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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 June 30, 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   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

As of July 31, 2009, there were 38,278,424 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 JUNE 30, 2009

INDEX



|                                                                                                                 |  |    |  | 
|---------------------------------------------------------------------------------------------------------------- |  | -- |  | 
|Part I FINANCIAL INFORMATION                                                                                     |  |   
|                                                                                                                 | 
|Item 1: Financial Statements:                                                                                    |  |   
|                                                                                                                 | 
|Condensed Consolidated Balance Sheets as of December 31, 2008 and June 30, 2009                                  |  | 1 
|                                                                                                                 | 
|Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2008 and 2009 |  | 2 
|                                                                                                                 | 
|Condensed Consolidated Statements of Cash Flows for six month periods ended June 30, 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                    |  | 18
|                                                                                                                 | 
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                                               |  | 27
|                                                                                                                 | 
|Item 4: Controls and Procedures                                                                                  |  | 27
|                                                                                                                 | 
|Part II OTHER INFORMATION                                                                                        |  |   
|                                                                                                                 | 
|Item 1: Legal Proceedings                                                                                        |  | 28
|                                                                                                                 | 
|Item 1A: Risk Factors                                                                                            |  | 28
|                                                                                                                 | 
|Item 2: Unregistered Sales of Equity Securities and Use of Proceeds                                              |  | 44
|                                                                                                                 | 
|Item 3: Defaults Upon Senior Securities                                                                          |  | 44
|                                                                                                                 | 
|Item 4: Submission of Matters to a Vote of Security Holders                                                      |  | 44
|                                                                                                                 | 
|Item 5: Other Information                                                                                        |  | 44
|                                                                                                                 | 
|Item 6: Exhibits                                                                                                 |  | 44
|                                                                                                                 | 
|SIGNATURES                                                                                                       |  | 46

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



| |  |  | failure of the our stockholders to approve the joint venture transaction with Astellas Pharma Inc., as described herein, the failure of any other closing condition
to be satisfied, and unexpected delays in the formation of the joint venture;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from
these predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in 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, and our Current Reports on Form 8-K and other
SEC filings. Maxygen is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.



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PART I  FINANCIAL
INFORMATION

ITEM1. FINANCIAL STATEMENTS

MAXYGEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                                             |  | December 31,2008 |          |   | June 30,2009 |  
|                                                                                                                                                                             |  | (Note 1)         |          |   | (unaudited)  |  
|ASSETS                                                                                                                                                                       |  |                  |          |   |              |   |          |  
|Current assets:                                                                                                                                                              |  |                  |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                                                                    |  | $                | 154,883  |   |              | $ | 153,558  |  
|Short-term investments                                                                                                                                                       |  |                  | 51,600   |   |              |   | 48,634   |  
|Accounts receivable and other receivables                                                                                                                                    |  |                  | 3,526    |   |              |   | 4,272    |  
|Prepaid expenses and other current assets                                                                                                                                    |  |                  | 1,201    |   |              |   | 977      |  
|                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|Total current assets                                                                                                                                                         |  |                  | 211,210  |   |              |   | 207,441  |  
|Property and equipment, net                                                                                                                                                  |  |                  | 2,347    |   |              |   | 2,106    |  
|                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|Total assets                                                                                                                                                                 |  | $                | 213,557  |   |              | $ | 209,547  |  
|                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|                                                                                                                                                                             |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                         |  |                  |          |   |              |   |          |  
|Current liabilities:                                                                                                                                                         |  |                  |          |   |              |   |          |  
|Accounts payable                                                                                                                                                             |  | $                | 1,438    |   |              | $ | 1,108    |  
|Accrued compensation                                                                                                                                                         |  |                  | 2,579    |   |              |   | 2,451    |  
|Accrued restructuring charges                                                                                                                                                |  |                  | 1,114    |   |              |   | 102      |  
|Accrued project costs                                                                                                                                                        |  |                  | 3,435    |   |              |   | 2,678    |  
|Accrued legal                                                                                                                                                                |  |                  | 285      |   |              |   | 1,653    |  
|Other accrued liabilities                                                                                                                                                    |  |                  | 950      |   |              |   | 1,355    |  
|Deferred revenue                                                                                                                                                             |  |                  | 6,175    |   |              |   | 5,409    |  
|                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|Total current liabilities                                                                                                                                                    |  |                  | 15,976   |   |              |   | 14,756   |  
|Non-current deferred revenue                                                                                                                                                 |  |                  | 3,069    |   |              |   | 2,157    |  
|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 June 30,
2009                                     |  |                  |         |   |              |   |         |  
|Common stock, $0.0001 par value: 100,000,000 shares authorized, 37,510,502 and 38,243,645 shares issued and outstanding at December 31,
2008 and June 30, 2009, respectively |  |                  | 4        |   |              |   | 4        |  
|Additional paid-in capital                                                                                                                                                   |  |                  | 434,210  |   |              |   | 439,487  |  
|Accumulated other comprehensive loss                                                                                                                                         |  |                  | (8       | ) |              |   | (174     | )
|Accumulated deficit                                                                                                                                                          |  |                  | (239,694 | ) |              |   | (246,683 | )
|                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|Total stockholders equity                                                                                                                                                   |  |                  | 194,512  |   |              |   | 192,634  |  
|                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|Total liabilities and stockholders equity                                                                                                                                   |  | $                | 213,557  |   |              | $ | 209,547  |  
|                                                                                                                                                                             |  |                  |          |   |              |   |          |  

See accompanying notes.



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MAXYGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per
share data)



