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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2002



Commission file number 000-28401



MAXYGEN, INC.

(Exact name of registrant as
specified in its charter)



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



515
Galveston Drive

Redwood City, California 94063

(Address of principal executive offices)



(650) 298-5300

(Registrants telephone
number, including area code)



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Securities registered pursuant to Section 12(b) of the Act:



None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, par value $0.0001 per share

(Title of Class)



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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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act). Yes x    No ̈



As of February 28, 2003, there
were 34,593,197 shares of the registrants common stock outstanding, which is the only class of common or voting stock of the registrant issued as of that date. The aggregate market value of the voting stock held by non-affiliates computed by
reference to the closing price for the common stock as quoted by the Nasdaq Stock Market as of February 28, 2003 was approximately $174,975,867.



DOCUMENTS INCORPORATED BY REFERENCE



Designated portions of the registrants definitive proxy statement for its 2003 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.



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TABLE OF CONTENTS



|          
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|PART I    
|          
|Item 1:   
|          
|Item 2:   
|          
|Item 3:   
|          
|Item 4:   
|          
|PART II   
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|Item 5:   
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|Item 6:   
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|Item 7:   
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|Item 7a:  
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|Item 8:   
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|Item 9:   
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|PART III  
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|Item 10:  
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|Item 11:  
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|Item 12:  
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|Item 13:  
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|Item 14:  
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|PART IV   
|          
|Item 15:  
|          
|Signatures



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In this report Maxygen, the Company, we, us and
our refer to Maxygen, Inc. and all its consolidated subsidiaries, including, unless the context indicates otherwise, our majority-owned chemicals subsidiary Codexis, Inc. and our wholly-owned agriculture subsidiary Verdia, Inc.



Maxygen and the Maxygen logo are registered
trademarks of Maxygen, Inc. MaxyScan and MolecularBreeding are some of our trademarks. Codexis is a trademark of Codexis, Inc. and Verdia, Inc. is a trademark of Verdia, Inc. Other service marks, trademarks and trade names referred to in this
report, and in the documents incorporated by reference 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.







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Forward Looking Statements



This report contains forward-looking
statements about our research, business prospects and future financial performance. In some cases, you can identify forward-looking statements by terminology, such as may, can, will, should,
expect, plan, anticipate, believe, estimate, predict, intend, potential or continue or the negative of these terms or other comparable words.
Examples of these forward-looking statements include, but are not limited to, statements regarding the following:



| | · |  | our MolecularBreeding directed molecular evolution and other technologies and processes;
| | - |  | ----------------------------------------------------------------------------------------



| | · |  | our ability to realize commercially valuable discoveries in our programs;
| | - |  | -------------------------------------------------------------------------



| | · |  | the attributes of any products we may develop;
| | - |  | ----------------------------------------------



| | · |  | our future financial performance;
| | - |  | ---------------------------------



| | · |  | our intellectual property portfolio and rights;
| | - |  | -----------------------------------------------



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



| | · |  | our ability to develop products suitable for commercialization.
| | - |  | ---------------------------------------------------------------



These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause
actual results to differ materially from these predictions. The risk factors set forth below at pages 29 to 40 should be considered carefully in evaluating us and our business.



Although we believe that the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. Other than as required by applicable law, we
disclaim any obligation to update or revise any forward-looking statement contained in this report as a result of new information or future events or developments.



PART I



|Item 1 |  | BUSINESS
|------ |  | --------



Overview



We are a leader in the field of directed
molecular evolution, a process by which genes are modified for specific commercial uses. We are focused on creating novel therapeutic and industrial products using our integrated technologies. Our technologies bring together advances in molecular
biology and protein modification to help create novel biotechnology products. Unlike conventional technologies, our approaches require minimal understanding of complex underlying biological systems and can therefore help develop products faster and
more cost-effectively. We have designed our technologies to rapidly improve existing biotechnology products as well as to create products that would be difficult or impossible to develop through other processes.



Our principal objective is to commercialize multiple
high-value products in a broad range of industries including human therapeutics, agriculture and chemicals. Our products will be developed and marketed either through corporate collaborations or independently by Maxygen. To date, we have established
strategic collaborations with leading companies including: Aventis Pasteur in novel vaccines; InterMune in next generation interferon gamma therapies; Lundbeck in interferon beta therapies for nervous system diseases, including multiple sclerosis;
ALK-Abelló in allergy; the International AIDS Vaccine Initiative in HIV; Eli Lilly, Pfizer and DSM in pharmaceutical manufacturing; and Shearwater Corporation (a subsidiary of Nektar Therapeutics) in protein pharmaceutical PEGylation
technologies. Additionally, we have a range of other strategic alliances in industrial applications, including with Novozymes, DuPont, Syngenta, Rio Tinto and Chevron. We also have received funding from U.S. government organizations including from
the Defense



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Advanced Research Projects Agency, the National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for
International Development and the U.S. Army Medical Research and Materiel Command.



We will continue to establish strategic collaborations with leaders in our target industries. We will also continue to retain rights in some of our collaborations to internally develop and market
products resulting from our alliances. In addition, we have invested, and will continue to invest, our own funds in specific areas and product opportunities. We have over 40 potential products in various stages of research, with sixteen potential
products in development. In addition, Codexis has five processes that are operating at commercial scale. We have also established over 20 strategic alliances.



We began operations in 1997 to commercialize technologies originally conceived at Affymax Research Institute, then a subsidiary of what is
now GlaxoSmithKline plc. We were incorporated in Delaware on May 7, 1996 and began operations in March 1997. Our principal executive offices are located at 515 Galveston Drive, Redwood City, CA 94063. Our telephone number is (650) 298-5300. We make
available on our website all reports filed with the Securities and Exchange Commission, including our reports on Form 10-K, 10-Q and 8-K, as soon as reasonably practicable after they have been filed. Our website is located at www.maxygen.com.
Information contained on our website is not a part of this annual report.



This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen and our wholly-owned subsidiaries, Maxygen ApS, Maxygen Holdings Ltd. and Verdia, Inc., as well as our 57% owned
subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.



Market Opportunity



We have a platform of proprietary technologies that helps allow us to integrate the powerful tools available in the biotechnology industry
to develop novel and improved products for human therapeutics and industrial applications. We are currently working on over 40 different potential products, including sixteen potential products that are in the development stage, either on our own or
with companies that are leaders in their fields. In addition, Codexis has five processes that are operating at commercial scale. Our target markets include protein pharmaceuticals, preventative and therapeutic vaccines, chemicals and agriculture.
Within these markets, we are focused on specific high-value opportunities.



Human Therapeutics.The human therapeutic protein pharmaceutical and vaccine markets represent a large opportunity for Maxygen. In 2001, worldwide sales of therapeutic
proteins made using recombinant DNA technology were approximately $25 billion. Protein pharmaceutical products, such as erythropoietin and granulocyte colony stimulating factor, represent some of the worlds most profitable pharmaceutical
products. The protein therapeutics sector is one of the fastest growing sectors of the pharmaceutical market, with an annual sales growth rate of 5 to 15%.



Worldwide sales of all vaccines in 2001 exceeded $5.8 billion and are expected to exceed approximately $11 billion by 2010. This dramatic
growth in the vaccine market is expected to be driven by the anticipated success of therapeutic vaccines and the development of novel vaccines that address significant unmet clinical needs.



In human therapeutics, we are focused on developing products
for a number of indications, including multiple forms of cancer, infectious diseases such as HIV, hematology, allergies, and autoimmune diseases such as rheumatoid arthritis and multiple sclerosis.



Industrial Applications.The
industrial application markets of chemicals and agriculture also offer an attractive market opportunity for Maxygen. In 2000, sales in the chemical industry exceeded $1.7 trillion, with



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approximately $50 billion in sales readily addressable by biological processing, for example, either by fermentation or through the use of
enzyme catalysts. An additional $200 billion in sales has been identified as potentially addressable by biological approaches within the next 10-20 years.



In chemicals, we are focused on developing novel biocatalytic processes that increase yields and decrease manufacturing costs for multiple
known products. In particular we are focused on developing proprietary catalysts and processes for the production of pharmaceutical products. The agricultural biotechnology seed market was estimated at approximately $3 billion in sales in 2001. It
is expected to grow to approximately $58 billion in sales by 2005 and to approximately $20-25 billion in sales by 2010. Biotechnology crops, first introduced to the market in 1996, have been adopted rapidly by farmers and were planted on
approximately 130 million acres in 2001. In agriculture, we are primarily applying our technologies to potentially increase crop yield, including through insect and pesticide resistance.



Uses and Limitations of Genes as Products



Genes and the protein products expressed by genes have
significant value in multiple commercial areas. The modern biotechnology industry was founded to capture this value, primarily through the isolation of genes from natural sources, and subsequent protein production from these genes for use in
commercial production systems. Despite some notable exceptions, the majority of proteins discovered by scientists and developed by the modern biotechnology industry have not been commercially successful. The lack of product success is due in part to
the fact that the relevant proteins did not evolve for commercial purposes.



In recent years, significant research efforts in biotechnology have focused on identifying genes and elucidating their function. These efforts, which are known as genomics, have been highly successful
in identifying tens of thousands of genes, but to date have not lead to rapid product development. This results from two primary causes. First, the genes identified by genomics did not evolve for commercial purposes. Second, once a gene has been
identified, a number of steps need to be completed before the genetic information can be used for the development of products.



Typical deficiencies of naturally occurring genes and proteins that limit their commercial utility as therapeutic products include
inappropriate availability in the body, instability, difficulty and cost to manufacture, lack of specificity, toxicity and other side effects. Similarly, in applications such as agriculture and chemical processes using enzymes as catalysts, problems
include the levels at which proteins can be made, lack of specificity, instability, poor efficiency of enzyme function under industrial manufacturing conditions and the degree of purity. In addition, potential products with the highest commercial
value often result from the action of multiple genes or multiple biological reactions and are difficult to optimize with modern biotechnology techniques. Many biotechnology companies have abandoned or never pursued development efforts with potential
product candidates as a result of the unsuitability of the wild-type proteins for commercial uses.



The biotechnology industry has used two other main approaches to attempt to adapt genes and their protein products for commercial uses.
One approach, rational design, seeks to modify a gene to improve its properties based on knowledge regarding how the structure of the gene determines the function of its resultant protein. Fundamental research on the mechanism of action of the
relevant protein is pursued until the knowledge gained is used to try to make a rational prediction of how to change the gene for desired effect. This process requires many simplifying assumptions, is costly, time intensive and has been generally
unsuccessful.



A second approach, directed
molecular evolution, seeks to improve genes for commercial purposes by mimicking the natural events of evolution. There are two general approaches to directed molecular evolution, those utilizing targeted mutagenesis and those utilizing
recombination-based techniques. Targeted mutagenesis involves the mutation of genes at preselected sites, most of which are harmful to gene function. The mutated genes are then screened to determine which mutations have resulted in improved
attributes. Since targeted mutation has a low probability of improving a gene or sequence of complex biological reactions, screening for



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positive changes is expensive and time consuming. The second approach to directed molecular evolution involves recombination-based
techniques, which mimic naturally occurring sexual recombination, a process in which regions of DNA are exchanged between strands of DNA. As recombination-based techniques do not require an understanding of the underlying biological process, and do
not generate as many harmful changes as random mutagenesis, use of this approach is generally less costly and less time intensive than genomics, rational design or targeted mutagenesis approaches.



