<PAGE>

                                 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 June 30, 2000

                       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 ____
                                   -----


As of August 1, 2000, there were 32,353,236 shares of the registrant's common
stock outstanding.
<PAGE>

                                 MAXYGEN, INC.
                                   FORM 10-Q
                          QUARTER ENDED JUNE 30, 2000

INDEX

Part I    FINANCIAL INFORMATION

<TABLE>
<S>                                                                                                      <C>
Item 1:  Condensed Consolidated Financial Statements and Notes:

         Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000......................     3

         Condensed Consolidated Statements of Operations for the three and six month periods ended
         June 30, 1999 and 2000...............................................................................     4

         Condensed Consolidated Statements of Cash Flows for the six month periods ended
         June 30, 1999 and 2000...............................................................................     5

         Notes to Condensed Consolidated Financial Statements.................................................     6

Item 2:  Management's Discussion and Analysis of Financial Condition and Results of Operations................    10

Item 3:  Quantitative and Qualitative Disclosures About Market Risk...........................................    22

Part II  OTHER INFORMATION

Item 1:  Legal Proceedings....................................................................................    23

Item 2:  Changes in Securities and Use of Proceeds............................................................    23

Item 3:  Defaults Upon Senior Securities......................................................................    23

Item 4:  Submission of Matters to a Vote of Security Holders..................................................    23

Item 5:  Other Information....................................................................................    24

Item 6:  Exhibits and Reports on Form 8-K.....................................................................    24

SIGNATURES....................................................................................................    25
</TABLE>
<PAGE>

================================================================================
Part I - Financial Information
Item 1
Financial Statements


                                 MAXYGEN, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
              (in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
                                                                                       December 31,          June 30,
                                                                                          1999                 2000
                                                                                       -----------           --------
                                                                                         (Note 1)           (unaudited)
<S>
ASSETS                                                                                 <C>                  <C>
Current assets:
 Cash and cash equivalents...........................................................   $136,343              $213,923
 Short-term investments..............................................................         --                 9,995
 Grant and other receivables.........................................................      3,038                 6,087
 Prepaid expenses and other current assets...........................................        800                 1,151
                                                                                        --------             ---------
  Total current assets...............................................................    140,181               231,156
                                                                                        --------             ---------
 Property and equipment, net.........................................................      4,764                 5,208
 Long-term investments...............................................................         --                46,835
 Deposits and other assets...........................................................        633                 1,387
                                                                                        --------             ---------
  Total assets.......................................................................   $145,578             $ 284,586
                                                                                        ========             =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable....................................................................   $    370             $     894
 Accrued compensation................................................................        393                 1,843
 Other accrued liabilities...........................................................      1,803                 2,704
 Deferred revenue....................................................................      4,935                 4,686
 Current portion of equipment financing obligations..................................        170                   392
                                                                                        --------             ---------
Total current liabilities............................................................      7,671                10,519
Deferred revenue.....................................................................      2,527                 2,127
Non-current portion of equipment financing obligations...............................      1,664                 1,579
Commitments
Stockholders' equity:
  Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized,
   no shares issued and outstanding at December 31, 1999 and June 30, 2000,
   respectively......................................................................         --                    --
  Common stock, $0.0001 par value: 70,000,000 shares and 100,000,000 shares
   authorized at December 31, 1999 and June 30, 2000, respectively,
   30,860,781, and 32,350,519 shares issued and outstanding at December 31,
   1999 and June 30, 2000, respectively..............................................          3                     3
 Additional paid-in capital..........................................................    176,517               317,755
 Notes receivable from stockholders..................................................     (1,411)                 (920)
 Deferred stock compensation.........................................................    (17,216)              (12,186)
 Accumulated other comprehensive loss................................................         --                  (130)
 Accumulated deficit.................................................................    (24,177)              (34,161)
                                                                                        --------             ---------
  Total stockholders' equity.........................................................    133,716               270,361
                                                                                        --------             ---------
  Total liabilities and stockholders' equity.........................................   $145,578             $ 284,586
                                                                                        ========             =========
</TABLE>

                            See accompanying notes.
<PAGE>

                                 MAXYGEN, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                     Three Months ended                   Six Months ended
                                                                          June 30,                             June 30,
                                                                 --------------------------           --------------------------
                                                                    1999             2000              1999               2000
                                                                 --------          --------           --------          --------
<S>                                                              <C>               <C>                <C>               <C>
Collaborative research and development revenue..............     $  2,042          $  3,195           $  3,372          $  6,241
Grant revenue...............................................        1,566             2,960              2,550             5,328
                                                                 --------          --------           --------          --------
Total revenues..............................................        3,608             6,155              5,922            11,569
Operating expenses:
   Research and development (Including charges for
    stock compensation of $274 and $1,891 in the
    three months ended June 30, 1999 and 2000,
    respectively, and $512 and $5,456 in the six
    months ended June 30, 1999 and 2000,
    respectively)...........................................        4,746             9,719              7,538            19,501
   General and administrative (Including charges for
    stock compensation of $285 and $1,300 in the three
    months ended June 30, 1999 and 2000, respectively,
    and $580 and $2,675 in the six months ended June
    30, 1999 and 2000, respectively)........................        1,454             4,143              2,445             7,531
   Acquired In-Process Research and Development.............           --               912                 --               912
                                                                 --------          --------           --------          --------
Total operating expenses....................................        6,200            14,774              9,983            27,944
                                                                 --------          --------           --------          --------
Loss from operations........................................       (2,592)           (8,619)            (4,061)          (16,375)
Interest income (expense), net..............................          192             4,275                362             6,391
                                                                 --------          --------           --------          --------
Net loss....................................................     $ (2,400)         $ (4,344)          $ (3,699)         $ (9,984)
                                                                 ========          ========           ========          ========
Basic and diluted net loss per share........................        (0.31)            (0.14)             (0.49)            (0.34)
Shares used in computing basic and diluted net
   loss per share...........................................        7,813            30,188              7,512            29,125
</TABLE>

                            See accompanying notes.
<PAGE>

                                 MAXYGEN, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                     (in thousands, except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                                Six Months ended
                                                                                                    June 30,
                                                                                          ---------------------------
                                                                                           1999                2000
                                                                                          -------            --------
<S>                                                                                       <C>                <C>
Operating activities
Net loss..........................................................................        $(3,699)           $ (9,984)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization...................................................            222                 649
  Deferred stock compensation amortization - employees............................          1,092               6,093
  Common stock issued and stock options granted to
     consultants for services rendered............................................            835               2,038
  Acquired in-process research and development....................................             --                 912
  Changes in operating assets and liabilities:
     Grant and other receivables..................................................         (2,072)             (3,049)
     Prepaid expenses and other current assets....................................           (179)               (351)
     Deposits and other assets....................................................           (154)               (754)
     Accounts payable.............................................................            222                 524
     Accrued compensation.........................................................            111               1,450
     Other accrued liabilities....................................................            150                 816
     Deferred revenue.............................................................          2,896                (649)
     Related party payables.......................................................           (105)                 --
                                                                                          -------            --------
Net cash used in operating activities.............................................           (681)             (2,305)
                                                                                          -------            --------
Investing activities
Purchases of available-for-sale securities........................................             --             (56,960)
Acquisition of property and equipment.............................................         (3,168)             (1,093)
                                                                                          -------            --------
Net cash used in investing activities.............................................         (3,168)            (58,053)
                                                                                          -------            --------
Financing activities
Borrowings under equipment financing obligation...................................             --                 166
Repayments under equipment financing obligation...................................             --                 (29)
Proceeds from issuance of common stock - net of issuance costs....................              4             137,367
Proceeds from issuance of convertible preferred stock - net of
  issuance cost...................................................................         19,917                  --
Repurchase of common stock........................................................             --                 (57)
Payments received on promissory notes.............................................             --                 491
                                                                                          -------            --------
Net cash provided by financing activities.........................................         19,921             137,938
                                                                                          -------            --------
Net increase in cash and cash equivalents.........................................         16,072              77,580
Cash and cash equivalents at beginning of period..................................         15,306             136,343
                                                                                          -------            --------
Cash and cash equivalents at end of period........................................        $31,378            $213,923
                                                                                          =======            ========
Non-cash financing activities
Shares issued to acquire a business...............................................             --                 827

</TABLE>

                            See accompanying notes.
<PAGE>

                                 MAXYGEN, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)



1.  Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. The information as of June 30, 2000 and for the three
months and six months ended June 30, 1999 and June 30, 2000 includes all
adjustments (consisting only of normal recurring adjustments) that the
management of the Company believes necessary for fair presentation of the
results for the periods presented.

