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UNITED
STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

Commission file number 000-28401





MAXYGEN, INC.

(Exact name of registrant as specified in its charter)







|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 77-0449487                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

515 Galveston Drive

Redwood City, California 94063

(Address of principal executive offices, including zip code)

(650) 298-5300

(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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

As of October 31, 2010, there were 29,996,948 shares of the registrants common stock, $0.0001 par value per share,
outstanding, which is the only class of common or voting stock of the registrant issued.









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MAXYGEN, INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2010

INDEX



|                                                                                                                                    |  |  |    | 
|----------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Part I FINANCIAL INFORMATION                                                                                                        |  |  |    | 
|                                                                                                                                    | 
|Item 1: Financial Statements:                                                                                                       |  |  |    | 
|                                                                                                                                    | 
|Condensed Consolidated Balance Sheets as of December 31, 2009 and September 30, 2010
(unaudited)                                    |  |  | 1  | 
|                                                                                                                                    | 
|Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 
30, 2009 and 2010 (unaudited) |  |  | 2  | 
|                                                                                                                                    | 
|Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 
30, 2009 and 2010 (unaudited)           |  |  | 3  | 
|                                                                                                                                    | 
|Notes to Condensed Consolidated Financial Statements                                                                                |  |  | 4  | 
|                                                                                                                                    | 
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations                                       |  |  | 21 | 
|                                                                                                                                    | 
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                                                                  |  |  | 29 | 
|                                                                                                                                    | 
|Item 4: Controls and Procedures                                                                                                     |  |  | 29 | 
|                                                                                                                                    | 
|Part II OTHER INFORMATION                                                                                                           |  |  |    | 
|                                                                                                                                    | 
|Item 1: Legal Proceedings                                                                                                           |  |  | 30 | 
|                                                                                                                                    | 
|Item 1A: Risk Factors                                                                                                               |  |  | 30 | 
|                                                                                                                                    | 
|Item 2: Unregistered Sales of Equity Securities and Use of Proceeds                                                                 |  |  | 32 | 
|                                                                                                                                    | 
|Item 3: Defaults Upon Senior Securities                                                                                             |  |  | 32 | 
|                                                                                                                                    | 
|Item 4: (Removed and Reserved)                                                                                                      |  |  | 32 | 
|                                                                                                                                    | 
|Item 5: Other Information                                                                                                           |  |  | 32 | 
|                                                                                                                                    | 
|Item 6: Exhibits                                                                                                                    |  |  | 32 | 
|                                                                                                                                    | 
|SIGNATURES                                                                                                                          |  |  | 33 | 

This report and the
disclosures herein include, on a consolidated basis, the business and operations of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc., Maxygen ApS and Maxygen Holdings, Inc., as well as its majority-owned subsidiaries,
Perseid Therapeutics LLC, Maxygen Holdings LLC and Maxygen Holdings Ltd. In this report, Maxygen, the company, we, us and our refer to such consolidated entities, unless, in each case, the
context indicates that the disclosure applies only to a named subsidiary.

Our web site is located at www.maxygen.com. We make
available free of charge, on or through our web site, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing such reports with the Securities and
Exchange Commission, or SEC. Information contained on our web site is not part of this report.



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We
own or have rights to various copyrights, trademarks and trade names used in our business, including Maxygen®.
MolecularBreeding is a trademark of Codexis, Inc. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners. The use of the word partner and partnership does
not mean a legal partner or legal partnership.

Forward Looking Statements

This document contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on the current expectations and beliefs of our management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in
the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, can, will, should, could, expect, plan,
anticipate, believe, estimate, predict, intend, potential or continue or the negative of these terms or other comparable terminology. In any forward-looking
statement in which we express an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement or expectation or belief
will result or be achieved or accomplished. The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements:



| |  |  | strategic alternatives and transactions with respect to our business and the timing, likelihood and outcome thereof;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | any decision by Astellas to exercise, or not exercise, its option to purchase our ownership interests in Perseid Therapeutics LLC;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | our implementation, and the timing, of any distribution of a portion of our cash resources or assets, including our shares of Codexis, Inc. common
stock, to stockholders or our failure to implement any such distribution;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | events related to Codexis, Inc. or our investment in Codexis, Inc. common stock;
| | - |  | --------------------------------------------------------------------------------



| |  |  | our ability to develop products suitable for commercialization;
| | - |  | ---------------------------------------------------------------



| |  |  | our predicted development and commercial timelines for any of our potential products;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to continue operations and our estimates for future performance and financial position of the company;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the establishment, development and maintenance of any manufacturing or collaborative relationships;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the effectiveness of the MolecularBreeding directed evolution platform and other technologies and processes and whether Codexis, Inc. will
effectively prosecute, maintain and protect the patent rights associated with this technology platform;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to protect our intellectual property portfolio and rights;
| | - |  | ----------------------------------------------------------------------



| |  |  | our ability to identify and develop new potential products;
| | - |  | -----------------------------------------------------------



| |  |  | the attributes of any products we, or any of our collaborative partners, may develop;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our business strategies and plans; and
| | - |  | --------------------------------------



| |  |  | other economic, business, competitive, and/or regulatory factors affecting our business and the market we serve generally.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

These statements are only predictions. Risks and uncertainties and the occurrence of other events could
cause actual results to differ materially from these predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. Important factors that could cause our actual results to differ materially from the forward-looking statements we
make in this report are set forth in our Form 10-K for the year ended December 31, 2009 and



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in this report, including the factors described in the section entitled Item 1A  Risk Factors, as well as those discussed in our Current Reports on Form 8-K and other SEC
filings. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements whether as a result of new information, future events, or otherwise.



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PART I  FINANCIAL INFORMATION



|ITEM1. | FINANCIAL STATEMENTS
|------ | --------------------

MAXYGEN, INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                  |  | December 31,2009 |          |   | September 30,2010 |  
|                                                                                                                                                                                  |  |                  |          |   | (unaudited)       |  
|ASSETS                                                                                                                                                                            |  |                  |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                   |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                         |  | $                | 125,919  |   |                   | $ | 142,004  |  
|Short-term investments                                                                                                                                                            |  |                  | 33,611   |   |                   |   |         |  
|Related party receivable                                                                                                                                                          |  |                  | 13,608   |   |                   |   | 8,621    |  
|Accounts receivable and other receivables                                                                                                                                         |  |                  | 473      |   |                   |   |         |  
|Available-for-sale investment in equity securities of related party                                                                                                               |  |                  |         |   |                   |   | 10,383   |  
|Prepaid expenses and other current assets                                                                                                                                         |  |                  | 1,849    |   |                   |   | 1,486    |  
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|Total current assets                                                                                                                                                              |  |                  | 175,460  |   |                   |   | 162,494  |  
|Property and equipment, net                                                                                                                                                       |  |                  | 1,777    |   |                   |   | 1,586    |  
|Other noncurrent assets                                                                                                                                                           |  |                  |         |   |                   |   | 1,346    |  
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|Total assets                                                                                                                                                                      |  | $                | 177,237  |   |                   | $ | 165,426  |  
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|LIABILITIES AND STOCK HOLDERS EQUITY                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                              |  |                  |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                  |  | $                | 1,239    |   |                   | $ | 5,196    |  
|Accrued compensation                                                                                                                                                              |  |                  | 1,651    |   |                   |   | 1,767    |  
|Accrued restructuring charges                                                                                                                                                     |  |                  | 4,384    |   |                   |   | 35       |  
|Accrued project costs                                                                                                                                                             |  |                  | 4,794    |   |                   |   | 3,436    |  
|Other accrued liabilities                                                                                                                                                         |  |                  | 1,302    |   |                   |   | 1,761    |  
|Related party deferred revenue                                                                                                                                                    |  |                  | 6,991    |   |                   |   | 3,577    |  
|Deferred revenue                                                                                                                                                                  |  |                  | 865      |   |                   |   |         |  
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                         |  |                  | 21,226   |   |                   |   | 15,772   |  
|Non-current deferred revenue                                                                                                                                                      |  |                  | 500      |   |                   |   |         |  
|Other non-current liabilities                                                                                                                                                     |  |                  |         |   |                   |   | 418      |  
|Commitments and contingencies (Notes 5 and 6)                                                                                                                                     |  |                  |          |   |                   |   |          |  
|Stockholders equity:                                                                                                                                                             |  |                  |          |   |                   |   |          |  
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2009 and
September 30, 2010                                     |  |                  |         |   |                   |   |         |  
|Common stock, $0.0001 par value, 100,000,000 shares authorized, 31,448,056 and 29,131,356 shares issued and outstanding at
December 31, 2009 and September 30, 2010, respectively |  |                  | 3        |   |                   |   | 3        |  
|Additional paid-in capital                                                                                                                                                        |  |                  | 423,924  |   |                   |   | 410,467  |  
|Accumulated other comprehensive income (loss)                                                                                                                                     |  |                  | (227     | ) |                   |   | 8,082    |  
|Accumulated deficit                                                                                                                                                               |  |                  | (272,096 | ) |                   |   | (273,128 | )
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|Total Maxygen, Inc. stockholders equity                                                                                                                                          |  |                  | 151,604  |   |                   |   | 145,424  |  
|Non-controlling interest                                                                                                                                                          |  |                  | 3,907    |   |                   |   | 3,812    |  
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                        |  |                  | 155,511  |   |                   |   | 149,236  |  
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                        |  | $                | 177,237  |   |                   | $ | 165,426  |  
|                                                                                                                                                                                  |  |                  |          |   |                   |   |          |  

See accompanying notes.



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MAXYGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except
per share data)



|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                       |  | Three months
endedSeptember 30, |         |   | Nine months
endedSeptember 30, |  
|                                                                                       |  | 2009                            |         |   | 2010                           |   |        | 2009 |  |   | 2010    |  
|                                                                                       |  | (unaudited)                     |        
|Related party revenue                                                                  |  | $                               | 6,675   |   |                                | $ | 5,887  |      |  | $ | 19,802  |   |  | $ | 30,716 |  
|Technology and license revenue                                                         |  |                                 | 5       |   |                                |   | 504    |      |  |   | 10      |   |  |   | 1,015  |  
|Grant revenue                                                                          |  |                                 | 1,115   |   |                                |   |       |      |  |   | 3,286   |   |  |   |       |  
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total revenues                                                                         |  |                                 | 7,795   |   |                                |   | 6,391  |      |  |   | 23,098  |   |  |   | 31,731 |  
|Operating expenses:                                                                    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Research and development                                                               |  |                                 | 11,099  |   |                                |   | 6,125  |      |  |   | 25,550  |   |  |   | 26,708 |  
|General and administrative                                                             |  |                                 | 6,468   |   |                                |   | 2,745  |      |  |   | 14,921  |   |  |   | 8,541  |  
|Restructuring charge                                                                   |  |                                 | 12,152  |   |                                |   |       |      |  |   | 12,250  |   |  |   | (98    | )
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                                               |  |                                 | 29,719  |   |                                |   | 8,870  |      |  |   | 52,721  |   |  |   | 35,151 |  
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Loss from operations                                                                   |  |                                 | (21,924 | ) |                                |   | (2,479 | )    |  |   | (29,623 | ) |  |   | (3,420 | )
|Interest income and other income, net                                                  |  |                                 | 166     |   |                                |   | (160   | )    |  |   | 876     |   |  |   | 35     |  
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net loss before income taxes                                                           |  |                                 | (21,758 | ) |                                |   | (2,639 | )    |  |   | (28,747 | ) |  |   | (3,385 | )
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Income tax benefit                                                                     |  |                                 |        |   |                                |   | 1,752  |      |  |   |        |   |  |   | 2,049  |  
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net loss                                                                               |  |                                 | (21,758 | ) |                                |   | (887   | )    |  |   | (28,747 | ) |  |   | (1,336 | )
|Net loss attributable to non-controlling interest                                      |  |                                 | (86     | ) |                                |   | (341   | )    |  |   | (86     | ) |  |   | (304   | )
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net loss attributable to Maxygen, Inc.                                                 |  | $                               | (21,672 | ) |                                | $ | (546   | )    |  | $ | (28,661 | ) |  | $ | (1,032 | )
|                                                                                       |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share attributable to Maxygen, Inc. common stockholders |  | $                               | (0.57   | ) |                                | $ | (0.02  | )    |  | $ | (0.75   | ) |  | $ | (0.03  | )
|Shares used in basic and diluted net loss per share calculations                       |  |                                 | 38,316  |   |                                |   | 29,402 |      |  |   | 38,125  |   |  |   | 30,221 |  

See accompanying
notes.