The Maxygen Solution



We have developed proprietary technologies that help address
the limitations of modern biotechnology, allow for the rapid identification of lead product candidates and increase the opportunities for developing characteristics optimally suited for specific commercial purposes. Our integrated technologies bring
together advances in molecular biology and protein modification to help create novel biotechnology products. Our technologies are faster and less expensive than conventional technologies. Our use of such technologies is commercially-focused and
results-oriented, and unlike many conventional approaches, requires minimal understanding of complex underlying biological systems.



The most significant of our technologies are our MolecularBreeding directed molecular evolution technologies, of which there are two
components. The first is DNAShuffling, our proprietary process for recombining genes into a diverse high-quality library of novel DNA sequences known as gene variants. The second is MaxyScan, a series of proprietary screening capabilities for the
selection of desired commercial properties from the library of gene variants. The combination of DNAShuffling recombination technologies and MaxyScan specialized screening help allow us to identify new potential products in a more rapid,
cost-effective manner than conventional techniques.



Virtually any product or process that utilizes, or could utilize, DNA or proteins can potentially be improved for optimal function using our technologies. We are currently applying our technologies to adapt genes and proteins for use
in fields as diverse as protein pharmaceuticals, vaccines, chemicals and agriculture.



We believe that our technologies provide distinctive advantages over traditional biotechnology, as summarized in the following table.



Advantages of Maxygens Technologies



|Characteristic                                                                         |  | Modern Biotechnology |  | Maxygens Technologies
|-------------------------------------------------------------------------------------- |  | -------------------- |  | ----------------------
|Time to generate lead product candidates                                               |  | several years        |  | weeks to months       
|Necessary understanding of the biological processes underlying lead product
candidates |  | yes                  |  | no                    
|Ability to optimally improve properties for commercial applications                    |  | no                   |  | yes                   
|Cost to generate lead product candidates                                               |  | high                 |  | low                   
|Amount of resulting genetic diversity                                                  |  | limited              |  | virtually unlimited   



The Maxygen Strategy



Our goal is to be a world leader in the
commercialization of biotechnology products. We believe our technologies have broad commercial application, including short-, medium- and long-term commercial opportunities in human therapeutics and industrial applications (agriculture and
chemicals). Our business strategy is built around two major efforts:



Commercialize Proprietary Products.    We will continue to strengthen our capabilities to develop high value products in each of our target markets through two primary mechanisms:



Product Development
Partnerships:    Our strategy in entering into strategic collaborations is to work with leaders in their respective industries in specific areas of product focus. Our agreements grant to our



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| | strategic collaborators licenses under intellectual property developed by us in the collaboration for specific products for specific uses.
Generally, we retain the right to work independently or with others on products outside the scope of the areas that are the subject of our collaborations. In exchange for commercial licenses to the products developed in specified fields, we
typically seek up-front license fees, research funding, technology advancement funding, research and commercial milestone payments and royalties on product sales. Our goal is to benefit from the combined expertise of Maxygen and our collaborators.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Independent Product Development:    We plan to develop multiple products for a number of industries. We have invested and will continue to invest our own funds in specific, economically attractive, product
opportunities.



Expand Our Proprietary
Technology Leadership.    To expand our technology leadership, we will continue to develop our core technologies by investing in research and development. We will continue to acquire and license technologies from third
parties that complement our capabilities to develop products. We will protect and build upon our existing patent portfolio and also rely on trade secrets to protect our proprietary technologies. We will continue to recruit, and collaborate with,
leaders in the field of directed molecular evolution and complementary technologies and in various therapeutic indications and industrial segments.



We will continue to support both elements of our business strategy by gaining access to complementary technologies, capabilities and
expertise through in-licensing agreements, corporate partnerships and corporate acquisitions. We may also pursue additional grants from U.S. government agencies in areas of commercial interest.



Since 1997 we have entered into over 20 strategic
collaborations and several proof of principle collaborations with commercial entities and have received nine grants from U.S. government agencies. Since inception we have received $116.1 million in funding from our collaborators and from government
grants, which includes $10.3 million in deferred revenue to be recognized over the next three years. Approximately $89.5 million was received from our collaborators and $26.6 million was received from government funding. We have also received
$15 million from our collaborators in consideration for purchases of equity. Assuming our research efforts for existing collaborations and grants are expended for their full research terms, as of December 31, 2002 we had total committed funding
of approximately $30.6 million remaining to be received over the next three years. Potential milestone payments from our existing collaborations could exceed $300 million based on the accomplishment of specific performance criteria. These
payments are in addition to royalties on product sales.



In 2002, we were successful in achieving most of our corporate goals. We advanced our four pre-clinical product candidates further in the development process. These product candidates include: interferon beta in our collaboration
with Lundbeck; interferon gamma in our collaboration with InterMune; a therapeutic colon cancer vaccine in internal development and a preventative vaccine for Dengue hemorraghic fever, also in internal development. We currently have 16 potential
products in development; 13 with corporate collaborators, one that is being funded by Maxygen and two that we are actively seeking outside funding for continued development. We entered into three new product development collaborations in 2002;
alliances with Cargill Dow and Eli Lilly in chemicals, and a joint venture with Delta and Pine Land Company in agriculture called DeltaMax Cotton LLC to exploit opportunities in cotton. In 2002 we also received our first commercialization royalties
and completed an independent financing of our chemicals subsidiary, Codexis, Inc. In 2002, we had 34 additional U.S. patents issue and 32 additional foreign patents granted bringing the total number of patents owned or licensed by us as of December
31, 2002 to 156. We also have over 400 patent applications worldwide.



Current Fields of Application



We are currently applying our technologies to high-value opportunities in the fields of human therapeutics (protein pharmaceuticals, prophylactic vaccines and therapeutic vaccines) and industrial applications (agriculture and
chemicals).



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Human Therapeutics



Our human therapeutics business, consisting
of protein pharmaceuticals, prophylactic vaccines and therapeutic vaccines, presents us with opportunities in a wide variety of disease indications for which there is a significant unmet medical need for more efficacious (or effective) treatments.
The markets for many of these disease indications are very large and are summarized in the table below.



|Therapeutic Category                                     |  | 2001 Sales ($US)
|-------------------------------------------------------- |  | ----------------
|Infectious diseases                                      |  | $               
|Autoimmune disorder (anti-arthritis, multiple sclerosis) |  | $               
|Cancer                                                   |  | $               
|Blood disorders                                          |  | $               

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Source: MedAdNews May 2002



Protein Pharmaceuticals



We are dedicated to becoming one of the worlds leading providers of improved, proprietary, protein-based therapeutics.



Market Opportunity.    In 2001, worldwide sales of therapeutic proteins made using recombinant DNA technology
were approximately $25 billion. Protein pharmaceutical products, such as erythropoietin and granulocyte colony stimulating factor, represent some of the worlds most profitable pharmaceutical products. The protein therapeutics sector is one of
the fastest growing sectors of the pharmaceutical market, with an annual sales growth rate of 5 to 15%.



However, many presently marketed protein pharmaceuticals have deficiencies as therapeutics. For examples some protein drugs have limited
stability or efficacy in vivo and, as a result, require frequent and high doses. Other protein pharmaceuticals have adverse side effects that limit dosing and patient compliance. Furthermore, proteins can also be immunogenic, potentially leading to
adverse events or reduced therapeutic efficacy.



As a result of the problems associated with use of naturally-occurring proteins as drugs, most FDA-approved protein pharmaceuticals have required some level of engineering to improve pharmacological properties. We believe significant
opportunity exists to further improve these approved drugs and other protein therapeutics. A subset of the FDA-approved recombinant protein pharmaceuticals that have been modified is listed below.



|Product/Company (Protein class)               |  | Modification                                                                  |  | Indication                                   |  | Improvement                                           
|--------------------------------------------- |  | ----------------------------------------------------------------------------- |  | -------------------------------------------- |  | ------------------------------------------------------
|Aranesp/Amgen (Erythropoietin)                |  | Two amino acid changes to allow for additional glycosylation sites            |  | Anemia                                       |  | Less frequent dosing                                  
|                                             
|Betaseron/Berlex (Interferon-beta)            |  | Changes to amino acid sequence                                                |  | Multiple sclerosis                           |  | Increased production yields                           
|                                             
|Humalog/Lilly (Insulin)                       |  | Change to amino acid sequence                                                 |  | Diabetes                                     |  | Faster onset of action                                
|                                             
|Infergen/Amgen & InterMune (Interferon-alpha) |  | Consensus sequence of four subtypes, additional change to amino acid sequence |  | Hepatitis C                                  |  | Increased potency, facilitate construction of molecule
|                                             
|Pegasys/Roche (Interferon alpha)              |  | Addition of a PEG molecule                                                    |  | Hepatitis C                                  |  | Less frequent dosing, improved efficacy               
|                                             
|Proleukin/Chiron (Interleukin-2)              |  | Changes to amino acid sequence, nonglycosylated                               |  | Metastatic melanoma and renal cell carcinoma |  | Increased specific activity                           

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Sources: Product monographs and
Kurtzman, et al. Current Opinion in Biotechnology 2001, 12: 361370.



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By applying
our technologies, including our MolecularBreeding directed molecular evolution technologies and post-translational modification tools, we believe we will be able to develop more potent and safer protein pharmaceuticals that help address the
limitations of current protein pharmaceuticals. Our technology offers a means both to develop new therapeutics, with better commercial and therapeutic attributes than naturally occurring proteins, and to develop improved next-generation protein
drugs.



Business
Strategy.    Our strategy for protein pharmaceuticals is to partner and independently develop new and improved therapeutic products. Biopharmaceuticals at all stages of developmentresearch, clinical, marketed or
failedare potential targets for improvement. We are currently building internal pre-clinical and clinical capabilities to allow us to move multiple products through the approval processes in the United States, Europe, and other important
markets. In parallel, we are working with pharmaceutical companies to develop, manufacture and commercialize biopharmaceutical candidates made using our technologies. By collaborating with leading pharmaceutical companies and creating better
versions of proven protein therapeutics we believe that we can maximize our return and decrease our development risk.



Our protein pharmaceuticals activities were expanded considerably in August 2000 by our acquisition of Maxygen ApS (then known as Profound
Pharma A/S), a Danish company, which contributed protein modification technologies and capabilities, as well as strong additions to our management team with drug development expertise. With the acquisition of Maxygen ApS, our research-stage protein
pharmaceutical product pipeline was doubled. We have also benefited by additional expertise related to all stages of protein pharmaceutical development including molecular biology, protein chemistry, in vitro and in vivo pharmacology,
immunology, and pre-clinical and clinical development. Additionally, having a European presence may provide us European business opportunities that may not have been accessible otherwise.



Technology Platform.    We are capable of improving biopharmaceuticals in
important parameters through the use of our integrated platform of proprietary technologies. In addition to our MolecularBreeding directed molecular evolution technologies, our proprietary platform includes a number of significant technologies for
structure-based molecular design, intelligent diversity generation, and directed PEGylation and glycosylation. We have also designed and implemented expression systems, automated high-throughput fermentation capabilities, and protein purification
and characterization techniques that are specific to proteins. Our technology platform is highly flexible and enables us to apply a wide selection of technologies in an integrated fashion to improve proteins for a desired function. For example, we
can use our MolecularBreeding directed molecular evolution technologies to modulate the receptor specificity of a protein, and subsequently use directed PEGylation to reduce immunogenicity and improve the pharmacokinetic profile.