Results for any interim period are not necessarily indicative of results for any
future interim period or for the entire year. The accompanying consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Report on Form 10-K for the year
ended December 31, 1999.

Revenue Recognition

Non-refundable up-front payments received in connection with research and
development collaboration agreements, including technology advancement funding
that is intended for the development of the Company's core technology, are
deferred and recognized on a straight-line basis over the relevant periods
specified in the agreement, generally the research term.

Revenue related to collaborative research with the Company's corporate
collaborators is recognized as research services are performed over the related
funding periods for each contract. Under these agreements, the Company is
required to perform research and development activities as specified in each
respective agreement. The payments received under each respective agreement are
not refundable and are generally based on a contractual cost per full-time
equivalent employee working on the project. Research and development expenses
under the collaborative research agreements approximate or exceed the 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. Milestone and royalty payments, if any, will be recognized
pursuant to collaborative agreements upon the achievement of specified
milestones.

The Company has also been awarded Defense Advanced Research Projects Agency
grants and National Institute of Standards and Technology-Advanced Technology
Program grants for various research and development projects. The terms of these
grant agreements are three years. Revenue related to grant agreements is
recognized as related research and development expenses are incurred.

Net loss per share

Basic and diluted net loss per common share are presented in conformity with the
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), for all periods presented. In accordance with SFAS 128, basic and diluted
net loss per share has been computed using the weighted-average number of shares
of common stock outstanding during the period, less shares subject to
repurchase. Pro forma basic and diluted net loss per common share, as presented
below, has been computed for the three and six months ended June 30, 1999 as
described above, and also gives effect to the conversion of the
<PAGE>

convertible preferred stock that automatically converted to common stock
immediately prior to the completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.

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

<TABLE>
<CAPTION>
                                                                             Three Months ended           Six Months ended
                                                                                  June 30,                    June 30,
                                                                         -------------------------   --------------------------
                                                                             1999          2000           1999          2000
                                                                         ------------  -----------   ------------  ------------
<S>                                                                      <C>           <C>           <C>           <C>
Net Loss...............................................................  $    (2,400)  $    (4,344)  $    (3,699)  $    (9,984)
                                                                         ===========   ===========   ===========   ===========
Basic and diluted:
  Weighted-average shares of common stock outstanding..................    9,312,615    32,314,264     9,276,016    31,645,946
  Less: weighted-average shares subject to repurchase..................   (1,499,632)   (2,126,193)   (1,764,003)   (2,520,732)
                                                                         -----------   -----------   -----------   -----------
  Weighted-average shares used in computing basic and
   diluted net loss per share..........................................    7,812,983    30,188,071     7,512,013    29,125,214
                                                                         ===========   ===========   ===========   ===========
Basic and diluted net loss per share...................................  $     (0.31)  $     (0.14)  $     (0.49)  $     (0.34)
                                                                         ===========   ===========   ===========   ===========
Pro forma:
  Shares used above....................................................    7,812,983                   7,512,013
  Pro forma adjusted to reflect weighted effect of
   conversion of convertible preferred stock
   (unaudited).........................................................    8,660,468                   8,061,068
                                                                         -----------                 -----------
 Shares used in computing pro forma basic and
   diluted net loss per share (unaudited)..............................   16,473,451                  15,573,081
                                                                         -----------                 -----------
Pro forma basic and diluted net loss per share
  (unaudited)..........................................................  $     (0.15)                $     (0.24)
                                                                         ===========                 ===========
</TABLE>

The Company has excluded all convertible preferred stock, outstanding stock
options, and shares subject to repurchase from the calculation of diluted loss
per common share because all such securities are antidilutive for all applicable
periods presented.  The total number of shares excluded from the calculations of
diluted net loss per share, prior to application of the treasury stock method
for options, was 3,462,000 at June 30, 1999 and 5,119,000 at June 30, 2000.
Such securities, had they been dilutive, would have been included in the
computations of diluted net loss per share along with restricted common stock
subject to the Company's right of repurchase.

Comprehensive loss

Comprehensive loss is primarily comprised of net unrealized gains or losses on
available-for-sale securities.  There is no material difference between the
reported net loss and the comprehensive net loss for all the periods presented.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133").  SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value.  Derivatives that
are not hedges must be adjusted to fair value through net income.  If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in the
other comprehensive income until the hedged item is recognized in earnings.  The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings.  SFAS 133 is effective for the Company's year ending
December 31, 2001.  The Company does not currently hold any derivatives and does
not expect this pronouncement to materially impact results of operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") that
must be adopted in the quarter ended
<PAGE>

December 31, 2000. SAB 101 summarizes certain areas of the Staff's views in
applying generally accepted accounting principles to revenue in financial
statements and specifically addresses revenue recognition for non-refundable
technology access fees. The Company believes that its current revenue
recognition principles comply with SAB 101 and thus the adoption is not expected
to have any effect on results of operations.

2.  Investments

Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company's debt securities are classifies as available-for-sale and are
carried at estimated fair value in cash equivalents and short-term 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 are included in
interest income and expense.  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 June 30, 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                               Gross            Gross
                                                              Amortized      Unrealized       Unrealized      Estimated
                                                                Cost            Gains           Losses        Fair Value
                                                              ---------      -----------      ----------      ----------
<S>                                                           <C>            <C>              <C>             <C>
Money market funds........................................    $  75,272        $    --         $    --        $  75,272
Commercial paper..........................................      192,224             99            (141)         192,182
                                                              ---------        --------        -------        ---------
  Total...................................................      267,496             --            (141)         267,454
Less amounts classified as cash equivalents...............     (210,536)           (89)              1         (210,624)
                                                              ---------        --------        -------        ---------
Total investments.........................................    $  56,960        $    10         $  (140)       $  56,830
                                                              =========        ========        =======        =========
</TABLE>

Realized gains or losses on the sale of available-for-sale securities for the
three month periods ended June 30, 1999 and June 30, 2000 were insignificant.

At June 30, 2000, the contractual maturities of short-term investments were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                       Amortized   Estimated
                                                         Cost      Fair Value
                                                       ---------   ----------
          <S>                                          <C>         <C>
          Due within one year........................  $18,019      $ 17,952
          Due after one year.........................   38,941        38,878
                                                       =======      ========
                                                       $56,960      $ 56,830
</TABLE>

3.  Collaborative Agreement

Technological Resources PTY Limited

In January 2000, the Company entered into a three year collaborative research
and development agreement with Technological Resources PTY Limited, a wholly
owned subsidiary of Rio Tinto Limited ("TRPL"), to develop novel enzymatic
systems to increase the efficiency of carbon dioxide fixation in connection with
the combustion of fossil fuels and for other purposes more generally for use in
chemical bioprocessing and other applications.  Pursuant to the agreement, TRPL
agreed to provide nonrefundable research and development funding and technology
advancement payments of up to $2.7 million, as well as revenue sharing on
certain commercialized products and processes.

