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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

Commission file number 000-28401

MAXYGEN, INC.

(Exact name of registrant as specified in its charter)



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

515 Galveston Drive

Redwood City, California 94063

(Address of principal executive offices,
including zip code)

(650) 298-5300

(Registrants telephone number, including area code)





Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes  x                    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ̈                    No   ̈

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



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

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

Yes   ̈                    No   x

As of April 30, 2009, there were 38,070,030 shares of the registrants common stock, $0.0001 par value per share, outstanding, which is the
only class of common or voting stock of the registrant issued.









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MAXYGEN, INC.

FORM 10-Q

QUARTER ENDED MARCH 31, 2009

INDEX



|           |  |                                                                                                           |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------- |  | --
|Part I     |  | FINANCIAL INFORMATION                                                                                     |  |   
|           |  |                                                                                                          
|Item 1:    |  | Financial Statements:                                                                                     |  |   
|           |  |                                                                                                          
|           |  | Condensed Consolidated Balance Sheets as of December 31, 2008 and March 31, 2009                          |  | 1 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2008 and 2009 |  | 2 
|           |  |                                                                                                          
|           |  | Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2008 and 2009 |  | 3 
|           |  |                                                                                                          
|           |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 4 
|           |  |                                                                                                          
|Item 2:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 16
|           |  |                                                                                                          
|Item 3:    |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 22
|           |  |                                                                                                          
|Item 4:    |  | Controls and Procedures                                                                                   |  | 22
|           |  |                                                                                                          
|Part II    |  | OTHER INFORMATION                                                                                         |  |   
|           |  |                                                                                                          
|Item 1:    |  | Legal Proceedings                                                                                         |  | 24
|           |  |                                                                                                          
|Item 1A:   |  | Risk Factors                                                                                              |  | 24
|           |  |                                                                                                          
|Item 2:    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                               |  | 39
|           |  |                                                                                                          
|Item 3:    |  | Defaults Upon Senior Securities                                                                           |  | 39
|           |  |                                                                                                          
|Item 4:    |  | Submission of Matters to a Vote of Security Holders                                                       |  | 39
|           |  |                                                                                                          
|Item 5:    |  | Other Information                                                                                         |  | 39
|           |  |                                                                                                          
|Item 6:    |  | Exhibits                                                                                                  |  | 40
|           | 
|SIGNATURES |  | 41                                                                                                       

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

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



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

Forward Looking Statements

This 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,
can, will, should, could, expect, plan, anticipate, believe, estimate, predict, intend, potential or
continue or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:



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



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



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



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



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



| |  |  | the effectiveness of our MolecularBreeding directed evolution platform and other technologies and processes;
| | - |  | -------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the attributes of any products we may develop; and
| | - |  | --------------------------------------------------



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

These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. Important factors that could cause our actual results to differ
materially from the forward-looking statements we make in this report are set forth in this report, including the factors described in the section entitled Item 1A  Risk Factors, as well as those discussed in our Annual Report
on Form 10-K for the year ended December 31, 2008.

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. Other than as
required by applicable law, we disclaim any obligation to update or revise any forward-looking statement contained in this report as a result of new information or future events or developments.



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PART I  FINANCIAL INFORMATION



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

MAXYGEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                              |  |                  |          |   |               |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------- | - | ---------- | -
|                                                                                                                                                                              |  | December 31,2008 |          |   | March 31,2009 |  
|ASSETS                                                                                                                                                                        |  |                  | (Note 1  | ) |               |   | (unaudited | )
|Current assets:                                                                                                                                                               |  |                  |          |   |               |   |            |  
|Cash and cash equivalents                                                                                                                                                     |  | $                | 154,883  |   |               | $ | 145,951    |  
|Short-term investments                                                                                                                                                        |  |                  | 51,600   |   |               |   | 54,917     |  
|Related party receivable                                                                                                                                                      |  |                  |         |   |               |   | 3,198      |  
|Accounts receivable and other receivables                                                                                                                                     |  |                  | 3,526    |   |               |   | 6,050      |  
|Prepaid expenses and other current assets                                                                                                                                     |  |                  | 1,201    |   |               |   | 1,049      |  
|                                                                                                                                                                              |  |                  |          |   |               |   |            |  
|Total current assets                                                                                                                                                          |  |                  | 211,210  |   |               |   | 211,165    |  
|Property and equipment, net                                                                                                                                                   |  |                  | 2,347    |   |               |   | 2,240      |  
|                                                                                                                                                                              |  |                  |          |   |               |   |            |  
|Total assets                                                                                                                                                                  |  | $                | 213,557  |   |               | $ | 213,405    |  
|                                                                                                                                                                              |  |                  |          |   |               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                          |  |                  |          |   |               |   |            |  
|Current liabilities:                                                                                                                                                          |  |                  |          |   |               |   |            |  
|Accounts payable                                                                                                                                                              |  | $                | 1,438    |   |               | $ | 1,845      |  
|Accrued compensation                                                                                                                                                          |  |                  | 2,579    |   |               |   | 1,871      |  
|Accrued restructuring charges                                                                                                                                                 |  |                  | 1,114    |   |               |   | 382        |  
|Accrued project costs                                                                                                                                                         |  |                  | 3,435    |   |               |   | 2,909      |  
|Other accrued liabilities                                                                                                                                                     |  |                  | 1,235    |   |               |   | 609        |  
|Deferred revenue                                                                                                                                                              |  |                  | 6,175    |   |               |   | 5,333      |  
|                                                                                                                                                                              |  |                  |          |   |               |   |            |  
|Total current liabilities                                                                                                                                                     |  |                  | 15,976   |   |               |   | 12,949     |  
|Non-current deferred revenue                                                                                                                                                  |  |                  | 3,069    |   |               |   | 2,618      |  
|Commitments and contingencies                                                                                                                                                 |  |                  |          |   |               |   |            |  
|Stockholders equity:                                                                                                                                                         |  |                  |          |   |               |   |            |  
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2008 and March 31,
2009                                     |  |                  |         |   |               |   |           |  
|Common stock, $0.0001 par value: 100,000,000 shares authorized, 37,510,502 and 38,049,179 shares issued and outstanding at December 31,
2008 and March 31, 2009, respectively |  |                  | 4        |   |               |   | 4          |  
|Additional paid-in capital                                                                                                                                                    |  |                  | 434,210  |   |               |   | 438,795    |  
|Accumulated other comprehensive loss                                                                                                                                          |  |                  | (8       | ) |               |   | (147       | )
|Accumulated deficit                                                                                                                                                           |  |                  | (239,694 | ) |               |   | (240,814   | )
|                                                                                                                                                                              |  |                  |          |   |               |   |            |  
|Total stockholders equity                                                                                                                                                    |  |                  | 194,512  |   |               |   | 197,838    |  
|                                                                                                                                                                              |  |                  |          |   |               |   |            |  
|Total liabilities and stockholders equity                                                                                                                                    |  | $                | 213,557  |   |               | $ | 213,405    |  
|                                                                                                                                                                              |  |                  |          |   |               |   |            |  

See accompanying notes.



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MAXYGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per
share data)



|                                                                                                                                                       |  |                             |         |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                                                       |  | Three months endedMarch 31, |        
|                                                                                                                                                       |  | 2008                        |         |   | 2009 |  
|                                                                                                                                                       |  | (unaudited)                 |        
|Collaborative research and development revenue                                                                                                         |  | $                           |        |   |      | $ | 3,996  |  
|Technology and license revenue (including amounts from related party:three months ended March 31, 2008$157; three months ended
March 31, 2009$3,606) |  |                             | 157     |   |      |   | 3,611  |  
|Grant revenue                                                                                                                                          |  |                             | 1,286   |   |      |   | 907    |  
|                                                                                                                                                       |  |                             |         |   |      |   |        |  
|Total revenues                                                                                                                                         |  |                             | 1,443   |   |      |   | 8,514  |  
|Operating expenses:                                                                                                                                    |  |                             |         |   |      |   |        |  
|Research and development                                                                                                                               |  |                             | 13,106  |   |      |   | 7,033  |  
|General and administrative                                                                                                                             |  |                             | 3,513   |   |      |   | 2,885  |  
|Restructuring charge                                                                                                                                   |  |                             | 533     |   |      |   | 98     |  
|                                                                                                                                                       |  |                             |         |   |      |   |        |  
|Total operating expenses                                                                                                                               |  |                             | 17,152  |   |      |   | 10,016 |  
|                                                                                                                                                       |  |                             |         |   |      |   |        |  
|Loss from operations                                                                                                                                   |  |                             | (15,709 | ) |      |   | (1,502 | )
|Interest income and other income (expense), net                                                                                                        |  |                             | 1,991   |   |      |   | 382    |  
|                                                                                                                                                       |  |                             |         |   |      |   |        |  
|Net loss                                                                                                                                               |  | $                           | (13,718 | ) |      | $ | (1,120 | )
|                                                                                                                                                       |  |                             |         |   |      |   |        |  
|Basic and diluted net loss per share                                                                                                                   |  | $                           | (0.37   | ) |      | $ | (0.03  | )
|Shares used in basic and diluted net loss per share calculations                                                                                       |  |                             | 36,996  |   |      |   | 37,900 |  

See accompanying notes.



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MAXYGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                       |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                       |  | Three months endedMarch 31, |        
|                                                                                                       |  | 2008                        |         |   | 2009 |  
|                                                                                                       |  | (unaudited)                 |        
|Operating activities                                                                                   |  |                             |         |   |      |   |         |  
|Net loss                                                                                               |  | $                           | (13,718 | ) |      | $ | (1,120  | )
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                          |  |                             | 568     |   |      |   | 281     |  
|Non-cash stock compensation                                                                            |  |                             | 1,230   |   |      |   | 1,452   |  
|Changes in operating assets and liabilities:                                                           |  |                             |         |   |      |   |         |  
|Related party receivable                                                                               |  |                             | 7,493   |   |      |   | (3,198  | )
|Accounts receivable and other receivables                                                              |  |                             | 297     |   |      |   | (2,524  | )
|Prepaid expenses and other current assets                                                              |  |                             | 280     |   |      |   | 152     |  
|Accounts payable                                                                                       |  |                             | 1,097   |   |      |   | 407     |  
|Accrued compensation                                                                                   |  |                             | (4,610  | ) |      |   | (708    | )
|Accrued restructuring charges                                                                          |  |                             | (3,666  | ) |      |   | (732    | )
|Accrued project costs                                                                                  |  |                             | (1,568  | ) |      |   | (526    | )
|Other accrued liabilities                                                                              |  |                             | (245    | ) |      |   | (626    | )
|Deferred revenue                                                                                       |  |                             |        |   |      |   | (1,293  | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                                                  |  |                             | (12,842 | ) |      |   | (8,435  | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Investing activities                                                                                   |  |                             |         |   |      |   |         |  
|Purchases of available-for-sale securities                                                             |  |                             | (24,023 | ) |      |   | (25,705 | )
|Maturities of available-for-sale securities                                                            |  |                             | 37,430  |   |      |   | 22,250  |  
|Acquisition of property and equipment                                                                  |  |                             | (174    | ) |      |   | (174    | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                                    |  |                             | 13,233  |   |      |   | (3,629  | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Financing activities                                                                                   |  |                             |         |   |      |   |         |  
|Proceeds from issuance of common stock                                                                 |  |                             | 617     |   |      |   | 3,132   |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                              |  |                             | 617     |   |      |   | 3,132   |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                   |  |                             | 1,008   |   |      |   | (8,932  | )
|Cash and cash equivalents at beginning of period                                                       |  |                             | 77,130  |   |      |   | 154,883 |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                             |  | $                           | 78,138  |   |      | $ | 145,951 |  
|                                                                                                       |  |                             |         |   |      |   |         |  

See accompanying notes.



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MAXYGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



|1. | Basis of Presentation and Significant Accounting Policies
|-- | ---------------------------------------------------------

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial information. The information as of March 31, 2009, and for the three months ended March 31, 2008 and 2009, includes all adjustments (consisting only of normal
recurring adjustments) that the management of Maxygen, Inc. (the Company) believes necessary for fair presentation of the results for the periods presented. The Condensed Consolidated Balance Sheet at December 31, 2008 has been
derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

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

In
addition, results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Maxygen ApS (Denmark) (Maxygen ApS), which was acquired by the Company in August 2000, and Maxygen Holdings Ltd. (Cayman Islands) (Maxygen Holdings).

Investment in Codexis, Inc.

The Company has a minority investment in Codexis, Inc. (Codexis), a biotechnology company focused on developing biocatalytic process technologies for certain pharmaceutical, energy and industrial chemical applications. The
Company formed Codexis in January 2002 as a wholly owned subsidiary to operate its former chemicals business. The Companys investment basis in Codexis as of March 31, 2009 was zero. The Company is not obligated to fund the operations or
other capital requirements of Codexis. As of December 31, 2008 and March 31, 2009, the Companys equity interest in Codexis was approximately 25% and 22%, respectively. In March 2009, the Companys equity interest in Codexis
decreased as a result of the purchase by Royal Dutch Shell plc of additional shares of Codexis preferred stock in connection with an expansion of a collaboration agreement between the two parties.

Reclassifications

Certain
previously reported amounts have been reclassified to conform with the current period presentation. Revenue of $157,000 has been reclassified from revenue from related party to technology and license revenue (including amounts from related party)
for the three-months ended March 31, 2008. This reclassification, when made, did not have any effect on total revenues, net loss, total assets or total liabilities and stockholders equity.