In addition, we have a broad strategic relationship with
Shearwater Corporation (a subsidiary of Nektar Therapeutics), a leader in PEG technology. This alliance provides us with access to Shearwaters proprietary PEGylation chemistries, as well as PEG compound supply, for the development of our
product candidates.



Products/Pipeline.Our protein pharmaceuticals activities are focused on the development of second-generation, tailor made, and novel protein therapeutics. At present, we have thirteen active
programs aimed at improving therapeutic proteins, many of which are next generation versions of successfully marketed products. Two of those potential products are in pre-clinical development.



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Examples of
Potential Products in Protein Pharmaceutical Pipeline



|Product  |  | Disease Indication    |  | Estimated Potential Market ($US) |  | Partner/Maxygen Retained Rights |  | Status      
|-------- |  | --------------------- |  | -------------------------------- |  | ------------------------------- |  | ------------
|Maxy-10  |  | CNS, including MS     |  | $3 billion                       |  | Lundbeck                        |  | Pre-clinical
|Maxy-50  |  | Fibrosis and Oncology |  | $2 billion                       |  | InterMune                       |  | Pre-clinical
|Maxy-996 |  | Hemostasis            |  | $2 billion                       |  | Maxygen                         |  | Research    
|Maxy-24  |  | Infectious disease    |  | $13 billion                     |  | Maxygen                         |  | Research    
|Maxy-20  |  | Allergy               |  | $1.6 billion                     |  | ALK-Abelló                      |  | Research    
|Maxy-30  |  | Autoimmune disease    |  | $1 billion                       |  | Maxygen                         |  | Research    

| | 
| | 

| | · |  | Research means the discovery or creation of prototype products, including their characterization.
| | - |  | ---------------------------------------------------------------------------------------------------

| | · |  | Pre-clinical means product scale-up, formulation and further testing in animals, including toxicology.
| | - |  | --------------------------------------------------------------------------------------------------------



Protein Pharmaceutical Alliances.



InterMune.In September 2001,
we granted a license to, and established a three-year collaboration with, InterMune, Inc. to develop and commercialize novel, next-generation interferon gamma products. The main purpose of the collaboration is to develop a next-generation
Actimmune®with enhanced pharmacokinetics and a less-frequent dosing regime. Actimmune®(Interferon gamma-1b), is currently being marketed by InterMune in the United States for the treatment of chronic
granulomatous disease (CGD) and severe, malignant osteopetrosis. InterMune is continuing the development of Actimmune®by conducting several advanced stage clinical trials, including a Phase III trial for the treatment of idiopathic pulmonary fibrosis (IPF) and a Phase III trial for ovarian cancer. Under the terms of the agreement, InterMune has
taken forward into clinical development product candidates created by Maxygen. InterMune has funded and will continue to fund optimization and development of the next-generation interferon gamma products, and will retain exclusive worldwide
commercialization rights for all human therapeutic indications. Maxygen has received up-front license fees, and has received and will continue to receive full research funding. It has also received one development milestone payment and will be
entitled to receive future development and commercialization milestone payments based upon clinical development, regulatory approvals and commercial sales. In addition, Maxygen will receive royalties on product sales. In October 2002 we announced
that Maxygen had received a $1 million milestone payment from InterMune for successfully achieving drug performance criteria established by InterMune. Maxygen has developed a series of preclinical candidates that have been shown in animal models to
improve pharmacokinetic properties that should allow a once-per-week dosing regimen. These compounds are now advancing into further pre-clinical development.



Lundbeck.    In September 2000, we established a three-year strategic alliance with H. Lundbeck A/S, a Danish
pharmaceutical company, to develop an interferon beta pharmaceutical product to address nervous system diseases, including multiple sclerosis. Treatments for these diseases may provide Lundbeck with access to a market with a potential value of $3.0
billion. Lundbeck specializes in the development of pharmaceuticals to treat psychiatric and neurological disorders. We have received research and development funding as well as license fees and milestone payments based on developmental success and
are entitled to receive further research and development funding, license fees and milestone payments based on clinical trials, regulatory approval and commercial sales. We are also entitled to receive royalties on product sales. We retain
development and marketing rights to the product in key Asian markets and global rights for all indications outside of nervous system diseases, including inflammatory diseases, infectious diseases and cancer. In February 2002 we announced that
Lundbeck intended to move an optimized interferon beta lead compound from the collaboration forward into pre-clinical development. The lead compound has been engineered by us to have an improved drug profile for therapy, with reduced immunogenicity,
increased bioavailablility and substantially improved half life, to minimize side effects and maximize therapeutic efficacy.



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Vaccines



We are dedicated to becoming a leader in
the development of novel vaccines for the prevention and treatment of infectious diseases, cancer, autoimmune disease and allergy.



Market Opportunity.    Worldwide sales of all vaccines in 2001 exceeded $5.8 billion and are expected to exceed
approximately $11 billion by 2010. Recombinant DNA technology has enabled the development of prophylactic vaccine products that are safer, cheaper and easier to manufacture. This may create new market potential for these types of products, such as
the Hepatitis B vaccine market, which is estimated to have had 2001 sales of $1.6 billion.



The vaccine market is expected to increase dramatically for several key reasons:



| | · |  | Vaccines are under development for the treatment of many existing diseases, such as cancer, autoimmune disease and allergy, and chronic infectious diseases. This
will expand the market size dramatically beyond the traditional use of vaccines as prophylactics for infectious diseases.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Vaccines remain the best way to control epidemics and the spread of disease.
| | - |  | ----------------------------------------------------------------------------



| | · |  | Combination vaccines are being introduced into medical practice, making patients, particularly children, more likely to be vaccinated broadly against infectious
diseases.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Travel around the world is increasing at a dramatic rate. Traveling increases the probability that viruses, bacteria and other infectious agents will be disbursed
worldwide.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Adults are being vaccinated more frequently, expanding the patient population.
| | - |  | ------------------------------------------------------------------------------



| | · |  | Increased bioterrorism threats.
| | - |  | -------------------------------



Business Strategy.    Our strategy for vaccines is to partner and independently develop new and improved
preventative and therapeutic vaccines. We intend to outlicense and partner potential products that we choose not to develop independently and enter into additional collaborations to further our technologies and product development capabilities. By
collaborating with leading pharmaceutical companies we seek to balance our return and our development risk. Additionally, the speed of our technologies allows many targets to be pursued simultaneously, thus decreasing portfolio risk.



Our vaccine business activities have been built primarily
through grant funding of more than $25 million from the U.S. government. This funding has enabled us to advance key programs and our technology platform as a whole.



Technology Platform.    We believe our proprietary technologies have the potential
to transform the design and development of vaccines through the optimization of properties that allow for the generation of broad and strong immune responses. We have shown that we can generate new modified vaccines that have the potential to
overcome the limitations of traditional vaccine development. This may enable us to help address both the treatment and prevention of a wide variety of diseases including cancer, allergy, autoimmune disease and infectious diseases such as AIDS and
hepatitis.



We believe our technologies will help
enable us to develop prophylactic and therapeutic vaccines with one or more of the following key characteristics:



| | · |  | The ability to generate the appropriate immune response.    Many prophylactic and therapeutic vaccines in development have not been
successful due to their inability to generate an immune response sufficient to treat or protect from disease. We have shown that our technologies can potentially be used to separately improve the various components of a vaccine, so that the overall
immune response is sufficiently improved. Vaccines with improved immunogenicity may be useful to treat cancer, allergy and chronic infectious diseases such AIDS, as well as protect against initial disease.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · |  | The ability to protect against multiple forms of a disease with one vaccine.    Many infectious agents provide long-lasting
protection against subsequent infection with the same pathogen. However, many viruses (e.g., HIV, influenza) and certain bacteria change frequently so that they can evade the immune system. Our technologies can potentially be used to create novel
vaccines that can provide protection from most or all forms of disease in one product.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Novel adjuvants to boost the relevant immune response.    Our technologies have been used to generate novel adjuvants, or components of
vaccines that boost the immunogenicity of the vaccine component. Adjuvants are expected to be critical components of successful vaccines, but have been disappointing because they are rarely effective without also causing unwanted side-effects. Our
novel adjuvants have the potential to be more efficient at boosting the immune response to the vaccine, and at the same time, cause fewer side effects. These novel adjuvants may be able to be used as components of vaccines against cancer, allergy
and chronic infectious diseases.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Novel therapeutic vaccines to induce tolerance.    When the bodys immune systems attacks its own healthy tissue, autoimmune disease
occurs. Types of autoimmune disease include rheumatoid arthritis, multiple sclerosis, inflammatory bowel disease and psoriasis. Therapeutics that are able to intervene in this process by downregulating the immune systems attack of its own
cells, and re-educating these cells by inducing tolerance, could be effective as therapies for many kinds of autoimmune disease. Multiple naturally-occurring proteins, such as cytokines and antibodies, are under development as therapeutics for
autoimmune disease. However, many of these therapies are limited because they generally cause multiple different kinds of responses in the body. Our technologies can potentially be used to develop therapeutic vaccines with the ability to
specifically downregulate the immune response and induce tolerance.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Products/Pipeline.    We are developing vaccines for the prevention and treatment of cancer, autoimmune diseases, allergy and infectious diseases. Products may be developed
both internally by Maxygen, as well as through corporate collaborations for specific product opportunities.



Examples of Potential Products in Vaccine Pipeline



|Product   |  | Disease Indication                    |  | Partner/Maxygen Retained Rights       |  | Status      
|--------- |  | ------------------------------------- |  | ------------------------------------- |  | ------------
|Maxy-1200 |  | Treatment of Colorectal Cancer        |  | Maxygen                               |  | Pre-clinical
|Maxy-1500 |  | Prevention of Dengue Virus infections |  | Maxygen                               |  | Pre-clinical
|Maxy-1100 |  | Treatment of Hepatitis B              |  | Maxygen                               |  | Research    
|Maxy-201  |  | HIV                                   |  | International AIDS Vaccine Initiative |  | Research    



|· |  | Research means the discovery or creation of prototype products, including their characterization.
|- |  | ---------------------------------------------------------------------------------------------------



|· |  | Pre-clinical means product scale-up, formulation and further testing in animals, including toxicology to assess suitability for, and prepare for,
clinical testing in humans.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our
two lead vaccine product candidates are in the pre-clinical development stage; the first is a therapeutic vaccine for the treatment of colorectal cancer; the second is a vaccine to prevent dengue virus infection and the risk of dengue hemmorrhagic
fever. We are pursuing out-licensing and/or joint development opportunities for each of these lead products. While each of the two lead product candidates has proven successful in pre-clinical primate studies, we will not be continuing into clinical
development on our own with either of the lead product candidates. However, we will move towards clinical development with either or both of the lead product candidates if we are able to secure funding from an appropriate corporate, government or
philanthropic partner. In addition to our two lead product candidates, we have approximately ten prophylactic and therapeutic vaccine candidates in our research pipeline.



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Vaccine
Alliances



U.S. Army Medical Research and
Materiel Command.In August 2002, we received a $2.4 million, three-year grant from the U.S. Army Medical Research and Materiel Command to develop cross protective vaccines against three types of encephalitis virus.
Maxygen scientists will be working in collaboration with scientists at the U.S. Army Medical Research Institute for Infectious Diseases to develop a single vaccine antigen that is capable of protecting against Venezuelan, Western and Eastern equine
encephalitis viruses. These viruses can cause infections in humans resulting in a spectrum of diseases, from inapparent infection to severe neurological consequences including death.