|                                                                                                                                                                                                                                     |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                                                                                                                                                     |  | Three months endedJune 30, |         |   | Six months endedJune 30, |  
|                                                                                                                                                                                                                                     |  | 2008                       |         |   | 2009                     |   |        | 2008 |  |   | 2009    |  
|                                                                                                                                                                                                                                     |  | (unaudited)                |        
|Collaborative research and development revenue                                                                                                                                                                                       |  | $                          |        |   |                          | $ | 5,246  |      |  | $ |        |   |  | $ | 9,242  |  
|Technology and license revenue (including amounts from related party: three months ended June 30, 2008- $120; three months ended
June 30, 2009-$279; six months ended June 30, 2008-$277; and six months ended June 30, 2009-$3,885) |  |                            | 120     |   |                          |   | 279    |      |  |   | 277     |   |  |   | 3,890  |  
|Grant revenue                                                                                                                                                                                                                        |  |                            | 1,037   |   |                          |   | 1,264  |      |  |   | 2,323   |   |  |   | 2,171  |  
|                                                                                                                                                                                                                                     |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                                                                                                                                                     |  |                            |         |  
|Total revenues                                                                                                                                                                                                                       |  |                            | 1,157   |   |                          |   | 6,789  |      |  |   | 2,600   |   |  |   | 15,303 |  
|Operating expenses:                                                                                                                                                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Research and development                                                                                                                                                                                                             |  |                            | 12,534  |   |                          |   | 7,418  |      |  |   | 25,640  |   |  |   | 14,451 |  
|General and administrative                                                                                                                                                                                                           |  |                            | 5,031   |   |                          |   | 5,568  |      |  |   | 8,544   |   |  |   | 8,453  |  
|Goodwill impairment                                                                                                                                                                                                                  |  |                            | 12,192  |   |                          |   |       |      |  |   | 12,192  |   |  |   |       |  
|Restructuring charge                                                                                                                                                                                                                 |  |                            | 266     |   |                          |   |       |      |  |   | 799     |   |  |   | 98     |  
|                                                                                                                                                                                                                                     |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                                                                                                                                                     |  |                            |         |  
|Total operating expenses                                                                                                                                                                                                             |  |                            | 30,023  |   |                          |   | 12,986 |      |  |   | 47,175  |   |  |   | 23,002 |  
|                                                                                                                                                                                                                                     |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                                                                                                                                                     |  |                            |         |  
|Loss from operations                                                                                                                                                                                                                 |  |                            | (28,866 | ) |                          |   | (6,197 | )    |  |   | (44,575 | ) |  |   | (7,699 | )
|                                                                                                                                                                                                                                     |  |                            |         |  
|Interest income and other (expense), net                                                                                                                                                                                             |  |                            | 759     |   |                          |   | 328    |      |  |   | 2,750   |   |  |   | 710    |  
|                                                                                                                                                                                                                                     |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                                                                                                                                                     |  |                            |         |  
|Net loss                                                                                                                                                                                                                             |  | $                          | (28,107 | ) |                          | $ | (5,869 | )    |  | $ | (41,825 | ) |  | $ | (6,989 | )
|                                                                                                                                                                                                                                     |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                                                                                                                                                     |  |                            |         |  
|Basic and diluted net loss per share                                                                                                                                                                                                 |  | $                          | (0.76   | ) |                          | $ | (0.15  | )    |  | $ | (1.13   | ) |  | $ | (0.18  | )
|                                                                                                                                                                                                                                     |  |                            |         |  
|Shares used in basic and diluted net loss per share calculations                                                                                                                                                                     |  |                            | 37,046  |   |                          |   | 38,159 |      |  |   | 37,021  |   |  |   | 38,030 |  

See accompanying notes.



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MAXYGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                       |  |                          |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                       |  | Six months endedJune 30, |        
|                                                                                                       |  | 2008                     |         |   | 2009 |  
|                                                                                                       |  | (unaudited)              |        
|Operating activities                                                                                   |  |                          |         |   |      |   |         |  
|Net loss                                                                                               |  | $                        | (41,825 | ) |      | $ | (6,989  | )
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |  |                          |         |   |      |   |         |  
|Depreciation                                                                                           |  |                          | 802     |   |      |   | 545     |  
|Goodwill impairment                                                                                    |  |                          | 12,192  |   |      |   |        |  
|Non-cash stock compensation                                                                            |  |                          | 3,877   |   |      |   | 2,584   |  
|Common stock issued and stock options granted to consultants for services rendered                     |  |                          |        |   |      |   | 3       |  
|Changes in operating assets and liabilities:                                                           |  |                          |         |   |      |   |         |  
|Related party receivable                                                                               |  |                          | 7,493   |   |      |   |        |  
|Accounts receivable and other receivables                                                              |  |                          | 959     |   |      |   | (746    | )
|Prepaid expenses and other current assets                                                              |  |                          | 1,094   |   |      |   | 224     |  
|Accounts payable                                                                                       |  |                          | 407     |   |      |   | (330    | )
|Accrued compensation                                                                                   |  |                          | (4,495  | ) |      |   | (128    | )
|Accrued restructuring charges                                                                          |  |                          | (4,367  | ) |      |   | (1,012  | )
|Accrued project costs                                                                                  |  |                          | 116     |   |      |   | (757    | )
|Accrued legal                                                                                          |  |                          | 283     |   |      |   | 1,368   |  
|Other accrued liabilities                                                                              |  |                          | (66     | ) |      |   | 404     |  
|Deferred revenue                                                                                       |  |                          |        |   |      |   | (1,678  | )
|                                                                                                       |  |                          |         |   |      |   |         |  
|Net cash used in operating activities                                                                  |  |                          | (23,530 | ) |      |   | (6,512  | )
|                                                                                                       |  |                          |         |   |      |   |         |  
|                                                                                                       |  |                         
|Investing activities                                                                                   |  |                          |         |   |      |   |         |  
|Purchases of available-for-sale securities                                                             |  |                          | (30,390 | ) |      |   | (37,700 | )
|Maturities of available-for-sale securities                                                            |  |                          | 56,880  |   |      |   | 40,500  |  
|Acquisition of property and equipment                                                                  |  |                          | (415    | ) |      |   | (304    | )
|                                                                                                       |  |                          |         |   |      |   |         |  
|Net cash provided by investing activities                                                              |  |                          | 26,075  |   |      |   | 2,496   |  
|                                                                                                       |  |                          |         |   |      |   |         |  
|                                                                                                       |  |                         
|Financing activities                                                                                   |  |                          |         |   |      |   |         |  
|Proceeds from issuance of common stock                                                                 |  |                          | 616     |   |      |   | 2,691   |  
|                                                                                                       |  |                          |         |   |      |   |         |  
|Net cash provided by financing activities                                                              |  |                          | 616     |   |      |   | 2,691   |  
|                                                                                                       |  |                          |         |   |      |   |         |  
|                                                                                                       |  |                         
|Effect of exchange rate changes on cash and cash equivalents                                           |  |                          |        |   |      |   |        |  
|                                                                                                       |  |                          |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                   |  |                          | 3,161   |   |      |   | (1,325  | )
|Cash and cash equivalents at beginning of period                                                       |  |                          | 77,130  |   |      |   | 154,883 |  
|                                                                                                       |  |                          |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                             |  | $                        | 80,291  |   |      | $ | 153,558 |  
|                                                                                                       |  |                          |         |   |      |   |         |  

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 June 30, 2009, and for the three and six months ended June 30, 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.

The Company has evaluated subsequent events through the time of filing this Form 10-Q on August 6, 2009, which is the date that these financial statements have been filed with the Securities and Exchange
Commission (SEC). No material subsequent events have occurred since June 30, 2009 that require recognition or disclosure in these financial statements.

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 June 30, 2009 was zero. The Company is not obligated to fund the operations or
other capital requirements of Codexis. As of December 31, 2008 and June 30, 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. Liabilities of $285,000 have been reclassified from other accrued liabilities to accrued legal on the Condensed Consolidated Balance Sheets at
December 31, 2008. On the Condensed Statements of Cash Flows, adjustments to



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reconcile net loss from continuing operations to net cash used in operating activities of $283,000 has been reclassified from other accrued liabilities to
accrued legal for the six months ended June 30, 2008. Revenue of $120,000 and $277,000 has been reclassified from revenue from related party to technology and license revenue (including amounts from related party) for the three-month and
six-months ended June 30, 2008. These reclassifications, when made, did not have any effect on total revenues, net loss, total assets or total liabilities and stockholders equity.