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MAXYGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                                     |  |                                |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                     |  | Nine months
endedSeptember 30, |        
|                                                                                                                     |  | 2009                           |         |   | 2010 |  
|                                                                                                                     |  | (unaudited)                    |        
|Operating activities                                                                                                 |  |                                |         |   |      |   |         |  
|Net loss                                                                                                             |  | $                              | (28,747 | ) |      | $ | (1,336  | )
|Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating
activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                                                        |  |                                | 796     |   |      |   | 739     |  
|Loss on disposal of property and equipment                                                                           |  |                                |        |   |      |   | 7       |  
|Non-cash stock compensation                                                                                          |  |                                | 5,718   |   |      |   | 1,878   |  
|Non-cash restructuring charges                                                                                       |  |                                | 8,952   |   |      |   |        |  
|Valuation of stock purchase warrants                                                                                 |  |                                |        |   |      |   | (233    | )
|Deferred income tax benefit                                                                                          |  |                                |        |   |      |   | (2,049  | )
|Common stock issued and stock options granted to consultants for services rendered                                   |  |                                | 3       |   |      |   |        |  
|Changes in operating assets and liabilities:                                                                         |  |                                |         |   |      |   |         |  
|Related party receivable                                                                                             |  |                                | (6,619  | ) |      |   | 4,987   |  
|Accounts receivable and other receivables                                                                            |  |                                | 611     |   |      |   | 473     |  
|Prepaid expenses and other current assets                                                                            |  |                                | (315    | ) |      |   | 596     |  
|Deposits and other assets                                                                                            |  |                                |        |   |      |   | (1,346  | )
|Accounts payable                                                                                                     |  |                                | 4,312   |   |      |   | 3,957   |  
|Accrued compensation                                                                                                 |  |                                | 939     |   |      |   | 116     |  
|Accrued restructuring charges                                                                                        |  |                                | 2,050   |   |      |   | (4,349  | )
|Deferred rent                                                                                                        |  |                                |        |   |      |   | 496     |  
|Accrued project costs                                                                                                |  |                                | (898    | ) |      |   | (1,358  | )
|Other accrued liabilities                                                                                            |  |                                | (326    | ) |      |   | 379     |  
|Related party deferred revenue                                                                                       |  |                                | (3,188  | ) |      |   | (3,414  | )
|Deferred revenue                                                                                                     |  |                                | 617     |   |      |   | (1,365  | )
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                                                                |  |                                | (16,095 | ) |      |   | (1,822  | )
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Investing activities                                                                                                 |  |                                |         |   |      |   |         |  
|Purchases of available-for-sale securities                                                                           |  |                                | (55,551 | ) |      |   | (11,926 | )
|Maturities of available-for-sale securities                                                                          |  |                                | 56,750  |   |      |   | 45,514  |  
|Acquisition of property and equipment                                                                                |  |                                | (420    | ) |      |   | (555    | )
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Net cash provided by investing activities                                                                            |  |                                | 779     |   |      |   | 33,033  |  
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Financing activities                                                                                                 |  |                                |         |   |      |   |         |  
|Sale of subsidiary shares to non-controlling interest                                                                |  |                                | 10,000  |   |      |   | 200     |  
|Proceeds from issuance of common stock                                                                               |  |                                | 3,242   |   |      |   | (665    | )
|Repurchase of common stock                                                                                           |  |                                |        |   |      |   | (14,661 | )
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                                                  |  |                                | 13,242  |   |      |   | (15,126 | )
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                                 |  |                                | (2,074  | ) |      |   | 16,085  |  
|Cash and cash equivalents at beginning of period                                                                     |  |                                | 154,883 |   |      |   | 125,919 |  
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                                           |  | $                              | 152,809 |   |      | $ | 142,004 |  
|                                                                                                                     |  |                                |         |   |      |   |         |  
|Non-cash investing activities                                                                                        |  |                                |         |   |      |   |         |  
|Valuation of available-for-sale investment in equity securities of related party                                     |  | $                              |        |   |      | $ | 10,383  |  
|                                                                                                                     |  |                                |         |   |      |   |         |  

See accompanying notes.



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MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information.
The information as of September 30, 2010, and for the three and nine months ended September 30, 2009 and 2010, includes all adjustments (consisting only of normal recurring adjustments) that the management of Maxygen, Inc. (the
Company) believes necessary for fair presentation of the results for the periods presented. The Condensed Consolidated Balance Sheet at December 31, 2009 has been derived from the audited financial statements at that date, but
does not include all of the information and footnotes required by GAAP for complete financial statements.

The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

In addition, results for any interim period are not necessarily indicative of results for any future interim period or for the entire
year. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.

Principles of Consolidation

The consolidated financial statements include the amounts of the Company and its wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc., Maxygen ApS and Maxygen Holdings, Inc., as well as its
majority-owned subsidiaries, Perseid Therapeutics LLC (Perseid), Maxygen Holdings LLC and Maxygen Holdings Ltd.

The Company is the primary beneficiary of each of its majority-owned subsidiaries, as determined under applicable accounting standards.
In connection with the Companys joint venture arrangement with Astellas Pharma Inc. (Astellas), Astellas acquired a minority interest in Perseid. Amounts pertaining to the ownership interests held by Astellas in the operating
results and financial position of Perseid are reported as non-controlling interest. In addition, in May 2010, the Company sold a minority membership interest in Maxygen Holdings LLC, a newly formed majority-owned subsidiary, to a third party for
$200,000 in cash and a contingent promissory note. The primary asset of Maxygen Holdings LLC is the stock of Maxygen Holdings Ltd., the Companys Cayman Islands subsidiary. Amounts pertaining to the ownership interest held by such third party
in the operating results and financial position of Maxygen Holdings LLC are also reported as non-controlling interest. At each reporting date, the Company will reassess whether it is still the primary beneficiary of each of its majority-owned
subsidiaries. If the Company determines that it is no longer the primary beneficiary, the Company will deconsolidate such subsidiary and record its interest at the fair market value on the date which it deconsolidates, along with any gain or loss at
the time of deconsolidation. The Company would then account for its interest using the equity accounting method.

The table
below reflects a reconciliation of the equity attributable to non-controlling interest:



|                                                                                  |  |   |       |  
|--------------------------------------------------------------------------------- |  | - | ----- | -
|Non-controlling interest at December 31, 2009                                     |  | $ | 3,907 |  
|Net loss attributable to non-controlling interest                                 |  |   | (304  | )
|Increase in non-controlling interest for sale of interest of Maxygen Holdings LLC |  |   | 209   |  
|                                                                                  |  |   |       |  
|Non-controlling interest at September 30, 2010                                    |  | $ | 3,812 |  



4



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





Investment
in Codexis, Inc.

The Company has a minority investment in Codexis, Inc. (Codexis), a biotechnology company
focused on developing biocatalytic process technologies for certain pharmaceutical, energy and industrial chemical applications. The Company formed Codexis in January 2002 as a wholly owned subsidiary to operate its former chemicals business. The
Company is not obligated to fund the operations or other capital requirements of Codexis. As of December 31, 2009 and September 30, 2010, the Companys equity interest in Codexis (not including a warrant to purchase an additional
30,816 shares of Codexis common stock) was approximately 21% and 17%, respectively. Codexis completed an initial public offering (IPO) of common stock in April 2010 and as a result, the Company recorded the fair value of that portion of
its Codexis common stock holdings that are estimated to qualify for resale within one year within its Condensed Consolidated Balance Sheet as of September 30, 2010. See Notes 4 and 8.

Restructuring Charge

Beginning in the third quarter of 2009, the Company implemented a restructuring plan in connection with the joint venture arrangement with Astellas that resulted in the termination of several employees,
including members of the Companys senior management team. In October 2008, the Company implemented a restructuring plan that resulted in the termination of approximately 30% of its workforce. In November 2007, the Company implemented a
restructuring plan that resulted in the cessation of research and development operations at Maxygen ApS.

In connection with
these restructuring plans, the Company recorded estimated expenses for severance and outplacement costs and other restructuring costs. Generally, costs associated with restructuring activities are recognized when they are incurred rather than at the
date of a commitment to an exit or disposal plan. However, in the case of leases, the expense is estimated and accrued when the property is vacated or at the point when the Company ceases to use the leased equipment. Given the significance of, and
the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including estimating the salvage value of equipment consistent with
abandonment date. In addition, a liability for post-employment benefits is recorded when payment is probable, the amount is reasonably estimable, the obligation is attributable to employees services already rendered and the obligation relates
to rights that have vested or accumulated.

Revenue Recognition

The Company has generally recognized revenue from multiple element arrangements under collaborative research agreements, including license
payments, research and development services, milestones, and royalties. Revenue arrangements with multiple deliverables are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone
value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items in the arrangement. The consideration the Company receives is allocated among the separate units of accounting based on their
respective fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units.

Non-refundable upfront payments received in connection with collaboration agreements, including license fees, and technology advancement funding that is intended for the development of the Companys
core technologies, are deferred upon receipt and recognized as revenue over the period of delivery of the undelivered element, typically the relevant research and development periods specified in the agreement. Under arrangements where the Company
expects its research and development obligations to be performed evenly over the specified period, the upfront payments are recognized on a straight-line basis over the period. Under arrangements where the Company expects its research and
development obligations to vary significantly from period to period, the Company recognizes the upfront payments based upon the actual amount of research and development efforts incurred relative to the amount of the total expected effort to be
incurred by the Company. In cases where the planned levels of research services fluctuate substantially over the research term, this requires the Company to make critical estimates in both the remaining time period and the total expected costs of
its obligations and, therefore, a change in the estimate of total costs to be incurred or in the remaining time period could have a significant impact on the revenue recognized in future periods.

Revenue related to collaborative research payments from a collaborator is recognized as research services are performed over the related
funding periods for each contract. Under these agreements, the Company is typically required to perform research and development activities as specified in the respective agreement. Generally, the payments received are not refundable and are based
on a contractual cost per full-time equivalent employee working



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



on the project. Under certain collaborative research and development agreements, the Company and the collaborative partner may agree to share in the costs of research and development. In periods
where the Company incurs more costs than the collaborative partner, payments from the collaborative partner are included in collaborative research and development revenues and, in periods where the collaborative partner incurs more expenses than the
Company, the Companys payments to the collaborative partner are included in research and development expenses. Research and development expenses (including associated general and administrative expenses) under the collaborative research
agreements approximate or exceed the research funding revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not incur the required level of effort during a specific
period in comparison to funds received under the respective contracts.

Non-refundable payments received relating to
substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event because the Company has no future performance obligations related to the payment. Incentive milestone payments may be
triggered either by the results of the Companys research efforts or by events external to the Company, such as regulatory approval to market a product.

The Company is eligible to receive royalties from licensees, which are typically based on sales of licensed products to third parties. Royalties are recorded as earned in accordance with the contract
terms when third party sales can be reliably measured and collectability is reasonably assured.

Revenue from the sale of
pre-clinical program assets or license agreements for which no further performance obligations exist are recognized as revenue on the earlier of when payments are received or the amount can be reliably measured and collectability is reasonably
assured.

The Company has previously been awarded grants from various government agencies related to the Companys
vaccines programs. The terms of these grant agreements ranged from one to five years with various termination dates, the last of which was July 2010. Revenue related to these grant agreements was recognized as the related research and development
expenses were incurred. In January 2010, AltraVax, Inc. (AltraVax) acquired substantially all of the Companys vaccine assets, including the related government grants. See Note 11.

Net Loss Per Share

Basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. During the periods in which the Company has net income, the diluted
net income per share has been computed using the weighted average number of shares of common stock outstanding and other dilutive securities.

The following table presents a reconciliation of the numerators and denominators of the basic and dilutive net loss per share computations and the calculation of basic and diluted net loss per share (in
thousands, except per share data):



|                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                               |  | Three months
endedSeptember 30, |         |   | Nine months
endedSeptember 30, |  
|                                                                               |  | 2009                            |         |   | 2010                           |   |        | 2009 |  |   | 2010    |  
|Numerator:                                                                     |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                                               |  |                                 |         |  
|Net loss attributable to Maxygen, Inc.                                         |  | $                               | (21,672 | ) |                                | $ | (546   | )    |  | $ | (28,661 | ) |  | $ | (1,032 | )
|                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Denominator:                                                                   |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                                               |  |                                 |         |  
|Basic and diluted:                                                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Weighted-average shares used in computing basic and diluted net loss per share |  |                                 | 38,316  |   |                                |   | 29,402 |      |  |   | 38,125  |   |  |   | 30,221 |  
|                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share                                           |  | $                               | (0.57   | ) |                                | $ | (0.02  | )    |  | $ | (0.75   | ) |  | $ | (0.03  | )
|                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  



6



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





The total number
of shares excluded from the calculations of diluted net loss per share was approximately 8,815,888 options, 234,500 restricted stock units and 933,250 restricted stock awards at September 30, 2009 and 8,019,072 options and 856,082 restricted
stock awards at September 30, 2010. These securities have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive.

Comprehensive income (loss)

Comprehensive income (loss) is
primarily comprised of net income (loss), net unrealized gains or losses on available-for-sale securities, including the Companys equity investment in Codexis and its related tax effects, and foreign currency translation adjustments.
Comprehensive income (loss) and its components for the three-month and nine-month periods ended September 30, 2009 and 2010 were as follows (in thousands):



|                                                                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                                               |  | Three months
endedSeptember 30, |         |   | Nine months
endedSeptember 30, |  
|                                                                                                                               |  | 2009                            |         |   | 2010                           |   |        | 2009 |  |   | 2010    |  
|Net loss                                                                                                                       |  | $                               | (21,758 | ) |                                | $ | (887   | )    |  | $ | (28,747 | ) |  | $ | (1,336 | )
|Changes in unrealized gains on available-for-sale investment in equity securities of related party, net of related tax
effects |  |                                 |        |   |                                |   | (675   | )    |  |   |        |   |  |   | 8,334  |  
|Changes in unrealized gains (losses) on securities available-for-sale                                                          |  |                                 | (22     | ) |                                |   | 14     |      |  |   | (188    | ) |  |   | (26    | )
|                                                                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive income (loss)                                                                                                    |  |                                 | (21,780 | ) |                                |   | (1,548 | )    |  |   | (28,935 | ) |  |   | 6,972  |  
|Comprehensive income (loss) attributable to non-controlling interest                                                           |  |                                 |        |   |                                |   | (341   | )    |  |   |        |   |  |   | (304   | )
|                                                                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive income (loss) attributable to Maxygen, Inc.                                                                      |  | $                               | (21,780 | ) |                                | $ | (1,207 | )    |  | $ | (28,935 | ) |  | $ | 7,276  |  
|                                                                                                                               |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |        |  

The changes in unrealized gains on available-for-sale investment in equity securities of related party of
$8.3 million represents the fair value of approximately 1,282,449 shares of Codexis common stock owned by the Company, less its estimated related tax effect, which represents the portion of the Companys holdings that are estimated to qualify
for resale within one year. The decrease in unrealized gains on available-for-sale investment in equity securities of related party of $675,000 represents the incremental fair value of the Codexis common stock recorded in the three month period
ended September 30, 2010 of $1.1 million, less an additional $1.8 million tax effect recorded in the period related to overall unrealized gain. The Company recorded the fair value of its investment in Codexis as a result of Codexis IPO on
April 27, 2010. See Note 4.