Aventis Pasteur.In November
2001, we established a three-year collaboration with Aventis Pasteur to develop improved vaccines for a specific undisclosed target. Aventis Pasteur is the new name of Pasteur Merieux Connaught, adopted at the creation of Aventis. Under the terms of
the agreement, Maxygen has received license fees and full research and development funding. Maxygen will also receive future license fees, full research and development funding and minimum annual royalties. We will also receive milestone payments
based on success-based milestones, clinical trials, regulatory approvals and commercial sales and royalty payments on product sales. Aventis Pasteur will receive exclusive worldwide rights to commercialize the vaccines developed in the
collaboration.



USAID.    In October 2001, we received a $3.7 million, three-year grant from the U.S. Agency for International Development (USAID) to support the research and development of a novel, broadly protective
malaria vaccine. Under the terms of the agreement, Maxygen will retain worldwide rights to commercialize successful vaccine candidates that result from the program.



ALK-Abelló.In February 2001, we established a three-year collaboration
with ALK-Abelló A/S, a wholly-owned subsidiary of Chr. Hansen Holding A/S, to research and develop novel recombinant therapeutics for the treatment of specific allergies. We are collaborating with ALK-Abelló to create therapies for
treating specific allergies, including allergies to house dust mites and grasses, which are the cause of many common allergies. ALK-Abelló will receive exclusive worldwide rights to commercialize all recombinant human therapeutics developed
in the collaboration. Treatments for these allergies may provide ALK-Abelló with access to a market with a potential value of $1.6 billion. Under the terms of the collaboration, we have received license fees, technology access fees and
research and development. We will also receive future license fees, technology access fees and research and development, and potential milestone payments based on clinical trials and commercial sales. Maxygen will also receive royalties on product
sales.



International AIDS Vaccine
Initiative.In February 2001, we established a three-year collaboration to develop novel HIV vaccines with the International AIDS Vaccine Initiative (IAVI) and DBLV LLC, an entity established and funded by the Rockefeller
Foundation. Under the agreement, DBLV has provided and will continue to provide full research and development funding to us for at least the three year initial research terms to expand our ongoing program in HIV vaccine development. We will retain
all rights to commercialize the HIV vaccine candidates in all developed countries of the world, as well as in certain markets in the developing world. In recognition of the great need for a vaccine against AIDS in the poorest countries of the world,
we have granted IAVI a royalty-free license to develop and distribute HIV vaccines to those who cannot afford them in developing countries.



Scripps Research Institute.    In September 2000, we established a research and screening collaboration with
the Scripps Research Institute to identify potential vaccine candidates for the treatment and prevention of HIV. We will use our proprietary technologies to create novel antigens capable of generating immune responses against the HIV virus. Scripps
will analyze the novel antigens for their ability to immunize against the HIV virus.



Karolinska Institute.    In July 2000, we initiated a two-year program with the Karolinska Institute for the development of novel allergy immunotherapeutics. Under the
agreement, we used our proprietary technologies to generate novel recombinant allergens for the treatment and prevention of certain common allergic conditions that



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the Karolinska Institute helped screen using sera and lymphocytes from allergic patients. We retain commercialization rights without any
future financial obligation to the Karolinska Institute for any application of potential allergy products.



Industrial Applications



ChemicalsCodexis, Inc.



Our chemicals business is operated through our majority-owned subsidiary Codexis, Inc. Codexis was incorporated in January 2002, and our chemicals business was contributed to Codexis in March 2002 in
exchange for all the capital stock of Codexis. On September 13, 2002, Codexis sold $15 million of Codexis redeemable, convertible preferred stock to investors, of which $5 million was purchased by Maxygen and $10 million was purchased by several
other investors. On October 1, 2002, Codexis sold an additional $10 million of redeemable, convertible preferred stock to several third party investors.



Codexis is dedicated to becoming a leader in providing high-value chemical products and services to the worldwide life science and fine
chemical industries. In particular Codexis is focused on developing proprietary catalysts and processes for the production of pharmaceutical products.



Codexis primary area of focus is the pharmaceutical market. Products in this area include chiral pharmaceuticals, complex natural
products and novel pharmaceutical building blocks. Codexis also plans to leverage its technologies towards the development of flavor and fragrance molecules and other high-value industrial chemicals.



Market Opportunity.The
chemicals industry is comprised of three major segments: commodity, specialty and fine. Together, 2000 sales in these three segments exceeded $1.7 trillion. Within these segments, approximately $50 billion in sales is readily addressable by
biological processing, for example, either by fermentation or through the use of enzyme catalysts. Some examples of existing biologically-based chemical processes are listed below:



|Product/Process                          |  | Company                             |  | Estimated Annual Sales ($US)
|---------------------------------------- |  | ----------------------------------- |  | ----------------------------
|Acrylamide                               |  | Nitto                               |  | $100+ million               
|Polylactic Acid                          |  | Cargill-Dow, LLC                    |  | $200 million                
|Nicotinates (nitrile catalyst)           |  | Lonza                               |  | $100 million                
|High fructose corn syrup                 |  | Archer Daniels Midland, A.E. Staley |  | $4.5 billion                
|Modified Penicillins (catalysts acylase) |  | DSM                                 |  | $300+ million               
|Aspartame (protease catalyst)            |  | DSM/Tanabe, Tosoh                   |  | $500 million                



Within
Codexis target pharmaceutical market, its MolecularBreeding directed molecular evolution technologies have the potential to provide a significant competitive advantage in the synthesis of high-value chiral intermediates, bulk actives and
natural products. Chirality is increasingly important in modern drug discovery and development. In 2000, chiral products accounted for over $130 billion in sales, while natural product drugs had sales of approximately $50 billion.



An additional $200 billion in sales has been identified as
potentially addressable by biological approaches within the next 10-20 years. Included in the potential market is the manufacturing of major chemicals, plastics, vitamins, compounds used in the manufacture of pharmaceuticals, enzymes for use as
catalysts, pigments and additives in paint, and polymers and fibers in clothing.



Enzymes occurring in nature are generally unable to meet the stringent activity requirements required for the commercial use of enzymes in industrial processes. Technologies such as directed molecular
evolution are potentially able to overcome such shortcomings.



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Business
Strategy.The chemical industry is undergoing a transformation in the way it produces chemicals and materials. Specifically in the pharmaceutical industry, increasing cost pressures and increasing chemical complexity in
the molecules in development are creating a need for innovations that can help reduce the cost of manufacture by, for example, eliminating multiple costly chemical synthetic steps or allowing for the use of a lower-cost raw material.



Codexis goal is to be a leading provider of proprietary
products and services to the pharmaceutical and fine chemical industry. Its technologies help allow for the generation of proprietary catalysts and processes for the production of pharmaceutical products. Codexis plans to capture value through the
outlicensing of processes to third parties for subsequent commercialization and the direct sale of pharmaceutical intermediates and bulk actives to major pharmaceutical companies via its own sales and marketing team. In the case of outlicensing,
Codexis expects to receive milestones and royalties on product sales. For direct product sales, Codexis plans to manufacture its products through third party toll manufacturing agreements and manufacturing joint ventures.



Codexis believes its business strategy provides several
distinct advantages, including:



| | · |  | Focusing on its key competitive advantagethe development of proprietary processes for the synthesis of high-value products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| | · |  | Capitalizing on Codexis manufacturing partners strengths in chemical development and manufacturing;
| | - |  | -----------------------------------------------------------------------------------------------------



| | · |  | Establishing a direct interface with the pharmaceutical customer; and
| | - |  | ---------------------------------------------------------------------



| | · |  | Potentially diminished fixed asset risk and overall financing requirements through managed headcount growth and toll manufacturing relationships.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



Technology Platform



Codexis is focused on improving existing
chemical processes and creating novel processes for the manufacturing of specialty and fine chemical products. In particular, Codexis is focused on developing proprietary catalysts and processes for the production of pharmaceutical products.
Codexis set of proprietary technologies can allow for the modification of enzymes, multi-enzyme pathways and organisms, helping to overcome existing limitations of enzyme catalysts and helping to enable the development of economically viable
biocatalytic and fermentative processes. Codexis believes that its approach can facilitate a new model in process design in which a biological catalyst can be designed for a process, rather than the process being designed around a catalyst.



Codexis has validated the use of its
technologies in multiple areas relevant to the development of improved pharmaceutical and chemical products. Codexis has achieved key milestones in its collaborations with Pfizer, DSM and Novozymes. It is currently receiving on-going
commercialization payments from these strategic relationships. Specifically, Codexis has used MolecularBreeding directed molecular evolution technologies to:



| | · |  | Develop low-cost, efficient catalysts with improved performance for the synthesis of complex molecules;
| | - |  | -------------------------------------------------------------------------------------------------------



| | · |  | Develop improved chemical production organisms;
| | - |  | -----------------------------------------------



| | · |  | Develop proprietary syntheses of high-value chemicals; and
| | - |  | ----------------------------------------------------------



| | · |  | Demonstrate the validity of its technology for multiple applications at relevant commercial scale.
| | - |  | --------------------------------------------------------------------------------------------------



In addition to DNAShuffling recombination technologies,
Codexis has developed expertise in developing high-throughput biological and chemical screening systems that closely mimic the commercial scale environment. Screening for trace amounts of a specific chemical, rheological properties of a polymer, or
a specific stereo- or regioisomer are just some of the high-throughput screening capabilities Codexis has developed



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to identify conversions and syntheses of interest. Coupled with the power of DNAShuffling recombination technologies, Codexis screening
systems help enable it to rapidly develop integrated, commercially viable chemical processes at the relevant scale.



Products/ Pipeline.    Codexis is targeting multiple major high-value, low-volume chemical processes in the
specialty and fine chemical areas for internal development and later stage partnering. These potential products include specific pharmaceutical intermediates and actives, antibiotics, vitamins and nutritional compounds and other fine chemicals.
Codexis has seven strategic alliances in the chemicals field and over 19 potential products and processes in its research pipeline, including two product candidates and processes in development. In addition, Codexis has five processes now operating
at commercial scale, with two such processes generating royalty payments.



Codexis technologies have been validated in the following major product categories.



Validated Applications in Chemicals



|Product Category             |  | Validation |  | Collaborator
|---------------------------- |  | ---------- |  | ------------
|Catalysts                    |  | Ö          |  |             
|Pharmaceutical Intermediates |  | Ö          |  |             
|Bulk Actives                 |  | Ö          |  |             
|Processes                    |  | Ö          |  |             



Chemical Alliances



Codexis has entered into various collaborations to accelerate the research, development and commercialization of its products and/or processes. Codexis plans to continue to partner with industry leaders in order to generate near-term
revenues in the form of license fees and research funding and to develop additional technologies relevant to the commercialization of processes for pharmaceutical products. The following table summarizes Codexis current alliances.



Codexis Strategic Alliances



|Collaborator   |  | Scope                                           |  | Estimated End Product Market (Yearly Sales)                        
|-------------- |  | ----------------------------------------------- |  | -------------------------------------------------------------------
|Eli Lilly      |  | Improved process for manufacture of bulk active |  | $150 million                                                       
|              
|Novozymes      |  | Industrial enzymes                              |  | $1.8 billion                                                       
|              
|Pfizer         |  | Improved process for bulk active manufacture    |  | $150+ million                                                      
|              
|DSM            |  | Improved process for antibiotic intermediate    |  | $300+ million                                                      
|              
|Rio Tinto      |  | Novel bioprocess for improved CO2 abatement     |  | $200$350/ton of coal; total coal consumption 1,400 million
tons/yr
|              
|Chevron-Texaco |  | Methanol                                        |  | $2 billion to $4 billion                                           
|              
|Cargill-Dow    |  | Lactic acid                                     |  | $200+ million                                                      



Eli
Lilly.    In January 2003, Codexis entered into a multi-year collaboration with Eli Lilly and Company focused on the development of improved fermentations for several of Eli Lillys natural product drugs. The
collaboration will take advantage of Codexis Whole Genome Shuffling strain improvement technologies, which were developed under a NIST-ATP grant sponsored in part by Eli Lilly. Under the terms of the collaboration, Eli Lilly has provided
Codexis with up-front technology access funding and has provided and will continue to provide full research funding; Codexis will be eligible to receive research and commercialization milestone payments.