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 categorizes them according to these phases of activities of the clinical trial. The start-up activities, which include site recruitment,
regulatory applications and investigator meetings, usually are performed reasonably uniformly and are performed by third-party CROs. Costs related to start-up activities are expensed uniformly over the start-up period which reflects the manner in
which such costs are incurred. The start-up period is followed by the portion of the clinical trial in which patients are dosed with the drug under study and results are monitored and measured. CROs also perform this portion of the study, which
comprises the major portion of the expense for conducting a clinical trial. The major driver of expense over this phase of a trial is the number of enrolled patients undergoing treatment, and as such the Company calculates costs attributable to
activities performed in this phase of the trial on a per-patient basis, and expenses those costs over the treatment phase based upon the stage of completion for each patient, as reported by the CRO. After the conclusion of the patient treatment
portion of the trial there are a series of activities relating to the closedown of the study and data quality assurance and analysis. These activities are performed reasonably uniformly and are expensed ratably over the closedown period. Other
costs, such as testing and drug material costs, are expensed as incurred, which is typically when the service has been rendered or the goods delivered.

CROs invoice the Company upon the occurrence of predetermined milestones (such as the enrollment of the first patient); however, the timing of these billings and the Companys related payments often does not
correspond directly to the level of contracted activities and the incurrence by us of a liability. In accordance with GAAP, to the extent contract payments are paid in advance of the activity, they are included in prepaid assets and expensed under
the policy indicated above, and to the extent that billings are in arrears to performance of the relevant activities, they are reflected as an adjustment to the liability reflected in the Companys financials at the time of performance of the
activity.

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.

The Company recently completed a Phase IIa clinical trial. The start-up activities during this trial were conducted over a period of approximately six
months, the site and study management activities were conducted over a period of approximately 18 months, and the close down activities were conducted over a period of approximately six months. The length of future clinical trials, and the various
phases of the trials, will vary depending upon the nature of the trials.

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.



5



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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.

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.



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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.

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 endedJune 30, |         |   | Six months endedJune 30, |  
|                                                                               |  | 2008                       |         |   | 2009                     |   |        | 2008 |  |   | 2009    |  
|Net loss                                                                       |  | $                          | (28,107 | ) |                          | $ | (5,869 | )    |  | $ | (41,825 | ) |  | $ | (6,989 | )
|                                                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted:                                                             |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Weighted-average shares used in computing basic and diluted net loss per share |  |                            | 37,046  |   |                          |   | 38,159 |      |  |   | 37,021  |   |  |   | 38,030 |  
|                                                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share                                           |  | $                          | (0.76   | ) |                          | $ | (0.15  | )    |  | $ | (1.13   | ) |  | $ | (0.18  | )
|                                                                               |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  

The total number of shares excluded from the calculations of diluted loss per share, prior to
application of the treasury stock method, was approximately 10,769,000 options and 1,273,000 restricted stock units at June 30, 2008 and 9,126,000 options and 650,000 restricted stock units at June 30, 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 and six-month
periods ended June 30, 2008 and 2009 were as follows (in thousands):



|                                                                      |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                      |  | Three months endedJune 30, |         |   | Six months endedJune 30, |  
|                                                                      |  | 2008                       |         |   | 2009                     |   |        | 2008 |  |   | 2009    |  
|Net loss                                                              |  | $                          | (28,107 | ) |                          | $ | (5,869 | )    |  | $ | (41,825 | ) |  | $ | (6,989 | )
|Changes in unrealized gains (losses) on securities available-for-sale |  |                            | (299    | ) |                          |   | (27    | )    |  |   | (130    | ) |  |   | (166   | )
|                                                                      |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Comprehensive loss                                                    |  | $                          | (28,406 | ) |                          | $ | (5,896 | )    |  | $ | (41,955 | ) |  | $ | (7,155 | )
|                                                                      |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  



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



|                                                   |  |                  |      |   |              |   |      |  
|-------------------------------------------------- |  | ---------------- | ---- | - | ------------ | - | ---- | -
|                                                   |  | December 31,2008 |      |   | June 30,2009 |  
|Unrealized gain on available-for-sale securities   |  | $                | 258  |   |              | $ | 78   |  
|Unrealized losses on available-for-sale securities |  |                  | (14  | ) |              |   |     |  
|Foreign currency translation adjustments           |  |                  | (252 | ) |              |   | (252 | )
|                                                   |  |                  |      |   |              |   |      |  
|Accumulated other comprehensive loss               |  | $                | (8   | ) |              | $ | (174 | )
|                                                   |  |                  |      |   |              |   |      |  

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 168, The FASB Accounting Standards CodificationTMand the Hierarchy of
Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162(FAS 168). The statement confirmed that the FASB Accounting Standards Codification (the
Codification) will become the single official source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and
related literature. After that date, only one level of authoritative U.S. GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new structure that
is organized in an easily accessible, user-friendly online research system. The Codification, which changes the referencing of financial standards, becomes effective for interim and annual periods ending on or after September 15, 2009. The
Company will apply the Codification beginning in the third quarter of 2009. The adoption of FAS 168 is not expected to have any substantive impact on the Companys financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (SFAS 165). This
standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth
the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company began
applying the provisions of SFAS 165 in the second quarter of 2009 and its adoption did not affect the Companys financial statements, other than the disclosures required by SFAS 165 which can be found in the Basis of Presentation portion
of this Note.

In April 2009, the FASB issued Statement of Financial Position (FSP FAS) No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, and is effective for the interim and annual periods ending after June 15, 2009. FSP FAS 157-4 provides
additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreases and includes guidance on
identifying circumstances that indicate a transaction is not orderly. During the period ended June 30, 2009, the Company adopted FAS 157-4. The adoption of FAS 157-4 did not have a material effect on its financial statements.

In April 2009, the FASB issued Statement of Financial Position (FSP FAS) No. 115-2 and No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, and is effective for the interim and annual periods ending after June 15, 2009. FSP FAS 115-2 and 124-2 amends the other-than-temporary impairment guidance in US GAAP for the debt securities to make
the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments debt and equity securities. During the period ended June 30, 2009, the Company adopted FAS 115-2 and 124-2. The adoption of FSP FAS
115-2 and 124-2 did not have a material effect on its financial statements.



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##### Table of Contents

In November 2008, the 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.

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 and six months ended June 30, 2009 was $678,000 and $1.0 million related to employee stock options, compared to $1.8 million and $2.9 million for the same
periods in 2008. Stock-based compensation expense related to restricted stock units was $296,000 and $1.3 million for the three and six months ended June 30, 2009. Stock-based compensation expense related to restricted stock units was $567,000
for the three and six months ended June 30, 2008. Stock-based compensation expense related to the ESPP for the three and six months ended June 30, 2009 was $0 and 79,000, compared to $0 and $120,000 for the same periods in 2008.
Stock-based compensation expense related to consultant stock options was $3,000 for the three and six months ended June 30, 2009, compared to $8,000 and $45,000 for the same periods 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.



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##### Table of Contents

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.