The components of accumulated other comprehensive income (loss) were as follows (in
thousands):



|                                                                                        |  |                  |      |   |                   |   |        |  
|--------------------------------------------------------------------------------------- |  | ---------------- | ---- | - | ----------------- | - | ------ | -
|                                                                                        |  | December 31,2009 |      |   | September 30,2010 |  
|Unrealized gains on available-for-sale investment in equity securities of related party |  | $                |     |   |                   | $ | 10,383 |  
|Tax effects of available-for-sale investment in equity securities of related party      |  |                  |     |   |                   |   | (2,049 | )
|Unrealized gains on available-for-sale securities                                       |  |                  | 26   |   |                   |   |       |  
|Unrealized losses on available-for-sale securities                                      |  |                  | (1   | ) |                   |   |       |  
|Foreign currency translation adjustments                                                |  |                  | (252 | ) |                   |   | (252   | )
|                                                                                        |  |                  |      |   |                   |   |        |  
|Accumulated other comprehensive income (loss)                                           |  | $                | (227 | ) |                   | $ | 8,082  |  
|                                                                                        |  |                  |      |   |                   |   |        |  

Recent Accounting Pronouncements

During the nine months ended September 30, 2010, the Company adopted the following accounting standards:

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance that amends the evaluation criteria to identify
the primary beneficiary of a variable interest entity. Additionally, this guidance requires ongoing



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. This guidance is effective for interim and annual reporting periods after November 15,
2009. The Company adopted this new guidance as of the beginning of fiscal year 2010 and the Company has applied such guidance in evaluating whether it is the primary beneficiary of Perseid and its other majority-owned subsidiaries and whether it
should continue to consolidate such majority-owned subsidiaries. Based on the Companys analysis, it has consolidated Perseid and its other majority owned subsidiaries at September 30, 2010.

In February 2010, the FASB issued guidance that removes the requirement for SEC filers to disclose the date through which management
evaluated subsequent events in the financial statements, and was effective upon its issuance. The Company adopted the updated guidance upon issuance. The adoption of this new guidance did not have an impact on the Companys financial
statements.

In January 2010, the FASB issued guidance that amended the disclosure requirements related to recurring and
nonrecurring fair value measurements. This guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the reasons for and the timing of the transfers. Additionally, this guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value measurements). The Company has adopted this guidance beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements,
which will become effective for the Company with the reporting period beginning January 1, 2011. The adoption of this new guidance did not have a material impact on the Companys financial statements.

In September 2009, the FASB amended the standards for revenue recognition for multiple deliverable revenue arrangements. As amended, the
standard eliminates the residual method of allocation and adds the requirement to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price
for each deliverable shall be determined using the vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling
price exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable when applying the relative selling price method. The accounting changes are effective for fiscal years beginning on or after
June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. The Company is currently evaluating the impact of the amended standards.

In April 2010, the FASB issued an accounting standards update related to the milestone method of revenue recognition. The accounting
standards update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development arrangements. A company may make an accounting policy election to
use the milestone method of revenue recognition for transactions within the scope of the amendments. The amendments will be effective in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. The Company has
evaluated the impact of adopting this guidance and believes it will have no material effect on its financial statements.



8



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





Stock-Based
Compensation

For the three and nine months ended September 30, 2009 and 2010, stock-based compensation expense
was allocated as follows (in thousands):



|                                       |  |                                  |       |  |                                |   |     |      |  |   |       |  |  |   |       | 
|-------------------------------------- |  | -------------------------------- | ----- |  | ------------------------------ | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                                       |  | Three months 
endedSeptember 30, |       |  | Nine months
endedSeptember 30, |  
|                                       |  | 2009                             |       |  | 2010                           |   |     | 2009 |  |   | 2010  | 
|Research and development               |  | $                                | 953   |  |                                | $ | 83  |      |  | $ | 2,174 |  |  | $ | 94    | 
|General and administrative             |  |                                  | 2,169 |  |                                |   | 672 |      |  |   | 3,377 |  |  |   | 1,784 | 
|                                       |  |                                  |       |  |                                |   |     |      |  |   |       |  |  |   |       | 
|Total stock-based compensation expense |  | $                                | 3,122 |  |                                | $ | 755 |      |  | $ | 5,551 |  |  | $ | 1,878 | 
|                                       |  |                                  |       |  |                                |   |     |      |  |   |       |  |  |   |       | 

No stock-based compensation costs were capitalized as of September 30, 2009 and 2010. There were no
recognized tax benefits during the quarters ended September 30, 2009 and 2010.

Stock Options

The exercise price of each stock option equals the closing market price of the Companys stock on the date of grant. Most options are
scheduled to vest over four years and all options expire no later than 10 years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model. This model was developed
for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. The Companys employee stock options have characteristics significantly different from those of publicly traded options.

The weighted average assumptions used in the model are outlined in the following tables:



|                                   |  |                                      |  |                                            |            |  
|---------------------------------- |  | ------------------------------------ |  | ------------------------------------------ | ---------- | -
|                                   |  | Three months endedSeptember 30, 2009 |  | Three months endedSeptember 30, 2010(1)(2) |           
|Expected dividend yield            |  | 0.0%                                 |  |                                            |           |  
|Risk-free interest rateOptions    |  | 2.77%                                |  |                                            |           |  
|Risk-free interest rate range-ESPP |  | 0.48% to 0.67%                       |  |                                            |           |  
|Expected lifeOptions              |  | 6.26 years                           |  |                                            |           |  
|Expected lifeESPP                 |  | 0.08 to 0.5 years                    |  |                                            |           |  
|Expected volatilityOptions        |  | 58.91%                               |  |                                            |           |  
|Expected volatility-ESPP           |  | 47.15% to 97.22%                     |  |                                            |           |  
|                                   |  |                                     
|                                   |  | Nine months endedSeptember 30, 2009  |  | Nine months endedSeptember 30, 2010(2)     |           
|Expected dividend yield            |  | 0.0%                                 |  |                                            | 0.0        | %
|Risk-free interest rateOptions    |  | 2.77%                                |  |                                            | 2.96       | %
|Risk-free interest rate rangeESPP |  | 0.48% to 2.38%                       |  |                                            |           |  
|Expected lifeOptions              |  | 6.26 years                           |  |                                            | 6.26 years |  
|Expected lifeESPP                 |  | 0.08 to 0.99 years                   |  |                                            |           |  
|Expected volatilityOptions        |  | 58.91%                               |  |                                            | 58.64      | %
|Expected volatilityESPP           |  | 47.15% to 112.67%                    |  |                                            |           |  



|(1) | There were no options granted to employees during the three months ended September 30, 2010.
|--- | --------------------------------------------------------------------------------------------

|(2) | Purchases of the Companys common stock under the Companys ESPP were suspended in September 2009.
|--- | --------------------------------------------------------------------------------------------------

The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new option grants is based on
historical volatilities. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods. For awards to employees and members of the Companys board
of directors in 2010, the expected life of the stock options was calculated under the shortcut method as permitted under applicable SEC accounting guidance.



9



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





Restricted
Stock Units

During 2008, the Company granted restricted stock unit awards under the Companys 2006 Equity Incentive
Plan (2006 Plan) representing an aggregate of 1,283,000 shares of Company common stock. The restricted stock units granted represented a right to receive shares of common stock at a future date determined in accordance with the
participants award agreement. An exercise price and monetary payment were not required for receipt of restricted stock units or the shares issued in settlement of the award. Instead, consideration was furnished in the form of the
participants services to the Company. Substantially all of the restricted stock units were originally scheduled to vest over two years. However, in connection with the consummation of the joint venture arrangement with Astellas, all remaining
unvested restricted stock units became fully vested during 2009. Compensation cost for these awards is based on the estimated fair value of the Companys common stock on the date of grant and recognized as compensation expense on a
straight-line basis over the requisite service period. For the three months ended September 30, 2010 and 2009, the Company recognized $0 and $1.5 million in stock-based compensation expenses related to these restricted stock unit
awards. For the nine months ended September 30, 2010 and 2009, the Company recognized a credit to stock-based compensation of $392,000 and stock-based compensation expenses of $2.8 million related to these restricted stock unit awards,
respectively. A credit to stock-based compensation expense recognized in the first quarter of 2010 resulted from the actual forfeiture rate of restricted stock units scheduled to vest in 2010 being greater than the estimated forfeiture rate for
terminated employees. At September 30, 2010, there was no unrecognized compensation cost related to these awards.

Restricted Stock

The Company has granted restricted stock awards under the 2006 Plan to certain employees and members of its board of directors. An exercise price and monetary payment are not required for receipt of
restricted stock. Instead, consideration is furnished in the form of the participants services to the Company. Most restricted stock awards are scheduled to vest over four years. The 2006 Plan and related award agreement provide for forfeiture
in certain events, such as voluntary termination of employment, and for acceleration of vesting in certain events, such as termination of employment without cause or a change in control of the Company. Compensation cost for these awards is based on
the closing price of the Companys common stock on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period. In September 2009, the Company granted restricted stock awards representing
an aggregate of 933,250 shares of Company common stock. In April 2010, the Company granted restricted stock awards representing an aggregate of 60,425 shares of Company common stock. For the three and nine months ended September 30, 2010, the
Company recognized approximately $360,000 and $1.1 million in stock-based compensation expenses related to these restricted stock awards. For the three and nine months ended September 30, 2009, the Company recognized approximately $50,000 in
stock-based compensation expenses related to these restricted stock awards. At September 30, 2010, the unrecognized compensation cost related to all restricted stock awards was approximately $4.9 million, which is expected to be recognized on a
straight-line basis over the requisite service periods of the awards.

Contingent Performance Units

The Company has granted contingent performance units (CPUs) under the 2006 Plan to all employees and board members who hold
options to purchase Company common stock. CPUs vest on the earliest to occur of (i) a change in control of the Company, (ii) a corporate dissolution or liquidation of the Company, or (iii) the fourth anniversary of the grant date (the
Settlement Date), generally so long as the holder continues to provide services for the Company on a continuous basis from the grant date to the Settlement Date. The CPUs are designed to protect holders of the Companys stock
options against a reduction in the share price of the Companys common stock resulting from potential future dividends or distributions to the Companys stockholders, which could negatively affect outstanding options held by option holders
of the Company since the options would not otherwise participate in any potential future dividends or distributions to the Companys stockholders. Accordingly, the CPUs will only have potential value should the Company make such a dividend
payment or distribution. The earned value of any CPU will generally be settled in shares of common stock of the Company, but may also be settled, in part, with cash or any property distributed by the Company. All unvested CPUs remaining following
the Settlement Date will expire immediately. Because the payout of the CPU awards is not yet probable and estimable, the Company did not recognize any expense in 2009 or for the three and nine months ended September 30, 2010 related to these
awards. Also see Note 6.



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





Profits
Interest Units

Perseid has granted profits interest units (PIUs) under the Perseid 2009 Equity Incentive Plan
to employees of the Company and Perseid. As of September 30, 2010, approximately 12.9 million PIUs were outstanding. A PIU is a special type of limited liability company common unit that allows the recipient to participate in any
future increase in the value of Perseid. The PIUs are intended to meet the definition of a profits interest under I.R.S. Revenue Procedure 93-27 and I.R.S. Revenue Procedure 2001-43. Subject to the recipient remaining an employee or
service provider of Perseid through each vesting date and subject to accelerated vesting, the PIUs will vest over four years. The potential value of a PIU, to the extent vested, will be equal to the deemed value of a Perseid common unit at the time
of a liquidity event, such as a buy-out of the Companys equity interest in Perseid by Astellas or the sale of Perseid to another company, less the deemed value of a common unit at the time the PIU was granted. Because the value of the PIU
awards cannot be reasonably estimated until the time of a liquidity event of Perseid, the Company did not recognize any expense in 2009 or for the three and nine months ended September 30, 2010 related to these awards. Also see Note 6.

2. Cash Equivalents and Investments

Management determines the appropriate classification of debt securities as current or non-current at the time of purchase and reevaluates such designation for new purchases as of each balance sheet date.
The Companys debt securities are classified as available-for-sale and are carried at estimated fair value in cash equivalents and investments. Unrealized gains and losses are reported as accumulated other comprehensive income (loss) in
stockholders equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses on
available-for-sale securities and declines in value deemed to be other than temporary, if any, are included in interest income and other income, net. The cost of securities sold is based on the specific identification method. Interest and dividends
on securities classified as available-for-sale are included in interest income.

The Companys cash equivalents and
investments as of September 30, 2010 were as follows (in thousands):



|                                                                    |  |               |          |   |                      |   |        |                       |  |   |                     |  |  |   |          |  
|------------------------------------------------------------------- |  | ------------- | -------- | - | -------------------- | - | ------ | --------------------- |  | - | ------------------- |  |  | - | -------- | -
|                                                                    |  | AmortizedCost |          |   | GrossUnrealizedGains |   |        | GrossUnrealizedLosses |  |   | EstimatedFair Value | 
|Money market funds                                                  |  | $             | 142,004  |   |                      | $ |       |                       |  | $ |                    |  |  | $ | 142,004  |  
|Available-for-sale investment in equity securities of related party |  |               |         |   |                      |   | 10,383 |                       |  |   |                    |  |  |   | 10,383   |  
|                                                                    |  |               |          |   |                      |   |        |                       |  |   |                     |  |  |   |          |  
|Total                                                               |  |               | 142,004  |   |                      |   | 10,383 |                       |  |   |                    |  |  |   | 152,387  |  
|Less amounts classified as cash equivalents                         |  |               | (142,004 | ) |                      |   |       |                       |  |   |                    |  |  |   | (142,004 | )
|                                                                    |  |               |          |   |                      |   |        |                       |  |   |                     |  |  |   |          |  
|Total investments                                                   |  | $             |         |   |                      | $ | 10,383 |                       |  | $ |                    |  |  | $ | 10,383   |  
|                                                                    |  |               |          |   |                      |   |        |                       |  |   |                     |  |  |   |          |  

The Companys cash equivalents and investments as of December 31, 2009 were as follows (in
thousands):



|                                            |  |               |          |   |                      |   |    |                       |  |   |                     |   |  |   |          |  
|------------------------------------------- |  | ------------- | -------- | - | -------------------- | - | -- | --------------------- |  | - | ------------------- | - |  | - | -------- | -
|                                            |  | AmortizedCost |          |   | GrossUnrealizedGains |   |    | GrossUnrealizedLosses |  |   | EstimatedFair Value |  
|Money market funds                          |  | $             | 125,919  |   |                      | $ |   |                       |  | $ |                    |   |  | $ | 125,919  |  
|U.S. government agency securities           |  |               | 33,586   |   |                      |   | 26 |                       |  |   | (1                  | ) |  |   | 33,611   |  
|                                            |  |               |          |   |                      |   |    |                       |  |   |                     |   |  |   |          |  
|Total                                       |  |               | 159,505  |   |                      |   | 26 |                       |  |   | (1                  | ) |  |   | 159,530  |  
|Less amounts classified as cash equivalents |  |               | (125,919 | ) |                      |   |   |                       |  |   |                    |   |  |   | (125,919 | )
|                                            |  |               |          |   |                      |   |    |                       |  |   |                     |   |  |   |          |  
|Total investments                           |  | $             | 33,586   |   |                      | $ | 26 |                       |  | $ | (1                  | ) |  | $ | 33,611   |  
|                                            |  |               |          |   |                      |   |    |                       |  |   |                     |   |  |   |          |  

No securities were sold prior to their maturity for the three and nine-month periods ended
September 30, 2009 and 2010. The net change in unrealized holding gains (losses) on available-for-sale securities included in accumulated other comprehensive income (loss) were unrealized losses of $22,000 and $188,000 for the three and nine
months ended September 30, 2009 and unrealized gains of $1.1 million and $10.4 million for the three and nine



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



months ended September 30, 2010. The unrealized gains for the three and nine month periods ended September 30, 2010 were primarily related to the valuation of the available-for-sale
investment in equity securities of related party. The securities aggregated in the table above have not been in a continuous unrealized loss position for greater than twelve months. At September 30, 2010, all investments had a contractual
maturity of less than one year.