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Accounting for Clinical Trial Costs

The Company charges research and development costs, including clinical study costs, to expense when incurred, consistent with Statement of Financial
Accounting Standard (SFAS) No. 2, Accounting for Research and Development Costs. Clinical study costs are a significant component of research and development expenses. Most of the Companys clinical studies are
performed by a third-party contract research organization (CRO). The clinical trials generally have three distinctive stages plus pass through costs:



| |  |  | start-up - initial setting up of the trial;
| | - |  | -------------------------------------------



| |  |  | site and study management of the trial; and
| | - |  | -------------------------------------------



| |  |  | close down and reporting of the trial.
| | - |  | --------------------------------------

The Company reviews the list of expenses for the trial from the original signed agreements and separates them into what it considers the start-up, enrollment or closedown expenses of the clinical trial. The start-up costs, which usually
occur within a few months after the contract has been executed and include costs, such as study initiation, site recruitment, regulatory applications and investigator meetings, are expensed ratably over the start-up period. The site management,
study management, medical and safety monitoring and data management expenses are calculated on a per patient basis and expensed ratably over the treatment period beginning on the date that the patient enrolls. The close down and reporting expenses
are expensed ratably over the close out period of time. Pass through costs, including the costs of the drugs, are expensed as incurred.

In
general, the Companys service agreements permit it to terminate at will, although it would continue to be responsible for payment of all services completed (or pro-rata completed) at the time of notice of termination, plus any non-cancellable
expenses that have been entered into by the CRO on the Companys behalf.

Restructuring Charge

In October 2008, the Company implemented a restructuring plan that has resulted in the termination of approximately 30% of its workforce. In November
2007, the Company implemented a plan to consolidate its research and development activities at its U.S. facilities in Redwood City, California. The consolidation resulted in cessation of research and development operations at Maxygen ApS, the
Companys wholly owned subsidiary in Denmark. In connection with these restructuring and consolidation plans, the Company recorded estimated expenses for severance and outplacement costs and other restructuring costs. In accordance with SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, generally costs associated with restructuring activities are recognized when they are incurred rather than at the date of a commitment to an exit or disposal
plan. However, in the case of leases, the expense is estimated and accrued when the property is vacated or at the point when the Company ceases to use the leased equipment. Given the significance of, and the timing of the execution of such
activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including estimating the salvage value of equipment consistent with abandonment date. In addition,
post-employment benefits accrued for workforce reductions related to restructuring activities are accounted for under SFAS No. 112, Employers Accounting for Post-employment Benefits. A liability for post-employment benefits is
recorded when payment is probable, the amount is reasonably estimable, the obligation is attributable to employees services already rendered and the obligation relates to rights that have vested or accumulated.

Revenue Recognition

The
Company has generally recognized revenue from multiple element arrangements under collaborative research agreements, including license payments, research and development services, milestones, and royalties. Revenue arrangements with multiple
deliverables are accounted for under the provisions of Staff Accounting Bulletin No. 104 and Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and are divided into
separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items in the arrangement.
The consideration the Company receives is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units.



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

Revenue related to collaborative research payments from a collaborator is recognized
as research services are performed over the related funding periods for each contract. Under these agreements, the Company is typically required to perform research and development activities as specified in the respective agreement. Generally, the
payments received are not refundable and are based on a contractual cost per full-time equivalent employee working on the project. Under certain collaborative research and development agreements, the Company and the collaborative partner may agree
to share in the costs of research and development. In periods where the Company incurs more costs than the collaborative partner, payments from the collaborative partner are included in collaborative research and development revenues and, in periods
where the collaborative partner incurs more expenses than the Company, the Companys payments to the collaborative partner are included in research and development expenses. Research and development expenses (including associated general and
administrative expenses) under the collaborative research agreements approximate or exceed the research funding revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does
not incur the required level of effort during a specific period in comparison to funds received under the respective contracts.

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

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

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

The Company has been awarded grants from various government agencies. The terms of these grant
agreements range from one to five years with various termination dates, the last of which is July 2010 for existing agreements. Revenue related to these grant agreements is recognized as the related research and development expenses are incurred.

Taxes

The
Companys effective tax rate differs from the U.S. federal statutory rate of 35% due to net operating losses in all jurisdictions.

Net Loss Per Share

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



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##### Table of Contents

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



|                                                                               |  |                             |         |   |      |   |        |  
|------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                               |  | Three months endedMarch 31, |        
|                                                                               |  | 2008                        |         |   | 2009 |  
|Numerator:                                                                     |  |                             |         |   |      |   |        |  
|Net loss                                                                       |  | $                           | (13,718 | ) |      | $ | (1,120 | )
|                                                                               |  |                             |         |   |      |   |        |  
|Denominator:                                                                   |  |                             |         |   |      |   |        |  
|Weighted-average shares used in computing basic and diluted net loss per share |  |                             | 36,996  |   |      |   | 37,900 |  
|                                                                               |  |                             |         |   |      |   |        |  
|Basic and diluted net loss per share                                           |  | $                           | (0.37   | ) |      | $ | (0.03  | )
|                                                                               |  |                             |         |   |      |   |        |  

The total number of shares excluded from the calculations of diluted net loss per share, prior to
application of the treasury stock method, was approximately 10,617,000 options at March 31, 2008 and approximately 9,425,000 options and 901,000 restricted stock units at March 31, 2009.

Comprehensive loss

Comprehensive loss is primarily comprised of net loss, net unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. Comprehensive loss and its components for the three-month periods ended
March 31, 2008 and 2009 were as follows (in thousands):



|                                                                      |  |                             |         |   |      |   |        |  
|--------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                      |  | Three months endedMarch 31, |        
|                                                                      |  | 2008                        |         |   | 2009 |  
|Net loss                                                              |  | $                           | (13,718 | ) |      | $ | (1,120 | )
|Changes in unrealized gains (losses) on securities available-for-sale |  |                             | 169     |   |      |   | (139   | )
|Changes in foreign currency translation adjustments                   |  |                             |        |   |      |   |       |  
|                                                                      |  |                             |         |   |      |   |        |  
|Comprehensive loss                                                    |  | $                           | (13,549 | ) |      | $ | (1,259 | )
|                                                                      |  |                             |         |   |      |   |        |  

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



|                                                   |  |                  |      |   |               |   |      |  
|-------------------------------------------------- |  | ---------------- | ---- | - | ------------- | - | ---- | -
|                                                   |  | December 31,2008 |      |   | March 31,2009 |  
|Unrealized gain on available-for-sale securities   |  | $                | 258  |   |               | $ | 115  |  
|Unrealized losses on available-for-sale securities |  |                  | (14  | ) |               |   | (10  | )
|Foreign currency translation adjustments           |  |                  | (252 | ) |               |   | (252 | )
|                                                   |  |                  |      |   |               |   |      |  
|Accumulated other comprehensive loss               |  | $                | (8   | ) |               | $ | (147 | )
|                                                   |  |                  |      |   |               |   |      |  

Recent Accounting Pronouncements

During the three months ended March 31, 2009, the Company adopted the following accounting standards:

In November 2008, the Financial Accounting Standards Board (FASB) ratified EITF Issue No. 08-6, Equity Method Investment
Accounting Considerations (EITF 08-6). EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Company adopted EITF 08-6 effective January 1, 2009 and there was no effect upon adoption of EITF 08-6.



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In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). SFAS 161 requires entities to provide greater transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and how derivative instruments and related hedged items affect an entitys financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company adopted SFAS 161 effective January 1, 2009 and there was no effect upon adoption of SFAS 161.

In December 2007, the FASB ratified the final consensus reached by the EITF on Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1), which requires certain income
statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement. EITF 07-1 is effective for the Company beginning
January 1, 2009. The Company adopted EITF 07-1 effective January 1, 2009 and there was no effect upon adoption of EITF 07-1 as the Company did not have any agreements on January 1, 2009 and has not entered into any agreements after
January 1, 2009 which meet the definition of a collaborative arrangement for purposes of this EITF.

In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. This standard defines fair value, establishes framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair
value in any new circumstances. Effective January 1, 2008, the Company adopted the provisions of SFAS 157 for all financial assets and liabilities and measures its required financial assets and liabilities at fair value. Effective
January 1, 2009, the Company adopted SFAS 157 for non-financial assets and non-financial liabilities. There was no effect upon adoption of SFAS 157 for non-financial assets and non-financial liabilities. See Note 7.

Stock-Based Compensation

Stock-based compensation expense recognized under SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) in the Condensed Consolidated Statements of Operations for the three months ended March 31,
2009 was $346,000 related to employee stock options, compared to $1.1 million for the comparable period in 2008. Stock-based compensation expense related to restricted stock units was $1.0 million for the three months ended March 31, 2009.
There was no such expense for the three months ended March 31, 2008. Stock-based compensation expense related to the ESPP for the three months ended March 31, 2009 was $79,000, compared to $120,000 for the comparable period in 2008.
Stock-based compensation expense related to consultant stock options was $0 for the three months ended March 31, 2009, compared to $37,000 for the comparable period in 2008.

Stock Options

The exercise price of
each stock option equals the closing market price of the Companys stock on the date of grant. Most options are scheduled to vest over four years and all options expire no later than 10 years from the grant date. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model.

In accordance with SFAS 123(R), the Company
also examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, the Company identified no discernable activity patterns.
The Company uses the Black-Scholes-Merton option pricing model to value all options.



8



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



|                                      |  |                                  |  |                                    
|------------------------------------- |  | -------------------------------- |  | -----------------------------------
|                                      |  | Three months endedMarch 31, 2008 |  | Three months endedMarch 31, 2009(1)
|Expected dividend yield               |  | 0.0%                             |  | 0.0%                               
|Risk-free interest rate rangeOptions |  | 2.75%                            |  |                                   
|Risk-free interest rate rangeESPP    |  | 2.13% to 4.98%                   |  | 1.49% to 2.38%                     
|Expected lifeOptions                 |  | 5.72 years                       |  |                                   
|Expected lifeESPP                    |  | 0.08 to 1.0 years                |  | 0.41 to 0.99 years                 
|Expected volatility-Options           |  | 50.61%                           |  |                                   
|Expected volatilityESPP              |  | 43.36% to 65.66%                 |  | 53.81% to 112.67%                  



|(1) | There were no options granted to employees during the three months ended March 31, 2009.
|--- | ----------------------------------------------------------------------------------------

The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new grants is based on historical volatilities.
When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods.

Restricted Stock Units

During 2008, the Company granted restricted stock unit awards under its 2006
Equity Incentive Plan representing an aggregate of 1,283,000 shares of Company common stock. The restricted stock units granted represent a right to receive shares of common stock at a future date determined in accordance with the participants
award agreement. An exercise price and monetary payment are not required for receipt of restricted stock units or the shares issued in settlement of the award. Instead, consideration is furnished in the form of the participants services to the
Company. Substantially all of the restricted stock units vest over two years. Compensation cost for these awards is based on the estimated fair value of the Companys common stock on the date of grant and recognized as compensation expense on a
straight-line basis over the requisite service period. For the three months ended March 31, 2009, the Company recognized $1.0 million in stock-based compensation expenses related to these restricted stock unit awards. There were no stock-based
compensation expenses related to restricted stock unit awards for the three months ended March 31, 2008. At March 31, 2009, the unrecognized compensation cost related to these awards was $3.5 million, which is expected to be recognized on
a straight-line basis over the requisite service period which ends on May 3, 2010 for all but one grant of restricted stock units which vests in full on December 31, 2009.