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Cargill
Dow.In March 2002, we established a collaboration with Cargill Dow LLC, to research and develop a novel process for the production of lactic acid. The goal of the collaboration is to further improve Cargill Dows
novel low-cost process for the production of lactic acid from natural sugars derived from annually renewable resources, such as corn. Under the terms of the collaboration, we received technology access payments and have received and will continue to
receive full research funding, and may receive research and commercialization milestones. Codexis will also receive royalties on any sales of products manufactured using its technologies. Cargill Dow has worldwide commercialization rights for
products generated from any improved production process developed in the collaboration. This collaboration was assigned to Codexis from Maxygen in connection with its capitalization in March 2002.



Chevron.    In October 2000, we
entered into a three-year collaboration with Chevron Research and Technology Co. to develop novel bioprocesses for specific petrochemical products. The initial area of focus is to develop a biocatalytic process for the conversion of methane to
methanol. Currently, the worldwide methanol market is estimated to be 11 billion pounds consumed annually at a price of $0.50 per pound. Chevron will have commercialization rights in exchange for license fees, technology access fees, full research
funding, success-based milestones, annual fees and product royalties. This collaboration was assigned to Codexis from Maxygen in connection with its capitalization in March 2002.



Pfizer.    In September 2000, we extended a May 1998 agreement with Pfizer Inc. in
the area of biochemical manufacturing of a specific pharmaceutical product. Under the 1998 agreement, we improved the selectivity of the biosynthetic pathway that is critical to the manufacture of Pfizers product, and delivered an improved
pathway that is currently in commercial operation at Pfizer. In the expanded collaboration, commercial terms were agreed upon for the improved process, with success earning Maxygen research and commercial milestones as well as a percentage of all
manufacturing cost savings once the optimized commercial process is scaled up at Pfizer. Additionally, Pfizer agreed to fund additional research and development at Maxygen to allow us to further improve the performance of the pathway. In September
2002 we announced that we had received our first commercial payment in connection with the collaboration. To date, Maxygen has also received two milestone payments for developing the improved second-generation manufacturing process. This
collaboration was assigned to Codexis in connection with its capitalization in March 2002.



Rio Tinto.    In January 2000, we entered into a three-year collaboration with Technological Resources Pty Limited, a wholly-owned subsidiary of Rio Tinto Corporation plc,
one of the worlds leading mining companies, to develop enzymatic systems to increase the efficiency of carbon dioxide fixation in connection with the combustion of fossil fuels and for other purposes. The technology, if successful, has broad
applicability to multiple billion-dollar industries. Increased efficiency could play a significant role in the reduction of CO2emissions. In connection with the collaboration, we have received research and funding payments and technology advancement fees. We will also receive future research and funding payments and technology advancement fees. Maxygen and
Rio Tinto will also each share revenues with the other from certain products or processes that are commercialized by the other. This collaboration was assigned to Codexis in connection with its capitalization in March 2002.



DSM.    In March 1999, we entered
into a three-year collaboration with Gist-Brocades N.V., a subsidiary of DSM N.V., to utilize our technologies to develop novel enzymes for use in the manufacture of certain classes of antibiotics. This collaboration was extended in June 2002. We
have received research funding and royalties from the commercialization of a process developed through our technologies. We will also receive future royalties from the commercialization of enzymes developed in the collaboration. In October 2002, we
announced that DSM had successfully commercialized a novel process for the manufacture of a pharmaceutical intermediate using Codexis proprietary technologies and as a result, Codexis would receive royalty payments from DSM. This collaboration
was assigned to Codexis in connection with its capitalization in March 2002.



Novozymes (formerly a division of Novo Nordisk A/S).    In September 1997, we entered into a five-year strategic collaboration with Novozymes, the worlds largest
producer of industrial enzymes, for the development



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and bulk production of specific industrial enzymes in fields such as laundry detergents, leather processing and pulp and paper manufacturing.
In addition to providing Novozymes with an improved subtilisin molecule (one of the most studied and highly modified industrial enzyme products, with 1999 worldwide sales in excess of $400 million) we provided an additional product candidate in
2000. In 2001 we announced the advancement of two further industrial enzyme product candidates into commercial development bringing to a total of four the number of product candidates in commercial development under the agreement. In November 2001,
the companies expanded the market areas addressed by the existing industrial enzymes collaboration. Under the terms of the expanded relationship, Novozymes will be licensed to use MolecularBreeding directed molecular evolution technologies for
additional industrial enzyme applications. Maxygen has received and will continue to receive certain minimum royalty payments and royalty payments on the sales of any products developed under the 1997 agreement and on the sale of any products in the
expanded industrial enzyme market areas. In addition, Maxygen will have co-exclusive rights to use the MolecularBreeding directed molecular evolution technologies for certain new industrial enzyme markets. This collaboration was assigned to Codexis
in connection with its capitalization in March 2002.



Hercules.In October 2000, Maxygen entered into a collaboration with Hercules Incorporated focused on developing specialty chemicals via custom-made biological catalysts for the pulp and paper industry.
Under the terms of the collaboration, we received full research funding, technology access fees and license fees. This collaboration was assigned to Codexis from Maxygen in connection with its capitalization in March 2002. The collaboration was
terminated in January 2003 in exchange for, inter alia, a termination payment and assignment of all program technology to Codexis. While we believe that the collaborative research was proceeding on schedule and in a satisfactory manner,
Hercules requested that the collaboration be terminated due to a change in its strategic direction.



In addition to our corporate and academic collaborations we have received grants from NIST-ATP (1998) to develop whole genome shuffling
and from DARPA (1998) to develop enzymes with the capacity to inactivate microbial spores.



AgricultureVerdia, Inc.



Our agriculture business is operated through our wholly-owned subsidiary Verdia, Inc. Verdia was incorporated in March 2002. Our agriculture business was contributed to Verdia in March 2002 in exchange
for all the capital stock of Verdia.



Verdia is
dedicated to becoming a global leader in providing proprietary product solutions to important commercial problems in plant-based businesses through the application of advanced DNA breeding methods.



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Market
Opportunity.The agricultural biotechnology seed market was estimated at approximately $3 billion in sales in 2001. It is expected to grow to approximately $5-8 billion in sales by 2005 and to approximately $20-25
billion in sales by 2010. Biotechnology crops, first introduced to the market in 1996, have been adopted rapidly by farmers and were planted on approximately 130 million acres in 2001. Adoption rates for transgenic crops are the highest for any new
technology in agriculture. Biotechnology crops create value by reducing farmer costs, simplifying farming systems and improving environmental sustainability through decreased use of conventional pesticides. Some examples of existing
biotechnology-based products, the utilization of transgenic crops relative to crop protection chemicals and an overview of the market potential for transgenic crops are listed below:



Acreage of Transgenic Crops in 2001



|Crop    |  | Trait                       |  | Acres Planted in 2001 (Million)
|------- |  | --------------------------- |  | -------------------------------
|Soybean |  | Herbicide Tolerant          |  | 81.9                           
|Corn    |  | Insect Tolerant             |  | 14.6                           
|Canola  |  | Herbicide Tolerant          |  | 6.7                            
|Corn    |  | Herbicide Tolerant          |  | 5.2                            
|Cotton  |  | Herbicide Tolerant          |  | 6.2                            
|Cotton  |  | Herbicide & Insect Tolerant |  | 5.9                            
|Cotton  |  | Insect Tolerant             |  | 4.7                            
|Corn    |  | Herbicide & Insect Tolerant |  | 4.4                            
|        |  |                             |  |                                
|Total   |  |                             |  | 129.6                          
|        |  |                             |  |                                



Global
Crop Protection Market in 2001: by Product Type



|Product Group    |  | $US Million |        | % Change from 2000 |     
|---------------- |  | ----------- | ------ | ------------------ | ----
|Herbicides       |  | $           | 12,887 |                    | -6.9
|Insecticides     |  | $           | 7,559  |                    | -6.1
|Fungicides       |  | $           | 5,306  |                    | -6.9
|Transgenic Crops |  | $           | 3,044  |                    | +3.7



Global
Transgenic Agriculture Market in 2001: by Crop



|Crop    |  | Global Acreage (Millions) |  | % Transgenic in 2001 |  
|------- |  | ------------------------- |  | -------------------- | -
|Soybean |  | 178                       |  | 46                   | %
|Cotton  |  | 84                        |  | 20                   | %
|Canola  |  | 62                        |  | 11                   | %
|Corn    |  | 346                       |  | 7                    | %



Biotechnology-based developments in agriculture over the past decade have focused on providing farmers with plants that resist insect pests and enable the use of convenient, more environmentally favorable herbicides with an
associated improvement in sustainable farming practices. The next generation of biotechnology crops will likely include plants capable of resisting additional pests and diseases, requiring reduced use of agrochemicals, as well as crops with improved
nutrient value for both human food and animal feed. Biotechnology research is also being directed toward developing plants designed as factories for the production of molecules of high commercial value, including natural polymers for materials
applications and fine chemicals for nutraceutical and pharmaceutical products. We believe our technology platform can be used to create numerous commercial opportunities in crop protection and plant quality traits.



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Business
Strategy.    Verdia aims to provide customers with transgenic traits that enhance the performance and value of seed products that address the crop protection, materials, food and feed markets.



Verdias long-term goal is to develop products on its own
but intends to initially enter the market through research and development relationships and through product development alliances with seed and plant propagation businesses. Verdia believes that this strategy decreases the financial risks
associated with product development and marketing while building the necessary infrastructure and capabilities to become an integrated company. Verdias initial products are expected to be cotton-based products.



Technology Platform.    Verdia
believes that its technologies, including its proprietary MolecularBreeding directed molecular evolution technologies, can be used to create numerous commercial opportunities in crop protection and plant quality traits. In particular, existing
commercial product performance potentially can be enhanced and new product concepts may be enabled by our technologies. In addition, Verdias technologies may be able to improve and help commercialize product concepts that have failed during
development for reasons of inadequate efficacy.



While exploiting the advantages of MolecularBreeding directed molecular evolution technologies to improve and develop new traits, Verdia has also developed expertise in:



| | · |  | high throughput plant-based screening of gene variants;
| | - |  | -------------------------------------------------------



| | · |  | high throughput bio-assays for insect, nematode, and fungal pathogens;
| | - |  | ----------------------------------------------------------------------



| | · |  | relevant crop transformation methods with commercial freedom to operate; and
| | - |  | ----------------------------------------------------------------------------



| | · |  | diversity-based gene discovery.
| | - |  | -------------------------------



Verdia is devoting a significant share of its internal resources to further development of these technologies.