3. Perseid Therapeutics LLC

On June 30, 2009, the Company entered into a joint venture agreement with Astellas relating to the establishment of Perseid, a majority-owned subsidiary of the Company focused on the discovery,
research and development of multiple protein pharmaceutical programs, including the Companys MAXY-4 program and other early stage programs. Perseid began operation upon consummation of the transactions contemplated by the joint venture
agreement on September 18, 2009.

Pursuant to the joint venture agreement, the Company contributed substantially all of
its programs and technology assets in protein pharmaceuticals, including the Companys MAXY-4 co-development and commercialization agreement with Astellas (but excluding its MAXY-G34 program), in exchange for an ownership interest in Perseid.
At the closing, each of the Company and Astellas also invested $10.0 million of cash in Perseid. As a result of these contributions and investments, the Company has an ownership interest in Perseid of approximately 83.3% and Astellas has the
remaining ownership interest of approximately 16.7%. Astellas has been granted an option to acquire all of the Companys ownership interest in Perseid at specified exercise prices that increase each quarter from the current option price of
$70.0 million (through December 18, 2010) to $123.0 million over the term of the buy-out option, which expires on September 18, 2012 (the third anniversary of the closing).

Pursuant to the joint venture arrangement, Astellas and Perseid entered into a new collaboration agreement pursuant to which Astellas
will fund substantially all of the costs, estimated at up to $30.0 million over the three-year option term and subject to certain limitations, related to the discovery, research and development by Perseid of multiple protein therapeutics (other than
the MAXY-4 program). Astellas also has been granted an option to obtain an exclusive license to any one product developed by Perseid under this agreement, and to proprietary products of Astellas, if any, which Astellas and Perseid agree to develop
under that agreement. This product option is subject to certain conditions and is exercisable only if Astellas does not exercise its buy-out option prior to expiration of its term. The on-going development costs for the MAXY-4 program will be shared
by Astellas and Perseid in accordance with the existing terms of the MAXY-4 co-development and commercialization agreement.

To support the research and development operations of Perseid, the Company also entered into a technology license agreement with Perseid
under which the Company granted Perseid certain exclusive licenses to use the MolecularBreeding technology platform and ancillary protein expression technologies for the discovery, research and development of protein pharmaceuticals, subject
to certain existing licenses and other limitations. In October 2010, the Company sold substantially all of the patents and other intellectual property rights associated with this technology platform to Codexis. However, the license agreement between
the Company and Perseid remains in effect and the Company has been granted a license back from Codexis sufficient to satisfy the Companys license obligations to Perseid.

In the event Astellas does not exercise the buy-out option prior to the expiration of the three-year option term, all rights to the protein therapeutics developed by Perseid (with the exception of any
products for which Astellas has exercised its license option) will be retained by Perseid. In the event that Astellas does not exercise its buy-out option and does not exercise its product option under the above-referenced collaboration agreement,
an Astellas subsidiary will be required to provide Perseid with up to 18 months of transition funding in the form of revolving loans of up to $20.0 million on pre-agreed terms in accordance with a form bridge loan agreement.

As a result of this transaction, substantially all of the Companys protein therapeutics business and research and development
operations are now operated through Perseid. The Company includes the results of Perseid in its consolidated financial statements, with the minority interest of Astellas in Perseid reflected in the Companys Consolidated Balance Sheet as a
non-controlling interest. However, the Company is not obligated to fund the operations or other capital requirements of Perseid.

4.
Codexis, Inc.

The Company owns 5,957,108 shares of Codexis common stock, representing approximately 17% of Codexis
outstanding common stock, and holds a warrant to purchase an additional 30,816 shares of Codexis common stock. The Company formed Codexis in January 2002 as a wholly owned subsidiary to operate its former chemicals business. On April 27, 2010,
Codexis completed an IPO of 6.0 million shares of common stock. The Company was also party to a license agreement with Codexis pursuant to which the Company granted to Codexis certain exclusive



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



rights to the MolecularBreeding directed evolution platform for certain small molecule pharmaceutical, energy and industrial chemical applications. This license agreement was terminated in
connection with the sale by the Company to Codexis of substantially all of the intellectual property rights that were subject to this license agreement (see below and Note 13). The Company is not obligated to fund the operations or other capital
requirements of Codexis.

Valuation of Codexis Shares

The shares of Codexis common stock owned by the Company are subject to a lock-up agreement with the underwriters of the public offering
that prevents the sale or other disposition of such shares until November 15, 2010, unless otherwise waived by the underwriters. After expiration of the lock-up, these shares will be tradeable subject to the volume limitations and other
conditions of Rule 144 of the Securities Act of 1933.

Due to the restrictions imposed by Codexis and the additional
limitations and conditions set forth in Rule 144, a significant number of the shares of Codexis common stock held by the Company may not be saleable within the next year. As such, the Company estimated that, at September 30, 2010, 1,282,449
shares of Codexis common stock would not be restricted but saleable within one year from September 30, 2010. This estimate was based on the applicable volume limitations imposed by Rule 144. The Company valued these shares at $9.60 per share,
the closing price of the Codexis common stock as quoted by the Nasdaq Global Market on September 30, 2010, less a 16% discount to account for the restrictions imposed by the existing lock-up agreement and the volume limitations imposed by Rule
144.

Accordingly, as a result of the Codexis IPO, the Company has recognized a fair value of $10.4 million for these shares
in its Condensed Consolidated Balance Sheet, with a corresponding credit to other comprehensive income (loss). This fair value of $10.4 million is reflected as an available-for-sale investment in equity securities of related party under the Level 2
heading in the fair value table presented in Note 8. The 16% discount was determined based on estimates of the value of various put contracts over the restriction period. The remaining 4,674,659 shares, which are subject to a restriction beyond one
year, were not recorded in the financial statements, but were valued at $37.8 million as a cost-method investment at September 30, 2010 using Codexis closing stock price of $9.60 on that date, less the 16% discount discussed above.

As a result of net operating losses that the Company concluded are realizable based on its estimate of future taxable income
resulting from future potential dispositions of the Companys shares of Codexis common stock that are estimated to qualify for resale within one year, the Company recorded tax benefits of $1,752,000 and $2,049,000 for the three and nine-month
periods ended September 30, 2010, respectively.

Also as a result of the Codexis IPO, the Companys warrant to
purchase preferred stock was converted to a warrant to purchase 30,816 shares of common stock. The warrant expires on May 25, 2013, has an exercise price of $5.96 and is exercisable immediately. As the warrant met the definition of a derivative
upon the Codexis IPO, a value of $233,000 was recorded for the warrant within other current assets on the Companys Condensed Consolidated Balance Sheet with a corresponding credit recorded to interest income and other income, net on the
Companys Condensed Consolidated Statement of Operations in the nine month period ended September 30, 2010. An initial value of $211,000 was recorded for this warrant in the second quarter of 2010 and as a result of mark-to-market
accounting for this derivative, an incremental $22,000 was recorded in the third quarter of 2010. The fair value of $233,000 at September 30, 2010 is reflected as a stock purchase warrant under the Level 2 heading in the fair value table
presented in Note 8. The value of the warrant was determined using the Black-Scholes Merton model utilizing the following assumptions: expected volatility of 134%, an expected dividend yield of 0%, a risk-free interest rate of 1%, and an expected
term of 2.7 years.

License Agreement

In connection with the formation of Codexis, the Company entered into a license agreement with Codexis pursuant to which the Company granted to Codexis certain exclusive rights to the
MolecularBreeding directed evolution platform for certain small molecule pharmaceutical, energy and industrial chemical applications. In December 2006, the Company expanded the scope of these exclusive licenses for certain applications
relating to energy, including biofuels. This license agreement was terminated in October 2010 in connection with the



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Companys sale of the MolecularBreeding directed evolution platform assets to Codexis. See Note 13. Under the license agreement, the Company was entitled to receive 20% of all
consideration received by Codexis from a third party licensee in the form of (1) up-front option and/or license fees, (2) FTE funding for biofuels research (in excess of a specified base rate), (3) milestone payments,
(4) payments from the sale of its equity securities (in excess of a specified price per share) and (5) payments in connection with the commercialization of energy products made with a biocatalyst developed using the licensed technology. If
Codexis had directly commercialized an energy product that was made using any biocatalyst developed from the licensed technology, the Company would have been eligible for a 2% royalty on any net sales by Codexis of the energy product. The Company
recognized approximately $230,000 and $2.0 million, respectively, for the three and nine months ended September 30, 2010 and $431,000 and $4.3 million for the comparable periods in 2009 under this license agreement, primarily in connection with
a collaboration agreement between Codexis and Royal Dutch Shell plc. As a result of the termination of the Codexis license, the Company is no longer eligible for any payments or potential royalties from Codexis under this license agreement.

5. Litigation

In December 2001, a lawsuit was filed in the U.S. District Court for the Southern District of New York against the Company and its chief
executive officer and chief financial officer at the time of the initial public offering, together with certain underwriters of the Companys initial public offering and secondary public offering of common stock. The complaint, which alleges
claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called laddering cases that have been commenced against over 300 companies that had
public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styled In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable
Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against the Companys former officers. As previously reported, the parties to these cases reached a tentative agreement to settle all claims against all
defendants, on terms that would have no material impact on the Company. On October 6, 2009, the Court approved the settlement, albeit over a number of objections. Subsequently, various parties filed either notices of appeal or other motions
intended to permit an appellate challenge to the Courts settlement-approval order. Appellate proceedings are in their very early stages, and the Company cannot predict how long appellate proceedings concerning the settlement could take, or
their outcome. Accordingly, there can be no assurance that the settlement will ultimately become effective. If the settlement does not become effective, the action may return to active litigation. In such an event, the Company would intend to defend
itself vigorously. However, if the outcome of any such litigation were adverse to the Company and if the Company was required to pay significant damages, its business could be significantly harmed.

On July 30, 2007, the Company received a demand letter, addressed to its board of directors, from counsel for Vanessa Simmonds, a
purported stockholder of the Company, concerning alleged violations by unspecified persons and entities of Section 16(b) of the Securities Exchange Act of 1934 Act in connection with the Companys initial public offering. On
October 5, 2007, a complaint was filed in the U.S. District Court for the Western District of Washington against certain underwriters of the Companys initial public offering of common stock alleging Section 16(b) violations by such
underwriters. The complaint named the Company as a nominal defendant, but plaintiff seeks no relief against the Company. An amended complaint was filed on February 28, 2008. Similar actions were filed by the same plaintiff in the same court
against underwriters involved with the initial public offerings of some 50 other companies common stock. The cases were related before the Honorable James L. Robart, who dismissed the actions by order dated March 12, 2009. Plaintiff filed
notice of appeals with respect to these dismissals (including the dismissal of the action involving the Company). Briefing of the appeals has concluded, but the Court of Appeals has not scheduled argument. As the Simmonds action seeks no relief
against the Company, the Company does not believe that these claims, even if reinstated on appeal and successfully prosecuted thereafter, will have a material effect on its business.

The Company is not currently a party to any other material pending legal proceedings. From time to time, the Company becomes involved in
claims and legal proceedings that arise in the ordinary course of its business. The Company does not believe that the resolution of these claims will have a material adverse effect on its financial statements.



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





6. Commitments

The Company has entered into various operating leases for its facilities and certain computer equipment and material contracts. The leases
expire on various dates through 2015. The facility leases were originally scheduled to expire in 2010, but were amended in February 2010 and now expire in 2015 and include scheduled rent increases that will be recognized on a straight-line basis
over the term of the leases. The material contracts expire on various dates through 2013.

The following are contractual
commitments as of September 30, 2010 associated with lease obligations and purchase obligations (in thousands):



|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year ending December 31, |  |   |      
|2010                     |  | $ | 1,990 | 
|2011                     |  |   | 3,773 | 
|Thereafter               |  |   | 3,502 | 
|                         |  |   |       | 
|Total commitments        |  | $ | 9,265 | 
|                         |  |   |       | 

Total rent expense for the three and nine months ended September 30, 2010 was $200,000 and $702,000,
respectively, and was $280,000 and $877,000 for the comparable periods in 2009.

Equity based awards

As discussed in Note 1 above, the Company has granted CPUs and Perseid has granted PIUs under their respective equity plans. These awards
only have potential value to the award recipient in the event that the Company made a dividend payment or distribution (in the case of Maxygen CPUs) or the occurrence of a liquidity event of Perseid (in the case of Perseid PIUs). Under applicable
accounting standards, the Company does not expect to record any amounts related to such awards unless and until the payout under such awards is probable and estimable.

7. Related Party Transactions

Astellas

The Company and Perseid are parties to various agreements with Astellas and/or its affiliates. On June 30, 2009, the Company
entered into a joint venture agreement with Astellas relating to the establishment of Perseid. Perseid began operation upon consummation of the transactions contemplated by the joint venture agreement on September 18, 2009. The arrangements
with Astellas are discussed more fully in Note 3.