Valuation and Expense Information under SFAS 123(R)

For the three months ended March 31, 2008 and 2009, stock based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) and stock based compensation expense related
to consultant stock options was allocated as follows (in thousands):



|                                                          |  |                             |       |      |   |      
|--------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                                          |  | Three months endedMarch 31,
|                                                          |  | 2008                        |       | 2009
|Research and development                                  |  | $                           | 588   |      | $ | 910  
|General and administrative                                |  |                             | 643   |      |   | 542  
|                                                          |  |                             |       |      |   |      
|Stock-based compensation expense before income taxes      |  |                             | 1,231 |      |   | 1,452
|Income tax benefit                                        |  |                             |      |      |   |     
|                                                          |  |                             |       |      |   |      
|Total stock-based compensation expense after income taxes |  | $                           | 1,231 |      | $ | 1,452
|                                                          |  |                             |       |      |   |      



9



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No stock-based employee compensation costs were capitalized as of March 31, 2008 and 2009. There
were no recognized tax benefits during the quarters ended March 31, 2008 and 2009.



|2. | Cash Equivalents and Investments
|-- | --------------------------------

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

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



|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  
|------------------------------------------- |  | ------------- | -------- | - | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------- | -
|                                            |  | AmortizedCost |          |   | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value |  
|Money market funds                          |  | $             | 145,951  |   |                      | $ |                      |  | $ |                    |   |  | $ | 145,951  |  
|Commercial paper                            |  |               | 9,486    |   |                      |   | 9                     |  |   |                    |   |  |   | 9,495    |  
|Corporate bonds                             |  |               |         |   |                      |   |                      |  |   |                    |   |  |   |         |  
|U.S. government agency securities           |  |               | 45,326   |   |                      |   | 106                   |  |   | (10                 | ) |  |   | 45,422   |  
|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  
|Total                                       |  |               | 200,763  |   |                      |   | 115                   |  |   | (10                 | ) |  |   | 200,868  |  
|Less amounts classified as cash equivalents |  |               | (145,951 | ) |                      |   |                      |  |   |                    |   |  |   | (145,951 | )
|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  
|Total investments                           |  | $             | 54,812   |   |                      | $ | 115                   |  | $ | (10                 | ) |  | $ | 54,917   |  
|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  

The Companys cash equivalents and investments as of December 31, 2008 were as follows
(in thousands):



|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  
|------------------------------------------- |  | ------------- | -------- | - | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------- | -
|                                            |  | AmortizedCost |          |   | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value |  
|Money market funds                          |  | $             | 154,883  |   |                      | $ |                      |  | $ |                    |   |  | $ | 154,883  |  
|Commercial paper                            |  |               | 19,176   |   |                      |   | 72                    |  |   |                    |   |  |   | 19,248   |  
|Corporate bonds                             |  |               | 1,504    |   |                      |   |                      |  |   | (4                  | ) |  |   | 1,500    |  
|U.S. government agency securities           |  |               | 30,676   |   |                      |   | 186                   |  |   | (10                 | ) |  |   | 30,852   |  
|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  
|Total                                       |  |               | 206,239  |   |                      |   | 258                   |  |   | (14                 | ) |  |   | 206,483  |  
|Less amounts classified as cash equivalents |  |               | (154,883 | ) |                      |   |                      |  |   |                    |   |  |   | (154,883 | )
|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  
|Total investments                           |  | $             | 51,356   |   |                      | $ | 258                   |  | $ | (14                 | ) |  | $ | 51,600   |  
|                                            |  |               |          |   |                      |   |                       |  |   |                     |   |  |   |          |  

Realized gains or losses on sale of available-for-sale securities prior to maturity for the
three-month periods ended March 31, 2008 and 2009 were insignificant. The change in unrealized holding gains (losses) on available-for-sale securities included in accumulated other comprehensive income (loss) were unrealized gains of $169,000
for the three months ended March 31, 2008 and unrealized losses of $139,000 for the three months ended March 31, 2009. The Company intends to hold the securities until maturity and therefore does not believe the current unrealized losses
of $10,000 are other than temporary.



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At March 31, 2009, the contractual maturities of investments were as follows (in thousands):



|                    |  |               |        |                     |   |       
|------------------- |  | ------------- | ------ | ------------------- | - | ------
|                    |  | AmortizedCost |        | EstimatedFair Value
|Due within one year |  | $             | 54,812 |                     | $ | 54,917
|                    |  |               |        |                     |   |       
|Total investments   |  | $             | 54,812 |                     | $ | 54,917
|                    |  |               |        |                     |   |       



|3. | Litigation
|-- | ----------

In December 2001, a lawsuit was filed
in the U.S. District Court for the Southern District of New York against the Company, its chief executive officer, Russell Howard, and its chief financial officer at the time of the initial public offering, Simba Gill, together with certain
underwriters of the Companys initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934, is among the so-called laddering cases that have been commenced against over 300 companies that had public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in
a proceeding styled In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against Drs. Howard and
Gill; the remainder of the case remains pending. The parties have recently submitted a proposed settlement stipulation and a motion for preliminary approval of the settlement has been presented to the Court and is under submission. If the proposed
settlement agreement is not approved, and an action proceeds against the Company based on the facts alleged in the above referenced proceeding, the Company intends to defend the lawsuit vigorously. The Company believes the lawsuit against it is
without merit. If the outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, its business could be significantly harmed.

On July 30, 2007, the Company received a demand letter, addressed to its board of directors, from counsel for Vanessa Simmonds, a purported
stockholder of the Company, concerning alleged violations by unspecified persons and entities of Section 16(b) of the Securities Exchange Act of 1934 Act in connection with the Companys initial public offering. On October 5, 2007, a
complaint was filed in the U.S. District Court for the Western District of Washington against certain underwriters of the Companys initial public offering of common stock alleging Section 16(b) violations by such underwriters. The
complaint named the Company as a nominal defendant, but plaintiff seeks no relief against the Company. An amended complaint was filed on February 28, 2008. Similar actions were filed by the same plaintiff in the same court against underwriters
involved with the initial public offerings of some 50 other companies common stock. The cases have been related before the Honorable James L. Robart. On July 25, 2008, both the underwriter defendants and most of the various issuer nominal
defendants (including the Company) filed motions to dismiss the various Section 16(b) lawsuits. A hearing on the motions was held in January 2009 and, on March 12, 2009, the court granted the defendants motions to dismiss. A notice
of appeal filed by the plaintiff with respect to these dismissals is currently pending. As the Simmonds action seeks no relief against the Company, the Company does not believe that these claims, if successfully appealed, will have a material effect
on its business.

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



|4. | Commitments
|-- | -----------

The Company has entered into various
operating leases for its facilities and certain computer equipment and material contracts. The leases expire on various dates through 2010. Prior to February 2009, the facilities leases also include scheduled rent increases. The scheduled rent
increases are recognized on a straight-line basis over the term of the leases. The material contracts expire on various dates through 2010.



11



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Minimum annual rental commitments under operating leases are as follows (in thousands):



|                                      |  |   |       
|------------------------------------- |  | - | ------
|For the remainder of 2009             |  | $ | 8,326 
|                                      | 
|Year ending December 31,              |  |  
|2010                                  |  | $ | 1,799 
|2011                                  |  |   | 77    
|Thereafter                            |  |   | 81    
|                                      |  |   |       
|Total commitments beyond current year |  | $ | 10,283
|                                      |  |   |       

Total rent expense for the three months ended March 31, 2008 and 2009 was $508,000 and
$288,000, respectively.



|5. | Guarantees and Indemnifications
|-- | -------------------------------

In November 2002,
the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee.

As permitted
under Delaware law and in accordance with the Companys Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the
Companys request in such capacity. The indemnification agreements with the Companys officers and directors terminate upon termination of their employment, but the termination does not affect claims for indemnification relating to events
occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Companys director and officer insurance policy reduces the Companys exposure and may enable the
Company to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of March 31,
2009.

In addition, the Company customarily agrees in the ordinary course of its business to indemnification provisions in its
collaboration agreements, in various agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases. With respect to lease agreements, the indemnification provisions typically apply
to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Companys contractual obligations. The indemnification provisions
appearing in the Companys collaboration agreements are similar, but in addition provide some limited indemnification for its collaborator in the event of third party claims alleging infringement of certain intellectual property rights. In each
of the cases above, the indemnification obligation generally survives the termination of the agreement for some extended period, although the obligation typically has the most relevance during the contract term and for a short period of time
thereafter. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general
liability that reduce its exposure for indemnification and would enable it in many cases to recover a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims related to these
indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of March 31, 2009.



|6. | Related Party Transactions
|-- | --------------------------

On April 1, 2006,
the Company entered into a consulting agreement with Waverley Associates, Inc. (Waverley), a private investment firm for which Mr. Isaac Stein is the president and sole stockholder. Mr. Stein also currently serves as chairman
of the Companys board of directors. The consulting agreement provides for the payment of consulting fees to Waverley of $24,166 per month. The consulting agreement, as amended in May 2008,



12



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##### Table of Contents

provides for the automatic renewal of the agreement for successive one-year terms and a two-year notice period for termination of the agreement by either
party. Under the consulting agreement, Mr. Stein was also granted an option on April 1, 2006 to purchase 250,000 shares of the Companys common stock at an exercise price of $8.28 per share. The option vested and became fully
exercisable in May 2007. For the three months ended March 31, 2008 and 2009, total expense under this arrangement, including cash payments, was approximately $72,000 and $72,000, respectively.

In December 2006, the Company expanded the scope of exclusive licenses previously granted to Codexis to its MolecularBreeding directed evolution
platform for certain applications relating to energy, including biofuels. Under the license agreement, as amended, the Company is entitled to receive a percentage of all consideration received by Codexis from a third party, including license fees,
milestone payments, royalties and the purchase of equity securities (subject to certain limitations) and research funding (in excess of a specified base rate), that relates to the use of the licensed rights for the development or commercialization
of certain products or processes in the energy field. In November 2006, Codexis entered into a collaboration agreement with Shell Oil Products US to explore enhanced methods of converting biomass to biofuels and, in November 2007, Codexis entered
into an expanded collaboration agreement with Royal Dutch Shell plc. Codexis and Royal Dutch Shell further expanded this collaboration in March 2009 pursuant to which Royal Dutch Shell purchased additional shares of Codexis preferred stock. During
the three months ended March 31, 2008 and 2009, the Company recognized approximately $157,000 and $3.6 million, respectively, from Codexis as a result of revenues and other payments received by Codexis under its collaboration agreements with
Shell, including $3.2 million recognized by the Company in the first quarter of 2009 in connection with the purchase by Royal Dutch Shell of Codexis preferred stock. The payments received or receivable from Codexis are reflected as technology and
license revenue in the Condensed Consolidated Statements of Operations.



|7. | Fair Value
|-- | ----------

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

Assets and liabilities recorded at fair value in the Condensed Consolidated Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by
SFAS 157 and directly related to the amount of subjectivity associated with the inputs to valuation of these assets and liabilities, are as follows:

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

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

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



13



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##### Table of Contents

In accordance with SFAS 157, the following tables represents the Companys fair value hierarchy for
its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of March 31, 2009 and December 31, 2008 (in thousands):



|                                  |  |                         |         |         |   |         |  |         |        |  |   |  
|--------------------------------- |  | ----------------------- | ------- | ------- | - | ------- |  | ------- | ------ |  | - | -
|                                  |  | As of March 31, 2009   
|                                  |  | EstimatedFair Value     |         | Level 1 |   | Level 2 |  | Level 3
|Money market funds                |  | $                       | 145,951 |         | $ | 145,951 |  | $       |       |  | $ | 
|Commercial paper                  |  |                         | 9,495   |         |   |        |  |         | 9,495  |  |   | 
|Corporate bonds                   |  |                         |        |         |   |        |  |         |       |  |   | 
|U.S. government agency securities |  |                         | 45,422  |         |   |        |  |         | 45,422 |  |   | 
|                                  |  |                         |         |         |   |         |  |         |        |  |   |  
|Total                             |  | $                       | 200,868 |         | $ | 145,951 |  | $       | 54,917 |  | $ | 
|                                  |  |                         |         |         |   |         |  |         |        |  |   |  
|                                  | 
|                                  |  | As of December 31, 2008
|                                  |  | EstimatedFair Value     |         | Level 1 |   | Level 2 |  | Level 3
|Money market funds                |  | $                       | 154,883 |         | $ | 154,883 |  | $       |       |  | $ | 
|Commercial paper                  |  |                         | 19,248  |         |   |        |  |         | 19,248 |  |   | 
|Corporate bonds                   |  |                         | 1,500   |         |   |        |  |         | 1,500  |  |   | 
|U.S. government agency securities |  |                         | 30,852  |         |   |        |  |         | 30,852 |  |   | 
|                                  |  |                         |         |         |   |         |  |         |        |  |   |  
|Total                             |  | $                       | 206,483 |         | $ | 154,883 |  | $       | 51,600 |  | $ | 
|                                  |  |                         |         |         |   |         |  |         |        |  |   |  

The Company did not have any financial liabilities, non-financial assets or non-financial
liabilities that were required to be measured at fair value as of March 31, 2009 or December 31, 2008.



|8. | Restructuring Charges
|-- | ---------------------

2008 U.S. Restructuring

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

2007 Denmark Restructuring

In November 2007, the Company implemented a plan to consolidate its
organization to reduce costs and increase overall operational efficiency across its research, preclinical, clinical and regulatory activities. The consolidation has resulted in the cessation of research and development operations at Maxygen ApS, the
Companys wholly owned subsidiary in Denmark, and the elimination of all employment positions at that site. As a result of these actions, a charge of $5.2 million was recorded in the year ended December 31, 2007 and $799,000 was recorded
in the year ended December 31, 2008 (of which $533,000 was incurred during the three months ended March 31, 2008). The restructuring charges, which include approximately $287,000 of non-cash stock compensation, are related to severance and
other benefits for the Companys Danish employees. For the three months ended March 31, 2009, the Company incurred additional costs of $98,000 relating to additional benefit costs associated with the one-time termination benefits for the
affected employees of Maxygen ApS. The Company substantially completed the activities related to this consolidation in the first half of 2008.