Products/Pipeline.    Both in
collaboration with its partners and internally, Verdia is working on a broad portfolio of 14 potential products in areas of input traits, yield improvement and quality traits, with seven of these potential products already in development with its
partners. Verdia has retained significant rights to develop and market certain applications of the products resulting from the collaborations. In addition to the existing collaborations, Verdia is pursuing independent development of high-value
agricultural products, and intends to enter into additional strategic alliances with leading agriculture companies.



Agriculture Alliances



Delta and Pine Land Company.In May 2002, Verdia (then known as MaxyAg, Inc.) established a joint venture
with Delta and Pine Land Company (D&PL) to develop and commercialize transgenic products for the cotton seed market. The joint venture, called DeltaMax Cotton LLC (DeltaMax), focuses on the creation of gene-based
improvements for herbicide tolerance and pest and disease control in cotton. Under the terms of the joint venture agreement, DeltaMax has contracted certain research activities to Verdia and will in the future contract research and development
activities to Verdia, D&PL and third parties, and license products to D&PL and, potentially, other cotton-seed companies, for commercialization. DeltaMax is 50/50 jointly owned by Verdia and D&PL and such parties will share income earned
by the joint venture.



Syngenta.    In June 1999, we entered into a five-year strategic collaboration with Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc, now known as Syngenta, to improve the yield and quality of
several of Syngentas strategic crops. In November 2002 the collaboration was extended for a further two years, until March 2006. We have received and will continue to receive research and development funding as well as license fees, milestone
payments based on field trials, regulatory approval and commercial sales and royalties on product sales. In 2001, two agriculture product candidates from the collaboration were advanced into development at Syngenta. This collaboration was assigned
to Verdia from Maxygen in connection with its capitalization in March 2002.



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DuPont.    In December 1998, we entered into a five-year strategic collaboration with Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. duPont de Nemours and Company, to utilize our
technologies to generate new gene variants for use in the development of specific crop protection and quality grain traits in corn, soybeans and certain other crops. We have received and will receive research and development funding as well as
license fees, success-based milestone payments and milestones based on regulatory approval and commercial sales and royalties on product sales. We currently have one agricultural product candidate from the collaboration in development at DuPont.
This collaboration was assigned to Verdia from Maxygen in connection with its capitalization in March 2002.



Maxygens Technologies



Evolution and DNA



Evolution is the process by which living organisms adapt to their environment. The first step of this process is sexual reproduction, which creates a variety of physical characteristics that increase the diversity of a
population. Second, nature exerts a selective force on the individuals, dictating which characteristics will be favored and be passed to the next generation. As a result of changing environmental and competitive pressures, diversity may increase,
leading to variation in the physical characteristics of individuals and species adapted for specific environments.



The physical characteristics of an organism are determined by genetic information inherited from the previous generation. This genetic
information is coded for by DNA, a molecule found in the cells of living organisms. DNA is comprised of four different chemical bases called nucleotides. Human cells have several billion nucleotides, the precise sequence of which determines the
content of the genetic information. DNA is organized into discrete units called genes. Genes act alone or in combination to produce proteins, that not only form the fabric of cells but also direct them to perform biological functions, which may in
turn influence physical characteristics. Generally, the inherited biological properties or physical characteristics of an organism change only when the DNA in a gene is altered.



In summary, variations in genes provide the basis for inherited diversity in a population, thus maximizing
the opportunity for developing characteristics optimally suited for a specific environment.



Mutation and Recombination



There are two predominant methods by which nature is able to change the genetic information encoded by DNA to create diversity: mutation and recombination.



All organisms incur a certain number of mutations in their DNA
as a result of normal cellular processes or interactions with external environmental factors such as radiation from sunlight. Mutation typically involves changes in individual nucleotides and is essentially random. Almost all mutations are harmful
to the function of genes, but a very small percentage are beneficial and may pass more broadly into the population.



Sexually reproducing organisms use recombination, a process that involves the organized exchange and reassortment of large sections of DNA
from their parents. This process allows for new combinations of genes without disrupting the function of the newly created genes. This has a significant impact on physical characteristics and is the primary cause of diversity in a sexually
reproducing population.



Classical Breeding
and Its Limitations



Without any knowledge
of the genetic basis of evolution, humans have been breeding crops and animals for over 4,000 years in the search for better physical characteristics. All of the domestic breeds of farm animals and horses, cereal crops, fruits, vegetables, crops for
fiber, household pets, most ornamental flowers and many other species represent the results of many generations of selective breeding by humans. In all these cases, humans



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have cross-bred crops or animals with the most desired physical characteristics to produce improvements in the next generation. For example,
modern corn now has a dramatically higher yield than the wild strain of corn, which produced very small amounts of grain. This improvement probably began with ancient Inca farmers continually selecting, breeding and propagating the most robust seed
corn. This is known as classical breeding.



In
the 19th century, advances in biology led to a better understanding of the basis of heredity. The discovery of the structure of DNA in 1953 subsequently led to the realization that genetic information was responsible for physical characteristics and
that its manipulation could further improve the breeding process. In modern breeding, the DNA of offspring is often sequenced to determine whether or not they are carrying undesirable genes. This reduces the probability of breeding poor quality
stock and increases the pace of improvement.



Despite the improvements in classical breeding, this technique has a number of significant limitations. First, the process is extremely time consuming, since the offspring must mature to determine if they carry the desired
characteristic. For example, this cycle takes several years in cattle. Second, classical breeding can only be used to breed entire organisms and cannot readily use genetic information to modify or select for specific genes and the traits they
represent. This limitation is compounded when multiple genes encode the selected trait or when the simultaneous breeding of multiple traits is desired. Thus, the scope of potential improvements accessible by classical breeding is limited.



MolecularBreeding Directed Molecular
Evolution Technologies



Our technologies
mimic the natural events of evolution. First, genes are subjected to DNAShuffling recombination technologies, generating a diverse library of gene variants. Second, our proprietary MaxyScan screening systems select individual proteins from the gene
variants in the library. The proteins that show improvements in the desired characteristics become the initial lead candidates. After confirmation of activity, the initial lead candidates are then used as the genetic starting material for additional
rounds of shuffling. Once the level of improvement needed for the particular commercial application is achieved, the group of lead candidates is moved forward to the product or process development stage.



Other Technologies



In addition to our proprietary MolecularBreeding directed
molecular evolution technologies, we have acquired and developed several complementary technologies potentially useful for the development of protein-based products. Two such examples of our directed strategies to post-translationally modify protein
drugs are our PEGylation and glycosylation technologies. These strategies represent a comprehensive portfolio of know-how and technologies around proprietary algorithms and chemistries for the directed PEGylation or glycosylation of protein
products. It is now generally accepted that effective, controlled PEGylation or glycosylation of therapeutic proteins can enhance the proteins drug profile in terms of immunogenicity, stability, bioavailability and half-life.



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LOGO



Step One:
DNAShuffling Recombination Technologies



Our
DNAShuffling recombination technologies work as follows: a single gene or multiple genes are cleaved into fragments and recombined, creating a population of new gene variants. The new genes created by DNAShuffling are then selected for one or more
desired characteristics. This selection process yields a population of genes that becomes the starting point for the next cycle of recombination. As with classical breeding, this process is repeated until genes expressing the desired properties are
identified.



DNAShuffling recombination
technologies can be used to evolve properties that are coded for by single genes, multiple genes or entire genomes. By repeating the process, DNAShuffling recombination technologies ultimately generate libraries with a high percentage of genes that
have the desired function. Due to the high quality of these libraries, a relatively small number of screening tests need to be performed to identify gene variants with the desired commercial qualities. This process can significantly reduce the cost
and time associated with identifying multiple potential products.



Step Two: MaxyScan Screening



The ability to screen or select for a desired improvement in function is essential to the effective development of an improved gene or protein. As a result, we have invested significant resources in developing automated, stringent,
rapid screens and selection formats.



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We have
developed screening tests that can measure the production of proteins or small molecules in culture without significant purification steps or specific test reagents, thereby eliminating time-consuming steps required for traditional screening tests.
We are also focusing on the development of reliable, cell-based screening tests that are predictive of specific functions relevant to our human therapeutics programs. Accordingly, we continue to develop new screening approaches and technologies. Our
approach is to create multitiered screening systems where we use a less sensitive screening test as a first screen to quickly select proteins with the desired characteristics, followed by a more sensitive screening test to confirm value in these
variants and to select for final lead product candidates. Unlike approaches that create random diversity, MolecularBreeding produces potentially valuable libraries of gene variants with a predominance of active genes with the desired function. As a
result of capturing the natural process of sexual recombination with our proprietary DNAShuffling methods, we are also able to generate gene variants with the desired characteristic at a frequency 5 to 10-fold higher than combinatorial chemistry,
rational design or other directed evolution methods. This allows us to use complex biological screens and formats as a final screening test, as relatively few proteins need to be screened to detect an improvement in the starting gene activity.
Furthermore, this allows us to focus on developing screens that generate a broader range of information that is more responsive to commercial and clinical concerns. This separates us from many of our potential competitors who invest significant time
and money to screen billions of compounds per day. While we have the capability to screen billions of compounds per day, we generally need to screen far fewer, on the order of 10,000 candidates per day or less.



Some of our screening capabilities include:



| | · |  | mass spectrometry;
| | - |  | ------------------



| | · |  | in vivo animal assays;
| | - |  | ----------------------



| | · |  | in vivo plant assays;
| | - |  | ---------------------



| | · |  | bioassays;
| | - |  | ----------



| | · |  | immunochemical assays;
| | - |  | ----------------------



| | · |  | chemical assays; and
| | - |  | --------------------



| | · |  | biochemical assays.
| | - |  | -------------------



We have access to multiple sources of genetic starting material. In addition to the wealth of publicly available genetic sequence
information, we are typically able to access our collaborators proprietary genes for use outside their specific fields of interest. Furthermore, we are able to inexpensively obtain our own genetic starting material or information, either
through our own in-house efforts or through collaborations with third parties. This information and such materials when coupled with our DNAShuffling recombination technologies, can provide a virtually infinite amount of new, proprietary gene
variants with potential commercial value.



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LOGO



We use certain
equipment and commercially available software in conjunction with our DNAShuffling recombination technologies and MaxyScan screening systems. We have also developed software internally to help with and/or enable this process. We also use other
internally developed software and software purchased from third party vendors to a limited extent in our research and development activities.



Demonstrated Successes of Our MolecularBreeding Directed Molecular Evolution Technologies in Multiple Applications



We have consistently achieved improvement in gene function
using our MolecularBreeding directed molecular evolution technologies. These improvements have been demonstrated to permit more useful products and improved manufacturing efficiencies. Our technologies have the ability to generate improvements that
would be difficult, costly, time intensive and, in many cases, impossible to achieve using other methods. We have shown that we can achieve improved gene function without a detailed understanding of the underlying complex biological processes.



For example, we have demonstrated our ability to
improve genes that increase the anti-viral activity of a protein and develop new enzymes that have the potential to streamline chemical and pharmaceutical manufacturing processes. In addition, we have improved the performance of subtilisin, one of
the most commercially valuable laundry detergent enzymes. Subtilisin is one of the most highly studied enzymes and has been extensively modified to improve its commercial properties. This example demonstrates the ability of MolecularBreeding
directed molecular evolution technologies to achieve further improvements beyond the limits of modern biotechnology.