4.  Stockholders Equity--Follow-on Offering

On March 24, 2000, the Company completed a follow-on public offering of its
common stock.  A total of 1,500,000 shares were sold by the Company at a price
of $97.00 per share.  The offering resulted in net proceeds to the Company of
approximately $137.4 million.
<PAGE>

5.  Acquisition of Technology

On May 8, 2000, the Company acquired certain in-process technology through the
acquisition of a privately held California corporation.  In connection with the
acquisition, the Company issued 39,600 shares of Company common stock.  Pursuant
to the terms of the acquisition agreement, 18,500 shares of Company common stock
are being held in escrow until such time contingencies regarding the patents
related to the acquired technology are resolved.  Accordingly, the Company has
recorded a charge for acquired in-process research and development of $912,000
representing the fair value of the 21,100 shares delivered to the sellers at
closing, plus certain transaction expenses.  Shares in escrow will be valued and
accounted for when, and if, the contingencies are resolved and the shares are
delivered to the sellers.  Had the acquisition occurred on January 1, 1999, pro
forma revenue would be unchanged from amounts reported in the consolidated
financial statements and the pro forma net loss would have increased to $3.9
million and $10.2 million for the six months ended June 30, 1999 and 2000
respectively.

6.  Subsequent Events

On August 10, 2000, the Company completed its acquisition of ProFound Pharma
A/S, a Danish biotechnology company located in Copenhagen, Denmark.  ProFound
focuses on discovery and development of improved biopharmaceuticals applying a
broad proprietary technology platform, involving computer modeling,
derivatization of proteins and robotic high-throughput screening systems.  The
transaction will be accounted for as a purchase.  The Company issued 1,102,578
shares of its common stock and options to purchase an aggregate of 41,812 shares
of its common stock in connection with the acquisition of all of the equity
securities of ProFound.  A portion of the purchase price will be allocated to
in-process research and development and will result in a substantial one-time
charge against earnings in the third quarter of 2000.
<PAGE>

================================================================================

Forward Looking Statements

This report contains forward-looking statements within the meaning of federal
securities laws that relate to future events or our future financial
performance.  In some cases, you can identify forward-looking statements by
terminology such as  "may,"  "will,"  "should,"  "expect,"  "plan,"
"anticipate,"  "believe,"  "estimate,"  "predict,"  "intend,"  "potential" or
"continue" or the negative of these terms or other comparable terminology.
Risks and uncertainties and the occurrence of other events could cause actual
results to differ materially from these predictions.  Factors that could cause
or contribute to such differences include those discussed below under "--Risk
Factors," as well as those discussed in our Annual Report on Form 10-K for the
year ended December 31, 1999.

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.  We are under no duty to update any of the forward-looking
statements after the date of this report or to conform these statements to
actual results.

================================================================================

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

Overview

Maxygen was founded in May 1996 and began operations in March 1997.  To date, we
have generated revenues from research collaborations with large agriculture and
chemical companies and from government grants.  Our current collaborators are
Novo Nordisk, DuPont/Pioneer Hi-Bred, AstraZeneca, DSM and Rio Tinto.  Our
government grants are from the Defense Advanced Research Projects Agency and the
National Institute of Standards and Technology-Advanced Technology Program.

We have invested heavily in establishing our MolecularBreeding technologies.
These investments contributed to revenue increases from $2.7 million in 1998 to
$14.0 million in 1999 and $11.6 million in the six months ended June 30, 2000.
Our total headcount increased from 74 employees at the end of 1998 to 143
employees at the end of 1999 and 165 employees as of June 30, 2000, of whom 77%
were engaged in research and development.  Research and development consisted of
work for collaborators, government grant agencies and work advancing our
technologies.

We have incurred significant losses since our inception.  As of June 30, 2000,
our accumulated deficit was $34.2 million and total stockholders' equity was
$270.4 million. Operating expenses increased from $11.8 million in fiscal 1998,
to $26.7 million in fiscal 1999 and to $27.9 million for the six months ended
June 30, 2000. We expect to incur additional operating losses over at least the
next several years as we continue to expand our research and development efforts
and infrastructure.

On August 10, 2000, we completed our acquisition of ProFound Pharma A/S, a
Danish biotechnology company located in Copenhagen, Denmark.  ProFound focuses
on discovery and development of improved biopharmaceuticals applying a broad
proprietary technology platform, involving computer modeling, derivatization of
proteins and robotic high-throughput screening systems.  The transaction will be
accounted for as a purchase.  We issued 1,102,578 shares of our common stock and
options to purchase an aggregate of 41,812 shares of our common stock in
connection with the acquisition of all of the equity securities of ProFound.  A
portion of the purchase price will be allocated to in-process research and
development and will result in a significant one-time charge against earnings in
the third quarter of 2000.


<PAGE>

Source of Revenue and Revenue Recognition Policy

We recognize revenues from research collaboration agreements as earned upon
achievement of the performance requirements of the agreements. Revenue related
to grant agreements is recognized as related research and development expenses
are incurred.  Our existing corporate collaboration agreements with Rio Tinto,
DuPont/Pioneer Hi-Bred and AstraZeneca provide for research funding for a
specified number of full time researchers working in defined research programs.
Revenue related to these payments is earned as the related research work is
performed.  In addition, these collaborators make technology advancement
payments that are intended to fund development of our core technology, as
opposed to a defined research program.  These payments are recognized ratably
over the applicable funding period. Payments received that are related to future
performance are deferred and recognized as revenue as the performance
requirements are achieved.  As of June 30, 2000, we have deferred revenues of
approximately $6.8 million.  Our sources of potential revenue for the next
several years are likely to be license, research, technology advancement and
milestone payments under existing and possible future collaborative
arrangements, government research grants, and royalties from our collaborators
based on revenues received from any products commercialized under those
agreements.


Deferred Compensation

Deferred compensation for options granted to employees has been determined as
the difference between the deemed fair market value for financial reporting
purposes of our common stock on the date the applicable options were granted and
the exercise price. Deferred compensation for options granted to consultants has
been determined in accordance with Statement of Financial Accounting Standards
No. 123 as the fair value of the equity instruments issued. Deferred
compensation for options granted to consultants is periodically remeasured as
the underlying options vest.

In connection with the grant of stock options to employees, we recorded deferred
stock compensation of approximately $2.4 million in 1998 and $19.5 million in
1999.  These amounts were initially recorded as a component of stockholders'
equity and are being amortized as charges to operations over the vesting period
of the options using a graded vesting method.  We recognized stock compensation
expense of approximately $1.6 million in 1998, $4.9 million in 1999 and $6.1
million in the six months ended June 30, 2000.  The amortization expense relates
to options awarded to employees in all operating expense categories.  In
connection with the grant of stock options to consultants, we recorded stock
compensation expense of $0.3 million in 1998, $1.7 million in 1999 and $2.0
million in the six months ended June 30, 2000.

Results of Operations

     Revenues

Our total revenues increased from $3.6 million and $5.9 million in the three and
six months ended June 30, 1999, to $6.2 million and $11.6 million in the
comparable periods of 2000.  The increase was due primarily to the increased
activity related to our research collaborations with AstraZeneca, DuPont/Pioneer
Hi-Bred, DSM Anti-Infectives and Rio Tinto, new government grants and the
expansion of existing government grants.

     Research and Development Expenses

Our research and development expenses consist primarily of salaries and other
personnel-related expenses, facility costs, supplies and depreciation of
facilities and laboratory equipment. Research and development expenses increased
from $4.7 million and $7.5 million in the three and six months ended June 30,
1999, to $9.7 million and $19.5 million in the comparable periods of fiscal
2000.  The increase was due primarily to increased staffing and other personnel-
related costs to support our additional collaborative and internal research
efforts.  Also included in research and development expenses is stock
compensation expense of $274,000 and $512,000 in the three and six months end
June 30, 1999 and $1.9 million and $5.4 million in the comparable periods of
fiscal 2000.