Waverley

On April 1, 2006, the Company entered into a consulting agreement with Waverley Associates, Inc. (Waverley), a private
investment firm for which Mr. Isaac Stein is the president and sole stockholder. Mr. Stein also currently serves as executive chairman of the Companys board of directors. The consulting agreement was most recently amended in
September 2009 to provide for an increase in the amount of consulting fees payable to Waverley to $50,000 per month. The consulting agreement, as amended to date, also provides for automatic renewal of the agreement for successive one-year terms and
a two-year notice period for termination of the agreement by either party. Total expense under this arrangement was approximately $150,000 and $450,000 for the three and nine month periods ended September 30, 2010, and approximately $79,000 and
$224,000 for the same periods in 2009.



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





Codexis

The Company was previously party to a license agreement with Codexis under which the Company had granted to Codexis
certain exclusive rights to its MolecularBreeding directed evolution platform for certain small molecule pharmaceutical, energy and industrial chemical applications. This license agreement was terminated on October 28, 2010 in connection
with the sale by the Company to Codexis of substantially all of the intellectual property rights associated with this technology platform (see Note 13). Under the license agreement, the Company was entitled to receive a portion of certain
consideration received by Codexis in connection with the use of the licensed rights. The Company recognized approximately $230,000 and $2.0 million, respectively, for the three and nine months ended September 30, 2010 and $431,000 and $4.3
million for the comparable periods in 2009 under this license agreement, including $3.2 million recognized by the Company in the first quarter of 2009 in connection with the purchase of Codexis preferred stock by Royal Dutch Shell. The payments from
Codexis are included in related party revenue in the Condensed Consolidated Statements of Operations. As a result of the the termination of this license agreement, the Company will no longer be eligible for any payments or royalties from Codexis.
The former license agreement with Codexis is discussed more fully in Note 4.

8. Fair Value

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly
transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.
Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or
market and the instruments complexity.

Assets and liabilities recorded at fair value in the Condensed Consolidated
Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to valuation of these
assets and liabilities, are as follows:

Level 1  Inputs are unadjusted, quoted prices in active markets for identical
assets or liabilities at the measurement date.

Level 2  Inputs (other than quoted prices included in Level 1) are either
directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instruments anticipated life.

Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities and which reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the
risk inherent in the inputs to the model.

The following tables represents the Companys fair value hierarchy for its
financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 (in thousands):



|                                                                    |  |                          |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|------------------------------------------------------------------- |  | ------------------------ | ------- |  | ------- | - | ------- | ------- |  | - | ------- |  |  | - | - | 
|                                                                    |  | As of September 30, 2010 |        
|                                                                    |  | EstimatedFair Value      |         |  | Level 1 |   |         | Level 2 |  |   | Level 3 | 
|Assets recorded on the balance sheet:                               |  |                          |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|Money market funds                                                  |  | $                        | 142,004 |  |         | $ | 142,004 |         |  | $ |        |  |  | $ |  | 
|Stock purchase warrant                                              |  |                          | 233     |  |         |   |        |         |  |   | 233     |  |  |   |  | 
|Available-for-sale investment in equity securities of related party |  |                          | 10,383  |  |         |   |        |         |  |   | 10,383  |  |  |   |  | 
|Corporate bonds                                                     |  |                          |        |  |         |   |        |         |  |   |        |  |  |   |  | 
|                                                                    |  |                          |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|Total                                                               |  | $                        | 152,620 |  |         | $ | 142,004 |         |  | $ | 10,616  |  |  | $ |  | 
|                                                                    |  |                          |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|Liabilities:                                                        |  |                          |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|Forward exchange contracts                                          |  | $                        | 38      |  |         | $ |        |         |  | $ | 38      |  |  | $ |  | 
|                                                                    |  |                          |         |  |         |   |         |         |  |   |         |  |  |   |   | 



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





|                                  |  |                         |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|--------------------------------- |  | ----------------------- | ------- |  | ------- | - | ------- | ------- |  | - | ------- |  |  | - | - | 
|                                  |  | As of December 31, 2009 |        
|                                  |  | EstimatedFair Value     |         |  | Level 1 |   |         | Level 2 |  |   | Level 3 | 
|Assets:                           |  |                         |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|Money market funds                |  | $                       | 125,919 |  |         | $ | 125,919 |         |  | $ |        |  |  | $ |  | 
|U.S. government agency securities |  |                         | 33,611  |  |         |   |        |         |  |   | 33,611  |  |  |   |  | 
|                                  |  |                         |         |  |         |   |         |         |  |   |         |  |  |   |   | 
|Total                             |  | $                       | 159,530 |  |         | $ | 125,919 |         |  | $ | 33,611  |  |  | $ |  | 
|                                  |  |                         |         |  |         |   |         |         |  |   |         |  |  |   |   | 

The Company owns 5,957,108 shares of Codexis common stock and holds a warrant to purchase an additional
30,816 shares of Codexis common stock. As a result of the IPO of Codexis in April 2010, the Company recorded fair value of $10.4 million for 1,282,449 shares of Codexis common stock, which represents the portion of the Companys holdings that
are estimated to qualify for resale within one year. This fair value of $10.4 million is reflected as an available-for-sale investment in equity securities of related party in the table above under the Level 2 heading. The Company historically
accounted for its investment in Codexis under the equity method of accounting, but as a result of the Codexis IPO, all shares not saleable within the next year are now accounted for as a cost method investment, with a carrying value of zero. The
fair value of such shares at September 30, 2010, which is not recorded in the financial statements, is $37.8 million, and was determined using the Codexis closing stock price on September 30, 2010 of $9.60, less a 16% discount.
Additionally, the Company recorded the fair value of the warrant within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet. This fair value of $233,000 is reflected as a stock purchase warrant in the table above
under the Level 2 heading. The value of such assets is discussed more fully in Note 4.

At September 30, 2010, the
Company had foreign currency contracts outstanding in the form of forward exchange contracts totaling $622,000. The fair value of the contracts of $38,000 is reported as a financial liability in the table above under the Level 2 heading. The Company
did not have any financial liabilities that were required to be measured at fair value on a recurring basis as of December 31, 2009, nor any financial assets or liabilities that were required to be measured at fair value on a non-recurring
basis as of September 30, 2010 or December 31, 2009.

The Companys financial assets classified as Level 2
currently consist of a stock purchase warrant, an available-for-sale investment in equity securities of related party and forward exchange contracts. The fair value of the securities classified as Level 2 is determined based on a number of
observable inputs, including quoted stock prices, recent stock trading volumes, risk-free interest rates and historical stock price volatilities. The Companys financial liabilities classified as Level 2 currently consist of forward exchange
contracts. The fair value of these derivatives is determined by a third-party valuation service using a market-based valuation approach.

9. Restructuring Charges

2009 U.S. Restructuring

Beginning in the third quarter of 2009, the Company implemented a restructuring plan in connection with the Companys joint venture arrangement with Astellas that resulted in the termination of
several employees, including members of the Companys senior management team. Under change of control agreements the Company entered into with each terminated executive officer, each executive was entitled to receive a lump sum severance
payment equal to three times his base salary. In addition, the vesting schedule of each of the executives outstanding equity awards was accelerated in full as of the date of termination and the post-termination exercise period of the
executives outstanding stock options and other awards was automatically extended to their full original term; provided that shares underlying restricted stock units were delivered to the executive at such later time as specified in the change
of control agreements. Under these agreements, subject to certain limitations, the Company is also required to pay all of the costs for each terminated executives continued group health, dental and vision coverage under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended (COBRA), while the executive remains entitled to coverage under COBRA. As a result of this restructuring plan, the Company recorded restructuring charges of approximately $16.0
million in 2009, which includes $11.4 million of non-cash stock-based compensation. Expenses related to the acceleration of these executives equity awards were recognized as general and administrative expense in the third quarter of 2009. The
majority of the severance and one-time termination benefits have been paid as of September 30, 2010.



17



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MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





2008 U.S.
Restructuring

In October 2008, the Company implemented a restructuring plan that resulted in the termination of
approximately 30% of its workforce through the end of April 2009. As a result of this restructuring plan, the Company recorded restructuring charges of approximately $1.2 million, primarily in the fourth quarter of 2008. The restructuring charges
were primarily associated with one-time termination benefits, the majority of which were paid out during the first quarter of 2009. The Company completed the activities related to this restructuring plan in April 2009.

2007 Denmark Restructuring

In November 2007, the Company implemented a restructuring plan that resulted in the cessation of research and development operations at Maxygen ApS and the elimination of all employment positions at that
site. As a result of these actions, a charge of $5.2 million was recorded in the year ended December 31, 2007 and $799,000 was recorded in the year ended December 31, 2008. The Company reversed the remaining balance of $98,000 related to
this restructuring in the nine month period ended September 30, 2010.

The activity in the restructuring accrual for the
nine months ended September 30, 2010 related to the actions described above was as follows (in thousands):



|                                                |  |                            |       |  |                                |   |     |                 |  |   |                         |  |  |                             |        |   |                    |   |    |                    |  |   |        |  |  |   |        | 
|----------------------------------------------- |  | -------------------------- | ----- |  | ------------------------------ | - | --- | --------------- |  | - | ----------------------- |  |  | --------------------------- | ------ | - | ------------------ | - | -- | ------------------ |  | - | ------ |  |  | - | ------ | 
|                                                |  |                            |       |  |                                |   |     |                 |  |   |                         |  |  | As of September 30, 2010    |        |   |                    |  
|                                                |  | Balance
atDecember 31,2009 |       |  | Chargesduring 
fiscalyear 2010 |   |     | Non-cashcharges |  |   | Cashpaymentsduring 2010 |  |  | Balance
atSeptember 30,2010 |        |   | Total Coststo Date |   |    | TotalExpectedCosts | 
|2009 U.S. Restructuring                         |  |                            |       |  |                                |   |     |                 |  |   |                         |  |  |                             |        |   |                    |   |    |                    |  |   |        |  |  |   |        | 
|Employee severance and other benefits charges   |  | $                          | 4,282 |  |                                | $ |    |                 |  | $ |                        |  |  | $                           | (4,247 | ) |                    | $ | 35 |                    |  | $ | 15,866 |  |  | $ | 15,866 | 
|                                                |  |                            |       |  |                                |   |    
|2008 U.S. Restructuring                         |  |                            |       |  |                                |   |     |                 |  |   |                         |  |  |                             |        |   |                    |   |    |                    |  |   |        |  |  |   |        | 
|Employee severance and other benefits charges   |  |                            | 4     |  |                                |   |    |                 |  |   |                        |  |  |                             | (4     | ) |                    |   |   |                    |  |   | 1,184  |  |  |   | 1,184  | 
|                                                |  |                            |       |  |                                |   |    
|2007 Denmark Restructuring                      |  |                            |       |  |                                |   |     |                 |  |   |                         |  |  |                             |        |   |                    |   |    |                    |  |   |        |  |  |   |        | 
|Employee severance and other benefits charges   |  |                            | 98    |  |                                |   | (98 | )               |  |   |                        |  |  |                             |       |   |                    |   |   |                    |  |   | 5,286  |  |  |   | 5,286  | 
|Contract termination and other associated costs |  |                            |      |  |                                |   |    |                 |  |   |                        |  |  |                             |       |   |                    |   |   |                    |  |   | 725    |  |  |   | 725    | 
|                                                |  |                            |       |  |                                |   |     |                 |  |   |                         |  |  |                             |        |   |                    |   |    |                    |  |   |        |  |  |   |        | 
|                                                |  | $                          | 4,384 |  |                                | $ | (98 | )               |  | $ |                        |  |  | $                           | (4,251 | ) |                    | $ | 35 |                    |  | $ | 23,061 |  |  | $ | 23,061 | 

10. Derivatives and Financial
Instruments

The Company addresses certain financial exposures through a program of risk management that includes the use
of derivative financial instruments. The Company in some instances has entered into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates on forecasted cash requirements.

The purpose of the hedging activities has been to minimize the effect of foreign currency exchange rate movements on payments to certain
vendors in Europe. To date, foreign currency contracts have been denominated in Danish kroner and euros. The Company recognized no foreign exchange gains or losses from hedge contracts during the nine months ended September 30, 2009 and had no
foreign currency contracts outstanding at September 30, 2009. At September 30, 2010, the Company had foreign currency contracts outstanding in the form of forward exchange contracts totaling $622,000. The Company made the decision to not
designate these contracts as cash flow hedges and therefore recognized changes in their fair value as interest income and other income, net in the period of



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MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



change. During the three month periodended September 30, 2010, the Company recorded income of $122,000 for the change in fair value of its forward exchange contracts. For the nine month
period ended September 30, 2010, the Company recorded an expense of $38,000 for the change in fair value of such contracts. The fair value of these contracts of $38,000 at September 30, 2010 is recorded as a component of other accrued
liabilities.

The Company also owns a warrant to purchase common stock of Codexis, which is currently accounted for as a
derivative. The fair value of this financial instrument is discussed in Note 4.

11. Sale of Vaccines Assets

On January 5, 2010, the Company consummated a transaction with AltraVax pursuant to which AltraVax acquired substantially all of the
Companys vaccines assets, including the related government grants. Under the arrangement, the Company received an initial payment of $500,000 and AltraVax is obligated to pay the Company an additional $1.0 million over the next two years. The
Company is also eligible to receive a certain percentage of any revenue received by AltraVax under contracts involving our vaccines technology that are entered into by AltraVax for a period of up to two years after the payment by AltraVax of the
total $1.5 million purchase price. As part of the transaction, the Company also entered into a license agreement under which it granted AltraVax certain exclusive licenses in the vaccines field and certain non-exclusive licenses in the adjuvants
field to the MolecularBreeding directed evolution platform and certain ancillary technologies, in each case, subject to existing third party rights to such licensed assets and technology. In October 2010, the Company sold substantially all of
the patents and other intellectual property rights associated with the MolecularBreeding technology platform to Codexis (see Note 13). However, the license agreement between the Company and AltraVax and the licenses granted to AltraVax
thereunder remain in effect and the Company has been granted a license back from Codexis sufficient to satisfy the Companys license obligations to AltraVax.

The initial payment of $500,000 was recognized as revenue in the three months ended March 31, 2010 as no further performance obligations existed at that date. Any further amounts receivable pursuant
to this transaction will be recognized as revenue on the earlier of when payments are received or the amounts can be reliably measured and collectability is reasonably assured.

The Company recorded grant revenue of $1.1 million and $3.3 million in the three and nine month periods ended September 30, 2009,
respectively. As a result of the transaction with AltraVax, the Company will no longer receive grant revenue relating to these vaccines assets.

