that a Change in Control
occurs with respect to the Company as well as the conditions for the vesting of
such Stock Units.

         (d)      Voting and Dividend Rights. The holders of Stock Units shall
have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded
under the Plan may, at the Committee's discretion, carry with it a right to
dividend equivalents. Such right entitles the holder to be credited with an
amount equal to all cash dividends paid on one Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Shares, or in a combination of both. Prior to distribution, any dividend
equivalents which are not paid shall be subject to the same conditions and
restrictions as the Stock Units to which they attach.

         (e)      Form and Time of Settlement of Stock Units. Settlement of
vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any
combination of both, as determined by the Committee. The actual number of Stock
Units eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based
on the average Fair Market Value of Shares over a series of trading days. Vested
Stock Units may be settled in a lump sum or in installments. The distribution
may occur or commence when all vesting conditions applicable to the Stock Units
have been satisfied or have lapsed, or it may be deferred to any later date. The
amount of a deferred distribution may be increased by an interest factor or by
dividend equivalents. Until an Award of Stock Units is settled, the number of
such Stock Units shall be subject to adjustment pursuant to Section 12.


                                      -12-
<PAGE>
         (f)      Death of Recipient. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's beneficiary
or beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.

         (g)      Creditors' Rights. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company. Stock Units
represent an unfunded and unsecured obligation of the Company, subject to the
terms and conditions of the applicable Stock Unit Agreement.

SECTION 12. PROTECTION AGAINST DILUTION.

         (a)      Adjustments. In the event of a subdivision of the outstanding
Shares, a declaration of a dividend payable in Shares, a declaration of a
dividend payable in a form other than Shares in an amount that has a material
effect on the price of Shares, a combination or consolidation of the outstanding
Shares (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more
of:

                  (i)      The number of Shares available for future Awards
         under Section 5;

                  (ii)     The limitation set forth in Section 4(b);

                  (iii)    The number of Shares covered by each outstanding
         Option and SAR;

                  (iv)     The Exercise Price under each outstanding Option and
         SAR; or

                  (v)      The number of Stock Units included in any prior Award
         which has not yet been settled.

Except as provided in this Section 12, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.

         (b)      Dissolution or Liquidation. To the extent not previously
exercised or settled, Options, SARs and Stock Units shall terminate immediately
prior to the dissolution or liquidation of the Company.

         (c)      Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Awards shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for:

                  (i)      The continuation of the outstanding Awards by the
         Company, if the Company is a surviving corporation;


                                      -13-
<PAGE>
                  (ii)     The assumption of the outstanding Awards by the
         surviving corporation or its parent or subsidiary;

                  (iii)    The substitution by the surviving corporation or its
         parent or subsidiary of its own awards for the outstanding Awards;

                  (iv)     Full exercisability or vesting and accelerated
         expiration of the outstanding Awards; or

                  (v)      Settlement of the value of the outstanding Awards in
         cash or cash equivalents followed by cancellation of such Awards less
         any applicable Purchase Price or Exercise Price.

         (d)      Reservation of Rights. Except as provided in this Section 12,
an Optionee or Offeree shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class, the payment of any dividend or
any other increase or decrease in the number of shares of stock of any class.
Any issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.

SECTION 13. DEFERRAL OF AWARDS.

         The Committee (in its sole discretion) may permit or require a
Participant to:

         a)       Have cash that otherwise would be paid to such Participant as
                  a result of the exercise of a SAR or the settlement of Stock
                  Units credited to a deferred compensation account established
                  for such Participant by the Committee as an entry on the
                  Company's books;

         b)       Have Shares that otherwise would be delivered to such
                  Participant as a result of the exercise of an Option or SAR
                  converted into an equal number of Stock Units; or

         c)       Have Shares that otherwise would be delivered to such
                  Participant as a result of the exercise of an Option or SAR or
                  the settlement of Stock Units converted into amounts credited
                  to a deferred compensation account established for such
                  Participant by the Committee as an entry on the Company's
                  books. Such amounts shall be determined by reference to the
                  Fair Market Value of such Shares as of the date when they
                  otherwise would have been delivered to such Participant.

A deferred compensation account established under this Section 13 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the


                                      -14-
<PAGE>
Company and shall be subject to the terms and conditions of the applicable
agreement between such Participant and the Company. If the deferral or
conversion of Awards is permitted or required, the Committee (in its sole
discretion) may establish rules, procedures and forms pertaining to such Awards,
including (without limitation) the settlement of deferred compensation accounts
established under this Section 13.

SECTION 14. LEGAL AND REGULATORY REQUIREMENTS.

         Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations and the regulations of any stock exchange on which the
Company's securities may then be listed, and the Company has obtained the
approval or favorable ruling from any governmental agency which the Company
determines is necessary or advisable.

SECTION 15. WITHHOLDING TAXES.

         (a)      General. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.

         (b)      Share Withholding. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Shares that otherwise would
be issued to him or her or by surrendering all or a portion of any Shares that
he or she previously acquired. Such Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash.

SECTION 16. NO EMPLOYMENT RIGHTS.

         No provision of the Plan, nor any right or Option granted under the
Plan, shall be construed to give any person any right to become, to be treated
as, or to remain an Employee, Consultant or Outside Director. The Company and
its Subsidiaries reserve the right to terminate any person's Service at any time
and for any reason, with or without notice.

SECTION 17. DURATION AND AMENDMENTS.

         (a)      Term of the Plan. The amended and restated Plan, as set forth
herein, shall terminate automatically on December 10, 2012 and may be terminated
on any earlier date pursuant to Subsection (b) below.

         (b)      Right to Amend or Terminate the Plan. The Board of Directors
may amend the Plan at any time and from time to time. Rights and obligations
under any Option granted before amendment of the Plan shall not be materially
impaired by such amendment, except with consent of the person to whom the Option
was granted. An amendment of the Plan shall be subject to the


                                      -15-
<PAGE>
approval of the Company's stockholders only to the extent required by applicable
laws, regulations or rules.

         (c)      Effect of Amendment or Termination. No Shares shall be issued
or sold under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.

SECTION 18. EXECUTION.

         To record the adoption of the amended and restated Plan by the Board of
Directors effective as of December 11, 2002, the Company has caused its
authorized officer to execute the same on behalf of the Company.

                                     APPLIED MOLECULAR EVOLUTION, INC.



                                     By ________________________________________
                                        William D. Huse, M.D., Ph.D.
                                        President and Chief Executive Officer


                                      -16-