Research and development expenses represented 132% and 127% of total revenues in
the three and six months ended June 30, 1999 and 158% and 169% of total revenues
in the comparable periods of 2000.  The increase as a percentage of total
revenues was due primarily to increased research and development activity offset
in part by the increase in our total revenue.  We expect to continue to devote
substantial resources to research and development, and we expect that research
and development expenses will continue to increase in absolute dollars.
<PAGE>

     General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel costs for
finance, human resources, business development, legal and general management, as
well as professional expenses, such as legal and accounting. General and
administrative expenses increased from $1.5 million and $2.4 million in the
three and six months ended June 30, 1999, to $4.1 million and $7.5 million in
the comparable periods of 2000. Expenses increased primarily due to increased
staffing necessary to manage and support our growth plus increased costs
associated with being a public company, offset in part by the growth in our
total revenues. Also included in general and administrative expenses is stock
compensation expense of $285,000 and $580,000 in the three and six months ended
June 30, 1999, and $1.3 million and $2.7 million in the comparable periods of
2000.

General and administrative expenses represented 40% and 41% of total revenues
for the three and six months ended June 30, 1999, and 67% and 65% of total
revenues for the comparable periods of 2000.  The increase as a percentage of
our total revenues was due primarily to increased staffing necessary to manage
and support our growth plus increased costs associated with being a public
company, offset in part by the growth in our total revenues.  We expect that our
general and administrative expenses will increase in absolute dollar amounts as
we expand our legal and accounting staff, add infrastructure and incur
additional costs related to being a public company, including directors' and
officers' insurance, investor relations programs and increased professional
fees.

     In-Process Research and Development

On May 8, 2000, we acquired certain in-process technology through the
acquisition of a privately held California corporation.  In connection with the
acquisition we issued 39,600 shares of our common stock.  Pursuant to the terms
of the acquisition agreement, 18,500 shares of our common stock are being held
in escrow until such time contingencies regarding the patents related to the
acquired technology are resolved.  Accordingly, we have recorded a charge for
acquired in-process research and development of $912,000 representing the fair
value of the 21,100 shares delivered to the sellers at closing, plus certain
transaction expenses.  Shares in escrow will be valued and accounted for when,
and if, the contingencies are resolved and the shares are delivered to the
sellers. As opportunities present themselves, we intend to continue to acquire
new technologies and companies; such acquisitions could lead to additional
direct and indirect expenses that could negatively affect our results of
operations.

On August 10, 2000 we completed the acquisition of ProFound Pharma A/S.  A
portion of the purchase price will be allocated to in-process research and
development and will result in a significant one-time charge against earnings in
the third quarter of 2000. It is not known at this time what portion of the
purchase price will be allocated to in-process research and development.

     Net Interest Income

Net interest income represents income earned on our cash, cash equivalents and
marketable securities net of interest expense. Net interest income increased
from $192,000 and $362,000 in the three and six months ended June 30, 1999 to
$4.3 million and $6.4 million in the comparable periods of 2000.  This increase
was due to higher average balances of cash, cash equivalents and marketable
securities.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private
placements and public offerings of equity securities, receiving aggregate
consideration from such sales totaling $302.5 million and research and
development funding from collaborators and government grants totaling
approximately $31.7 million.  As of June 30, 2000, we had $271 million in cash,
cash equivalents and marketable securities.

Our operating activities used cash of $681,000 in the six months ended June 30,
1999 and $2.3 million in the comparable periods of 2000. Uses of cash in
operating activities were primarily to fund net operating losses offset by
receipt of funding from collaborators that has been deferred.
<PAGE>

Net cash used in investing activities was $3.2 million and $58.1 million in the
six months ended June 30, 1999 and 2000, respectively.  The cash used in the
2000 period primarily represented purchases of available-for-sale securities.

Additions of property and equipment were $3.2 million in the six months ended
June 30, 1999 and $1.1 million in the comparable period of 2000.  We expect to
continue to make significant investments in the purchase of property and
equipment to support our expanding operations.  We may use a portion of our cash
to acquire or invest in complementary businesses, products or technologies, or
to obtain the right to use such complementary technologies.

Financing activities provided $19.9 million in the six months ended June 30,
1999 and $137.9 million in the comparable period of 2000.  The 2000 amount
primarily consists of the net proceeds we received from the sale of common stock
in a follow-on public offering in March 2000.

We expect cash flows from our existing corporate collaborators for the funding
of research and technology advancement to total approximately $12 million in
each of 2000 and 2001, and up to this amount in each of 2002 and 2003 if our
collaboration with DuPont/Pioneer Hi-Bred extends to fourth and fifth years.
DuPont/Pioneer Hi-Bred may terminate the agreement after three years, upon six
months notice if a specified milestone has not been met. The above amounts
include $1 million annually of technology advancement funding from AstraZeneca.
In lieu of making this payment, AstraZeneca can elect to purchase $3 million of
our equity securities at a 50% premium to the fair value of the securities on
the date of issuance. Cash flows from government grants are determined by the
expenses incurred by Maxygen. Total remaining committed grant funding amounts to
$20 million through fiscal 2002; however some grant programs are subject to a
yearly appropriations process in Congress and we may not receive funds under
existing grants because of budgeting constraints of the agency administering the
program.

We believe that our current cash, cash equivalents, short-term investments and
long-term investments together with funding received from collaborators and
government grants will be sufficient to satisfy our anticipated cash needs for
working capital and capital expenditures for at least the next two years.
However, it is possible that we will seek additional financing within this
timeframe. We may raise additional funds through public or private financing,
collaborative relationships or other arrangements. Additional funding, if
sought, may not be available on terms favorable to us. Further, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants. Our failure to raise capital
when needed may harm our business and operating results.

     RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

You should carefully consider the risks described below, together with all of
the other information included in this report, in considering our business and
prospects.  The risks and uncertainties described below are not the only ones
facing Maxygen.  Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business operations.  The
occurrence of any of the following risks could harm our business, financial
condition or results of operations.

We Have a History of Net Losses.  We Expect to Continue to Incur Net Losses and
We May Not Achieve or Maintain Profitability.

We have incurred net losses since our inception, including a net loss of
approximately $11.3 million for the year ended December 31, 1999 and $10.0
million for the six months ended June 30, 2000.  As of June 30, 2000, we had an
accumulated deficit of approximately $34.2 million.  We expect to have
increasing net losses and negative cash flow in the foreseeable future.  The
size of these net losses will depend, in part, on the rate of growth, if any, in
our contract revenues and on the level of our expenses.  To date, we have
derived all of our revenues from collaborations and grants and will continue to
do so in the foreseeable future. Revenues from collaborations and grants are
uncertain because our existing agreements have fixed terms and because our
ability to secure future agreements will depend upon our ability to address the
needs of our potential future collaborators.  We expect to spend significant
amounts to fund research and development and enhance our core technologies.  As
a result of our recently completed acquisition of ProFound Pharma A/S, we expect
costs to increase further due to expanded operations and integration costs
associated with the acquisition.  As a result, we expect that our operating
expenses will increase significantly in the near term and, consequently, we will
need to generate significant additional revenues to
<PAGE>

achieve profitability. Even if we do achieve profitability, we may not be able
to sustain or increase profitability on a quarterly or annual basis.

We Are an Early Stage Company Deploying Unproven Technologies.  If We Do Not
Develop Commercially Successful Products, We May Be Forced to Cease Operations.

You must evaluate us in light of the uncertainties and complexities affecting an
early stage biotechnology company. Our MolecularBreeding and other technologies
are new and in the early stage of development. We may not develop products that
prove to be safe and efficacious in any market, meet applicable regulatory
standards, are capable of being manufactured at reasonable costs, or can be
marketed successfully.