12. Repurchases of Common Stock

On May 27, 2010, the Company announced a stock repurchase program under which the Company may purchase up to $10.0 million of its common stock through December 31, 2010. As of September 30,
2010, the Company had repurchased 1,165,784 shares of its common stock under this program at an aggregate cost of approximately $6.7 million. This is in addition to the 1,433,361 shares of common stock the Company repurchased in March 2010 from
entities affiliated with GlaxoSmithKline plc and the 7,345,103 shares of common stock the Company repurchased in December 2009 pursuant to a modified Dutch auction tender offer.

13. Subsequent Events

On October 28, 2010, the Company entered into an Asset Purchase Agreement (the Purchase Agreement) with Codexis and
Codexis Mayflower Holdings, LLC, a wholly-owned subsidiary of Codexis (Codexis Holdings), pursuant to which Codexis Holdings acquired substantially all of the patents and other intellectual property rights associated with the
Companys MolecularBreeding technology platform. The assets acquired by Codexis Holdings include patents, trademarks, copyrights, software and certain assumed contracts. The assets acquired by Codexis Holdings did not include any patent
rights covering the specific products under development by the Company or Perseid and the Company has retained all rights to its MAXY-G34 program.

The intellectual property assets and rights acquired by Codexis Holdings under the Purchase Agreement will continue to be subject to existing license rights previously granted by the Company to third
parties, including Perseid, which retains exclusive licenses to use the MolecularBreeding technology platform for the discovery, research and development of protein pharmaceuticals.



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##### Table of Contents

MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)





In connection with
the assets acquired by Codexis Holdings under the Purchase Agreement, the Company also entered into a License Agreement with Codexis Holdings (the License Agreement), pursuant to which Codexis Holdings has granted to Maxygen certain
license rights to the intellectual property assets acquired by Codexis Holdings to the extent necessary for the Company to fulfill its contractual obligations under the license agreements retained by the Company, such as the Companys license
agreement with Perseid, and to permit the Company to practice any retained rights under such agreements. The License Agreement also provides for a grant by the Company of certain license rights to Codexis Holdings, including rights necessary for
Codexis Holdings to fulfill its contractual obligations under the license agreements it has assumed under the Purchase Agreement. Under the License Agreement, the Company is obligated to continue to pay a portion of certain costs incurred by Codexis
in connection with the continued prosecution and maintenance of the acquired patent rights.

Since Codexis Holdings now owns
substantially all of the intellectual property rights that were subject to the Companys prior license agreement with Codexis, the Company and Codexis terminated that license agreement in connection with the assets acquired by Codexis Holdings
under the Purchase Agreement. The Companys prior license agreement with Codexis was entered into by the parties in connection with the formation of Codexis in March 2002 and granted to Codexis certain exclusive rights to the
MolecularBreeding directed evolution platform for certain small molecule pharmaceutical, energy and industrial chemical applications. Under the license agreement, the Company was entitled to receive 20% of certain consideration received by
Codexis from a third party licensee in connection with the commercialization of energy products made with a biocatalyst developed using the licensed technology. The Company was also eligible for a 2% royalty on net sales of any related energy
product commercialized directly by Codexis. As a result of the termination of this license agreement, the Company is no longer eligible for any payments or potential royalties from Codexis.

In consideration for the assets acquired by Codexis Holdings under the Purchase Agreement and the termination of the Companys prior
license agreement with Codexis, Codexis Holdings paid a total purchase price to the Company of $20.0 million, of which $4.0 million will be held in escrow for twelve months, with $2.0 million of such amount to be held in escrow for a total of
twenty-three months, in each case to satisfy any indemnification obligations of the Company under the Purchase Agreement. Escrow amounts not used to satisfy such obligations or subject to pending claims will be released to the Company upon
expiration of the applicable escrow term.

The transactions under the Purchase Agreement closed concurrently with the
execution and delivery of the relevant agreements on October 28, 2010.



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|ITEM2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|------ | -------------------------------------------------------------------------------------

Overview

We are a biopharmaceutical company focused on developing improved versions of protein drugs through internal development and external collaborations and other arrangements. We use the
MolecularBreeding directed evolution technology platform, along with ancillary technologies, and extensive protein modification expertise to pursue the creation of biosuperior proteins.

We operate substantially all of our research and development operations through Perseid Therapeutics LLC, or Perseid, a majority-owned
subsidiary established in September 2009 in connection with a joint venture arrangement with Astellas Pharma Inc., or Astellas. Perseid is focused on the discovery, research and development of multiple protein pharmaceutical programs, including
CTLA-4 Ig product candidates (designated as our MAXY-4 program) that are designed to be superior, next-generation CTLA-4 Ig therapeutics for the treatment of a broad array of autoimmune disorders, including rheumatoid arthritis, and transplant
rejection.

The consummation of the joint venture transaction with Astellas in September 2009 largely completed a multi-year
strategic process to position our programs and assets in collaborations and other arrangements that are primarily supported by external parties. We continued this process in January 2010 with the sale of substantially all of the Companys
vaccine assets, including the related government grants, to AltraVax, Inc., or AltraVax.

In addition, on October 28,
2010, we sold substantially all of the patents and other intellectual property rights associated with our MolecularBreeding technology platform to a subsidiary of Codexis, Inc., or Codexis, for $20.0 million in cash. The assets acquired by
Codexis include patents, trademarks, copyrights, software and certain assumed contracts. The assets acquired by Codexis did not include any patent rights covering the specific products under development by us or Perseid and we have retained all
rights to our MAXY-G34 program. Under the agreement, $4.0 million of the purchase price will be held in escrow for twelve months, with $2.0 million of such amount to be held in escrow for a total of twenty-three months, in each case to satisfy any
of our indemnification obligations under the purchase agreement. Escrow amounts not used to satisfy such obligations or subject to pending claims will be released to us upon expiration of the applicable escrow term. The intellectual property assets
and rights acquired by Codexis continue to be subject to existing license rights previously granted by us to third parties, including Perseid, which retains exclusive licenses to use the MolecularBreeding technology platform for the discovery,
research and development of protein pharmaceuticals. In connection with the transaction, we also terminated our license agreement with Codexis under which we had granted Codexis certain exclusive rights to the technology platform for certain small
molecule pharmaceutical, energy and industrial chemical applications and were eligible for a portion of certain payments received by Codexis and royalties related to energy products, including biofuels. As a result of the transaction and the
termination of the Codexis license, we will no longer be eligible for any payments or potential royalties from Codexis. See Note 13 of the Notes to Condensed Consolidated Financial Statements for further discussion regarding this transaction.

In addition to our majority ownership of Perseid, we continue to retain a number of significant assets, including
approximately $142.0 million in cash and cash equivalents as of September 30, 2010 (including $26.5 million held by Perseid as of such date); our MAXY-G34 program; approximately 17% of the total shares of the common stock of Codexis; and a
potential $30.0 million milestone payment from Bayer HealthCare LLC, or Bayer. Over the next several years, our focus will be to manage these assets and arrangements to maximize the return to our stockholders.

To date, we have generated revenues from collaboration agreements, technology and license arrangements and government research grants,
and from the sale of certain assets. Our total revenues were $6.4 million and $31.7 million in the three and nine months ended September 30, 2010 and $7.8 million and $23.1 million in the comparable periods in 2009. Revenues for the 2010 and
2009 periods primarily consisted of related party revenues recognized by Perseid under its two collaboration agreements with Astellas; one for the co-development and commercialization of the MAXY-4 product candidates and one for the discovery,
research and preclinical development of certain protein therapeutics other than MAXY-4.



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Our research and
development expenses consist primarily of external collaborative research expenses (including contract manufacturing and contract research expenses), salaries and benefits, facility costs, supplies, research consultants, depreciation and stock
compensation expense. Research and development expenses were $6.1 million and $26.7 million in the three and nine months ended September 30, 2010 and $11.1 million and $25.6 million in the 2009 periods.

We have incurred significant operating losses from continuing operations since our inception. As of September 30, 2010, our
accumulated deficit was $273.1 million.

For the purposes of this report, our continuing operations consist of the results of
Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc., Maxygen ApS and Maxygen Holdings, Inc., as well as its majority-owned subsidiaries, Perseid Therapeutics LLC, Maxygen Holdings LLC and Maxygen Holdings Ltd.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. Except as provided below, we believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form
10-K for the year ended December 31, 2009.

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board, or FASB, issued guidance that amends the evaluation criteria to identify the
primary beneficiary of a variable interest entity. Additionally, this guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. This guidance is effective for interim and annual
reporting periods after November 15, 2009. We adopted this new guidance as of the beginning of fiscal year 2010 and have applied such guidance in evaluating whether we should continue to consolidate Perseid and our other majority-owned
subsidiaries. Determining the primary beneficiary requires significant judgment on the part of our management and is based on an analysis of all relevant facts and circumstances, including, but not limited to:



| |  |  | our ability to direct the activities that most significantly affect the entitys economic performance;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | whether we have an obligation to absorb losses or rights to receive benefits from the entity that could potentially be significant to the variable
interest entity.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based on our analysis, applying the guidance above, we have determined that we are still
the primary beneficiary of Perseid and our other majority-owned subsidiaries and will continue to consolidate such subsidiaries. At each reporting date, we will reassess whether we are still the primary beneficiary of each majority-owned subsidiary.
If we determine that we are no longer the primary beneficiary, we will deconsolidate such subsidiary and record our interest at its fair market value at the date on which we deconsolidate. We would then account for our interest using the equity
accounting method.

Fair Value Measurements

We record a number of assets and liabilities in our Condensed Consolidated Balance Sheet at fair value on a recurring basis, including, but not limited to, an available-for-sale investment in equity
securities of related party, a stock purchase warrant, corporate bonds and forward exchange contracts. While the fair value of these assets and liabilities is determined through the use of observable market inputs, the fair value of certain of these
assets and liabilities cannot be determined solely based on quoted market prices. Instead, the fair value of these assets and liabilities is determined through the use of the Black-Scholes Merton model, which utilizes, among other observable
assumptions, estimates of future stock price volatility based on historical stock price volatility. However, these assumptions consist of estimates of future market conditions, which are inherently uncertain, and therefore subject to
managements judgment.

In addition, due to the high degree of judgment involved in our estimation techniques, any value
actually derived from any disposition or settlement of such asset or liability may differ materially from the fair value of the asset or liability recorded in our Condensed Consolidated Balance Sheet.



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Results of Operations

Revenues

Our revenues have been derived primarily from collaboration agreements, technology and license arrangements and government research grants, and from the sale of certain assets. Our total revenues in the
three and nine months ended September 30, 2010 were $6.4 million and $31.7 million, compared to $7.8 million and $23.1 million in the same periods in 2009. The increase in total revenue for the nine month period was primarily as a result of an
increase in related party revenues received under Perseids collaboration agreements with Astellas. The decrease in total revenue for the three month period was primarily as a result of the absence of grant revenue in 2010 in connection with
the transfer of all remaining government grants to AltraVax in the first quarter of 2010.

Related party revenue was $5.9
million and $30.7 million in the three and nine months ended September 30, 2010, compared to $6.7 million and $19.8 million in the same periods in 2009. Related party revenue primarily consists of revenues received under Perseids
collaboration agreements with Astellas and to a lesser extent, revenues received by Maxygen under its prior licensing arrangement with Codexis, which was terminated in October 2010 in connection with the acquisition by Codexis of the intellectual
property rights associated with the MolecularBreeding directed evolution platform. The decrease in related party revenue in the three months ended September 30, 2010 resulted from the timing of certain manufacturing and pre-clinical
activities under Perseids collaboration agreements with Astellas in both periods. The increase in related party revenue in the nine months ended September 30, 2010 was primarily due to an increase in revenue under Perseids
collaboration agreements with Astellas resulting from increased preclinical development activities under those agreements. This increase was partially offset by a $2.3 million decrease in revenue recognized under our prior license agreement with
Codexis. The nine month period ended September 30, 2010 included $5.0 million in revenue recognized as a result of the achievement of a preclinical milestone under Perseids collaboration with Astellas. As a result of the sale of our
MolecularBreeding directed evolution platform to Codexis and the related termination of our license agreement with Codexis, we will not be eligible for any further payments or potential royalties from Codexis under the license agreement.

Technology and license revenue was $504,000 and $1.0 million in the three and nine months ended September 30, 2010,
compared to $5,000 and $10,000 in the same periods in 2009, respectively. Technology and license revenue for the three months ended September 30, 2010 consisted primarily of a non-refundable option fee received from Cangene in 2009, which we
recognized in the third quarter of 2010 as a result of the termination of our prior option and license agreement with Cangene in July 2010. Technology and license revenue in the nine month period ended September 30, 2010 also included the
initial $500,000 payment we received from AltraVax in January 2010 in connection with its acquisition of substantially all of our vaccines assets, including the related government grants. Technology and license revenue in the 2009 period consisted
primarily of certain miscellaneous licensing fees received from third parties.

In January 2010, we consummated a transaction
with AltraVax for the sale of our vaccine assets, including the related government grants. As a result, there was no revenue from government research grants in the three and nine months ended September 30, 2010. For the three and nine-month
periods ended September 30, 2009, revenue from government research grants was $1.1 million and $3.3 million. As a result of this transaction, these grants will not be a source of revenue for us going forward.

Research and Development Expenses

Our research and development expenses consist primarily of external collaborative research expenses (including contract manufacturing and contract research expenses), salaries and benefits, facility
costs, supplies, research consultants, depreciation and stock compensation expense. Research and development expenses were $6.1 million and $26.7 million in the three and nine months ended September 30, 2010, compared to $11.1 million and $25.6
million in the same periods in 2009. The decrease in our research and development expenses for the three month period was primarily due to decreased external collaborative research costs on the MAXY-4 program, which resulted from the timing of
certain manufacturing and pre-clinical activities under Perseids collaboration agreements with Astellas. The decrease in our research and development expenses for the three month period was also due to reduced salaries, benefits, stock
compensation and other operating expenses resulting from a reduction in headcount completed in April 2009 and the termination of a senior R&D officer on October 31, 2009. The increase in our research and development expenses for the nine
month period was primarily due to increased external collaborative research costs on the MAXY-4 program, partially offset by reduced salaries, benefits, stock compensation and other operating expenses resulting from a reduction in headcount
mentioned above.