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



|                                      |  |                                |  |                                  
|------------------------------------- |  | ------------------------------ |  | ---------------------------------
|                                      |  | Three months endedJune 30,2008 |  | Three months endedJune 30,2009(1)
|Expected dividend yield               |  | 0.0%                           |  |                                 
|Risk-free interest rate rangeOptions |  | 2.85%                          |  |                                 
|Risk-free interest rate rangeESPP    |  |                               |  |                                 
|Expected lifeOptions                 |  | 5.72 years                     |  |                                 
|Expected lifeESPP                    |  |                               |  |                                 
|Expected volatilityOptions           |  | 51.86%                         |  |                                 
|Expected volatilityESPP              |  |                               |  |                                 



|                                      |  |                              |  |                                
|------------------------------------- |  | ---------------------------- |  | -------------------------------
|                                      |  | Six months endedJune 30,2008 |  | Six months endedJune 30,2009(1)
|Expected dividend yield               |  | 0.0%                         |  | 0.0%                           
|Risk-free interest rate rangeOptions |  | 2.75% to 2.85%               |  |                               
|Risk-free interest rate rangeESPP    |  | 2.13% to 4.98%               |  | 1.49% to 42.38%                
|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% to 51.86%             |  |                               
|Expected volatilityESPP              |  | 65.66%                       |  | 53.81% to 112.67%              



|(1) | There were no options granted to employees during the three and six months ended June 30, 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 and six months ended June 30, 2009, the Company recognized $296,000 and $1.3 million in stock-based compensation expenses related to these restricted stock unit awards. The
stock-based compensation expenses related to restricted stock unit awards for the three and six months ended June 30, 2008 were $567,000. At June 30, 2009, the unrecognized compensation cost related to these awards was $2.7 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.



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##### Table of Contents

In connection with the transactions contemplated by the Companys Joint Venture Agreement with
Astellas (see Note 11), these restricted stock units will become fully vested as of ninety (90) days following the closing of the transaction. This will not affect the restricted stock units held by our executive officers, who have different
equity acceleration provisions in their employment related agreements.

Valuation and Expense Information under SFAS 123(R)

For the three and six months ended June 30, 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 endedJune 30, |       | Six months endedJune 30,
|                                                          |  | 2008                       |       | 2009                     |   | 2008 |  | 2009
|Research and development                                  |  | $                          | 1,101 |                          | $ | 311  |  | $    | 1,689 |  | $ | 1,221
|General and administrative                                |  |                            | 1,279 |                          |   | 666  |  |      | 1,922 |  |   | 1,208
|                                                          |  |                            |       |                          |   |      |  |      |       |  |   |      
|Stock-based compensation expense before income taxes      |  |                            | 2,380 |                          |   | 977  |  |      | 3,611 |  |   | 2,429
|Income tax benefit                                        |  |                            |      |                          |   |     |  |      |      |  |   |     
|                                                          |  |                            |       |                          |   |      |  |      |       |  |   |      
|Total stock-based compensation expense after income taxes |  | $                          | 2,380 |                          | $ | 977  |  | $    | 3,611 |  | $ | 2,429
|                                                          |  |                            |       |                          |   |      |  |      |       |  |   |      

There was no capitalized stock-based employee compensation cost as of June 30, 2008 and 2009.
There were no recognized tax benefits during the quarters ended June 30, 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 June 30, 2009 were as follows (in thousands):



|                                            |  |               |          |   |                      |   |                       |  |                     |   |  |   |          |  
|------------------------------------------- |  | ------------- | -------- | - | -------------------- | - | --------------------- |  | ------------------- | - |  | - | -------- | -
|                                            |  | AmortizedCost |          |   | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value |  
|Money market funds                          |  | $             | 153,558  |   |                      | $ |                      |  | $                   |  |  | $ | 153,558  |  
|Commercial paper                            |  |               | 2,998    |   |                      |   | 1                     |  |                     |  |  |   | 2,999    |  
|U.S. government agency securities           |  |               | 45,558   |   |                      |   | 77                    |  |                     |  |  |   | 45,635   |  
|                                            |  |               |          |   |                      |   |                       |  |                     |   |  |   |          |  
|Total                                       |  |               | 202,114  |   |                      |   | 78                    |  |                     |   |  |   | 202,192  |  
|Less amounts classified as cash equivalents |  |               | (153,558 | ) |                      |   |                      |  |                     |  |  |   | (153,558 | )
|                                            |  |               |          |   |                      |   |                       |  |                     |   |  |   |          |  
|Total investments                           |  | $             | 48,556   |   |                      | $ | 78                    |  | $                   |  |  | $ | 48,634   |  
|                                            |  |               |          |   |                      |   |                       |  |                     |   |  |   |          |  



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##### Table of Contents

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 the maturity of available-for-sale securities for the three and
six-month periods ended June 30, 2008 and 2009 were insignificant. The change in unrealized holding gains (losses) on available-for-sale securities included in accumulated other comprehensive loss were unrealized losses of $27,000 and $166,000
for the three and six months ended June 30, 2009 and unrealized losses of $299,000 and $130,000 for the three and six months ended June 30, 2008.

At June 30, 2009, the contractual maturities of investments were as follows (in thousands):



|                    |  |               |        |                     |   |       
|------------------- |  | ------------- | ------ | ------------------- | - | ------
|                    |  | AmortizedCost |        | EstimatedFair Value
|Due within one year |  | $             | 48,556 |                     | $ | 48,634
|                    |  |               |        |                     |   |       
|Total investments   |  | $             | 48,556 |                     | $ | 48,634
|                    |  |               |        |                     |   |       

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. On June 10, 2009, on motion of the parties, the Court granted preliminary approval of a settlement, and scheduled a hearing to consider final settlement approval for
September 10, 2009. The settlement contemplates no payment by the Company. There can be no assurance that the settlement will receive final Court approval and become effective. If the settlement does not receive final approval or otherwise
fails to become effective, the action may return to active litigation. If the outcome of any such litigation would be adverse to the Company and if the Company would be 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



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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 2013.

Minimum annual commitments under operating leases and purchase obligations are as follows (in thousands):



|                          |  |   |       
|------------------------- |  | - | ------
|For the remainder of 2009 |  | $ | 17,489



|                                      |  |   |      
|------------------------------------- |  | - | -----
|Year ending December 31,              |  |  
|2010                                  |  | $ | 1,900
|2011                                  |  |   | 81   
|Thereafter                            |  |   | 87   
|                                      |  |   |      
|Total commitments beyond current year |  | $ | 2,068
|                                      |  |   |      

Total rent expense for the three and six months June 30, 2009 was $309,000 and $597,000, respectively, and
$362,000 and $870,000 for the comparable periods in 2008

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 June 30, 2009.



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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 June 30, 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, 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 and was fully expensed by the Company as of that date. Total expense
under this arrangement, including cash payments, was approximately $72,000 and $145,000 for the three and six month periods ended June 30, 2009, and approximately $72,000 and $145,000 for the same periods in 2008.

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 and six months ended June 30, 2009, the Company recognized approximately $279,000 and $3.9 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 Company recognized revenue of $120,000 and $277,000 during the same periods in
2008. 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.



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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.

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 June 30, 2009 and December 31, 2008 (in thousands):



|                                  |  |                     |         |         |   |         |  |         |        |  |   |  
|--------------------------------- |  | ------------------- | ------- | ------- | - | ------- |  | ------- | ------ |  | - | -
|                                  |  | As of June 30, 2009
|                                  |  | EstimatedFair Value |         | Level 1 |   | Level 2 |  | Level 3
|Money market funds                |  | $                   | 153,558 |         | $ | 153,558 |  | $       |       |  | $ | 
|Commercial paper                  |  |                     | 2,999   |         |   |        |  |         | 2,999  |  |   | 
|Corporate bonds                   |  |                     |        |         |   |        |  |         |       |  |   | 
|U.S. government agency securities |  |                     | 45,635  |         |   |        |  |         | 45,635 |  |   | 
|                                  |  |                     |         |         |   |         |  |         |        |  |   |  
|Total                             |  | $                   | 202,192 |         | $ | 153,558 |  | $       | 48,634 |  | $ | 
|                                  |  |                     |         |         |   |         |  |         |        |  |   |  



|                                  |  |                         |         |         |   |         |  |         |        |  |   |  
|--------------------------------- |  | ----------------------- | ------- | ------- | - | ------- |  | ------- | ------ |  | - | -
|                                  |  | 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 June 30, 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 were paid out during the first quarter of 2009. The Company completed the activities
related to this restructuring plan in April 2009.