We may not be successful in the commercial development of products. Successful
products will require significant development and investment, including testing,
to demonstrate their cost-effectiveness prior to their commercialization. To
date, companies in the biotechnology industry have developed and commercialized
only a limited number of products. We have not proven our ability to develop and
commercialize products. Further, none of our potential vaccine or protein
therapeutic products are expected to enter clinical trials within the next year.
We must conduct a substantial amount of additional research and development
before any regulatory authority will approve any of our products. Our research
and development may not indicate that our products are safe and effective, in
which case regulatory authorities may not approve them. Problems frequently
encountered in connection with the development and utilization of new and
unproven technologies and the competitive environment in which we operate might
limit our ability to develop commercially successful products.

Commercialization of Our Technologies Depends On Collaborations With Other
Companies. If We Are Not Able to Find Collaborators in the Future, We May Not Be
Able to Develop Our Technologies or Products.

Since we do not currently possess the resources necessary to develop and
commercialize potential products that may result from our MolecularBreeding or
other technologies, or the resources to complete any approval processes that may
be required for these products, we must enter into collaborative arrangements to
develop and commercialize products. We have entered into collaborative
agreements with other companies to fund the development of certain new products
for specific purposes. These contracts expire after a fixed period of time. If
they are not renewed or if we do not enter into new collaborative agreements,
our revenues will be reduced and our products may not be commercialized.

We have limited or no control over the resources that any collaborator may
devote to our products. Any of our present or future collaborators may not
perform their obligations as expected. These collaborators may breach or
terminate their agreement with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner. Further, our
collaborators may elect not to develop products arising out of our collaborative
arrangements or devote sufficient resources to the development, manufacture,
market or sale of these products. If any of these events occur, we may not be
able to develop our technologies or commercialize our products.

We Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our
Collaborators or Any Inability to Commercialize Products Resulting from This
Research Could Harm Our Business.

An important part of our strategy involves conducting proprietary research
programs. We may pursue opportunities in fields that could conflict with those
of our collaborators. Moreover, disagreements with our collaborators could
develop over rights to our intellectual property. Any conflict with our
collaborators could reduce our ability to obtain future collaboration agreements
and negatively impact our relationship with existing collaborators, which could
reduce our revenues.

Certain of our collaborators could also become competitors in the future. Our
collaborators could develop competing products, preclude us from entering into
collaborations with their competitors, fail to obtain timely regulatory
approvals, terminate their agreements with us prematurely or fail to devote
sufficient resources to the development and commercialization of products. Any
of these developments could harm our product development efforts.

                                       14
<PAGE>

We will either commercialize products resulting from our proprietary programs
directly or through licensing to other companies. We have no experience in
manufacturing and marketing, and we currently do not have the resources or
capability to manufacture products on a commercial scale. In order for us to
commercialize these products directly, we would need to develop, or obtain
through outsourcing arrangements, the capability to manufacture, market and sell
products. We do not have these capabilities, and we may not be able to develop
or otherwise obtain the requisite manufacturing, marketing and sales
capabilities. If we are unable to successfully commercialize products resulting
from our proprietary research efforts, we will continue to incur losses.

We May Encounter Difficulties in Managing Our Growth. These Difficulties Could
Increase Our Losses.

We have experienced a period of rapid and substantial growth that has placed
and, if this growth continues, will place a strain on our human and capital
resources. If we are unable to manage this growth effectively, our losses could
increase. The number of our employees increased from 74 at December 31, 1998 to
143 at December 31, 1999 to 165 at June 30, 2000. Our revenues increased from
$2.7 million in 1998 to $14.0 million in 1999 and were $11.6 million for the six
months ended June 30, 2000. In addition, as a result of our recently completed
acquisition of ProFound Pharma A/S, we will grow as an even increased rate in
the third quarter. ProFound will immediately add 57 employees. Our ability to
manage our operations and growth effectively requires us to continue to expend
funds to enhance our operational, financial and management controls, reporting
systems and procedures and to attract and retain sufficient numbers of talented
employees. If we are unable to implement improvements to our management
information and control systems in an efficient or timely manner, or if we
encounter deficiencies in existing systems and controls, then management may
have access to inadequate information to manage our day-to-day operations.

Acquisitions Could Result in Operating Difficulties and Other Harmful
Consequences.

If appropriate opportunities present themselves, we intend to acquire businesses
and technologies that complement our capabilities. As set forth above in this
report, on August 10, 2000 we completed our acquisition of ProFound Pharma A/S,
a Danish biotechnology company. The process of integrating any acquisition may
create unforeseen operating difficulties and expenditures and is itself risky.
The areas where we may face difficulties include:

     .    diversion of management time (both ours and that of the acquired
          company) during the period of negotiation through closing and further
          diversion of such time after closing from focus on operating the
          businesses to issues of integration and future products;

     .    decline in employee morale and retention issues resulting from changes
          in compensation, reporting relationships, future prospects, or the
          direction of the business;

     .    the need to integrate each company's accounting, management
          information, human resource and other administrative systems to permit
          effective management and the lack of control if such integration is
          delayed or not implemented; and

     .    the need to implement controls, procedures and policies appropriate
          for a larger public company in companies that prior to acquisition had
          been smaller, private companies.

We have almost no experience in managing this integration process. Moreover, the
anticipated benefits of any or all of these acquisitions may not be realized.

Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets, any of which could
harm our business. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all. Even if available, this financing may be dilutive.


                                       15
<PAGE>


Since Our Technologies Can Be Applied to Many Different Industries, If We Focus
Our Efforts on Industries That Fail to Produce Viable Product Candidates, We May
Fail to Capitalize on More Profitable Areas.

We have limited financial and managerial resources. In light of the fact that
our technologies may be applicable to numerous, diverse industries, we will be
required to prioritize our application of resources to discrete efforts. This
requires us to focus on product candidates in selected industries and forego
efforts with regard to other products and industries. Our decisions may not
produce viable commercial products and may divert our resources from more
profitable market opportunities.

Public Perception of Ethical and Social Issues May Limit the Use of Our
Technologies, Which Could Reduce Our Revenues.

Our success will depend in part upon our ability to develop products discovered
through our MolecularBreeding or other technologies. Governmental authorities
could, for social or other purposes, limit the use of genetic processes or
prohibit the practice of our MolecularBreeding or other technologies. Ethical
and other concerns about our MolecularBreeding or other technologies,
particularly the use of genes from nature for commercial purposes, and products
resulting therefrom could adversely affect their market acceptance.

If the Public Does Not Accept Genetically Engineered Products, We Will Have Less
Demand for Our Products.

The commercial success of our potential products will depend in part on public
acceptance of the use of genetically engineered products including drugs, plants
and plant products. Claims that genetically engineered products are unsafe for
consumption or pose a danger to the environment may influence public attitudes.
Our genetically engineered products may not gain public acceptance. Negative
public reaction to genetically modified organisms and products could result in
greater government regulation of genetic research and resultant products,
including stricter labeling laws or regulations, and could cause a decrease in
the demand for our products.

The subject of genetically modified organisms has received negative publicity in
Europe, which has aroused public debate. The adverse publicity in Europe could
lead to greater regulation and trade restrictions on imports of genetically
altered products. If similar adverse public reaction occurs in the United
States, genetic research and resultant agricultural and other products could be
subject to greater domestic regulation and could cause a decrease in the demand
for our products.

Many Potential Competitors Who Have Greater Resources and Experience Than We Do
May Develop Products and Technologies That Make Ours Obsolete.

The biotechnology industry is characterized by rapid technological change, and
the area of gene research is a rapidly evolving field. Our future success will
depend on our ability to maintain a competitive position with respect to
technological advances. Rapid technological development by others may result in
our products and technologies becoming obsolete.