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The activity in the restructuring accrual for the three months ended March 31, 2009 related to the
actions described above was as follows (in thousands):



|                                                |  |                            |       |                                                  |   |              |  |   |                         |   |                      |   |                    |  |   |       |  |   |      
|----------------------------------------------- |  | -------------------------- | ----- | ------------------------------------------------ | - | ------------ |  | - | ----------------------- | - | -------------------- | - | ------------------ |  | - | ----- |  | - | -----
|                                                |  |                            |       |                                                  |   |              |  |   |                         |   | As of March 31, 2009
|                                                |  | Balance atDecember31, 2008 |       | Chargesduring thethree monthsended March31, 2009 |   | Cashpayments |  |   | Balance atMarch 31,2009 |   | Total Costs toDate   |   | TotalExpectedCosts
|2008 U.S. Restructuring                         |  |                            |       |                                                  |   |              |  |   |                         |   |                      |   |                    |  |   |       |  |   |      
|Employee severance and other benefits charges   |  | $                          | 1,096 |                                                  | $ |             |  | $ | (812                    | ) |                      | $ | 284                |  | $ | 1,188 |  | $ | 1,188
|2007 Denmark Restructuring                      |  |                            |       |                                                  |   |              |  |   |                         |   |                      |   |                    |  |   |       |  |   |      
|Employee severance and other benefits charges   |  |                            |      |                                                  |   | 98           |  |   |                        |   |                      |   | 98                 |  |   | 5,384 |  |   | 5,384
|Contract termination and other associated costs |  |                            | 18    |                                                  |   |             |  |   | (18                     | ) |                      |   |                   |  |   | 725   |  |   | 725  
|                                                |  |                            |       |                                                  |   |              |  |   |                         |   |                      |   |                    |  |   |       |  |   |      
|                                                |  | $                          | 1,114 |                                                  | $ | 98           |  | $ | (830                    | ) |                      | $ | 382                |  | $ | 7,297 |  | $ | 7,297
|                                                |  |                            |       |                                                  |   |              |  |   |                         |   |                      |   |                    |  |   |       |  |   |      



|9. | Derivatives and Financial Instruments
|-- | -------------------------------------

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

The purpose of the
hedging activities has been to minimize the effect of foreign currency exchange rate movements on the cash flows related to the Companys funding of Maxygen ApS and payments to vendors in Europe. To date, foreign currency contracts have been
denominated in Danish kroner and euros. At December 31, 2008, the Company had no foreign currency contracts outstanding. At December 31, 2007, the Company had foreign currency contracts outstanding in the form of forward exchange contracts
totaling $8.8 million. These contracts were entered into in December of 2007 to cover a substantial portion of the disbursements scheduled for the first quarter of 2008. Because of the short duration of less than 90 days, the Company made the
decision to not designate these contracts as cash flow hedges and therefore recognized changes in their fair value as interest income and other income (expense), net in the period of change. During the three months ended March 31, 2008, the
Company recognized $386,000 of foreign exchange gains from the hedge contracts which were included with interest income and other income (expense), net. The Company recognized no foreign exchange gains or losses from hedge contracts during the three
months ended March 31, 2009. The Company had no foreign currency contracts outstanding at March 31, 2009.



|10. | Subsequent Event
|--- | ----------------

On May 6, 2009, the Company
entered into an option and license agreement with Cangene Corporation (Cangene) pursuant to which the Company has granted Cangene options to obtain certain licenses to intellectual property rights associated with the Companys
MAXY-G34 protein therapeutic to fulfill potential future government contracts related to the development, manufacture and procurement of MAXY-G34 for the treatment or prevention of neutropenia associated with acute radiation syndrome
(ARS). ARS is an acute and potentially life threatening illness caused by exposure to ionizing radiation over a very short period of time.



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Under the agreement, Cangene has paid the Company an option fee of $500,000. If Cangene is awarded a
specified government contract and exercises its option for an initial license, Cangene will pay the Company an option exercise fee of $12.5 million. Under the initial license and any subsequent license, the Company would also be entitled to license
fees from Cangene equal to a specified percentage of any net contract revenues recognized by Cangene under an applicable government contract. Cangenes obligation to pay such license fees would continue until the later of the expiration of
certain related patent claims licensed under the agreement or seven years from Cangenes exercise of its option for the initial license.

In addition, at any time prior to the second anniversary of Cangenes exercise of its option for the initial license, Cangene may elect to obtain a fully paid automatic grant of the initial license and subsequent license for a one-time
payment to the Company of $30 million. Upon such payment, Cangene would no longer be obligated to pay the Company any further license fees (other than any amounts due to the Company at the time of such election). If Cangene were to make this
election within five days following the exercise of the option for the initial license, the $12.5 million option exercise fee for the initial license would be credited against the $30 million payment.

The Company retains all rights to MAXY-G34 for commercial development of therapeutic areas outside of the ARS indication, including all rights for
chemotherapy-induced neutropenia indications.



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

Executive Summary

We are a biotechnology company engaged in the discovery and development of improved next-generation protein pharmaceuticals for the
treatment of disease and serious medical conditions. We use our MolecularBreeding directed evolution technology platform, along with ancillary technologies, in an effort to create improved, proprietary proteins. Our portfolio of
next-generation product candidates includes MAXY-4 and MAXY-G34.

Our MAXY-4 product candidates are designed to be superior,
next-generation CTLA-4 Ig therapeutics for the treatment of a broad array of autoimmune disorders, including rheumatoid arthritis. In September 2008, we entered into a co-development and commercialization agreement with Astellas Pharma, Inc., or
Astellas, relating to the development and commercialization of our MAXY-4 product candidates for autoimmune diseases and transplant rejection.

Our MAXY-G34 product candidate has been designed to be an improved next-generation pegylated, granulocyte colony stimulating factor, or G-CSF. We recently completed a Phase IIa clinical trial for our MAXY-G34 product candidate for the
treatment of chemotherapy-induced neutropenia in breast cancer patients. As discussed further below, we have substantially suspended our development of MAXY-G34 for chemotherapy-induced neutropenia. We also recently entered into a license agreement
with Cangene Corporation, or Cangene, for the development of MAXY-G34 for acute radiation syndrome (ARS) in connection with the fulfillment of potential government contracts.

In October 2008, we announced plans to delay both Phase III manufacturing activities and a Phase IIb clinical trial of our MAXY-G34 program for
chemotherapy-induced neutropenia until we identify a partner who can share these significant future costs. The Phase III manufacturing costs were anticipated to begin in September 2008, and the delay of this expenditure is expected to have a
material impact on the MAXY-G34 project timeline. Our original schedule called for the Phase IIb trial to begin in the second half of 2009. To date, we have not identified a suitable partner for this program for chemotherapy-induced neutropenia.
However, in May 2009, we entered into an agreement with Cangene pursuant to which we have granted Cangene certain options to obtain licenses to our MAXY-G34 protein therapeutic to fulfill potential future government contracts related to the
development, manufacture and procurement of MAXY-G34 for the treatment or prevention of neutropenia associated with ARS. We received an option fee of $500,000 from Cangene and, if Cangene exercises its option for an initial license, we are eligible
to receive an option exercise fee of $12.5 million, as well as license fees equal



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to a specified percentage of any net contract revenues recognized by Cangene under an applicable government contract. We have retained all rights to MAXY-G34
for commercial development of therapeutic areas outside of the ARS indication, including all rights for chemotherapy-induced neutropenia indications. See Note 10 of the Notes to Condensed Consolidated Financial Statements for further discussion of
this agreement.

In addition to our development stage product candidates, we have other, earlier stage biosuperior protein drug programs in
preclinical research, plus assets outside of our core business, including vaccine research and an investment in Codexis, Inc., a biotechnology company focused on developing biocatalytic process technologies for certain pharmaceutical, energy and
industrial chemical applications.

In October 2008, we also announced that we would be evaluating potential strategic options, including a
sale or disposition of one or more corporate assets, a strategic business combination, or other transactions, and that we had hired a financial advisor to assist us in this process. In connection with the reduced activities on our MAXY-G34 program
and our revised corporate strategy, we also implemented a restructuring plan that has resulted in the termination of approximately 30% of our workforce. We continue to be actively engaged in this process.

To date, we have generated revenues from collaborations with pharmaceutical, chemical and agriculture companies, government grants and the sale of
certain assets. Our total revenues were $8.5 million and $1.4 million in the three months ended March 31, 2009 and 2008, respectively. Research and development expenses were $7.0 million and $13.1 million in the three months ended
March 31, 2009 and 2008, respectively.

We have incurred significant operating losses from continuing operations since our inception.
As of March 31, 2009, our accumulated deficit was $240.8 million. We expect to incur additional operating losses over at least the next several years and may never achieve profitability.

We continue to maintain a strong cash position to fund our operations and revised corporate strategy, with cash, cash equivalents and marketable
securities totaling $200.9 million as of March 31, 2009.

For the purposes of this report, our continuing operations consist of the
results of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen ApS (Denmark) and Maxygen Holdings Ltd. (Cayman Islands).

Critical Accounting
Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our
critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

Revenues

Our
revenues have been derived primarily from collaboration agreements, technology and license arrangements and government research grants. Our total revenues were $8.5 million in the three months ended March 31, 2009, compared to $1.4 million in
the comparable period in 2008. The increase in revenue was primarily due to collaborative research and development revenues we recognized under our MAXY-4 co-development and commercialization agreement with Astellas and technology and license
revenue we recognized under our license agreement with Codexis.

Revenues from our collaboration agreements were $4.0 million in the three
months ended March 31, 2009. We had no collaborative research and development revenues during the comparable period in 2008. Astellas was the only collaborative partner that contributed to our collaborative research and development revenues
during the three months ended March 31, 2009. Collaborative research and development revenues during this period include the recognition of $984,000 of the $10 million upfront fee we received from Astellas under the MAXY-4 co-development and
commercialization agreement and $3.0 million earned as net reimbursement of our research and development activities performed under this agreement during the period.



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Technology and license revenue (including related party) was $3.6 million for the three months ended
March 31, 2009, compared to $157,000 for the comparable period in 2008. These revenues reflect amounts received or receivable under our license agreement with Codexis as a result of payments received by Codexis under its collaboration
arrangements with Shell. The increase in technology and license revenue in 2009 resulted from our recognition of a one-time receivable of $3.2 million related to an expanded collaboration agreement between Codexis and Royal Dutch Shell that included
the purchase of Codexis preferred stock by Shell.

Revenues from government research grants were $907,000 in the three months ended
March 31, 2009, compared to $1.3 million in the comparable period in 2008. The decrease in grant revenue primarily reflects a decrease in activity relating to our existing grants.

In July 2008, we sold our hematology assets, including MAXY-VII, and granted certain licenses to our MolecularBreeding technology platform to Bayer
HealthCare LLC, or Bayer, for aggregate cash proceeds of $90 million, which we recognized as revenue in 2008. Excluding these revenues associated with the Bayer transaction, revenue in 2008 was $10.7 million. We expect our revenues for the remainder
of 2009 to increase compared to 2008 (excluding revenues associated with the Bayer transaction), primarily due to collaborative research and development revenue we expect to recognize in 2009 under our collaboration agreement with Astellas (revenues
under this agreement in 2008 reflect only three months of revenues from Astellas). Our revenues may fluctuate substantially in 2009 based on the completion of any strategic transactions or new licensing or collaborative agreements and our receipt of
any development related milestones, royalties and other payments under such agreements. However, we cannot predict with any certainty whether we will enter into any strategic transaction or new licensing or collaborative agreements or receive any
milestone, royalty or other payments under any existing or future licensing, collaboration or other agreements or whether any particular collaboration or research effort will ultimately result in a commercial product.

Research and Development Expenses

Our research and development expenses consist primarily of external collaborative research expenses (including contract manufacturing and clinical trial expenses), salaries and benefits, facility costs, supplies, research consultants,
depreciation and stock compensation expense. Research and development expenses were $7.0 million in the three months ended March 31, 2009, compared to $13.1 million in the same period in 2008. The decrease in our research and development
expenses for the three month periods was primarily related to decreased external expenses associated with the development of our product candidates, including expenses related to clinical trials of our MAXY-G34 product candidates and the manufacture
of MAXY-G34 and MAXY-VII product for clinical trials and reduced salaries, benefits and other operating expenses resulting from the cessation of operations in Denmark in the first quarter of 2008. These decreases were partially offset by increases
in stock compensation expenses primarily as a result of our issuance of restricted stock units in May 2008.

Stock compensation expenses
included in research and development expenses increased to $910,000 in the three months ended March 31, 2009 from $588,000 in the comparable period in 2008, primarily as a result stock compensation expense associated with restricted stock unit
awards granted in May 2008.

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



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



|                                                  |  |                             |        |      |   |      
|------------------------------------------------- |  | --------------------------- | ------ | ---- | - | -----
|                                                  |  | Three months endedMarch 31,
|                                                  |  | 2008                        |        | 2009
|Collaborative projects funded by third parties(1) |  | $                           |       |      | $ | 3,073
|Government grants                                 |  |                             | 1,198  |      |   | 1,043
|Internal projects                                 |  |                             | 11,908 |      |   | 2,917
|                                                  |  |                             |        |      |   |      
|Total                                             |  | $                           | 13,106 |      | $ | 7,033
|                                                  |  |                             |        |      |   |      



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

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

We expect our research and
development expenses to decrease somewhat in the future based on our continued reduction in spending on our MAXY-G34 program. This decrease will be partially offset by research and development costs resulting from the preclinical development of our
MAXY-4 product candidates, the cost of which will be shared by Astellas.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel costs for finance, legal, general management, business development and human
resources, insurance premiums and professional expenses, such as external expenditures for legal and accounting services, and stock compensation expense. General and administrative expenses were $2.9 million in the three months ended March 31,
2009 and $3.5 million in the comparable period in 2008. Included in general and administrative expenses were stock-based compensation expenses of $542,000 in the three months ended March 31, 2009 and $643,000 million in the comparable period in
2008. The decrease in general and administrative expenses was primarily due to decreases in salaries and employee related costs, including lower expenditures on salaries and benefits related to our restructuring in the U.S. and the cessation of our
operations in Denmark and lower consulting costs, offset in part by an increase in external legal and accounting costs in 2009.