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We do not track fully
burdened research and development costs by project. However, we do estimate, based on full-time equivalent personnel effort, the percentage of research and development efforts (as measured in hours incurred, which approximates costs) undertaken for
projects funded by collaborators and government grants, on the one hand, and projects funded by us, on the other hand. To approximate research and development expenses by funding category, the number of hours expended in each category has been
multiplied by the approximate cost per hour of research and development effort and added to project-specific external costs. In the case where a collaborative partner is sharing the research and development costs, the expenses for that project are
allocated proportionately between the collaborative projects funded by third parties and internal projects. We believe that presenting our research and development expenses in these categories will provide our investors with meaningful information
on how our resources are being used.

The following table presents our approximate research and development expenses by
funding category (in thousands):



|                                                    |  |                                 |        |  |                                |   |       |      |  |   |        |  |  |   |        | 
|--------------------------------------------------- |  | ------------------------------- | ------ |  | ------------------------------ | - | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                    |  | Three months
endedSeptember 30, |        |  | Nine months
endedSeptember 30, |  
|                                                    |  | 2009                            |        |  | 2010                           |   |       | 2009 |  |   | 2010   | 
|Collaborative projects funded by related parties(1) |  | $                               | 6,919  |  |                                | $ | 5,558 |      |  | $ | 13,834 |  |  | $ | 21,581 | 
|Government grants                                   |  |                                 | 1,204  |  |                                |   |      |      |  |   | 3,552  |  |  |   |       | 
|Internal projects(2)                                |  |                                 | 2,976  |  |                                |   | 567   |      |  |   | 8,164  |  |  |   | 5,127  | 
|                                                    |  |                                 |        |  |                                |   |       |      |  |   |        |  |  |   |        | 
|Total                                               |  | $                               | 11,099 |  |                                | $ | 6,125 |      |  | $ | 25,550 |  |  | $ | 26,708 | 
|                                                    |  |                                 |        |  |                                |   |       |      |  |   |        |  |  |   |        | 



|(1) | Research and development expenses related to collaborative projects funded by related parties may be less than the reported revenues due to the amortization of
non-refundable upfront payments, as well as a portion of the collaborative research and development revenue that is charged for general and administrative expenses.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Research and development expenses in the category Internal projects for the 2010 periods consist of Perseids funding of the MAXY-4 program and other
projects under its collaboration with Astellas.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our product development programs are at an early stage and may
not result in any marketed products. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. Product candidates may be found ineffective or cause harmful side effects during
clinical trials, may take longer to progress through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals, may prove impractical to manufacture in commercial quantities at reasonable costs and with acceptable
quality and may be barred from commercialization if they are found to infringe or otherwise violate a third partys intellectual property rights. In addition, competitors may develop superior competing products. Furthermore, it is uncertain
which of our internally developed product candidates will be subject to future collaborative arrangements. The participation of a collaborative partner may accelerate the time to completion and reduce the cost to us of a product candidate or it may
delay the time to completion and increase the cost to us due to the alteration of our existing strategy. The risks and uncertainties associated with our research and development projects are discussed more fully in our Annual Report on Form 10-K for
the year ended December 31, 2009, including in the section of that report entitled Item 1A  Risk Factors. Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the
development of any of our product candidates or the ultimate product development cost in any particular case.

We expect our
research and development expenses to increase somewhat in the future based on Perseids preclinical development of the MAXY-4 product candidates and other preclinical product candidates, the cost of which Perseid will share with Astellas under
the collaboration agreement between the parties.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel costs for finance, legal, general management, business development
and human resources, stock compensation expense, insurance premiums and professional expenses, such as external expenditures for legal and accounting services. General and administrative expenses were $2.7 million and $8.5 million in the three and
nine months ended September 30, 2010, compared to $6.5 million and $14.9 million in the comparable periods in 2009. The decrease in general and administrative



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expenses in the three month period was primarily due to decreases in salaries, benefits and stock compensation resulting from a reduction in headcount completed in April 2009 and the termination
of two executive officers as of September 30, 2009. Also contributing to this reduction in general and administrative expense for the three month period were decreases for legal and financial advisory services that were incurred in the
consummation of certain strategic transactions in the 2009 period. The decrease in general and administrative expenses in the nine month period was primarily related to the decreases in legal and financial advisory services along with the headcount
reductions discussed above.

Our general and administrative expenses for the remainder of 2010 should be less when compared to
2009, depending on, among other things, the levels of share-based payments granted in 2010, the use of external consultants and market analysis, and expenditures for legal and accounting services. Our general and administrative expenses going into
2011 are expected to be generally consistent with 2010 levels but could fluctuate quarter to quarter depending on, but not limited to, the factors enumerated above.

Restructuring Charges

As part of the closure of our Danish operations in
2007, we recorded an additional $98,000 charge for severance and benefits in the three months ended March 31, 2009. We have subsequently determined that this amount will not be paid and have therefore reversed the $98,000 in the nine months
ended September 30, 2010. We completed the activities related to our consolidation of our Danish operations during the first half of 2008 and do not expect to incur any additional costs relating to this consolidation. We completed the
activities related to the 2008 U.S. restructuring plan in April 2009 and do not expect to record any additional restructuring expenses related to this restructuring. In connection with our 2009 U.S. restructuring, the majority of severance and
one-time termination benefits were paid out during the first half of 2010 and we do not expect to record any additional restructuring expenses. See Note 9 of the Notes to Condensed Consolidated Financial Statements for further discussion of this
matter.

Interest Income and Other Income, Net

Interest income and other income, net, represents income earned on our cash, cash equivalents and marketable securities, gains or losses on the fair value of certain stock purchase warrants, foreign
currency gains or losses, gain or loss on disposal of equipment and interest expense, if any. Amounts included in interest income and other income, net are as follows (in thousands):



|                                                             |  |                                  |     |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------------------ |  | -------------------------------- | --- | - | ------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                             |  | Three months 
endedSeptember 30, |     |   | Nine months 
endedSeptember 30, |  
|                                                             |  | 2009                             |     |   | 2010                            |   |      | 2009 |  |   | 2010 |  
|Interest income                                              |  | $                                | 159 |   |                                 | $ | 80   |      |  | $ | 876  |   |  | $ | 309  |  
|Gain (loss) on warrant valuation                             |  |                                  |    |   |                                 |   | 22   |      |  |   |     |   |  |   | 233  |  
|Foreign exchange gains (losses)                              |  |                                  | (7  | ) |                                 |   | (267 | )    |  |   | (5   | ) |  |   | (508 | )
|Gains (losses) on disposal of equipment and interest expense |  |                                  | 14  |   |                                 |   | 5    |      |  |   | 5    |   |  |   | 1    |  
|                                                             |  |                                  |     |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|Total interest income and other income, net                  |  | $                                | 166 |   |                                 | $ | (160 | )    |  | $ | 876  |   |  | $ | 35   |  
|                                                             |  |                                  |     |   |                                 |   |      |      |  |   |      |   |  |   |      |  

The decrease in interest income and other income, net from the 2009 periods to the 2010 periods was due to
lower interest income resulting from significantly lower interest rates. The gain on warrant valuation reflects the recognition of the fair market value of the warrant held by the Company to purchase 30,816 shares of Codexis common stock. See Note 4
of the Notes to Condensed Consolidated Financial Statements.

Income Tax Benefit

During the three and nine month periods ended September 30, 2010, we recorded a $1.8 million and $2.0 million tax benefit. This tax
benefit relates to net operating losses that we concluded are realizable based on our estimate of future taxable income resulting from potential dispositions of our shares of Codexis common stock that are estimated to qualify for resale within one
year. The final determination of the amount taxable to us will be assessed upon the actual disposition, if any, of the Codexis common stock we hold.



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Recent
Accounting Pronouncements

During the nine months ended September 30, 2010, we adopted the following accounting
standards:

In June 2009, the FASB issued guidance that amends the evaluation criteria to identify the primary beneficiary of
a variable interest entity. Additionally, this guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. This guidance is effective for interim and annual reporting periods after
November 15, 2009. We adopted this new guidance as of the beginning of fiscal year 2010 and we have applied such guidance in evaluating whether we are the primary beneficiary of Perseid and our other majority-owned subsidiaries and whether we
should continue to consolidate such majority-owned subsidiaries. Based on our analysis, we have consolidated Perseid and our other majority owned subsidiaries at September 30, 2010.

In February 2010, the FASB issued guidance that removes the requirement for SEC filers to disclose the date through which management
evaluated subsequent events in the financial statements, and was effective upon its issuance. We have adopted the updated guidance upon issuance. The adoption of this new guidance did not have an impact on our financial statements.

In January 2010, the FASB issued guidance that amended the disclosure requirements related to recurring and nonrecurring fair value
measurements. This guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value
measurement hierarchy, including the reasons for and the timing of the transfers. Additionally, this guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). We have adopted this guidance beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become
effective for us with the reporting period beginning January 1, 2011. The adoption of this new guidance did not have a material impact on our financial statements.

In September 2009, the FASB amended the standards for revenue recognition for multiple deliverable revenue arrangements. As amended, the standard eliminates the residual method of allocation and adds the
requirement to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using the vendor specific
objective evidence of selling price, if it exists, otherwise third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, the vendor shall use its best
estimate of the selling price for that deliverable when applying the relative selling price method. The accounting changes are effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be
on a prospective basis or by retrospective application. We are currently evaluating the impact of the amended standards.

In
April 2010, the FASB issued an accounting standards update related to the milestone method of revenue recognition. The accounting standards update provides guidance on defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development arrangements. A company may make an accounting policy election to use the milestone method of revenue recognition for transactions within the scope of the amendments. The amendments
will be effective in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. We have evaluated the impact of adopting this guidance and believe it will have no material effect on our financial statements.

Liquidity and Capital Resources

Since inception, we have financed our continuing operations primarily through private placements and public offerings of equity securities, research and development funding from collaborators and
government grants and through the sale or license of various assets. In October 2010, Codexis paid us a total purchase price of $20.0 million in connection with the sale of our MolecularBreeding technology platform assets, of which $4.0
million will be held in escrow for twelve months, with $2.0 million of such amount to be held in escrow for a total of twenty-three months, in each case to satisfy any of our indemnification obligations under the purchase agreement. In September
2009, as a result of the consummation of the joint venture agreement between us and Astellas, we received $10.0 million from Astellas for its investment in Perseid. In May 2009, we received a non-refundable option fee of $500,000 from Cangene for
the option to license certain MAXY-G34 related intellectual property rights for the potential fulfillment of government contracts relating to the treatment of ARS, however, our option and license agreement with Cangene expired in July 2010 and we
are not eligible for any future payments under this agreement.



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In July 2008, we recognized $90.6 million in revenue from Bayer in connection with the sale of our hematology assets and the grant of certain license rights to the MolecularBreeding
technology platform, which included an up-front cash payment of $90.0 million. In September 2008, we received an upfront fee of $10.0 million from Astellas under the co-development and commercialization agreement with Astellas for our MAXY-4 product
candidates (which agreement was assigned to Perseid). In October 2010, Perseid was awarded $733,437 in funding under the U.S. Governments Qualifying Therapeutic Discovery Project (QTDP) program. The QTDP program was created by Congress in
March 2010, as enacted under the Patient Protection and Affordable Care Act of 2010, and provides a tax credit or grant to eligible companies to cover certain costs and expenses in connection with qualified therapeutic discovery projects.

In December 2009, we completed the repurchase of approximately 18.5% of our outstanding common stock in a modified
Dutch auction tender offer for a total cost of approximately $39.2 million. In March 2010, we repurchased an additional 1.4 million shares of our common stock in a private transaction for an aggregate purchase price of approximately
$8.0 million and, from June 1 through September 30, 2010, we repurchased an additional 1,165,784 shares of our common stock in accordance with a stock repurchase program for a total cost of approximately $6.7 million. As of
September 30, 2010, we had $142.0 million in cash and cash equivalents on a consolidated basis. Of this amount, $26.5 million is held by Perseid and may only be used for Perseids operations.

We are not obligated to fund the operations or other capital requirements of Perseid. Astellas and Perseid are parties to agreements that
require Astellas to fund or share certain expenses relating to the research and development activities of Perseid. Under a collaboration agreement between Astellas and Perseid, Astellas will fund substantially all of the costs, estimated at up to
$30.0 million over the three-year option term and subject to certain limitations, related to the discovery, research and development by Perseid of multiple protein therapeutics (other than the MAXY-4 program). The ongoing development costs for the
MAXY-4 program will be shared by Astellas and Perseid in accordance with the existing terms of the MAXY-4 collaboration agreement. Under certain circumstances, an Astellas subsidiary also will be required to provide Perseid with up to 18 months of
transition funding in the form of revolving loans of up to $20.0 million on pre-agreed terms. See Note 3 of the Notes to Condensed Consolidated Financial Statements.

Net cash used in operating activities was $16.1 million in the nine months ended September 30, 2009, compared to $1.8 million in the comparable period in 2010. Cash used in the 2010 period consisted
primarily of severance payments made in connection with our 2009 restructuring, a decrease in accrued project costs, a reduction in deferred revenue, an increase in deposits and other current assets relating to increased security deposits under our
lease agreements and a contingent payment under a licensing arrangement. These uses of cash were partially offset by an increase in related party receivable and accounts payable and net loss, as adjusted to exclude certain non-cash items. Cash used
in the 2009 period consisted primarily of net loss, as adjusted to exclude certain non-cash items, a reduction in related party receivable and related party deferred revenue. These uses of cash were partially offset by an increase in accounts
payable and accrued restructuring charges.

Net cash provided by investing activities was $779,000 in the nine months ended
September 30, 2009, compared to $33.0 million in the same period in 2010. The cash provided during the 2010 and 2009 periods was related to maturities of available-for-sale securities in excess of purchases. We expect to continue to make
investments in the purchase of property and equipment to support our operations. We may use a portion of our cash to acquire or invest in businesses, products or technologies, or to obtain the right to use such technologies.

Net cash provided by financing activities was $13.2 million in the nine months ended September 30, 2009, compared with $15.1 million
used in financing activities in the comparable period in 2010. The cash used during 2010 was primarily due to the repurchase of our common stock and to a lesser extent, the settlement, through our common stock, of employee tax obligations in
connection with the delivery of stock issued under restricted stock units held by our former executives. The cash provided by financing activities during the 2009 period includes an investment of $10 million by Astellas in Perseid and proceeds from
the sale of common stock in connection with the exercise of stock options by employees.