We face, and will continue to face, intense competition from organizations such
as large and small biotechnology companies, as well as academic and research
institutions and government agencies that are pursuing competing technologies
for modifying DNA and other proteins. These organizations may develop
technologies that are alternatives to our technologies. Further, our competitors
in the directed molecular evolution field may be more effective at implementing
their technologies to develop commercial products. Some of these competitors
have entered into collaborations with leading companies within our target
markets to produce enzymes for commercial purposes.

Any products that we develop through our MolecularBreeding and other
technologies will compete in multiple, highly competitive markets. Most of the
organizations competing with us in the markets for such products have greater
capital resources, research and development and marketing staffs and facilities
and capabilities, and greater experience in modifying DNA and proteins,
obtaining regulatory approvals, manufacturing products and marketing.

                                       16
<PAGE>

Accordingly, our competitors may be able to develop technologies and products
more easily, which would render our technologies and products and those of our
collaborators obsolete and noncompetitive.

Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our
Competitive Position.

Our success will depend in part on our ability to obtain patents and maintain
adequate protection of our other intellectual property for our technologies and
products in the U.S. and other countries.  If we do not adequately protect our
intellectual property, competitors may be able to practice our technologies and
erode our competitive advantage.  The laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the U.S., and many
companies have encountered significant problems in protecting their proprietary
rights in these foreign countries.  These problems can be caused by, for
example, a lack of rules and processes for defending intellectual property
rights.

The patent positions of biopharmaceutical and biotechnology companies, including
our patent position, are generally uncertain and involve complex legal and
factual questions.  We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. We will apply for patents covering both our
technologies and products as we deem appropriate. However, these applications
may be challenged and may not result in issued patents.  Our existing patents
and any future patents we obtain may not be sufficiently broad to prevent others
from practicing our technologies or from developing competing products.
Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies.  In addition, others
may challenge or invalidate our patents, or our patents may fail to provide us
with any competitive advantages.

We rely upon trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information. These measures may not provide adequate protection for our trade
secrets or other proprietary information. We seek to protect our proprietary
information by entering into confidentiality agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or
consultants may still disclose our proprietary information, and we may not be
able to meaningfully protect our trade secrets. In addition, others may
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets.

Litigation or Other Proceedings or Third Party Claims of Intellectual Property
Infringement Could Require Us to Spend Time and Money and Could Shut Down Some
of Our Operations.

Our commercial success depends in part on neither infringing patents and
proprietary rights of third parties, nor breaching any licenses that we have
entered into with regard to our technologies and products. Others have filed,
and in the future are likely to file, patent applications covering genes or gene
fragments that we may wish to utilize with our MolecularBreeding and other
technologies, or products that are similar to products developed with the use of
our MolecularBreeding and other technologies or alternative methods of
generating gene diversity. If these patent applications result in issued patents
and we wish to use the claimed technology, we would need to obtain a license
from the third party.

Third parties may assert that we are employing their proprietary technology
without authorization. In addition, third parties may obtain patents in the
future and claim that use of our technologies infringes these patents. We could
incur substantial costs and diversion of management and technical personnel in
defending ourselves against any of these claims or enforcing our patents or
other intellectual property rights against others. Furthermore, parties making
claims against us may be able to obtain injunctive or other equitable relief
that could effectively block our ability to further develop, commercialize and
sell products, and such claims could result in the award of substantial damages
against us. In the event of a successful claim of infringement against us, we
may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, if at
all. In that event, we could encounter delays in product introductions while we
attempt to develop alternative methods or products or be required to cease
commercializing effected products.

We routinely monitor the public disclosures of other companies operating in our
industry regarding their technological development efforts. If we determine that
these efforts violate our intellectual property or other rights, we intend to
take appropriate action, which could include litigation. Any action we take
could

                                       17
<PAGE>

result in substantial costs and diversion of management and technical
personnel. Furthermore, the outcome of any action we take to protect our rights
may not be resolved in our favor.

On April 27, 2000, we announced that we had initiated an arbitration proceeding
against Echira Biotechnology (then known as Energy BioSystems Corporation) in
connection with Echira's claim that it has developed a "new gene shuffling"
technology. We allege that Echira has breached the confidentiality provisions
and certain other terms of the Development and License Agreement entered into by
Echira and Maxygen in 1997, pursuant to which we disclosed confidential
information regarding our MolecularBreeding technologies to Echira.

If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional
Personnel We May Be Unable to Pursue Collaborations or Develop Our Own Products.

We are highly dependent on the principal members of our management and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to our success. We do not currently have sufficient executive
management personnel to execute fully our business plan. There is currently a
shortage of skilled executives, which is likely to continue. As a result,
competition for skilled personnel is intense, and the turnover rate can be high.
Although we believe we will be successful in attracting and retaining qualified
personnel, competition for experienced scientists from numerous companies and
academic and other research institutions may limit our ability to do so on
acceptable terms. Failure to attract and retain personnel could prevent us from
pursuing collaborations or developing our products or core technologies.


Our planned activities will require additional expertise in specific industries
and areas applicable to the products developed through our technologies. These
activities will require the addition of new personnel, including management, and
the development of additional expertise by existing management personnel. The
inability to acquire these services or to develop this expertise could impair
the growth, if any, of our business.

We Will Need Additional Capital in the Future. If Additional Capital is Not
Available, We Will Have to Curtail or Cease Operations.

Our future capital requirements will be substantial and will depend on many
factors including payments received under collaborative agreements and
government grants, the progress and scope of our collaborative and independent
research and development projects, the effect of any acquisitions, and the
filing, prosecution and enforcement of patent claims.

Changes may also occur that would consume available capital resources
significantly sooner than we expect. We may be unable to raise sufficient
additional capital. If we fail to raise sufficient funds, we will have to
curtail or cease operations. We anticipate that the net proceeds from our recent
public offerings and interest earned thereon, together with existing cash and
cash equivalents and anticipated cash flows from operations, will enable us to
maintain our currently planned operations for at least the next two years. If
our capital resources are insufficient to meet future capital requirements, we
will have to raise additional funds to continue the development of our
technologies and complete the commercialization of products, if any, resulting
from our technologies.

Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The
Government Has License Rights to Technology Developed With Its Funds.

We have received and expect to continue to receive significant funds under
various U.S. government research and technology development programs. The
government may significantly reduce funding in the future for a number of
reasons. For example, some programs are subject to a yearly appropriations
process in Congress. Additionally, we may not receive funds under existing or
future grants because of budgeting constraints of the agency administering the
program. There can be no assurance that we will receive the entire funding under
our existing or future grants.

Our grants provide the U.S. government a non-exclusive, non-transferable, paid-
up license to practice for or on behalf of the U.S. inventions made with federal
funds. If the government exercises these rights, the U.S. government could use
these inventions and Maxygen's potential market could be reduced.

                                       18
<PAGE>

Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain
Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be
Able to Commercialize Those Products.

The Food and Drug Administration must approve any vaccine or therapeutic product
before it can be marketed in the U.S. Before we can file a new drug application
or biologic license application with the FDA, the product candidate must undergo
extensive testing, including animal and human clinical trials, which can take
many years and require substantial expenditures. Data obtained from such testing
are susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new application or product license application may cause
delays or rejections. The regulatory process is expensive and time consuming.

Because our products involve the application of new technologies and may be
based upon new therapeutic approaches they may be subject to substantial review
by government regulatory authorities and government regulatory authorities may
grant regulatory approvals more slowly for our products than for products using
more conventional technologies. We have not submitted an application to the FDA
or any other regulatory authority for any product candidate, and neither the FDA
nor any other regulatory authority has approved any therapeutic product
candidate developed with our MolecularBreeding technologies for
commercialization in the U.S. or elsewhere. We or any of our collaborators may
not be able to conduct clinical testing or obtain the necessary approvals from
the FDA or other regulatory authorities for our products. The regulatory
agencies of foreign governments must also approve our therapeutic products
before the products can be sold in those other countries.