Intellectual Property and Technology Licenses



Pursuant to a technology transfer agreement we entered into with Affymax Technologies N.V. and Glaxo Group Limited (each of which was then
a wholly-owned subsidiary of what is now GlaxoSmithKline plc), we were assigned all rights to the patents, applications and know-how related to MolecularBreeding directed molecular evolution technologies. Affymetrix, Inc. retains an exclusive,
royalty-free license under most of the patents and patent applications previously owned by Affymax for use in the diagnostics and research supply markets for specific applications. In addition, Affymax assigned jointly to us and to Affymetrix a
family of patent applications relating to circular PCR techniques.



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We have an
extensive patent portfolio including 62 issued U.S. patents and 50 foreign patents relating to our proprietary MolecularBreeding directed molecular evolution technologies. Counterpart applications of the U.S. patents are pending in other major
industrialized countries. We have an additional 184 pending U.S. patent applications and 226 pending foreign and international counterpart applications relating to our MolecularBreeding directed molecular evolution technologies and specialized
screening technologies, and the application of these technologies to diverse industries including agriculture, protein pharmaceuticals, vaccines, gene therapy and chemicals.



Our expanding patent estate provides us with an increasingly broad and unique platform from which to create
and improve therapeutic, industrial and other products. Patents owned by us or for which we have exclusive licenses cover a broad range of activities surrounding recombination-based directed molecular evolution including:



| | · |  | methods for template-based gene recombination to produce chimeric genes, including use of single or double-stranded templates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| | · |  | methods for recombining nucleic acid segments produced by incomplete nucleic acid chain extension reactions to produce chimeric genes including the staggered
extension process (StEP);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | methods utilizing reiterative screening or only a single cycle of screening;
| | - |  | ----------------------------------------------------------------------------



| | · |  | methods of combining any mutagenesis technique with DNA recombination methods to produce new chimeric genes;
| | - |  | ------------------------------------------------------------------------------------------------------------



| | · |  | methods using synthesized nucleic acid fragments;
| | - |  | -------------------------------------------------



| | · |  | in vivo and in vitro recombination methods of the above, in a variety of formats;
| | - |  | ---------------------------------------------------------------------------------



| | · |  | methods of screening directed evolution libraries;
| | - |  | --------------------------------------------------



| | · |  | methods for ligation- and single-stranded template-based recombination and reassembly;
| | - |  | --------------------------------------------------------------------------------------



| | · |  | mutagenesis, including codon and gene site saturation mutagenesis, used in conjunction with recombination and reassembly;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| | · |  | cell-based recombination methods; and
| | - |  | -------------------------------------



| | · |  | fluorescence-, bioluminescence-, and nutrient-based screening methods, including the use of ultra-high throughput FACS-based methods for screening diverse variants.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



Such patents reinforce our
preeminent position as the industry leader in recombination-based directed molecular evolution technologies for the preparation of chimeric genes for commercial applications.



In addition to the patents that we own directly, we have also exclusively licensed patent rights and
technology for specific uses from Novozymes, the California Institute of Technology (Caltech), the University of Washington and GGMJ Technologies, L.L.C. These licenses give us rights to an additional 17 issued U.S. patents, 13 granted foreign
patents, 31 U.S. pending patent applications and 133 additional international or foreign counterpart applications.



We have also received from Affymax a worldwide, non-exclusive license to certain Affymax patent applications and patents related to
technology for displaying multiple diverse proteins on the surface of bacterial viruses.



As part of our confidentiality and trade secret protection procedures, we enter into confidentiality agreements with our employees, consultants and potential collaborative partners. Despite these
precautions, third parties could obtain and use information regarding our technologies without authorization, or develop similar technology independently. It is difficult for us to police unauthorized use of our methods. Effective protection of



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intellectual property rights is also unavailable or limited in some foreign countries. The protection of our proprietary rights may be
inadequate and our competitors could independently develop similar technology or design around any patents or other intellectual property rights we hold.



Competition



Any products that we develop through our technologies will compete in highly competitive markets. In the protein pharmaceuticals field we
face competition from large pharmaceutical and biopharmaceutical companies such as Eli Lilly and Company, Pharmacia, Inc., Genentech, Inc. and Amgen Inc. and from smaller biotechnology companies such as Human Genome Sciences, Inc. In the vaccines
field we face competition from biotechnology companies such as Corixa Corporation and Vical Corporation as well as large pharmaceutical companies including GlaxoSmithKline plc and Merck & Co., Inc. In chemicals, Codexis faces competition from
large chemical companies such as E. I. du Pont de Nemours and Company and The Dow Chemical Company and from smaller biotechnology companies such as Genencor International and Diversa Corporation. In the agriculture field, Verdia faces competition
from large agribusinesses, such as Monsanto Company and DowAgroScience and from smaller biotechnology companies such as Paradigm Genetics.



Many of our potential competitors, either alone or together with their collaborative partners, have substantially greater financial,
technical and personnel resources than we do, and we cannot assure you that they will not succeed in developing technologies and products that would render our technologies and products or those of our collaborators obsolete or noncompetitive. In
addition, many of those competitors have significantly greater experience than we do in:



| | · |  | developing products;
| | - |  | --------------------



| | · |  | undertaking pre-clinical testing and clinical trials;
| | - |  | -----------------------------------------------------



| | · |  | obtaining FDA and other regulatory approvals of products; and
| | - |  | -------------------------------------------------------------



| | · |  | manufacturing and marketing products.
| | - |  | -------------------------------------



We are a leader in the field of directed molecular evolution. We are aware that companies such as Diversa Corporation and Applied
Molecular Evolution have alternative methods for obtaining and generating genetic diversity. Academic institutions such as Caltech and the University of Washington are also working in this field, and we have licensed certain technology from Caltech
and the University of Washington. This field is highly competitive and companies and academic and research institutions are actively seeking to develop technologies that could be competitive with our technologies.



We are aware that other companies and persons have described
technologies that appear to have some similarities to our patented proprietary technologies. We monitor publications and patents that relate to directed molecular evolution to be aware of developments in the field and evaluate appropriate courses of
action in relation to these developments.



In
early 2000, we initiated an arbitration proceeding against Enchira Biotechnology Corporation (then known as Energy Biosystems Corporation) in connection with Enchiras claim that it had developed a new gene shuffling technology. We
alleged that Enchira had breached the confidentiality provisions and certain other terms of a development and license agreement entered into between Enchira and Maxygen in 1997, pursuant to which we disclosed confidential information regarding our
MolecularBreeding directed molecular evolution technologies to Enchira. The arbitrator found that Enchira had breached the development and license agreement and awarded us an injunction barring Enchira from, inter alia, using, practicing,
licensing or selling the gene shuffling technology that Enchira calls Rachitt until 2017. The arbitrator further ordered Enchira to reimburse Maxygen for attorneys fees and pay all costs of conducting the arbitration. The California Superior Court
confirmed the arbitrators decision in a final order and judgment issued on December 21, 2001 and Enchira reimbursed Maxygen in early 2002.



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Employees



As of January 31, 2003 we had 280 employees, 117 of whom hold
Ph.D., Ph.D. equivalent or M.D. degrees and 205 of whom were engaged in full-time research activities. We plan to expand our corporate development programs and hire additional staff if additional corporate collaborations are established or if
existing corporate collaborations are expanded. We continue to search for qualified individuals with interdisciplinary training and flexibility to address the various aspects and applications of our technologies. None of our employees is represented
by a labor union, and we consider our employee relations to be good.



Directors and Executive Officers



Our directors and executive officers, and their ages as of January 31, 2003, are as follows:



|Name                           |  | Age |  | Position                                         
|------------------------------ |  | --- |  | -------------------------------------------------
|Russell J. Howard, Ph.D.       |  | 52  |  | Chief Executive Officer and Director             
|Simba Gill, Ph.D.              |  | 38  |  | President                                        
|Michael Rabson, Ph.D.          |  | 49  |  | General Counsel and Senior Vice President        
|Lawrence W. Briscoe.           |  | 58  |  | Chief Financial Officer and Senior Vice President
|John Bedbrook, Ph.D.           |  | 53  |  | President of Verdia, Inc.                        
|Alan Shaw, Ph.D.               |  | 39  |  | President of Codexis, Inc.                       
|R. Paul Spence, D. Phil.       |  | 46  |  | Senior Vice President                            
|Elliot Goldstein, M.D.         |  | 51  |  | Senior Vice President                            
|Isaac Stein(1)(2)              |  | 56  |  | Chairman of the Board and Director               
|Robert J. Glaser, M.D.(2)      |  | 84  |  | Director                                         
|M.R.C. Greenwood, Ph.D.        |  | 60  |  | Director                                         
|Ernest Mario, Ph.D.(1)(2)      |  | 63  |  | Director                                         
|Gordon Ringold, Ph.D.(1)(2)    |  | 52  |  | Director                                         
|George Poste, D.V.M., Ph.D.(1) |  | 58  |  | Director                                         

---

|(1) |  | Member of the audit and finance committees
|--- |  | ------------------------------------------

|(2) |  | Member of the compensation committee
|--- |  | ------------------------------------



Russell J. Howard, Ph.D., has served as our Chief Executive Officer and a Director since June 1998 and is one of our co-founders.
Dr. Howard was elected our President and Chief Operating Officer in May 1997. Originally trained in biochemistry and chemistry, Dr. Howard has spent over 20 years studying infectious diseases, primarily malaria, and currently serves on the National
Institutes of Health and USAID advisory panels for malaria vaccine development. Before joining Maxygen, Dr. Howard was from August 1994 to June 1996 the President and Scientific Director of Affymax Research Institute, an institute employing
combinatorial chemistry and high throughput target screening to discover drug leads.



Simba Gill, Ph.D., has served as our President since April 2000. Dr. Gill joined us in July 1998 as Chief Financial Officer and Senior Vice President of Business Development. Before joining
Maxygen, Dr. Gill was, from November 1996 to July 1998, Vice President of Business Development at Megabios Corp., a biotechnology research and development company. From November 1995 to November 1996, Dr. Gill was Director of Business Development at
Systemix, Inc., a biotechnology research and development company. Before joining Systemix, Dr. Gill held a variety of positions at Boehringer Mannheim, a pharmaceutical company, including Global Product Manager for erythropoietin, Manager of
Corporate Business Development and Director of new diagnostics program management. Dr. Gill received his Ph.D. in immunology at Kings College, London University in collaboration with the U.K. biotechnology company Celltech, and his M.B.A. from
INSEAD in Fontainbleau, France.



Michael
Rabson, Ph.D., joined us in September 1999 as General Counsel and Senior Vice President. Before joining Maxygen, from February 1996 to September 1999, Dr. Rabson was a member of Wilson Sonsini



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Goodrich & Rosati, P.C. Dr. Rabson received his Ph.D. in infectious disease epidemiology from Yale University and did a post-doctoral
fellowship at the National Cancer Institute, National Institutes of Health. He was a patent examiner at the U.S. Patent and Trademark Office before he received his J.D. from Yale Law School.



Lawrence W. Briscoe joined Maxygen in November 2000 as
Chief Financial Officer and Senior Vice President. From July 1994 until November 2000, Mr. Briscoe was Chief Financial Officer and Vice President, Finance and Administration of Catalytica, Inc., a company engaged in the application of expertise in
catalytic technologies to the pharmaceutical and energy industries. Before joining Catalytica, he held various executive and financial positions, including President and Chief Operating Officer and Director at Brae Corporation, Vice President of
Corporate Development at Transamerica Corp. and Chief Executive Officer of United States Commercial Telephone Corp. Mr. Briscoe has a M.B.A. from Stanford University, an M.S. in business from the University of Southern California and a B.S. in
electrical engineering from the University of Missouri.