Our
general and administrative expenses during the remainder of 2009 should be less than general and administrative expenses for 2008, depending on, among other things, the levels of share-based payments, if any, granted in 2009, the use of external
consultants and market analysis, and expenditures for legal and accounting services.



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Restructuring Charges

We recognized charges of $98,000 in the three months ended March 31, 2009 related to the restructuring plan we implemented in November 2007 that
resulted in the cessation of research and development operations at Maxygen ApS, our Danish subsidiary, and the elimination of all employment positions at that site. These charges relate to additional benefit costs relating to the one-time
termination benefits for affected employees of Maxygen ApS. We recognized charges of $533,000 in the three months ended March 31, 2008 resulting from the cessation of operations at Maxygen ApS. These charges primarily reflect one-time
termination benefits for the affected employees of Maxygen ApS and other costs associated with the closure of the Maxygen ApS facility, the disposal of remaining fixed assets and termination of various leases. With the exception of the additional
$98,000 of additional benefit costs recognized in the three months ended March 31, 2009, we completed the activities related to our consolidation of our Danish operations during the first half of 2008 and do not expect to incur any additional
costs relating to this consolidation. We completed the activities related to our current restructuring plan in April 2009 and do not expect to incur any additional costs relating to this restructuring. See Note 8 of the Notes to Condensed
Consolidated Financial Statements for further discussion of this matter.

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net represents income earned on our cash, cash equivalents and marketable securities,
foreign currency gains or losses related to our Danish subsidiary, Maxygen ApS, gain or loss on disposal of equipment and interest expense, if any. Amounts included in interest income and other income (expense), net are as follows (in thousands):



|                                                               |  |                             |       |   |      |   |     |  
|-------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | --- | -
|                                                               |  | Three months endedMarch 31, |      
|                                                               |  | 2008                        |       |   | 2009 |  
|Interest income                                                |  | $                           | 1,431 |   |      | $ | 441 |  
|Foreign exchange gains (losses)                                |  |                             | 572   |   |      |   | (50 | )
|Gains (losses) on disposal of equipment and interest (expense) |  |                             | (12   | ) |      |   | (9  | )
|                                                               |  |                             |       |   |      |   |     |  
|Total interest income and other income (expense), net          |  | $                           | 1,991 |   |      | $ | 382 |  
|                                                               |  |                             |       |   |      |   |     |  

The decrease from the 2008 period to the 2009 period was due to lower interest income resulting
from significantly lower interest rates on a higher average investment base.

Recent Accounting Pronouncements

During the three months ended March 31, 2009, we adopted the following accounting standards:

In November 2008, the Financial Accounting Standards Board (FASB) ratified EITF Issue No. 08-6, Equity Method Investment Accounting
Considerations (EITF 08-6). EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. We adopted EITF 08-6 effective January 1, 2009 and there was no effect upon adoption of EITF 08-6.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 applies to
all derivative instruments and related hedged items accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 161 requires entities to provide greater transparency
about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an
entitys financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted SFAS 161 effective January 1,
2009 and there was no effect upon adoption of SFAS 161.



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In December 2007, the FASB ratified the final consensus reached by the EITF on Issue No. 07-1,
Accounting for Collaborative Arrangements (EITF 07-1), which requires certain income statement presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with
disclosure about the nature and purpose of the arrangement. EITF 07-1 is effective for us beginning January 1, 2009. We adopted EITF 07-1 effective January 1, 2009 and there was no effect upon adoption of EITF 07-1 as we did not have any
agreements on January 1, 2009 and have not entered into any agreements after January 1, 2009 which meet the definition of a collaborative arrangement for purposes of this EITF.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using
fair value to measure assets and liabilities. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies
whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. Effective January 1, 2008, we have adopted the provisions of SFAS 157 and
measure our required financial assets and liabilities at fair value. Effective January 1, 2009, we adopted SFAS 157 for non-financial assets and non-financial liabilities. There was no effect upon adoption of SFAS 157 for non-financial assets
and non-financial liabilities. See Note 7 of the Notes to Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

Since inception, we have financed our continuing operations primarily through private placements and public offerings of equity securities, research
and development funding from collaborators and government grants and through the sale or license of various assets. In May 2009, we received $500,000 from Cangene for the option to license certain MAXY-G34 related intellectual property rights for
the potential fulfillment of government contracts relating to the treatment of acute radiation syndrome. In July 2008, we received cash proceeds of $90 million from the sale of our hematology assets and the grant of certain license rights to our
MolecularBreeding technology platform and, in September 2008, we received an upfront fee of $10 million from Astellas under our co-development and commercialization agreement with Astellas for our MAXY-4 product candidates. As of
March 31, 2009, we had $200.9 million in cash, cash equivalents and marketable securities.

Net cash used in operating activities
decreased from $12.8 million in the three months ended March 31, 2008 to $8.4 million in the comparable period in 2009, primarily due to decreases in net loss during the three months ended March 31, 2009. Uses of cash in operating
activities were primarily to fund losses from continuing operations.

Net cash used in investing activities was $3.6 million in the three
months ended March 31, 2009, compared to net cash provided by investing activities of $13.2 million in the same period in 2008. The cash used during the three-month period ended March 31, 2009 was primarily related to purchases of
available-for-sale securities in excess of maturities. The cash provided during the three-month period ended March 31, 2008 was primarily related to maturities of available-for-sale securities in excess of purchases. We may use a portion of our
cash to acquire or invest in businesses, products or technologies, or to obtain the right to use such technologies.

Net cash provided by
financing activities was $3.1 million in the three months ended March 31, 2009 and $617,000 in the comparable period in 2008. The cash provided during the 2009 and 2008 periods relate to proceeds from the sale of common stock in connection with
our Employee Stock Purchase Plan (ESPP) and the exercise of stock options by employees.

In accordance with FASB Statement No. 52,
Foreign Currency Translation, the functional currency for our Danish operations was its local currency through November 30, 2007. However, as the result of the consolidation of our research and development activities to our U.S.
facilities in Redwood City, California and cessation of operations at Maxygen ApS, we determined that the functional currency of our Danish operations is the U.S. dollar after November 30, 2007. Consequently, Maxygen ApS no longer generates
translation adjustments which would impact the balance of accumulated other comprehensive income (loss). Translation adjustments from prior periods will continue to remain in accumulated other comprehensive income (loss) on the Condensed
Consolidated Balance Sheets. There was no effect of exchange rate changes on cash and cash equivalents in the three months ended March 31, 2008 and 2009.



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The following are contractual commitments as of March 31, 2009 associated with lease obligations and
purchase obligations (in thousands):



|                            |  |                        |        |                |   |          |  |          |       |                 |   |   |  |   |  
|--------------------------- |  | ---------------------- | ------ | -------------- | - | -------- |  | -------- | ----- | --------------- | - | - |  | - | -
|                            |  | Payments Due by Period
|Contractual Obligations     |  | Total                  |        | Lessthan 1Year |   | 1-3Years |  | 4-5Years |       | Morethan 5Years
|Operating lease obligations |  | $                      | 1,133  |                | $ | 927      |  | $        | 206   |                 | $ |  |  | $ | 
|Purchase obligations        |  |                        | 9,150  |                |   | 7,399    |  |          | 1,746 |                 |   | 5 |  |   | 
|                            |  |                        |        |                |   |          |  |          |       |                 |   |   |  |   |  
|Total                       |  | $                      | 10,283 |                | $ | 8,326    |  | $        | 1,952 |                 | $ | 5 |  | $ | 
|                            |  |                        |        |                |   |          |  |          |       |                 |   |   |  |   |  

We are eligible to receive up to $213.0 million in potential milestone and event based payments,
including up to $160 million from Astellas based on the achievement of certain events related to the development and commercialization of our MAXY-4 program, up to $30 million from Bayer based on the achievement of certain events related to the
potential initiation of a phase II clinical trial of MAXY-VII and the satisfaction of certain patent related conditions associated with the MAXY-VII program, and up to $23 million from sanofi pasteur, the vaccines division of the sanofi-aventis
Group, under our existing license agreement relating to the development of a vaccine for the dengue virus. Under our agreement with Cangene, to the extent Cangene exercises its option for an initial license, we are also eligible to receive an option
exercise fee of $12.5 million, as well as license fees equal to a specified percentage of any net contract revenues recognized by Cangene under an applicable government contract. However, there can be no assurances that we will receive any
milestone, event based payments or other payments under any of these agreements.

We believe that our current cash, cash equivalents and
short-term investments, together with funding expected to be received from collaborators, licensors and government grants, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next
twelve months. Our failure to raise capital if and when needed may harm our business and operating results.



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

Market Risk Management

Our cash flow and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and other factors. We attempt to limit our exposure to some or all of these market risks through the use of various
financial instruments. There were no significant changes in our market risk exposures during the three months ended March 31, 2009. These activities are discussed in further detail in Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended December 31, 2008.



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

Evaluation of Controls and Procedures

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



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Changes in Internal Control

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

Limitations on the Effectiveness
of Controls

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



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PART II OTHER INFORMATION



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

The information set forth above under Note 3 contained in the unaudited Condensed Consolidated Financial Statements in Part I  Item 1 of this report is incorporated herein by reference.



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

A
restated description of the risk factors associated with our business is set forth below. This description includes all material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part
I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008. 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 our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the
following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

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

In October 2008, we announced a restructuring plan that has resulted in the reduction of approximately 30% of our workforce
and a substantial delay in the development activities on our MAXY-G34 program. We also announced our engagement of a financial advisor to assist us in evaluating various strategic options. These options could include a sale or disposition of one or
more corporate assets, a strategic business combination, or other transactions. While we continue to be actively engaged in this process, there can be no assurance that any particular strategic option or outcome will be pursued, whether any
transaction, or series of transactions required to sell individual assets, will occur, or whether we will be able to successfully consummate any such transaction on a timely basis, on terms acceptable to us or at all. If we continue to execute our
operating plan instead of pursuing a strategic option, our stock price could decline. In addition, we may be unsuccessful in implementing an option that is chosen by our board of directors, or we may implement an option that yields unexpected
results. The process of continuing to review, and potentially executing, strategic options may be very costly and time-consuming and may distract our management and otherwise disrupt our operations, which could have adverse effects on our business,
financial condition and results of operations. As a result, there can be no assurances that any particular business arrangement or transaction, or series of transactions, will be consummated or lead to increased stockholder value.

To the extent that we elect to pursue a transaction, or series of transactions, that includes a sale of one or more corporate assets, our ability to sell
any assets may be limited by many factors beyond our control, such as general economic conditions or the attributes of the particular asset. We cannot predict whether we would be able to sell any particular asset on favorable terms and conditions,
if at all, or the length of time needed to sell any asset. For example, the shares that we own of Codexis, Inc. common and preferred stock represent shares of a private company that are not freely tradeable and we cannot predict the likelihood or
length of time for Codexis to achieve a liquidity event, if any, for its shares, such as an initial public offering or a sale of the company. We also have a number of early stage research programs, ancillary technologies and similar assets that we
view as important to our ongoing operations, but that may not be accorded any additional value in an asset sale or other strategic transaction. Accordingly, there can be no assurances that we or our stockholders will realize any value from all of
our assets or any particular asset.

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



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If we do not retain key employees, our ability to maintain our ongoing operations or execute a
potential strategic option could be impaired.

To be successful and achieve our objectives under our revised corporate strategy, we
must retain qualified scientific and management personnel. The recent reduction of our workforce and the continued review of our strategic options may create uncertainty for our employees and this uncertainty may adversely affect our ability to
retain key employees, including our senior management, and to hire new talent necessary to maintain our ongoing operations, including the maintenance of the co-development agreement with Astellas for our MAXY-4 program, or to execute a potential
strategic option, which could have a material adverse effect of our business.

In addition, even if we retain key personnel, our recent
restructuring and the revision of our corporate strategy could place significant strain on our resources and our ability to maintain our ongoing operations. Our restructuring plan may also require us to rely more heavily on third party contractors
and consultants to assist with managing our operations. Accordingly, we may fail to maintain our ongoing operations or execute our strategic plan if we are unable to manage such changes effectively.

If we are unable to enter into a collaborative or other arrangement with a third party to fund the further development and commercialization of our
MAXY-G34 product candidate, we may elect to further delay or cease all development activities on this program.

We recently
announced the delay of both Phase III manufacturing and the Phase IIb trial of our MAXY-G34 product candidate for the treatment of chemotherapy-induced neutropenia until we identify a partner who will share the costs of these activities. However, to
date, we have not identified a partner for this program and there can be no assurances that we will enter into a collaborative or other arrangement with a third party to fund the further development of MAXY-G34 for the treatment of
chemotherapy-induced neutropenia. Accordingly, although we have recently licensed certain MAXY-G34 intellectual property rights to Cangene for the fulfillment of government contracts related to the treatment of acute radiation syndrome, we may
further delay or cease development of MAXY-G34 for the treatment of chemotherapy-induced neutropenia, which could adversely affect our business and our ability to realize any value from this program.

In addition, the delay of both Phase III manufacturing and the Phase IIb trial for this program is expected to have an adverse impact on the timeline for
any potential commercialization of MAXY-G34 for chemotherapy-induced neutropenia, which could make it more difficult for us to secure a collaborative or other arrangement to fund the further development of this product candidate and could limit the
commercial potential of MAXY-G34, if commercialized.