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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 $266,000 and $799,000 was
incurred during the three and six months ended June 30, 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 and six months ended June 30, 2009, the Company incurred additional costs of $0 and $98,000, respectively, 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.

The activity in
the restructuring accrual for the six months ended June 30, 2009 related to the actions described above was as follows (in thousands):



|                                                |  |                            |       |                                               |   |              |  |   |                        |   |                     |   |                    |  |   |       |  |   |      
|----------------------------------------------- |  | -------------------------- | ----- | --------------------------------------------- | - | ------------ |  | - | ---------------------- | - | ------------------- | - | ------------------ |  | - | ----- |  | - | -----
|                                                |  |                            |       |                                               |   |              |  |   |                        |   | As of June 30, 2009
|                                                |  | Balance atDecember 31,2008 |       | Chargesduring thesix monthsended June 30,2009 |   | Cashpayments |  |   | Balance atJune 30,2009 |   | Total Costs toDate  |   | TotalExpectedCosts
|2008 U.S. Restructuring                         |  |                            |       |                                               |   |              |  |   |                        |   |                     |   |                    |  |   |       |  |   |      
|Employee severance and other benefits charges   |  | $                          | 1,096 |                                               | $ |             |  | $ | (1,092                 | ) |                     | $ | 4                  |  | $ | 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           |  | $ | (1,110                 | ) |                     | $ | 102                |  | $ | 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



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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 and six months ended June 30, 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 and six months June 30, 2009. The Company
had no foreign currency contracts outstanding at June 30, 2009.

10. Option and License Agreement for MAXY-G34

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 program 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.

Under the agreement, Cangene has paid the Company an up-front option fee of $500,000, which has been recorded as non-current deferred
revenue. The option period for the initial license is one year, but may be extended under certain circumstances. If Cangene is awarded a specified government contract and exercises its option for an initial license, Cangene will pay the Company a
license fee of $12.5 million. Under the initial license and any subsequent license, the Company would also be entitled to continuing 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.

11. Master Joint
Venture Agreement with Astellas

On June 30, 2009, the Company entered into a Master Joint Venture Agreement (the Joint
Venture Agreement) with Astellas Pharma Inc. and Astellas Bio Inc. (together, Astellas), pursuant to which the parties will establish a joint venture subsidiary (the Joint Venture) focused on the discovery, research and
development of multiple protein pharmaceutical programs, including the Companys MAXY-4 program and other early stage programs.

Pursuant to the Joint Venture Agreement, the Company will contribute substantially all of its programs and technology assets in protein pharmaceuticals, including the Companys co-development and commercialization agreement with
Astellas (but excluding its MAXY-G34 program), in exchange for an ownership interest in the Joint Venture. At the closing, the Company and Astellas also will invest $10 million of cash in the Joint Venture, immediately following which the Company
will have an ownership interest in the Joint Venture of approximately 83.3% and Astellas will have the remaining ownership interest of approximately 16.7%. Astellas will be granted an option (the Buy-Out Option) to acquire all of the
Companys ownership interest in the Joint Venture at specified exercise prices that will increase each quarter from $53 million to $123 million over the term of the option, which expires on the third anniversary of the closing.



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Pursuant to the Joint Venture Agreement, Astellas and the Joint Venture also will enter into a
collaboration agreement pursuant to which Astellas will fund substantially all of the costs, estimated at up to $30 million over the three-year option term and subject to certain limitations, related to the discovery, research and development by the
Joint Venture of multiple protein therapeutics (other than the MAXY-4 program). Astellas will be granted an option to obtain an exclusive license to any one product developed by the Joint Venture under this agreement, and to proprietary products of
Astellas, if any, which Astellas and the Joint Venture agree to develop under that agreement. This product option is subject to certain conditions and is exercisable only if Astellas does not exercise the Buy-Out Option prior to expiration of its
term. The on-going development costs for the MAXY-4 program will be shared by Astellas and the Joint Venture in accordance with the existing terms of the MAXY-4 co-development and commercialization agreement.

To support the research and development operations of the Joint Venture, the Company also will enter into a technology license agreement with the Joint
Venture under which the Company will grant the Joint Venture certain exclusive licenses to use the Companys MolecularBreeding technology platform and ancillary protein expression technologies for the discovery, research and development
of protein pharmaceuticals, subject to certain existing licenses and other limitations.

In the event Astellas does not exercise the
Buy-Out Option prior to the expiration of the three-year option term, all rights to the protein therapeutics developed by the Joint Venture (with the exception of any products for which Astellas has exercised its license option) will be retained by
the Joint Venture. In the event that Astellas does not exercise its Buy-Out Option and does not exercise its product option under the above-referenced collaboration agreement, an Astellas subsidiary will be required to provide the Joint Venture with
up to 18 months of transition funding in the form of revolving loans of up to $20 million on pre-agreed terms in accordance with a form bridge loan agreement.

The boards of directors of Astellas and the Company, respectively, have approved the terms of the joint venture arrangement. The consummation of this transaction is subject to customary closing conditions, including
approval by the Companys stockholders. The parties expect the transaction to close late in the third quarter of 2009.

Upon
consummation of the transactions contemplated by the Joint Venture Agreement, the Company expects to consolidate the results of the Joint Venture in its consolidated financial statements. The minority interest of Astellas in the Joint Venture will
be reflected in the Companys consolidated balance sheet as a non-controlling interest.

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

Executive Summary

We are a biopharmaceutical company focused on developing improved versions of protein drugs through both internal development and external collaborations and other arrangements. We use our MolecularBreeding directed evolution
technology platform, along with ancillary technologies, and extensive protein modification expertise to pursue the creation of biosuperior 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. As discussed further below, in June 2009, we entered into a joint venture agreement with Astellas relating to substantially all of our programs and technology assets in protein
pharmaceuticals, including the MAXY-4 co-development and commercialization agreement

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 we previously announced, we plan to continue to delay both Phase III manufacturing activities and a Phase IIb clinical



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trial of our MAXY-G34 program for chemotherapy-induced neutropenia until we identify a partner who can share these significant future costs. To date, we have
not identified a suitable partner for this program for chemotherapy-induced neutropenia. However, in May 2009, we entered into an option and license agreement with Cangene Corporation, or Cangene pursuant to which we have granted Cangene options to
obtain certain licenses to intellectual property rights associated with our MAXY-G34 program 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. We have received an option fee of $500,000 and are eligible to receive an option exercise fee, as well as additional license fees based on a percentage of net contract revenue received by
Cangene, to the extent that Cangene is awarded one or more applicable government contracts and exercises an option for a license. See Note 10 of the Notes to Condensed Consolidated Financial Statements for further discussion of this agreement.