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The following are
contractual commitments as of September 30, 2010 associated with lease obligations and purchase obligations (in thousands):



|                            |  |                        |       |  |                |   |       |           |  |   |           |  |  |                  |       |  |  |   |   | 
|--------------------------- |  | ---------------------- | ----- |  | -------------- | - | ----- | --------- |  | - | --------- |  |  | ---------------- | ----- |  |  | - | - | 
|                            |  | Payments Due by Period |      
|Contractual Obligations     |  | Total                  |       |  | Lessthan 1Year |   |       | 1-3 Years |  |   | 4-5 Years |  |  | More than 5Years |      
|Operating lease obligations |  | $                      | 4,024 |  |                | $ | 213   |           |  | $ | 2,698     |  |  | $                | 1,113 |  |  | $ |  | 
|Purchase obligations        |  |                        | 5,241 |  |                |   | 1,777 |           |  |   | 3,464     |  |  |                  |      |  |  |   |  | 
|                            |  |                        |       |  |                |   |       |           |  |   |           |  |  |                  |       |  |  |   |   | 
|Total                       |  | $                      | 9,265 |  |                | $ | 1,990 |           |  | $ | 6,162     |  |  | $                | 1,113 |  |  | $ |  | 
|                            |  |                        |       |  |                |   |       |           |  |   |           |  |  |                  |       |  |  |   |   | 

We are eligible to receive $30.0 million from Bayer based on the achievement of certain events related to
the potential initiation of a phase II clinical trial of MAXY-VII and the satisfaction of certain patent related conditions associated with the MAXY-VII program. We were eligible to receive up to $23.0 million from sanofi pasteur, the vaccines
division of the sanofi-aventis Group, under our license agreement relating to the development by sanofi of a vaccine for the dengue virus, however, this license agreement was terminated in August 2010 and we are not eligible to receive any future
payments under this agreement. Under our joint venture arrangement with Astellas, Astellas has an option to acquire all of our ownership interest in Perseid at specified exercise prices that increase each quarter from the current option price of
$70.0 million (through December 18, 2010) to $123.0 million over the term of the option, which expires on September 18, 2012 (the third anniversary of the closing). In addition, Perseid is eligible to receive potential milestone and event
based payments from Astellas based on the achievement of certain events related to the development and commercialization of the MAXY-4 program. In January 2010 and July 2010, Perseid received milestone payments of $5.0 million each under this
agreement. However, there can be no assurances that either we or Perseid will receive any future milestone, event based payments or other proceeds under any of these agreements. In addition, any payments related to milestones achieved under the
co-development and commercialization agreement between Perseid and Astellas for the MAXY-4 program would be paid to Perseid and, as a result, such funds would not be directly available to Maxygen.

In April 2010, Codexis completed an initial public offering of 6.0 million shares of common stock. We own 5,957,108 shares of
Codexis common stock, representing approximately 17% of the total shares of Codexis common stock outstanding, and a warrant to purchase an additional 30,816 shares of Codexis common stock. The shares of Codexis common stock owned by us are subject
to a lock-up agreement with the underwriters of the public offering that prevents the sale or other disposition of such shares until November 15, 2010, unless otherwise waived by the underwriters. After expiration of the lock-up, these shares
will be tradeable subject to the volume limitations and other conditions of Rule 144 of the Securities Act of 1933.

We
believe that our current cash and cash equivalents, together with funding expected to be received from collaborators and licensors, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least
the next twelve months.

In addition, given that we continue to have large cash reserves and a reduced ongoing financial
commitment to the business contributed to Perseid, our board of directors expects to consider and evaluate one or more additional distributions to our stockholders of a portion of our cash resources or assets in excess of our current and longer term
operational requirements. Such distributions may be accomplished through cash dividends, stock repurchases, property distributions or other mechanisms and may be fully or partially taxable depending on the circumstances of such distribution.



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|ITEM3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------ | ----------------------------------------------------------

Market Risk Management

Our cash flow and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and other
factors. We attempt to limit our exposure to some or all of these market risks through the use of various financial instruments. There were no significant changes in our market risk exposures during the three months ended September 30, 2010.
These activities are discussed in further detail in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended December 31, 2009.



|ITEM4. | CONTROLS AND PROCEDURES
|------ | -----------------------

Evaluation of Controls and Procedures

Under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time period specified in the Securities and Exchange Commissions rules and forms.

Changes in Internal Control

There has been no change in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures and internal controls over financial reporting will prevent
all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.



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PART II  OTHER INFORMATION



|ITEM1. | LEGAL PROCEEDINGS
|------ | -----------------

The information set forth above under Note 5 contained in the unaudited Condensed Consolidated Financial Statements in Part I  Item 1 of this report is incorporated herein by reference.



|ITEM1A. | RISK FACTORS
|------- | ------------

The following risk factors are in addition to or materially amend the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the year ended December 31, 2009, but are not a
complete list of all risk factors. Except as set forth below, there have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the year ended December 31, 2009.

We have implemented a substantial restructuring of our operations and have revised our strategic plan, and we may fail to
successfully execute this plan.

The formation of Perseid Therapeutics LLC, or Perseid, the consummation of our joint
venture transaction with Astellas Pharma Inc., or Astellas, in September 2009 and the recent changes in our management team have largely completed a multi-year strategic process to restructure our operations and position our programs and assets in
collaborations and other arrangements that are primarily supported by external parties. However, we plan to continue to evaluate options regarding the management of our assets and arrangements in an effort to maximize the return to our stockholders
over the next several years. These options could include a sale or disposition of one or more corporate assets, the acquisition of a business or asset, a strategic business combination, or other transactions. For example, in January 2010, we sold
substantially all of our vaccines assets to AltraVax, Inc. and, in October 2010, we sold substantially all of our patent rights and certain other assets relating to the MolecularBreeding directed evolution platform to Codexis. While we
continue to be actively engaged in this process, there can be no assurance that any particular strategic option or outcome will be pursued, whether any transaction, or series of transactions required to sell or acquire individual assets, will occur,
or whether we will be able to successfully consummate any such transaction on a timely basis, on terms acceptable to us or at all. In addition, we may be unsuccessful in implementing an option that is chosen by our board of directors, or we may
implement an option that yields unexpected results. The process of continuing to review, and potentially executing, strategic options may be very costly and time-consuming and may distract our management and otherwise disrupt our operations, which
could have adverse effects on our business, financial condition and results of operations. As a result, there can be no assurances that any particular business arrangement or transaction, or series of transactions, will be consummated or lead to
increased stockholder value.

To the extent that we elect to pursue a transaction, or series of transactions, that includes a
sale of one or more corporate assets, our ability to sell any assets may be limited by many factors beyond our control, such as general economic conditions or the attributes of the particular asset. We cannot predict whether we would be able to sell
any particular asset on favorable terms and conditions, if at all, or the length of time needed to sell any asset. We also have a number of ancillary technologies and similar assets that may not be accorded any additional value in an asset sale or
other strategic transaction. Accordingly, there can be no assurances that we or our stockholders will realize any value from all of our assets or any particular asset. In addition, although we intend to structure any potential transaction so as to
minimize the federal and state tax consequences to both us and our stockholders, any particular transaction that we pursue could result in the imposition of both federal and state taxes that may have an adverse affect on us and our stockholders.

Furthermore, we have incurred, and may in the future incur, significant costs related to the execution of our revised
strategic plan, such as legal and accounting fees and expenses and other related charges. We may also incur additional unanticipated expenses in connection with this strategic plan. A considerable portion of the costs related to any strategic
transaction, such as legal and accounting fees, will be incurred regardless of whether any transaction is completed. These expenses will decrease the remaining cash available for use in our business or the execution of our strategic plan.



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Our investment
in Codexis common stock gives us limited influence over Codexis, is illiquid and may decline in value.

We own
approximately 6.0 million shares of the common stock of Codexis, Inc., which completed an initial public offering of its common stock in April 2010 and now trades on the Nasdaq Global Market under the symbol CDXS. We no longer have
a representative on the Codexis board of directors, exert no influence or control over the management of Codexis and have limited insight into the affairs of Codexis other than as a stockholder and licensee of certain intellectual property rights.
As a publicly traded company, the market value of the Codexis common stock may fluctuate due to market conditions and other conditions over which we have no control. Any other than a temporary decrease in the Codexis stock price would decrease the
value of our investment. In addition, because we hold a significant portion of the outstanding common stock of Codexis, any fluctuation or decrease in the Codexis stock price or any announcements or events related to Codexis may cause an unrelated
or disproportionate fluctuation or decrease in our stock price, regardless of our operating performance.

In addition, our
shares of Codexis common stock are subject to certain lockup restrictions and therefore are not freely tradable. Upon expiration of these lock-up restrictions, our shares will be tradeable subject to the volume limitations and other conditions of
Rule 144 under the Securities Act of 1933. Accordingly, if we decide to sell or otherwise dispose of any portion of our Codexis shares, we may be unable to do so at a favorable price or on a timely basis. In addition, any sale, distribution or other
disposition of our Codexis shares could cause or stock price to decline and result in the imposition of both federal and state taxes that may have an adverse affect on us and our stockholders.

We rely heavily on the technology licensed to us by Codexis and if these rights are not effectively prosecuted, maintained or
protected by Codexis our business and the success of Perseid may be harmed.

In October 2010, we sold substantially
all of our patent rights and certain other assets relating to our MolecularBreeding directed evolution platform to Codexis. Perseid Therapeutics LLC relies heavily on this technology, which is now licensed to us by Codexis. While Perseid
retains exclusive licenses to use the technology platform for the discovery, research and development of protein pharmaceuticals, Codexis, as the owner of these intellectual property rights, now has the right to control prosecution, maintenance and
enforcement of these patent rights. If Codexis or an acquirer of Codexis chooses not to enforce the intellectual property rights on which our business and that of Perseid relies, or enforces those rights ineffectively and has them invalidated,
Perseids ability to effectively use its licensed rights may be adversely impacted. In addition, if Codexis does not adequately prosecute, maintain or protect these intellectual property rights, competitors may be able to practice these
technologies and erode Perseids competitive advantage. Any loss of rights thereunder could also decrease the likelihood that Astellas would exercise its option to purchase our interests in Perseid and, if so, could make it more difficult for
us to continue the business of Perseid.

In addition, the intellectual property portfolio we sold to Codexis will continue to
be subject to existing licenses that we previously granted to third parties under agreements that we will remain a party to. While Codexis is obligated to comply with the terms of these agreements and to indemnify us for certain losses under these
agreements, any action or omission by Codexis that causes us to breach any of our obligations under these agreements may subject us to liability and, to the extent indemnification by Codexis is not available, we may be required to pay damages to
such third party.



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|ITEM2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
|------ | -----------------------------------------------------------

Issuer Purchases of Equity Shares

The table below summarizes information about our purchases of equity securities registered pursuant to Section 12 of the Exchange Act
during the quarterly period ended September 30, 2010.



|                                   |  |                                   |         |  |                               |   |      |                                                                                  |  |  |                                                                                                            |  |  |   |           | 
|---------------------------------- |  | --------------------------------- | ------- |  | ----------------------------- | - | ---- | -------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------------------------------------- |  |  | - | --------- | 
|Period                             |  | Total Numberof SharesPurchased(1) |         |  | Average PricePaid
perShare(2) |   |      | Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs(1) |  |  | Maximum Number (orApproximate DollarValue) of Shares
thatMay Yet Be PurchasedUnder the Plans orPrograms(1) | 
|July 1, 2010 through July 31, 2010 |  |                                   | 483,208 |  |                               | $ | 5.64 |                                                                                  |  |  | 483,208                                                                                                    |  |  | $ | 5,854,471 | 
|Aug. 1, 2010 through Aug. 31, 2010 |  |                                   | 239,206 |  |                               | $ | 5.65 |                                                                                  |  |  | 239,206                                                                                                    |  |  | $ | 4,502,051 | 
|Sep. 1, 2010 through Sep. 30, 2010 |  |                                   | 196,581 |  |                               | $ | 5.73 |                                                                                  |  |  | 196,581                                                                                                    |  |  | $ | 3,375,106 | 
|                                   |  |                                   |         |  |                               |   |      |                                                                                  |  |  |                                                                                                            |  |  |   |           | 
|Total                              |  |                                   | 918,995 |  |                               | $ | 5.66 |                                                                                  |  |  | 918,995                                                                                                    |  |  | $ | 3,375,106 | 
|                                   |  |                                   |         |  |                               |   |      |                                                                                  |  |  |                                                                                                            |  |  |   |           | 



|(1) | On May 27, 2010, we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications,
up to an aggregate maximum amount of $10.0 million through December 31, 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The price paid per share of common stock does not include any related transaction costs.
|--- | ----------------------------------------------------------------------------------------



|ITEM3. | DEFAULTS UPON SENIOR SECURITIES
|------ | -------------------------------

Not applicable.



|ITEM4. | (REMOVED AND RESERVED)
|------ | ----------------------



|ITEM5. | OTHER INFORMATION
|------ | -----------------

Not applicable.



|ITEM6. | EXHIBITS
|------ | --------

The following exhibits are filed as part of this report:



|      |  |                                                                                                                                                                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Asset Purchase Agreement, dated as of October 28, 2010, between Maxygen, Inc., Codexis, Inc. and Codexis Mayflower Holdings, LLC (incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 28, 2010).
|      | 
|2.1.1 |  | License Agreement, dated as of October 28, 2010, between Maxygen, Inc. and Codexis Mayflower Holdings, LLC (incorporated by reference to Exhibit 2.1.1 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on October 28, 2010).                    
|      | 
|31.1  |  | Certification of Chief Executive Officer and 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.                                                                                                                                                     



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SIGNATURES

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



|                 |  |  |  |               |  |                                                  
|---------------- |  |  |  | ------------- |  | -------------------------------------------------
|                 |  |  |  | MAXYGEN, INC.
|                 |  |  | 
|November 4, 2010 |  |  |  | By:           |  | /S/    JAMES R.
SULAT                            
|                 |  |  |  |               |  | James R. Sulat                                   
|                 |  |  |  |               |  | Chief Executive Officer & Chief Financial Officer



33