We have a history of net losses. We expect to continue to incur net losses and
may not achieve or maintain profitability.

As of March 31, 2009, we had an accumulated deficit of $240.8 million. Although we
achieved profitability in 2008, primarily due to the $90 million we received from Bayer HealthCare LLC in connection with the sale of our hematology assets, we expect to incur additional operating losses for the foreseeable future and may not
achieve profitability in the future. To date, we have derived substantially all our revenues from collaborations, license agreements and government grants and expect to derive a substantial majority of our revenue from such sources for the
foreseeable future. Revenues from such sources are uncertain because such agreements and grants generally have fixed terms and may be terminated under certain conditions, and because our ability to secure future agreements will depend upon our
ability to address the needs of current and potential future collaborators. As part of our revised corporate strategy, we may also sell assets that currently generate revenue for us. We expect that our operating expenses will exceed revenues in the
near term and we do not expect to achieve profitability during the next several years, if at all. These operating expenses will decrease the remaining cash available for use in our business or the execution of our strategic plan.



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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. We may not be successful in the commercial development of products. Successful products will require significant investment and development, including clinical testing, to demonstrate their safety and
effectiveness before their commercialization. To date, companies in the biotechnology industry have developed and commercialized only a limited number of biological products. We have not proven our ability to develop or commercialize any products.
We, alone or in conjunction with corporate collaborators, will need to conduct a substantial amount of additional development before any regulatory authority will approve any of our potential products. This research and development may not indicate
that our products are safe and effective, in which case regulatory authorities may not approve them. Problems are frequently encountered in connection with the development and utilization of new and unproven technologies, and the competitive
environment in which we operate could limit our ability to develop commercially successful products.

The prospects of our current
product candidates are highly uncertain.

There is a substantial risk that our drug discovery and development efforts may not
result in the development of any commercially successful products. Our MAXY-G34 product candidate recently completed a Phase IIa clinical trial in breast cancer patients for the treatment of chemotherapy-induced neutropenia. While we have previously
announced positive progress in this clinical trial, the results of preliminary studies and early-stage clinical trials do not necessarily predict the results of later-stage clinical trials, including the safety and efficacy profiles of any
particular drug candidate. Moreover, in our industry, most product candidates fail before entering clinical trials or in clinical trials and most products that commence clinical trials are not approved for use in humans and never reach the market.
Accordingly, negative or inconclusive results from ongoing or future clinical trials of MAXY-G34 could lead us to cease the development of this product candidate and decide not to advance this product candidate into later stage clinical trials, such
as a Phase IIb trial or pivotal Phase III trials.

In addition, as noted above, regardless of the clinical properties of MAXY-G34, we may
continue to delay or cease development of this product candidate at any time if we determine that we cannot afford the costs of further developing this product candidate ourselves and we are unable to enter into a collaborative or other arrangement
with a third party to fund the further development and commercialization of this product candidate.

Even if we are able to enter into a collaborative or other arrangement with a third party to fund the further development and commercialization of MAXY-G34 and this product candidate successfully completes clinical
trials and is approved for marketing in the United States or other countries, it will need to compete with other G-CSF drugs then on the market. The ability of MAXY-G34 to be successful in the market will depend on a variety of factors, including,
for example, whether MAXY-G34 is clinically differentiated from other G-CSF drugs, the scope and limitations of the label approved by regulators for the use of MAXY-G34, the price of MAXY-G34, reimbursement decisions by third parties with regard to
MAXY-G34, the approval and sale of any generic or bioequivalent forms of G-CSF products, such as Neulasta® and Neupogen®, in the
United States, and the effort and success of marketing activities undertaken with regard to MAXY-G34.

Litigation or other
proceedings or third party claims of intellectual property infringement relating to our MAXY-G34 product candidate may delay or materially impact the ability to commercialize MAXY-G34.

We are aware that Amgen Inc. and other third parties have a number of issued patents that claim certain G-CSF compositions and their use. Amgen Inc. and
other third parties also have pending patent applications that are directed at certain G-CSF compositions and their use and these applications could result in issued patents. The owners of issued patents, such as Amgen, Inc., could elect to commence
a patent infringement suit against us with regard to MAXY-G34 in the courts or before the International Trade Commission. While we believe that we would have good defenses to any such suit, the outcome of patent litigation is necessarily uncertain
and we could be forced to expend significant resources in the defense of any such suit, and we may not prevail. If the outcome of any such suit or action was unfavorable to us, we might have to pay significant damages to the patent owner, and if any
patents found to be infringed had not expired, we could be enjoined from commercializing or importing MAXY-G34.



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For example, on June 3, 2008, the United States Patent & Trademark Office (USPTO) granted a
U.S. patent (U.S. Patent No. 7,381,804B2) to Amgen with certain claims to mutated G-CSF molecules. We do not believe that the USPTO should have granted this patent because we do not believe the claims of the patent are valid. Moreover, the
grant of this patent to Amgen does not affect the validity of our existing patents on our novel, proprietary G-CSF compositions. However, Amgen may contend that the claims of this recently issued patent cover our patented MAXY-G34 product candidate.
While our current activities related to MAXY-G34 are exempt from patent infringement liability because these activities are strictly limited to obtaining information for regulatory approval, if and when our MAXY-G34 related activities extend beyond
those related to seeking regulatory approval, such as, for example, if and when we commercialize MAXY-G34, Amgen might then commence an infringement action against us based on this patent and/or other related patents that it may be granted in the
future. If Amgen elects to sue us, we believe that we would have viable defenses to any such infringement suit and intend to vigorously defend against any such claims. Typically, such defenses include non-infringement and invalidity claims. However,
there can be no assurance that the relevant court would find in our favor with respect to such defenses. If we are unable to show that Amgens patent is invalid, or that we do not infringe the claims of such patent, and we are unable to obtain
a license from Amgen for the use of their intellectual property, this may materially impact our ability to manufacture and sell MAXY-G34.

The delay and cost to us of any patent litigation or other proceedings, such as interference or inter parte reexamination proceedings, even if resolved in our favor, could be substantial. Some of our competitors, including Amgen, may
be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other
proceedings could have a material adverse effect on our ability to compete in the marketplace. In addition, the existence of this Amgen patent may limit our ability to enter into a partnering or other arrangement with respect to MAXY-G34. Patent
litigation and other proceedings may also absorb significant management time which may materially and adversely impact our financial position and results of operations.

Drug development is a long, expensive and uncertain process and may not result in the development of any commercially successful products.

The development of human therapeutic products is long and uncertain. Most product candidates fail before entering clinical trials or in clinical trials.
Moreover, most products that commence clinical trials are not approved for use in humans and never reach the market. In addition, due to the nature of human therapeutic research and development, the expected timing of product development, initiation
of clinical trials and the results of such development and clinical trials are uncertain and subject to change at any point. Such uncertainty, which exists even for product candidates that appear promising based on earlier data, may result in
research or development delays, clinical trial delays and failures, product candidate failures and delays in regulatory action or approval. Such delays or failures could reduce or eliminate our revenue by delaying or terminating the potential
development and commercialization of our product candidates and could drastically reduce the price of our stock and our ability to raise capital. Without sufficient capital, we could be forced to reduce or cease our operations.

All of our product candidates are subject to the risks of failure inherent in drug development. Preclinical studies may not yield results that would
satisfactorily support the filing of an investigational new drug application (IND) with respect to our drug candidates, and the results of preclinical studies do not necessarily predict the results of clinical trials. Moreover, the available animal
models may be unsuitable for assessing our potential products for one or more indications, increasing the risk that animal models may not provide accurate or meaningful data as to the suitability or advantages of our potential products as treatments
for the diseases or medical conditions of interest. Similarly, early-stage clinical trials may not predict the results of later-stage clinical trials, including the safety and efficacy profiles of any particular drug candidate. In addition, there
can be no assurance that the design of our clinical trials will result in obtaining the desired efficacy data to support regulatory approval. Even if we believe the data collected from clinical trials of our drug candidates are promising, such data
may not be sufficient to support approval by the U.S. Food and Drug Administration (FDA) or any foreign regulatory agency, which could delay, limit or prevent regulatory approval of our drug candidates. The FDA and similar regulatory agencies
determine the type and amount of data necessary to obtain approval of any drug candidate, and as a result of new data or changes in the policies or practices of such agencies, the type and amount of data required for approval may change in the
period between the start of product development and the completion of clinical trials.



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Any failure or substantial delay in successfully completing clinical trials, obtaining regulatory
approval and commercializing any of our current or future product candidates could severely harm our business.

The development of
our product candidates, which is based on modifications to natural human proteins, may be subject to substantial delays, increased development costs, reduced market potential for any resulting product or the termination of the affected development
program by us or a collaborator, each of which could adversely affect our business.

We design our product candidates to confer
what we believe will be improved biological properties as compared to one or more currently marketed products. As a result, our product candidates differ from currently marketed drugs in ways that we expect will be beneficial. However, the impact of
the modifications that we make in our product candidates may not be fully apparent in preclinical testing and may only be discovered in clinical testing. Such altered properties may render a product candidate unsuitable or less beneficial than
expected for one or more diseases or medical conditions of possible interest or make the product candidate unsuitable for further development. For example, our products may be found to be more immunogenic than the corresponding natural human
proteins or demonstrate undesirable pharmokinetic or pharmodynamic properties. For a particular product candidate, this may lead to the redirection of the development strategy which could result in substantial delays, increased development costs,
decreased likelihood of obtaining regulatory approval, and reduced market potential for any resulting product. This also could result in the termination of the development of the affected product candidate. In either case, such results could
adversely affect our business.

In addition, we or a collaborator may determine that certain preclinical or clinical product candidates or
programs do not have sufficient therapeutic or commercial potential to warrant further advancement for a particular indication or all indications, and may elect to terminate a program for such indications or product candidates at any time. Our
assessment of the commercial potential for a product may change significantly from the time when we invest in discovery and development to the time when the product either reaches the market or reaches clinical development stages that require
investment at risk. Commercial potential can change due to many factors beyond our control, such as general economic conditions, the qualitative and quantitative properties of medical reimbursement schemes at the time, the legal status for sale of
biologic generics (i.e. bioequivalent protein drugs, generic biologicals and biogenerics), and the financial status of potential partner companies. As commercial potential decreases so the ability or interest of other parties to share the costs of
further development of our products may decrease, thus precluding advancement of our products. Furthermore, we may conclude that a product candidate is not differentiated in a meaningful way from existing products, or that the costs of seeking to
establish that a product candidate is differentiated would be prohibitive, or that the market size for a differentiated product with the attributes of a particular product candidate does not justify the expense and risk of further development. If we
terminate a preclinical or clinical program in which we have invested significant resources, our financial condition and results of operations may be adversely affected, as we will have expended resources on a program that will not provide a return
on our investment and we will have missed the opportunity to have allocated those resources to potentially more productive uses.

In
particular, the failure of our MAXY-G34 product candidate in any further clinical development or MAXY-4 product candidates in preclinical development could have a material adverse impact on our business. Termination of either program may also cause
the price of our stock to drop significantly.

Our clinical development strategy, which relies on third party contract research
organizations, exposes us to additional risk.

We do not have the ability to independently conduct clinical trials for our product
candidates in the United States and other countries, and therefore rely on third parties, such as contract research organizations, to assist us in designing our clinical trials, preparing documents for submission to regulatory authorities, obtaining
regulatory approval to conduct clinical trials, enrolling qualified patients, conducting and maintaining our clinical trials, and analyzing the results of such trials. If these third parties do not successfully carry out their contractual duties, do
not



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conduct the clinical trials in accordance with planned deadlines and the approved protocol and regulatory requirements, or are unable to manage the conduct
of our clinical trials effectively in compliance with FDA and other regulatory requirements, it could adversely impact the results obtained in such trials and delay the progress or completion of clinical trials, regulatory submissions and
commercialization of our potential products. In any such case, we may be affected by increased costs and delays or both, which may harm our business.

Our revenues, expenses and operating results are subject to fluctuations that may cause our stock price to decline.

Our revenues, expenses and 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 revenues, expenses and operating results to fluctuate include:



| |  |  | the sale of an asset, or assets, that currently generate revenue for us;
| | - |  | ------------------------------------------------------------------------



| |  |  | the termination of research and development contracts with collaborators or government research grants, which may not be renewed or replaced;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the success rate of our development or discovery efforts leading to milestones and royalties under collaboration arrangements, if any;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of expenses, particularly with respect to contract manufacturing, preclinical studies and clinical trials;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and willingness of any existing or future collaborators to commercialize our products, which would result in royalties to us; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general and industry specific economic conditions, which may affect the research and development expenditures of any future collaborator.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

In addition, a large portion of our expenses is relatively fixed, including expenses for facilities, equipment and
personnel. Accordingly, if revenues fluctuate unexpectedly due to unexpected expiration of government research grants, failure to obtain anticipated new contracts or other factors, we may not be able to immediately reduce our operating expenses,
which could 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 likely decline.

Our current and future product candidates could take a long time to
complete clinical development, may fail in clinical development, or may never gain approval, which could reduce or eliminate our revenue by delaying or terminating the potential commercialization of our product candidates.

The conduct of clinical trials for a single product candidate is a time-consuming, expensive and uncertain process and typically requires years to
complete. In December 2008, we completed a Phase IIa clinical trial in Eastern Europe for our MAXY-G34 product candidate for the treatment of chemotherapy-induced neutropenia in breast cancer patients. Thus, our most advanced product candidate is
now only in the early stages of clinical trials.