Even after investing significant time and expenditures we may not obtain
regulatory approval for our products. Even if we receive regulatory approval,
this approval may entail limitations on the indicated uses for which we can
market a product. Further, once regulatory approval is obtained, a marketed
product and its manufacturer are subject to continual review, and discovery of
previously unknown problems with a product or manufacturer may result in
restrictions on the product, manufacturer and manufacturing facility, including
withdrawal of the product from the market. In certain countries, regulatory
agencies also set or approve prices.

Laws May Limit Our Provision of Genetically Engineered Agricultural Products in
the Future. These Laws Could Reduce Our Ability to Sell These Products.

We may develop genetically engineered agricultural products. The field testing,
production and marketing of genetically engineered plants and plant products are
subject to federal, state, local and foreign governmental regulation. Regulatory
agencies administering existing or future regulations or legislation may not
allow us to produce and market our genetically engineered products in a timely
manner or under technically or commercially feasible conditions. In addition,
regulatory action or private litigation could result in expenses, delays or
other impediments to our product development programs or the commercialization
of resulting products.

The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as applied to foods developed through traditional
plant breeding. However, genetically engineered food products will be subject to
premarket review if these products raise safety questions or are deemed to be
food additives. Our products may be subject to lengthy FDA reviews and
unfavorable FDA determinations if they raise questions, are deemed to be food
additives, or if the FDA changes its policy.

The FDA has also announced in a policy statement that it will not require that
genetically engineered agricultural products be labeled as such, provided that
these products are as safe and have the same nutritional characteristics as
conventionally developed products. The FDA may reconsider or change its labeling
policies, or local or state authorities may enact labeling requirements. Any
such labeling requirements could reduce the demand for our products.

The U.S. Department of Agriculture prohibits genetically engineered plants from
being grown and transported except pursuant to an exemption, or under strict
controls. If our future products are not exempted by the USDA, it may be
impossible to sell such products.

                                       19
<PAGE>

Adverse Events in the Field of Gene Therapy May Negatively Impact Regulatory
Approval or Public Perception of Any Gene Therapy Products We or Our
Collaborators May Develop.

Currently, we are not engaged in developing gene therapy products; however, we
may engage in these activities in the future either for our own account or with
collaborators. If we or our collaborators develop gene therapy products, these
products may encounter substantial delays in development and approval due to the
government regulation and approval process. A recent death and other adverse
events reported in gene therapy clinical trials may lead to more government
scrutiny of proposed clinical trials of gene therapy products, stricter labeling
requirements for these products and delays in the approval of gene therapy
products for commercial sale.

The commercial success of any potential gene therapy products made by us or our
collaborators will depend in part on public acceptance of the use of gene
therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapies are unsafe, and gene therapy
products may not gain the acceptance of the public or the medical community.
Negative public reaction to gene therapy could result in a decrease in demand
for any gene therapy products we or our collaborators may develop.

Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on
Pharmaceutical Products.

Our future products are expected to include pharmaceutical products.  Our
ability and that of our collaborators to commercialize pharmaceutical products
developed with our MolecularBreeding and other technologies may depend in part
on the extent to which reimbursement for the cost of these products will be
available from government health administration authorities, private health
insurers and other organizations.  Third-party payors are increasingly
challenging the price of medical products and services.  Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and there can be no assurance that adequate third party coverage will be
available for any product to enable us to maintain price levels sufficient to
realize an appropriate return on our investment in research and product
development.

Our Collaborations With Outside Scientists May Be Subject to Change, Which Could
Limit Our Access to Their Expertise.

We work with scientific advisors and collaborators at academic and other
institutions. These scientists are not our employees and may have other
commitments that would limit their availability to us. Although our scientific
advisors generally agree not to do competing work, if a conflict of interest
between their work for us and their work for another entity arises, we may lose
their services. Although our scientific advisors and collaborators sign
agreements not to disclose our confidential information, it is possible that
certain of our valuable proprietary knowledge may become publicly known through
them.

We May Be Sued for Product Liability.

We may be held liable if any product we develop, or any product that is made
with the use or incorporation of, any of our technologies, causes injury or is
found otherwise unsuitable during product testing, manufacturing, marketing or
sale. These risks are inherent in the development of chemical, agricultural and
pharmaceutical products. Although we intend to obtain product liability
insurance, this insurance may be prohibitively expensive, or may not fully cover
our potential liabilities. Inability to obtain sufficient insurance coverage at
an acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or our collaborators. If we are sued for any injury caused by our products,
our liability could exceed our total assets.

We Use Hazardous Chemicals and Radioactive and Biological Materials in Our
Business. Any Claims Relating to Improper Handling, Storage or Disposal of These
Materials Could Be Time Consuming and Costly.

Our research and development processes involve the controlled use of hazardous
materials, including chemicals, radioactive and biological materials. Some of
these materials may be novel, including viruses with novel properties and animal
models for the study of viruses. Our operations also produce hazardous waste
products. Some of our work also involves the development of novel viruses and
viral animal models. We cannot eliminate the risk of accidental contamination or
discharge and any resultant injury from these materials. Federal, state and
local laws and regulations govern the use, manufacture, storage,

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<PAGE>

handling and disposal of these materials. We believe that our current operations
comply in all material respects with these laws and regulations. We could be
subject to civil damages in the event of an improper or unauthorized release of,
or exposure of individuals to, hazardous materials. In addition, claimants may
sue us for injury or contamination that results from our use or the use by third
parties of these materials, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development, or
production efforts. We believe that our current operations comply in all
material respects with applicable Environmental Protection Agency regulations.

In addition, certain of our collaborators are working with these types of
hazardous materials in connection with our collaborations. To our knowledge, the
work is performed in accordance with biosafety regulations. In the event of a
lawsuit or investigation, we could be held responsible for any injury caused to
persons or property by exposure to, or release of, these viruses and hazardous
materials. Further, under certain circumstances, we have agreed to indemnify our
collaborators against all damages and other liabilities arising out of
development activities or products produced in connection with these
collaborations.

Our Stock Price Has Been, and May Continue to Be, Extremely Volatile.

The trading prices of life science company stocks in general, and ours in
particular, have experienced extreme price fluctuations in recent months. The
valuations of many life science companies without consistent product revenues
and earnings, including ours, are extraordinarily high based on conventional
valuation standards such as price to earnings and price to sales ratios. These
trading prices and valuations may not be sustained. Any negative change in the
public's perception of the prospects of biotechnology or life science companies
could depress our stock price regardless of our results of operations. Other
broad market and industry factors may decrease the trading price of our common
stock, regardless of our performance. Market fluctuations, as well as general
political and economic conditions such as recession or interest rate or currency
rate fluctuations, also may decrease the trading price of our common stock. In
addition, our stock price could be subject to wide fluctuations in response to
factors including the following:

     .    announcements of new technological innovations or new products by us
          or our competitors;

     .    changes in financial estimates by securities analysts;

     .    conditions or trends in the biotechnology and life science industries;

     .    changes in the market valuations of other biotechnology or life
          science companies;

     .    developments in domestic and international governmental policy or
          regulations;

     .    announcements by us or our competitors of significant acquisitions,
          strategic partnerships, joint ventures or capital commitments;

     .    developments in patent or other proprietary rights;

     .    period-to-period fluctuations in our operating results;

     .    future royalties from product sales, if any, by our strategic
          partners; and

     .    sales of our common stock or other securities in the open market.


In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities.  If a stockholder files a securities class action suit against us,
we would incur substantial legal fees and our management's attention and
resources would be diverted from operating our business in order to respond to
the litigation.

We Expect that Our Quarterly Results of Operations Will Fluctuate, and This
Fluctuation Could Cause Our Stock Price to Decline.