On June 30, 2009, we entered into a joint venture agreement with Astellas, pursuant to which we will contribute substantially all of
our programs and technology assets in protein pharmaceuticals, including our existing MAXY-4 co-development and commercialization agreement with Astellas, together with $10 million in cash, to a newly-formed joint venture in which we will have an
initial ownership interest of approximately 83.3%. Astellas also will invest $10 million in the joint venture in exchange for the remaining ownership interest in the joint venture of approximately 16.7%. Astellas will be granted an option to acquire
all of our ownership interest in the joint venture at specified exercise prices that will increase each quarter from $53 million to $123 million over the three-year term of the option. Upon consummation of the transactions contemplated by the joint
venture agreement, we expect to consolidate the results of the joint venture subsidiary in our consolidated financial statements, with the minority interest of Astellas in the joint venture subsidiary reflected in our consolidated balance sheet as a
non-controlling interest. See Note 11 of the Notes to Condensed Consolidated Financial Statements for further discussion of this agreement.

This joint venture transaction, if consummated, will largely complete a multi-year strategic process to position our programs and assets in collaborations and other arrangements that are primarily supported by external parties. If the joint
venture transaction is consummated, we expect that our primary operational focus will be on the continued development of the MAXY-4 program and certain other early stage programs as part of the joint venture with Astellas, with a view toward
maximizing the value of our investment in the joint venture and the likelihood that Astellas will exercise its buy-out option in the future. Our corporate structure (other than by way of establishment of the joint venture as our majority owned
subsidiary), our public reporting obligations and the listing of our common stock on the Nasdaq Global Market, will not be affected as a result of completing the transactions.

In addition to our majority ownership of the joint venture, we will continue to retain a number of significant assets, including approximately $190
million in cash, cash equivalents and marketable securities (after our $10 million investment in the joint venture subsidiary); our MAXY-G34 program (including the previously announced licensing arrangement with Cangene Corporation for Acute
Radiation Syndrome); a 22% ownership interest in Codexis, Inc. and a revenue stream from Maxygens biofuels license to Codexis; a potential $30 million milestone payment from Bayer HealthCare LLC; our MolecularBreeding platform and
intellectual property portfolio (including certain additional fields of application of the technology platform not yet licensed); and a fully funded vaccine discovery program. Going forward, our focus will be to manage these arrangements to maximize
the return to our stockholders over the next few years. However, given that we will have large cash reserves and a reduced ongoing financial commitment to the business of the joint venture if the proposed transactions are consummated, our board of
directors expects to consider and evaluate one or more distributions to our stockholders of a portion of our cash resources in excess of our current and longer term operational requirements. Such distributions may be accomplished through cash
dividends, share repurchases or other mechanisms and may be fully or partially taxable depending on the circumstances of such distribution. Our board of directors has not determined the timing, amount or form of such distributions and will be
addressing such matters if the proposed transactions are consummated.

In addition, if the transactions are completed, it is expected that
our executive officers other than Mr. Yonehiro, our chief business officer, will terminate employment with us after a transition period following the establishment of the joint venture and will receive termination payments pursuant to amended and
restated change in control agreements that we have entered into with them. Mr. Yonehiro will assume the position of chief executive officer and president of the joint venture and will receive certain transaction bonus payments and retention payments
for his continuing services to us and the joint venture.

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 $6.8 million and $15.3 million in the three and six months ended June 30, 2009, respectively, compared to $1.2 million and $2.6
million in the comparable periods in 2008. Research and development expenses were $7.4 million and $14.5 million in the three and six months ended June 30, 2009, respectively, compared to $12.5 million and $25.6 million in the comparable
periods in 2008.

As discussed further below, if the transactions contemplated by the joint venture agreement with Astellas are
consummated, we expect modest increases to our revenues and general and administrative expenses, no significant changes to our research and development expenses and significant increases in our restructuring charges during the second half of 2009.

We have incurred significant operating losses from continuing operations since our inception. As of June 30, 2009, our accumulated
deficit was $246.7 million. We expect to incur additional operating losses over at least the next several years and may never achieve profitability.



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We continue to maintain a strong cash position to fund our operations and revised corporate strategy,
with cash, cash equivalents and marketable securities totaling $202.2 million as of June 30, 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, government research grants and the sale of
certain assets. Our total revenues in the three and six months ended June 30, 2009 were $6.8 million and $15.3 million, compared to $1.2 million and $2.6 million in the same periods 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 $5.2 million and $9.2 million in the three and six months ended June 30, 2009. We had no
collaborative research and development revenues during the comparable periods in 2008. Astellas was the only collaborative partner that contributed to our collaborative research and development revenues during the three and six months ended
June 30, 2009. For the three and six month periods ended June 30, 2009, collaborative research and development revenues included the recognition of $1.3 million and $2.3 million, respectively, of the $10 million upfront fee we received
from Astellas under the MAXY-4 co-development and commercialization agreement and $4.0 million and $7.0 million, respectively, earned as net reimbursement of our research and development activities performed under this agreement during the
comparable periods. If the transactions contemplated by the joint venture agreement with Astellas are consummated, we will transfer all of our rights and obligations under the MAXY-4 co-development and commercialization agreement to the joint
venture subsidiary.

Technology and license revenue (including related party) was $279,000 and $3.9 million for the three and six months
ended June 30, 2009, compared to $120,000 and $277,000 for the same periods in 2008. These revenues reflect amounts received 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 during the six months ended June 30, resulted from our recognition of a one-time payment 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 in the first quarter of 2009.

Revenues from
government research grants were $1.3 million and $2.2 million in the three months and six months ended June 30, 2009, compared to $1.0 million and $2.3 million in the comparable periods in 2008. The fluctuations in grant revenues reflects the
activity levels relating to our existing grants including work performed by outside CROs.

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



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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. In addition, if the transactions contemplated by the joint venture agreement with Astellas
are consummated, we expect modest increases in our revenues for the remainder of 2009 as Astellas begins to fund certain research and development activities of the joint venture subsidiary.

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 $7.4 million and $14.5 million in the three and six month periods ended June 30, 2009, compared to $12.5 million and $25.6 million in the same periods in 2008.
The decreases in our research and development expenses for the three and six month periods were 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, reduced salaries, benefits and other operating expenses resulting from the cessation of operations in Denmark in the first quarter of 2008,
and decreases in stock compensation expense.

Stock compensation expenses included in research and development expenses decreased to
$311,000 and $1.2 million in the three and six month periods ended June 30, 2009 from $1.1 million and $1.7 million in the comparable periods in 2008, primarily as a result of not issuing any new employee stock options to date in 2009

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 endedJune 30, |        | Six months endedJune 30,
|                                                  |  | 2008                       |        | 2009                     |   | 2008  |  | 2009
|Collaborative projects funded by third parties(1) |  | $                          |       |                          | $ | 3,842 |  | $    |       |  | $ | 6,915 
|Government grants                                 |  |                            | 1,255  |                          |   | 1,305 |  |      | 2,432  |  |   | 2,348 
|Internal projects                                 |  |                            | 11,279 |                          |   | 2,271 |  |      | 23,208 |  |   | 5,188 
|                                                  |  |                            |        |                          |   |       |  |      |        |  |   |       
|Total                                             |  | $                          | 12,534 |                          | $ | 7,418 |  | $    | 25,640 |  | $ | 14,451
|                                                  |  |                            |        |                          |   |       |  |      |        |  |   |       



|(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 increase somewhat in the future based on the continued preclinical development of our MAXY-4 product candidates, the cost of which will be shared by Astellas. If the transactions contemplated by the joint venture agreement
with Astellas are consummated, we expect no significant changes in our research and development expenses for the remainder of 2009.