Our product candidates or potential product candidates may produce undesirable toxicities
and adverse effects in preclinical studies. Such toxicities or adverse effects could delay or prevent the filing of an IND with respect to such product candidates or potential product candidates. In clinical trials, administering any of our product
candidates to humans may produce undesirable toxicities or side effects. These toxicities or side effects could interrupt, delay, suspend or terminate clinical trials of our product candidates and could result in the FDA or other



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regulatory authorities denying approval of our product candidates for any or all targeted indications. Indications of potential adverse effects or toxicities
which may occur in clinical trials and which we believe are not significant during the course of such trials may later turn out to actually constitute serious adverse effects or toxicities when a drug has been used in large populations or for
extended periods of time.

Although MAXY-G34 and MAXY-4 have demonstrated desirable properties in preclinical testing, and in early
clinical testing of MAXY-G34, indicating that these product candidates may have advantages as compared to currently marketed drugs, the results from preclinical testing in vitro and animal models, as well as early, small scale clinical trials, often
are not predictive of results obtained in larger later stage clinical trials designed to prove safety and efficacy. For example, after promising preclinical and early clinical data from our lead MAXY-alpha product candidate, clinical trials of this
product candidate were terminated after an unexpected reduction of the pharmacodynamic and pharmacokinetic effects was observed and antibodies binding to MAXY-alpha were identified in a Phase I repeat-dosing trial. As a result, there can be no
assurances that clinical trials of any of our current or future product candidates will be completed or produce sufficient safety and efficacy data necessary to obtain regulatory approval or result in a marketed product.

In addition, the timing of the commencement, continuation or completion of clinical trials may be subject to significant delays, or a clinical trial may
be suspended or delayed by us, a collaborator, the FDA or other foreign governmental agencies for various reasons, including:



| |  |  | deficiencies in the conduct of the clinical trials;
| | - |  | ---------------------------------------------------



| |  |  | negative or inconclusive results from the clinical trials that necessitate additional clinical studies;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | difficulties or delays in identifying and enrolling patients who meet trial eligibility criteria;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | delays in obtaining or maintaining required approvals from institutions, review boards or other reviewing entities at clinical sites;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inadequate supply or deficient quality of product candidate materials necessary for the conduct of the clinical trials;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the occurrence of unacceptable toxicities or properties or unforeseen adverse events, especially as compared to currently approved drugs intended to treat the same
indications;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our lack of financial resources to continue the development of a product candidate;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | future legislation or administrative action or changes in FDA policy or the policy of foreign regulatory agencies during the period of product development, clinical
trials and FDA regulatory review; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other reasons that are internal to the business of a collaborative partner, which it may not share with us.
| | - |  | -----------------------------------------------------------------------------------------------------------

As a result of these risks and other factors, we may conduct lengthy and expensive clinical trials of MAXY-G34 or preclinical studies and clinical trials
of MAXY-4 and our other current or future product candidates, only to learn that a particular product candidate has failed to demonstrate sufficient safety or efficacy necessary to obtain regulatory approval for one or more therapeutic indications,
has failed to demonstrate clinically relevant differentiation of our products from currently marketed products, does not offer therapeutic or other improvements compared to other marketed drugs, has unforeseen adverse events or does not otherwise
demonstrate sufficient potential to make the commercialization of the product worthwhile. Any failure or substantial delay in successfully completing clinical trials, obtaining regulatory approval and commercializing our product candidates could
severely harm our business.

Our potential products are subject to a lengthy and uncertain regulatory process and may never gain
approval. If our potential products are not approved, we will not be able to commercialize those products.

The FDA must approve
any therapeutic product or vaccine before it can be marketed in the United States. Other countries also require approvals from regulatory authorities comparable to the FDA before products can be marketed in the applicable country. Before we can file
biologic license application (BLA) with the FDA or other



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regulatory entity, the product candidate must undergo extensive testing, including animal studies and human clinical trials, which can take many years and
require substantial expenditures. Data obtained from such testing may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval.

Because our potential 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 these
authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. Neither the FDA nor any other regulatory authority has approved any therapeutic product candidate developed with our
MolecularBreeding directed evolution platform for commercialization in the United States or elsewhere. We, or a collaborator, may not be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory
authorities for our products.

Regulatory approval of a BLA is never guaranteed, and the approval process typically takes several years and
is extremely expensive. The FDA and other regulatory agencies also have substantial discretion in the drug approval process. Despite the time and expense exerted, failure can occur at any stage and we could encounter problems that cause us to
abandon clinical trials or to repeat or perform additional preclinical testing and clinical trials. The number and focus of preclinical studies and clinical trials that will be required for approval from the FDA and other regulatory agencies varies
depending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug candidate. The FDA and other regulatory agencies can delay, limit or deny approval of a
drug candidate for many reasons, including:



| |  |  | a drug candidate may not be safe or effective;
| | - |  | ----------------------------------------------



| |  |  | regulatory officials may not find the data from preclinical testing and clinical trials sufficient;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the FDA and other regulatory agencies might not approve our third-party manufacturers processes or facilities; or
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the FDA or other regulatory agencies may change their approval policies or adopt new regulations.
| | - |  | -------------------------------------------------------------------------------------------------

Even if we receive regulatory approval to sell a product, the approved label for a product may entail limitations on the indicated uses for which we can
market a product. For example, even if MAXY-G34 is further developed for the treatment of chemotherapy-induced neutropenia and approved by the FDA, if we are not able to obtain broad labeling for this product allowing approved use with multiple
chemotherapy regimens for multiple cancers, MAXY-G34 may not be adopted by hospital formularies or otherwise have limited commercial success which could have a significant adverse impact on our business. Further, once regulatory approval is
obtained, a marketed product and its manufacturer are subject to continued review, and discovery of previously unknown problems or adverse events associated with an approved product or the discovery of previously unknown problems with the
manufacturer may result in restrictions on the product, the manufacturer or the manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices.

During the period while we are engaged in product development, the policies of the FDA and foreign regulatory entities may change and additional
government laws or regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. If we are not able to maintain regulatory compliance, we might not obtain approval of our products or be permitted to market our
products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. In this regard, legislation has been proposed in the United
States but not yet enacted into law that would define a regulatory approval process for protein drugs that are similar to already marketed protein drugs.

Our manufacturing strategy, which relies on third-party manufacturers, exposes us to additional risks.

We do not currently have the resources, facilities or experience to manufacture any product candidates or potential products ourselves. Completion of any clinical trials and any commercialization of our products will
require access to, or development of, manufacturing facilities that meet FDA standards or other regulatory requirements to manufacture a sufficient supply of our potential products. We currently depend on third parties for the scale up and
manufacture of our product candidates for preclinical and clinical purposes. If our third party manufacturer is unable



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to manufacture preclinical or clinical supplies in a timely manner, or is unable or unwilling to satisfy our needs or FDA or other regulatory requirements,
it could delay clinical trials, regulatory submissions and commercialization of our potential products, entail higher costs and possibly result in our being unable to sell our products. In addition, technical problems or other manufacturing delays
could delay the advancement of potential products into preclinical or clinical trials, delay or prevent us from achieving development milestones under a collaborative agreement or result in the termination of development of particular product
candidates, adversely affecting our revenues and product development timetable, which in turn could adversely affect our business and our stock price.

There are a limited number of contract manufacturers that are suitable for the manufacture of protein pharmaceuticals in compliance with current Good Manufacturing Practices (GMP) requirements and there is often
limited access to such facilities. If we are unable to enter into agreements with qualified manufacturers that will provide us with our product candidates in a timely manner and at an acceptable cost, the development or commercialization of a
potential product could be delayed, which would adversely affect our business.

With regard to our MAXY-G34 product candidate, we obtain
polyethylene glycol (PEG) for use in making such product from Nektar Therapeutics AL, Corporation (formerly Shearwater Polymers, Inc.), a subsidiary of Nektar Therapeutics. If Nektar fails or is unable to timely supply us with PEG that meets our
product needs, then we could encounter delays in any further development or commercialization of MAXY-G34, which in turn could adversely affect our business and our stock price.

In addition, failure of any third party manufacturers or us to comply with applicable regulations, including pre- or post-approval inspections and the
current GMP requirements of the FDA or other comparable regulatory agencies, could result in sanctions being imposed on us. These sanctions could include fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing
approval of our products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.

The manufacturing of our product candidates presents technological, logistical and regulatory risks, each of which may adversely
affect our potential revenues.

The manufacturing and manufacturing process development of pharmaceuticals, and, in particular,
biologicals, are technologically and logistically complex and heavily regulated by the FDA and other governmental authorities. The manufacturing and manufacturing process development of our product candidates present many risks, including, but not
limited to, the following:



| |  |  | before we can obtain approval of any of our product candidates for the treatment of a particular disease or condition, we must demonstrate to the satisfaction of
the FDA and other governmental authorities that the drug manufactured for commercial use is comparable to the drug manufactured for clinical trials and that the manufacturing facility complies with applicable laws and regulations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | it may not be technically feasible to scale up an existing manufacturing process to meet demand or such scale-up may take longer than anticipated; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to comply with strictly enforced GMP regulations and similar foreign standards may result in delays in product approval or withdrawal of an approved product
from the market.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any of these factors could delay any clinical trials, regulatory submissions or commercialization of
our product candidates, entail higher costs and result in our being unable to effectively sell any products.

We may need additional
capital in the future. If additional capital is not available, we may have to curtail or cease operations.

We anticipate that
existing cash and cash equivalents and income earned thereon, together with anticipated revenues from existing collaboration and license agreements and grants, will enable us to maintain our currently planned operations for at least the next twelve
months. However, our current plans and assumptions may change, and our capital requirements may increase in future periods depending on many factors, including payments received



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under our collaboration and license agreements and government grants, the progress and scope of our research and development projects, the extent to which we
advance products into and through clinical trials with our own resources, the effect of any strategic transactions, 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 have no committed sources of capital and do not know whether additional financing will be
available when needed, or, if available, that the terms will be favorable to us or our stockholders. If additional funds are not available, we may be forced to delay or terminate research or preclinical development programs, clinical trials or the
commercialization of products, if any, resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets, or grant
licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

If our collaborations are not successful or we are unable to enter into and maintain future collaboration arrangements for any of our product
candidates, we may not be able to effectively develop and market some of our products.

Since we do not currently possess the
resources necessary to develop and commercialize multiple products, or the resources to complete all approval processes that may be required for these potential products, we have generally sought to enter into collaborative arrangements to fund the
development of new product candidates for specific indications and to develop and commercialize potential products. We are currently party to a collaboration arrangement only with respect to our MAXY-4 product candidates and, if we are unable to
enter into any new collaboration arrangements, or if existing or future collaboration arrangements are not maintained, our potential products may not be commercialized.

We have limited or no control over the resources that a collaborator may devote to the development and commercialization of our potential products. A collaborator may elect not to develop potential products arising
out of a collaborative arrangement or not to devote sufficient resources to the development, manufacture, marketing or sale of these products. Further, a collaborator may not perform its obligations as expected and may delay the development or
commercialization of a product candidate, terminate its agreement with us, or breach or otherwise fail to conduct its collaborative activities successfully and in a timely manner. If any of these events occur, we may not be able to develop or
commercialize our potential products.

For example, if we are unable to enter into a collaboration or licensing arrangement for the
continued clinical development of MAXY-G34, or are unable to maintain our existing collaboration arrangement for our MAXY-4 program, we may elect to delay or discontinue further development of such program, which may harm our business.

Any conflicts with a collaborator could harm our business.

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

In addition, a collaborator may market
products intended to treat the medical conditions that our product candidates are planned to be used to treat, and could become our competitors in the future. For example, a collaborator could develop and commercialize competing products, fail to
rapidly develop our product candidates, fail to obtain timely regulatory approvals for product commercialization, terminate their agreements with us prematurely, or fail to devote sufficient resources to allow the development and commercialization
of our products. Any of these circumstances could harm our product development efforts. We have limited ability to prevent actions by any future collaborator that could have any adverse impact on the development and commercialization of our related
product candidates.



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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 intellectual
property for our technologies and products in the United States 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 United States, 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 allowing for meaningfully defending intellectual property rights.

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. The patent positions of
biopharmaceutical and biotechnology companies, including our patent positions, are often uncertain and involve complex legal and factual questions. We apply for patents covering our technologies and potential products as we deem appropriate.
However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. 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. Enforcement of our patents against infringers could require us to expend significant amounts with no assurance that we
would be successful in any litigation. Others may independently develop similar or alternative technologies or design around our patented technologies or products. In addition, others may challenge or invalidate our patents or our patents may fail
to provide us with any competitive advantages.

The USPTO adopted rules that were to become effective on November 1, 2007, regarding
processes for obtaining patents in the United States. However, in April 2008, the U.S. District Court for the Eastern District of Virginia granted summary judgment for plaintiffs challenging the new rules to permanently enjoin enforcement of the new
rules by the USPTO. If the USPTO successfully appeals the courts decision and the rules are implemented, these rules could make it more difficult for patent applicants to obtain patents, especially with regard to biotechnology products and
processes. Although we do not believe that the rule changes, if made effective, would likely have a material adverse impact with regard to our MAXY-G34 or MAXY-4 programs, it may be more difficult to obtain patent protection in the United States for
any future product candidates.