Our quarterly operating results have fluctuated in the past and are likely to do
so in the future. These fluctuations could cause our stock price to fluctuate
significantly or decline. Some of the factors that could cause our operating
results to fluctuate include:

     .    expiration of research contracts with collaborators or government
          research grants, which may not be renewed or replaced;

     .    the success rate of our discovery efforts leading to milestones and
          royalties;

     .    the timing and willingness of collaborators to commercialize our
          products, which would result in royalties; and

                                       21
<PAGE>

     .    general and industry specific economic conditions, which may affect
          our collaborators' research and development expenditures.

A large portion of our expenses are relatively fixed, including expenses for
facilities, equipment and personnel. Accordingly, if revenues decline or do not
grow as anticipated due to expiration of research contracts or government
research grants, failure to obtain new contracts or other factors, we may not be
able to correspondingly reduce our operating expenses. In addition, we plan to
significantly increase operating expenses in 2000. Failure to achieve
anticipated levels of revenues could therefore significantly harm our operating
results for a particular fiscal period.

Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. Our operating results in some quarters may
not meet the expectations of stock market analysts and investors. In that case,
our stock price would probably decline.

Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make
Decisions that Are in the Best Interests of All Stockholders.

Our officers, directors and principal stockholders (greater than 5%
stockholders) together control approximately 43% of our outstanding common
stock, including Glaxo Wellcome International B.V. which owns approximately 18%
of our outstanding common stock. As a result, these stockholders, if they act
together, and Glaxo Wellcome International B.V. by itself, are able to exert a
significant degree of influence over our management and affairs and over matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. In addition, this concentration of
ownership may delay or prevent a change in control of Maxygen and might affect
the market price of our common stock, even when a change may be in the best
interests of all stockholders. In addition, the interests of this concentration
of ownership may not always coincide with our interests or the interests of
other stockholders and accordingly, they could cause us to enter into
transactions or agreements that we would not otherwise consider.

Item 3
Quantitative And Qualitative Disclosures About Market Risk


Interest Rate Risk

The primary objective of our investment activities is to preserve the principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents, short-
term and long-term investments in a variety of securities, including corporate
obligations and money market funds. As of June 30, 2000, approximately 83% of
our total portfolio will mature in one year or less, with the remainder maturing
in less than two years.

The following table represents the fair value balance of our cash, cash
equivalents, short-term and long-term investments that are subject to interest
rate risk by year of expected maturity and average interest rates as of June 30,
2000 (dollars in thousands):

                                               2000            2001
          Cash equivalents...............    $213,923             --
          Average interest rates.........        6.57%            --

          Short-term investments.........    $  9,995             --
          Average interest rates.........        6.41%            --

          Long-term investments..........          --        $46,835
          Average interest rates.........          --           7.19%

We did not hold derivative instruments as of June 30, 2000, and we have never
held such instruments in the past. In addition, we had outstanding debt,
consisting of borrowings under an equipment financing line of credit, of $2.0
million as of June 30, 2000, with a range of interest rates of between 11.73%
and 12.78%.

                                       22
<PAGE>

Foreign Currency Risk


Currently the majority of our revenue and expenses are denominated in U.S.
dollars and as a result we have experienced no significant foreign exchange
gains and losses to date. While we expect to effect some transactions in foreign
currencies during 2000, we do not expect that foreign exchange gains or losses
will be significant. We have not engaged in foreign currency hedging to date.

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<PAGE>

Part II - Other Information



Item 1
Legal Proceedings


Not applicable.



Item 2
Changes in Securities and Use of Proceeds


On May 8, 2000, we completed the acquisition of a privately held California
corporation. We acquired all the outstanding stock of the corporation from its
existing shareholders in exchange for 39,600 shares of our common stock.

The issuance of securities in the transaction described in the paragraph above
was deemed to be exempt from registration under the Securities Act of 1933, as
amended, pursuant to Regulation D promulgated thereunder. Each purchaser of
Maxygen securities represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. The stock
certificates were issued with a legend to the effect that such securities had
not been registered under the Securities Act or any state securities laws and
could not be sold or transferred in the absence of such registration or an
exemption therefrom. All recipients, either alone or with a duly appointed
purchaser representative, were knowledgeable, sophisticated and experienced in
making investment decisions of this kind and received adequate information about
the registrant.

The effective date of our first registration statement, filed on Form S-1 under
the Securities Act of 1933 (No. 333-89413) relating to our initial public
offering of common stock, was December 15, 1999. A total of 6,900,000 shares of
our common stock were sold at a price of $16.00 per share to an underwriting
syndicate led by Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc. and
Invemed Associates LLC. Of these 6,900,000 shares, 900,000 were issued upon
exercise of the underwriters' over-allotment option. The offering commenced on
December 16, 1999 and closed on December 21, 1999. The initial public offering
resulted in gross proceeds of $110.4 million, $7.7 million of which was applied
toward the underwriting discount. Expenses related to the offering totaled
approximately $1.7 million. Net proceeds to us were approximately $101.0
million. From the time of receipt through June 30, 2000, the proceeds were
applied toward:

     .    purchases and installation of equipment and build-out of facilities,
          $1.1 million.

     .    repayment of indebtedness, $29,000;

     .    working capital, $2.7 million; and

     .    temporary investments in certificates of deposits, mutual funds and
          corporate debt securities, $97.2 million.


Item 3
Defaults Upon Senior Securities


Not applicable.


Item 4
Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on May 25, 2000. The
following is a brief description of each matter voted upon at the meeting and
the number of votes cast for, withheld, or against and the number of abstentions
with respect to each matter. Each director proposed by the Company was elected
and the two management proposals were approved by the stockholders.

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<PAGE>

(a)  The stockholders reelected the seven nominees for the Company's Board of
     Directors:


                                     Shares Voted For              Shares
                Candidate               Candidate                 Withheld
          Russell J. Howard...........  26,570,958                  6,557
          Isaac Stein.................  26,570,743                  6,772
          Robert J. Glaser............  26,570,198                  7,317
          M.R.C. Greenwood............  26,570,898                  6,617
          Adrian Hennah...............  26,232,474                345,041
          Gordon Ringold..............  26,570,808                  6,707
          George Poste................  26,570,768                  6,747

(b)  The stockholders approved the proposed amendment to the 1997 Stock Option
Plan to increase the number of shares of common stock reserved for issuance
thereunder by 1,500,000 shares, from 7,500,000 to 9,000,000:


                     Shares voted for......................... 25,475,640
                     Shares voted against.....................  1,095,470
                     Shares abstaining........................      6,405
                     Broker non-votes.........................          0

(c)  The stockholders approved the proposed amendment to the Certificate of
Incorporation to increase the number of shares of common stock authorized by
30,000,000 shares, from 70,000,000 to 100,000,000:


                     Shares voted for......................... 26,313,433
                     Shares voted against.....................    258,561
                     Shares abstaining........................      5,521
                     Broker non-votes.........................          0


Item 5
Other Information


Not applicable.


Item 6
Exhibits and Reports on Form 8-K


(a)  The following exhibits are filed as part of this report:


          3.1   Amended and Restated Certificate of Incorporation


          3.2   Amended and Restated By-laws


          10.1  1997 Stock Option Plan, as amended


          10.2  Lease between Metropolitan Life Insurance Company and Maxygen,
                Inc. dated April 21, 2000


          27.1  Financial Data Schedule (EDGAR version only)

(b)  There were no reports on Form 8-K filed during the quarter ended June 30,
     2000.

                                       25
<PAGE>

================================================================================
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.



August 11, 2000          By: /s/ Russell J. Howard
                             -------------------------
                             Russell J. Howard
                             Chief Executive Officer



August 11, 2000          By: /s/ Simba Gill
                             -------------------------
                             Simba Gill
                             President, Chief Financial Officer and Senior Vice
                             President of Corporate Development

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