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 $5.6 million and $8.5 million in the three months and six months ended June 30, 2009, compared to $5.0 million and $8.5 million in the comparable periods in 2008. General and administrative expenses in 2009 include significant
increases in outside legal, accounting and financial advisory services, offset by 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. Included in general and administrative expenses were stock-based compensation expenses of $666,000 and $1.2 million in the three and six months ended June 30, 2009 compared to $1.3 million and $1.9 million in the same
periods in 2008. These decreases in stock compensation expense were primarily the result of not issuing any new employee stock options to date in 2009.



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If the transactions contemplated by the joint venture agreement with Astellas are consummated, we expect
general and administrative expenses to increase slightly in the second half of 2009, primarily due to increased expenditures for legal and financial advisory services and certain employment related expenses associated with the transaction. We
otherwise expect general and administrative expenses to decrease in future periods, primarily due to decreases in salaries and employee related costs, external legal costs and financial advisory services.

Goodwill Impairment

In the second
quarter of 2008, we performed an additional goodwill impairment test due to the significant decline of our stock price subsequent to the announcement on June 13, 2008 of certain patent matters related to our MAXY-G34 product candidate and
concluded that the carrying value of the net assets exceeded our fair value, based on quoted market prices of our common stock. Accordingly, we performed an additional analysis, as required by SFAS No. 142, Goodwill and Other Intangible
Assets, which indicated that an impairment loss was probable because the implied fair value of goodwill recorded on our balance sheet was zero. As a result, we recorded an estimated impairment charge of $12.2 million in the second quarter
of 2008 relating to the write-off of our goodwill. We completed our determination of the fair value of the affected goodwill during the third quarter of 2008 and concluded that no revision of the estimated charge was required.

Restructuring Charges

We recognized
no charges in the three months ended June 30, 2009 and $98,000 six months ended June 30, 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. In the three and
six months ended June 30, 2008, we recognized a charge of $266,000 and $799,000 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 six months
ended June 30, 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.

In addition, if the transactions contemplated by the joint venture agreement with Astellas are consummated, we expect to recognize
additional restructuring charges in the third or fourth quarter of 2009, primarily to reflect severance and other termination benefits for several affected employees, including cash and other benefits payable to our chief executive officer, chief
financial officer and chief operating officer under the amended and restated change of control agreement for each such officer.

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 endedJune 30, |      | Six months endedJune 30, |     
|                                                              |  | 2008                       |      |                          | 2009 |   | 2008 |  | 2009 |      
|Interest income                                               |  | $                          | 953  |                          |      | $ | 276  |  | $    | 2,372 |  | $ | 717 |  
|Foreign exchange gains (losses)                               |  |                            | (202 | )                        |      |   | 52   |  |      | 370   |  |   | 2   |  
|Gains (losses) on disposal of equipment and interest expense) |  |                            | 8    |                          |      |   |     |  |      | 8     |  |   | (9  | )
|                                                              |  |                            |      |                          |      |   |      |  |      |       |  |   |     |  
|Total interest income and other income (expense), net         |  | $                          | 759  |                          |      | $ | 328  |  | $    | 2,750 |  | $ | 710 |  
|                                                              |  |                            |      |                          |      |   |      |  |      |       |  |   |     |  



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The decreases from the 2008 periods to the 2009 periods were primarily due to lower interest income
resulting from significantly lower interest rates on a higher average investment base.

Recent Accounting Pronouncements

During the six months ended June 30, 2009, we adopted the following accounting standards:

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162(FAS 168). The statement confirmed that the FASB Accounting Standards Codification (the Codification) will become the single official
source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. After that date, only one level of
authoritative U.S. GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly
online research system. The Codification, which changes the referencing of financial standards, becomes effective for interim and annual periods ending on or after September 15, 2009. We will apply the Codification beginning in the third
quarter of fiscal 2009. The adoption of FAS 168 is not expected to have any substantive impact on our financial statements.

In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (SFAS 165). This standard is intended to establish general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and
the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We began applying the provisions of SFAS 165 in the second quarter of 2009 and our adoption did not affect our financial
statements, other than the disclosures required by SFAS No. 165 which can be found in the Basis of Presentation portion of Footnote 1.

In April 2009, the FASB issued Statement of Financial Position (FSP FAS) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly, and is effective for the interim and annual periods ending after June 15, 2009. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value
Measurements, when the volume and level of activity for the asset or liability have significantly decreases and includes guidance on identifying circumstances that indicate a transaction is not orderly. We adopted FAS 157-4 during the period
ended June 30, 2009 and the adoption did not have a material effect on our financial statements.

In April 2009, the FASB issued
Statement of Financial Position (FSP FAS) No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, and is effective for the interim and annual periods ending after June 15, 2009. FSP FAS 115-2
and 124-2 amends the other-than-temporary impairment guidance in US GAAP for the debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments debt and equity
securities. We adopted FAS 115-2 and 124-2 during the period ended June 30, 2009. The adoption of FSP FAS 115-2 and 124-2 did not have a material effect on our financial statements.

In November 2008, the 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



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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.

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 June 30, 2009, we had $202.2 million in cash, cash equivalents and marketable securities. If the joint
venture transaction with Astellas is consummated, we will be required to invest $10 million of our cash in the joint venture subsidiary and, as a result, such cash investment would no longer be directly available to us.

Net cash used in operating activities decreased from $23.5 million in the six months ended June 30, 2008 to $6.5 million in the comparable period in
2009, primarily due to decreases in net loss during the six months ended June 30, 2009. Uses of cash in operating activities were primarily to fund losses from continuing operations.

Net cash provided by investing activities was $2.5 million in the six months ended June 30, 2009 and net cash provided by investing activities was
$26.1 million in the comparable period in 2008. The cash provided by investing activities during the six-month period ended June 30, 2009 was primarily related to maturities of available-for-sale securities in excess of purchases. The cash
provided during the six-month period ended June 30, 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 $2.7 million in the six months ended
June 30, 2009 and $616,000 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.



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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 six months ended June 30, 2008 and 2009.

The following are contractual commitments as of
June 30, 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 |  | $                      | 824    |                | $ | 618      |  | $        | 206   |                 | $ |  |  | $ | 
|Purchase obligations        |  |                        | 18,733 |                |   | 16,871   |  |          | 1,856 |                 |   | 6 |  |   | 
|                            |  |                        |        |                |   |          |  |          |       |                 |   |   |  |   |  
|Total                       |  | $                      | 19,557 |                | $ | 17,489   |  | $        | 2,062 |                 | $ | 6 |  | $ | 
|                            |  |                        |        |                |   |          |  |          |       |                 |   |   |  |   |  

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 a license
fee of $12.5 million, as well as continuing licensing 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 or event based payments under any of these agreements. In addition, if the joint venture transaction with Astellas is consummated, any payments related to milestones achieved under the co-development and commercialization agreement with
Astellas for our MAXY-4 program would be paid to the joint venture subsidiary and, as a result, such funds would not be directly available to us.

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.