We also 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 or misuse 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 require us to shut down some of our operations.

Our ability to develop products depends in part on not infringing patents or other proprietary rights of third parties, and not breaching any licenses
that we have entered into with regard to our technologies and products. In particular, others have obtained patents, and have filed, and in the future are likely to file, patent applications that may issue as patents that cover genes or gene
fragments or corresponding proteins or peptides that we may wish to utilize to develop, manufacture and commercialize our product candidates. There are often multiple patents owned by third parties that cover particular proteins and related nucleic
acids that are of interest to us in the development of our product candidates. For example, we are aware that Amgen, Inc. and others have issued patents and pending patent applications relating to G-CSF. To the extent that these patents, or patents
that may issue in the future, cover methods or compositions that we wish to use in developing, manufacturing or commercializing our product candidates, and such use by us or on our behalf would constitute infringement of an issued valid patent
claim, we would need to obtain a license from the proprietor of the relevant patent rights, which may not be available to us on acceptable terms, if at all.



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Third parties may assert that we are employing their proprietary technology without authorization. In
particular, our efforts to develop improved, next-generation protein pharmaceuticals could lead to allegations of patent infringement by the parties that hold patents covering other versions of such proteins or methods of making and using such
proteins. In addition, third parties that do not have patents that currently cover our activities may obtain such patents in the future and then claim that our activities or product candidates infringe these patents. We could incur substantial costs
and diversion of the time and attention 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. In addition, 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 affected products.

We 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 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.

Budget or cash constraints may force us to delay or terminate our efforts to develop certain products and could prevent us from executing our
business plan, meeting our stated timetables and commercializing our potential products as quickly as possible.

Because the
research and development of pharmaceuticals is a long and expensive process, we must regularly assess the most efficient allocation of our research and development resources. Accordingly, we may choose to delay or terminate our research and
development efforts for a promising product candidate to allocate those resources to another program, which could cause us to fall behind our timetables for development and prevent us from commercializing product candidates as quickly as possible.
As a result, we may not be able to fully realize the value of some of our product candidates in a timely manner, since they will be delayed in reaching the market, or may not reach the market at all.

For example, in October 2008, we announced the delay of both Phase III manufacturing and a Phase IIb trial of MAXY-G34, our lead candidate, until we
identify a partner who can share the costs of these activities and the delay of these activities are expected to have a material impact on the timeline for any potential commercialization of MAXY-G34. We also implemented a restructuring plan that
will result in the reduction of approximately 30% of our workforce and announced the engagement of a financial advisor to assist us in evaluating strategic options.

We are continuing our efforts to contain costs and continue to believe that strict cost containment in the near term is essential if our current funds are to be sufficient to allow us to continue our currently planned
operations and execute our revised strategic plan. We assess market conditions on an ongoing basis and plan to take appropriate actions as required. However, we may not be able to effectively contain our costs and achieve an expense structure
commensurate with our business activities and revenues. As a result, we could have inadequate levels of cash for future operations or for future capital requirements, which could significantly harm our ability to operate the business or execute our
revised corporate strategy.

Our revenues have primarily been derived from collaboration and license agreements and government
grants, and our inability to maintain these grants and agreements or establish and maintain new collaborations, license agreements or grants would adversely impact our revenues, financial position and results of operation.

We currently have a collaboration agreement for our MAXY-4 program, various government grants and a license agreement with Codexis that we expect to
generate revenue for the remainder of 2009 and expect that a substantial portion of our revenue for the foreseeable future will result from these sources. If these agreements or grants are materially amended, terminated, or we sell any such asset,
and we are unable to enter into new agreements or obtain new grants, our revenues, financial position and results of operations would be materially adversely affected.



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Other biological products may compete with our products.

If approved for sale by regulatory authorities, our next-generation protein therapeutics will likely compete with already approved earlier-generation
products based on the same protein. In addition, as the patent protection for such earlier-generation protein products expires, we expect that additional products with amino acid sequences identical or substantially similar to those of the
earlier-generation protein products that have lost patent protection will also enter the marketplace, and compete with such earlier generation protein products and our products. This competition may be intense, with success determined by product
attributes, price and marketing power. The availability of such similar products may result in price erosion for all products of the class and could lead to limits on reimbursement for our products by third party payors.

With regard to our MAXY-G34 product candidate, we expect Neulasta® and Neupogen® to compete with MAXY-G34, if commercialized. In addition, we are aware that BioGeneriX AG and Teva Pharmaceutical Industries Ltd. are
developing G-CSF products based on naturally occurring human G-CSF.

With regard to
our MAXY-4 product candidates, we expect Orencia® (Bristol Myers Squibb Company) to compete with MAXY-4, if commercialized. In addition, we are aware that Bristol Myers Squibb Company is
also developing belatacept that, if marketed, could compete with MAXY-4.

The Committee for Medicinal Products for Human Use (CHMP) of the
European Agency for the Evaluation of Medicinal Products (EMEA) has adopted guidelines for assessing the comparability of biosimilar products including G-CSF. The basis for such approvals in the European Union will be proof of comparability of the
new protein drug to the prior drug, which will require clinical studies of the biosimilar protein drug.

In the United States, there is
presently no legislation that specifically addresses the regulatory process for approval of biosimilar protein drugs, and to date only a biosimilar human growth hormone and certain insulin products have been approved by the FDA under a new drug
application (NDA) in accordance with Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act. However, legislation has been introduced into both the U.S. Senate and House of Representatives that addresses the development path and
requirements for biosimilar protein drugs. It is not clear whether such legislation will be enacted into law, and if passed, what the substance of such legislation will be. However, any law that permits the approval of biosimilars would likely lead
to the eventual introduction of biosimilar protein products in the United States, which could result in increased competition for all forms of a particular therapeutic protein.

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 or product development by others may result in our products and technologies becoming obsolete.

As a company that is focused on next-generation protein therapeutic products, we face, and will continue to face, intense competition from
both large and small biotechnology companies, as well as academic and research institutions and government agencies, that are pursuing competing technologies for modifying DNA and proteins. These companies and organizations may develop technologies
that are alternatives to our technologies. Further, our competitors in the protein optimization field, including companies that have developed and commercialized prior versions of protein therapeutic products, 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 commercial products. In addition, therapeutic products that are small molecules
may be developed by our competitors that could reduce or displace the market for our protein therapeutic products. Small molecule drugs are often less expensive and easier to administer than protein therapeutics and therefore would have competitive
advantages if they were developed and shown to be safe and effective for the indication that our product candidates are targeting.



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Even if approved by the FDA or a comparable foreign regulatory agency, any products that we develop
through our technologies will compete in multiple, highly competitive markets may fail to achieve market acceptance, which would impair our ability to become profitable. Most of the companies and organizations competing with us in the markets for
such products have greater capital resources, research and development and marketing staff and facilities and capabilities, and greater experience in modifying DNA and proteins, obtaining regulatory approvals, manufacturing products and marketing.
Accordingly, our competitors may be able to develop technologies and products more easily, which would render our technologies and products and those of a collaborator obsolete and noncompetitive.

In addition, if any of our drug candidates are approved for commercial sale, they will need to compete with other products intended to treat the same
disease, including the marketed versions of the protein therapeutic drug that we have sought to improve, and possibly including other variant versions of such drug, and generic bioequivalent or biosimilar versions of such drugs, and small molecule
drugs. Such competition may be intense and lead to price reductions for all forms of a particular therapeutic protein. Moreover, any adverse developments related to a currently marketed version of the protein therapeutic drug that we have sought to
improve or a generic bioequivalent or biosimilar version of such drug may have a significant adverse impact on the continued development or future commercialization and marketing of our related product candidates and could cause us to change our
development plans or discontinue further development of such product candidates. If we are unable to market and commercialize our product successfully, our business would be adversely affected.

Legislative actions, new accounting pronouncements and higher compliance costs may adversely impact our future financial position and results of
operations.

Future changes in financial accounting standards may cause adverse, unexpected earnings fluctuations and may adversely
affect our reported results of operations. New accounting pronouncements and varying interpretations of such pronouncements have occurred with frequency in the recent past and may occur in the future. In addition, we may make changes in our
accounting policies in the future.

In addition, compliance with changing regulations regarding corporate governance and public disclosure
may also result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations and Nasdaq Global Market listing
requirements, have often created uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with
evolving standards, and this investment may result in increased general and administrative expenses and cause a diversion of management time and attention from revenue-generating activities to compliance activities.

Our stock price has been, and may continue to be, extremely volatile, and an investment in our stock could decline in value.

The trading prices of life science company stocks in general, and ours in particular, have experienced significant price fluctuations in the last several
years. During the twelve months ended March 31, 2009, the price of our common stock on the Nasdaq Global Market ranged from $2.95 to $9.49. The valuations of many life science companies without product revenues and earnings, including ours, are
based on valuation standards such as price to sales ratios and progress in product development or clinical trials. Trading prices based on these 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. In addition,
our stock price could be subject to wide fluctuations in response to factors including the following:



| |  |  | our consummation, or our failure to consummate, any strategic transaction;
| | - |  | --------------------------------------------------------------------------



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| |  |  | our failure to meet our publicly announced revenue and/or expense projections and/or product development timetables;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | adverse or inconclusive results or delays in preclinical development or clinical trials;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | any entry into or material amendment or termination of a collaborative or license agreement;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | any decisions to discontinue or delay development programs or clinical trials;
| | - |  | ------------------------------------------------------------------------------



| |  |  | announcements of new technological innovations or new products by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in general economic, political and market conditions, such as recessions, interest rate changes, terrorist acts and other factors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | developments in or challenges relating to our patent or other proprietary rights, including lawsuits or proceedings alleging patent infringement based on the
development, manufacturing or commercialization of our product candidates; 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 could incur substantial legal fees and our managements attention and resources would be diverted from operating our business to respond to the litigation.

Substantial sales of shares may adversely impact the market price of our common stock.

If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, the market price of
our common stock may decline. Our common stock trading volume is low and thus the market price of our common stock is particularly sensitive to trading volume. Significant sales of our common stock may adversely impact the then-prevailing market
price of our common stock.

If current levels of market disruption and volatility continue or worsen, we may not be able to preserve
our cash balances or access such sources if necessary.

The capital and credit markets have been experiencing extreme volatility
and disruption. As of March 31, 2009, we had $200.9 million in cash, cash equivalents and marketable securities. While we maintain an investment portfolio primarily of short-term commercial paper and money market funds and have not experienced
any liquidity issues with respect to these securities, we may experience reduced liquidity with respect to some of our investments if current levels of market disruption and volatility continue or worsen. Under extreme market conditions, there can
be no assurance that we would be able to preserve our cash balances or that such sources would be available or sufficient for our business.

If we or a collaborator receives regulatory approval for one of our drug candidates, we will be subject to ongoing FDA obligations and continued regulatory review, and we may also be subject to additional FDA post-marketing
obligations, all of which may result in significant expense and limit our ability to commercialize our potential drugs.



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Any regulatory approvals that we or a collaborator receives for one of our product candidates may also be
subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA or a foreign regulatory agency approves any of our drug
candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion, and record keeping for the product will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the
product, including adverse events of unanticipated severity or frequency, may result in restriction on the marketing of the product, and could include withdrawal of the drug from the market.

We may be subject to costly product liability claims and may not have adequate insurance.

Because we conduct clinical trials in humans, we face the risk that the use of our product candidates will result in adverse effects. We currently
maintain product liability insurance for our clinical trials, however, such liability insurance may not be adequate to fully cover any liabilities that arise from clinical trials of our product candidates. We may not have sufficient resources to pay
for any liabilities resulting from a claim excluded from, or beyond the limit of, our insurance coverage.

Some of our existing
stockholders can exert control over us, and may not make decisions that are in the best interests of all stockholders.

As of
March 31, 2009, our executive officers and directors, together with principal stockholders holding more than 5% of our common stock, beneficially owned approximately 39% of our common stock in the aggregate. These stockholders, if they act
together, could 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 our company 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. This concentration of
ownership could also depress our stock price.

Our facilities in California are located near an earthquake fault, and an earthquake
or other types of natural disasters or resource shortages could disrupt our operations and adversely affect our results.

Our U.S.
facilities are located in our corporate headquarters in Redwood City, California near active earthquake zones. We do not have a formal business continuity or disaster recovery plan, and in the event of a natural disaster, such as an earthquake or
localized extended outages of critical utilities or transportation systems, we could experience a significant business interruption.



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

Not applicable.



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

Not applicable.



|ITEM4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|------ | ---------------------------------------------------

Not applicable.



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

Not applicable.



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

The following exhibits are filed as part
of this report:



|     |  |                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     | 
|32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

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



| |  |              |  |               |  |     |  |                        
| |  | ------------ |  | ------------- |  | --- |  | -----------------------
| |  |              |  | MAXYGEN, INC.
| |  |              |  |              
| |  | May 11, 2009 |  |               |  | By: |  | /s/ Russell J. Howard  
| |  |              |  |               |  |     |  | Russell J. Howard      
| |  |              |  |               |  |     |  | Chief Executive Officer
| |  |              |  |              
| |  | May 11, 2009 |  |               |  | By: |  | /s/ Lawrence W. Briscoe
| |  |              |  |               |  |     |  | Lawrence W. Briscoe    
| |  |              |  |               |  |     |  | Chief Financial Officer



41