In addition, given that we will have large cash reserves and a reduced ongoing financial commitment to the business of the proposed joint venture if the transactions contemplated by the joint venture agreement with
Astellas are consummated, our board of directors expects to consider and evaluate one or more distributions to our stockholders of a portion of our cash resources in excess of our current and longer term operational requirements. Such distributions
may be accomplished through cash dividends, share repurchases or other mechanisms and may be fully or partially taxable depending on the circumstances of such distribution. Currently, our board of directors has not determined the timing, amount or
forms of such distributions and will be addressing such matters if and after the proposed transactions are consummated.



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ITEM3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

Our cash flow and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and other
factors. We attempt to limit our exposure to some or all of these market risks through the use of various financial instruments. There were no significant changes in our market risk exposures during the six months ended June 30, 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.

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 entered into a joint venture agreement with Astellas that will involve
substantially all of our protein pharmaceutical programs and assets, including our MAXY-4 program, as well as our research and development personnel. If we fail to consummate the transactions contemplated by this agreement our business may be
substantially harmed.

In June 2009, we entered into a joint venture agreement with Astellas pursuant to which we will contribute
substantially all of our protein pharmaceutical assets and programs, including our MAXY-4 program, to a newly-formed joint venture subsidiary. The transactions contemplated by this agreement are subject to a number of closing conditions, including
approval by our stockholders, and as a result the transactions might not be completed in a timely manner or at all. If the transactions are not consummated, our directors, executive officers and other employees will have expended extensive time and
effort and will have experienced significant distractions from their work during the pendency of this matter, and we will have incurred significant transaction costs. In addition, we have implemented a number of management and other changes and have
entered into arrangements with our employees that are all contingent upon the consummation of these transactions. As a result, if the transactions are not consummated, there may be a substantial disruption to our operations and our ability to retain
employees and maintain our ongoing operations may be adversely affected.

In addition, the joint venture agreement places restrictions on
the conduct of our business prior to completion of the transactions and on the ability of our board of directors to solicit or engage in discussions or negotiations with a third party regarding alternative transactions, each of which may delay or
prevent us from undertaking business opportunities that may arise pending completion of the transactions.

Following the formation of the
joint venture subsidiary, Astellas, as a holder of the subsidiarys preferred units, will have the right to veto certain alternative transactions in which we might realize value for our investment in the subsidiary, including mergers and
acquisitions and asset sales. The joint venture arrangements will also place substantial restrictions on our ability to license the intellectual property rights that we have contributed to the joint venture to parties other than Astellas.

Furthermore, if the transactions contemplated by the joint venture agreement are consummated, macroeconomic or industry-wide conditions
may improve, or the business contributed to the joint venture may be more successful than expected when we negotiated the transactions, each of which may make the business and assets that we have contributed to the joint venture more valuable than
anticipated. The prices at which Astellas may buy-out our entire equity interest in the joint venture at various times are fixed and may be less than the value of our interest in the joint venture at the time of exercise.



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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. Our joint
venture agreement with Astellas, if consummated, will largely complete this strategic process, however, we will continue to evaluate options regarding the management of our assets and arrangements to maximize the return to our stockholders over the
next few years. 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 have
incurred, and may in the future incur, significant costs related to the execution of our revised strategic plan, such as legal and accounting fees and expenses and other related charges. We may also incur additional unanticipated expenses in
connection with this strategic plan. A considerable portion of the costs related to any strategic transaction, such as legal and accounting fees, will be incurred regardless of whether any transaction is completed. These expenses will decrease the
remaining cash available for use in our business or the execution of our strategic plan.

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, to maintain the operation of our joint venture with Astellas, if such transaction is consummated, or to execute additional potential strategic options, 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.



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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.

Last year, we 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, absent a collaborative or other arrangement, we will 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 June 30, 2009, we had an
accumulated deficit of $246.7 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.

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.



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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 plan to continue to delay or cease development of this product
candidate if 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.

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 and, although the USPTO has recently decided to undertake a re-examination of this patent, its not possible to predict the result or timing of such a re-examination. 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.



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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.

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



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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 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;
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| |  |  | 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;
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| |  |  | the timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements;
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| |  |  | the timing of expenses, particularly with respect to contract manufacturing, preclinical studies and clinical trials;
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| |  |  | 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 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.



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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;
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| |  |  | difficulties or delays in identifying and enrolling patients who meet trial eligibility criteria;
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| |  |  | delays in obtaining or maintaining required approvals from institutions, review boards or other reviewing entities at clinical sites;
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| |  |  | inadequate supply or deficient quality of product candidate materials necessary for the conduct of the clinical trials;
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| |  |  | the occurrence of unacceptable toxicities or properties or unforeseen adverse events, especially as compared to currently approved drugs intended to treat the same
indications;
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| |  |  | our lack of financial resources to continue the development of a product candidate;
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| |  |  | 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 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



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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;
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| |  |  | 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 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.



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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 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.



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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.

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



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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.

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.



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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.

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.



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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.

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.



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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 June 30, 2009, the price of our common stock on the Nasdaq Global Market ranged from $3.02 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, including the joint venture arrangement with Astellas;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | any decisions to distribute a portion of our cash resources to stockholders; 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 June 30, 2009, we had $202.2 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.

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.



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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 June 30, 2009, our executive officers and directors, together with principal
stockholders holding more than 5% of our common stock, beneficially owned approximately 32% 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.

ITEM6. EXHIBITS

The following exhibits are filed as part of this report:



|      |  |                                                                                                                                   
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Master Joint Venture Agreement, dated as of June 30, 2009, by and among Maxygen, Inc., Astellas Pharma Inc. and Astellas Bio Inc.
|      | 
|2.1.1 |  | Form of Asset Contribution Agreement                                                                                             
|      | 
|2.1.2 |  | Form of Other Products Collaboration Agreement                                                                                   



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|      |  |                                                                                                                                
|----- |  | -------------------------------------------------------------------------------------------------------------------------------
|2.1.3 |  | Form of License Agreement                                                                                                     
|      | 
|2.1.4 |  | Form of Limited Liability Company Agreement                                                                                   
|      | 
|2.1.5 |  | Form of Investors Rights Agreement                                                                                           
|      | 
|10.1* |  | Form of Amended and Restated Change of Control Agreement                                                                      
|      | 
|10.2* |  | Retention Agreement, dated June 30, 2009, between Maxygen, Inc. and Grant Yonehiro                                            
|      | 
|10.3* |  | Amended and Restated Change of Control Agreement, dated June 30, 2009, between Maxygen, Inc. and Grant Yonehiro               
|      | 
|10.4* |  | Contingent Offer Letter to Grant Yonehiro from Maxygen, Inc. dated June 26, 2009                                              
|      | 
|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.

| | 
| | 

| |  | Incorporated by reference to the corresponding exhibit to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on
July 1, 2009.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Management contract or compensatory plan or arrangement.
| | - | --------------------------------------------------------



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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.
|               |  |              
|August 6, 2009 |  | By:           |  | /s/    Russell J. Howard  
|               |  |               |  | Russell J. Howard         
|               |  |               |  | Chief Executive Officer   
|               |  |              
|August 6, 2009 |  | By:           |  | /s/    Lawrence W. Briscoe
|               |  |               |  | Lawrence W. Briscoe       
|               |  |               |  | Chief Financial Officer   



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