John Bedbrook, Ph.D., joined Maxygen in November 1999 as President of Agriculture; he became President of Verdia, Inc., Maxygens wholly-owned Agriculture subsidiary upon its formation in March 2002. Before joining
Maxygen, Dr. Bedbrook was Chief Executive Officer of Plant Science Ventures and was Chief Technology Officer at SAVIA from February 1998 to October 1999. Before joining SAVIA, Dr. Bedbrook held several senior management positions including Executive
Vice President of Research and Development and Co-President at DNA Plant Technology Corp. from 1988 to 1997. Dr. Bedbrook received his Ph.D. in molecular biology from the University of Auckland in New Zealand.



Alan Shaw, Ph.D., joined Maxygen in September 2001 as
President of Chemicals; he became President of Codexis, Inc., Maxygens majority-owned Chemicals subsidiary upon its formation in January 2002. From September 2000 to August 2001, Dr. Shaw was Head of New Business Development and Managing
Director, Lancaster Synthesis Group at Clariant Life Science Molecules, a unit within Clariants Life Science and Electronics division. Prior to joining Clariant, Dr. Shaw was the Chief Operating Officer of Archimica Fine Chemicals, the fine
chemical division of BTP plc from 1999 to 2000. From 1994 to 1999, Dr. Shaw held the position of Managing Director of Chirotech Technology Limited, the fine chemicals division of the ChiroScience Group plc. Dr. Shaw received his Ph.D. in Chemistry
from the University of Durham.



R. Paul
Spence, D. Phil., joined Maxygen in July 2002 as Senior Vice President, Research and Development. Prior to joining Maxygen, Dr. Spence was Vice President of Biotechnology at Pharmacia Corporation, a pharmaceutical company, from 2000. Before the
merger with Pharmacia Upjohn, which lead to the creation of Pharmacia, Dr. Spence served Monsanto Company and its subsidiary Searle Pharmaceutical as Head of Biotechnology and in other capacities from 1998 to 2000. From 1992 to 1998, Dr. Spence
worked in various capacities at Wyeth-Ayerst and Xenova. Dr. Spence received his D.Phil. in molecular virology from Oxford University in the U.K.



Elliot Goldstein, M.D., joined Maxygen in February 2003 as Senior Vice President, Clinical Development and Danish Operations. Prior
to joining Maxygen, Dr. Goldstein was Chief Executive Officer of British Biotech, a pharmaceutical research and development company, from September 1998 to November 2002. Prior to joining British Biotech, Dr. Goldstein was, from 1994 to 1998, Senior
Vice President, Worldwide Strategic Product Development at SmithKline Beecham, a pharmaceutical company. Prior to joining SmithKline Beecham, Dr. Goldstein held a variety of senior level positions at Sandoz, a pharmaceutical company, in France,
Switzerland and the U.S. including Vice President, Clinical Research and Development at Sandoz Research Institute. Dr. Goldstein obtained his M.D. from the University of Aix-Marseille, France.



Isaac Stein has served as our Chairman of the Board of
Directors since June 1998 and has been a Director since May 1996. He is one of our co-founders. Since November 1982, Mr. Stein has been President of Waverley Associates, Inc. a private investment firm. Mr. Stein is also a Managing Member of
Technogen Enterprises, L.L.C. and of Technogen Managers, L.L.C., which is the General Partner of Technogen Associates, L.P. He is also the Chairman of the Board of Trustees of Stanford University.



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Robert J.
Glaser, M.D., has served as a Director since September 1997. Dr. Glaser was Director for medical science at the Lucille P. Markey Charitable Trust from 1984 to June 1997, and a Trustee from 1988 to June 1997, when in accordance with the
donors will, the Trust ceased operations. Dr. Glaser is a Director of Hanger Orthopedic Group, Inc. and was a Director of the ALZA Corporation until it was acquired by Johnson & Johnson in 2001. He was Dean of the medical schools at the
University of Colorado and Stanford University, and professor of social medicine at Harvard University. Trained as an internist, Dr. Glaser has 124 publications on streptococcal infections, rheumatic fever, medical education and health care, as well
as being a contributor to numerous scientific treatises. He was a founding member of the Institute of Medicine, National Academy of Sciences, and is a Fellow of the American Academy of Arts and Sciences, the American Philosophical Society and the
Royal College of Physicians of London.



M.R.C.
Greenwood, Ph.D., has served as a Director since February 1999. Dr. Greenwood has been Chancellor of the University of California (UC) at Santa Cruz since July 1996. Before being named Chancellor of UC Santa Cruz, Dr. Greenwood was
Dean of Graduate Studies and Vice Provost at UC Davis from July 1989 to July 1996. In addition, from November 1993 to May 1995, Dr. Greenwood took a leave from UC Davis to serve as Associate Director for Science in the White House Office of Science
and Technology Policy. She is a member of the Institute of Medicine/National Academy of Sciences as well as a fellow and past President of the American Association for the Advancement of Science. Dr. Greenwood received her Ph.D. in physiology,
developmental biology and neurosciences from Rockefeller University.



Ernest Mario, Ph.D., has served as a Director since July 2001. Dr. Mario serves as the Chairman of the Board of IntraBiotics Pharmaceuticals, Inc., a biopharmaceutical company. He was also Chief Executive Officer of
IntraBiotics and its predecessor, Apothogen, Inc. from the founding of Apothogen in January 2002, through its acquisition by IntraBiotics in April 2002, until February 2003. Dr. Mario was the Chairman and Chief Executive Officer of ALZA Corporation,
a pharmaceutical company, until December, 2001. Prior to joining ALZA, Dr. Mario served as Chief Executive Officer of Glaxo Holdings plc, a pharmaceutical company, from May 1989 to March 1993, and as Deputy Chairman from January 1992 to March
1993. Prior to that time, Dr. Mario served as Chairman and Chief Executive Officer of Glaxo, Inc., a subsidiary of Glaxo Holdings, from 1988 to 1989 and as President and Chief Operating Officer of Glaxo, Inc. from 1986 to 1988. Prior to joining
Glaxo, Dr. Mario held various executive positions at Squibb Corporation and served as a Director of that company. Dr. Mario is also a Director of Catalytica Energy Systems, Inc., Orchid Biosciences, Inc., Pharmaceutical Product Development, Inc.,
SonoSite, Inc., Boston Scientific Corporation and Millennium Pharmaceuticals.



Gordon Ringold, Ph.D., has served as a Director since September 1997. Since 1997, Dr. Ringold has served as Chairman and Chief Executive Officer of SurroMed, a biotechnology company focused on
novel clinical databases. From March 1995 to February 2000, Dr. Ringold was Chief Executive Officer and Scientific Director of Affymax Research Institute where he managed the development of novel technologies to accelerate the pace of drug
discovery. Before serving as Chief Executive Officer, Dr. Ringold was the President and Scientific Director of Affymax Research Institute. Dr. Ringold received his Ph.D. in the laboratory of Dr. Harold Varmus, before joining the Stanford University
school of medicine, department of pharmacology, and serving as the Vice President and Director of the Institute for Cancer and Development Biology of Syntex Research. Dr. Ringold is a Managing Member of Technogen Enterprises, L.L.C. and of
Technogen Managers, L.L.C., which is the General Partner of Technogen Associates, L.P.



George Poste, D.V.M., Ph.D., has served as a Director since October 1999. He is Chief Executive Officer of Health Technology Networks, a consulting group specializing in genetics. Dr. Poste was
Chief Science and Technology Officer at SmithKline Beecham, a pharmaceutical company, from 1992 to 1999 and was a member of the Board of Directors of SmithKline Beecham. Dr. Poste is Chairman of diaDexus and Structural GenomiX and serves on the
Board of Directors of Illumina, Inc. and Orchid Biosciences, Inc. He is a fellow of Pembroke College Cambridge and distinguished fellow at the Hoover Institution, Stanford University. He is a member of the Defense Science Board of the U.S.
Department of Defense and in this capacity chairs the task force on Bioterrorism.



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Scientific Advisory Board



The following individuals are members of
our Scientific Advisory Board:



Baruch S.
Blumberg, M.D., Ph.D., is a Distinguished Scientist at Fox Chase Cancer Center, Philadelphia, and University Professor of Medicine and Anthropology at the University of Pennsylvania. Dr. Blumbergs research has covered many areas including
clinical research, epidemiology, virology, genetics and anthropology. Dr. Blumberg was awarded the Nobel Prize in 1976 for his work on infectious diseases and specifically for the discovery of the hepatitis B virus and has also been elected to the
National Inventors Hall of Fame for the invention of the hepatitis B vaccine. Dr. Blumbergs research and insight into infectious diseases are valuable to Maxygen programs related to vaccines and hepatitis B in particular.



Arthur Kornberg, M.D., is an active Professor Emeritus
at the Stanford University School of Medicine, Department of Biochemistry. Dr. Kornberg has received numerous accolades including several honorary degrees and awards, the National Medal of Science, and the Nobel Prize in Medicine in 1959. He is a
member of several prestigious scientific societies and serves as a member of several scientific advisory boards. Dr. Kornbergs years of research in enzymes and metabolism is a valuable contribution to directing the internal research programs
of Maxygen.



Joshua Lederberg, Ph.D., a
research geneticist, is Professor Emeritus at the Rockefeller University, in New York. Formerly, Dr. Lederberg was a Professor of Genetics at the University of Wisconsin and at Stanford University School of Medicine. Dr. Lederberg is a pioneer in
the field of bacterial genetics with the discovery of genetic recombination in bacteria, work for which he received the Nobel Prize in physiology and medicine in 1958. Maxygen has funded work in Dr. Lederbergs laboratory pertaining to the
ultimate limits of growth rates of microbes. His work and guidance in genetic recombination is important to our MolecularBreeding directed molecular evolution technologies.



Alejandro C. Zaffaroni, Ph.D., is one of our co-founders. Dr. Zaffaroni currently serves as chief
executive officer of Alexza MDC, a specialty pharmaceutical company that he founded in 2000. Dr. Zaffaroni is a biochemist by training and a highly successful biotechnology entrepreneur, who has co-founded and built several companies including
Syntex Corporation, ALZA Corporation, DNAX Institute of Molecular and Cellular Biology, Affymax N.V. and Affymetrix, Inc. Dr. Zaffaroni has repeatedly recognized the commercial value of leading-edge technologies and has turned those visions into
highly successful companies. In 1995, Dr. Zaffaroni was awarded the National Medal of Technology by President Clinton in recognition of his contributions to the pharmaceutical and biotechnology industries.



RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND
FINANCIAL CONDITION



You should carefully
consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Maxygen. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. 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 a History of Net Losses. We Expect to Continue to Incur Net Losses and We May Not Achieve or Maintain Profitability.



We have incurred net losses since our inception, including a net loss of approximately $59.6 million in 2000, $45.0 million in 2001 and
$33.9 million in 2002. As of December 31, 2002, we had an accumulated deficit of approximately $162.7 million. We expect to have net losses and negative cash flow for at least the next several years. The size of these net losses will depend, in
part, on the rate of growth, if any, in our contract revenues and



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on the level of our expenses. To date, we have derived substantially all our revenues from collaborations and grants and expect to derive a
majority of our revenue from such sources for at least the next several years. Revenues from collaborations and grants are uncertain because our existing agreements have fixed terms and because our ability to secure future agreements will depend
upon our ability to address the needs of our potential future collaborators. We expect to spend significant amounts to fund development of products and further research and development to enhance our core technologies. As a result, we expect that
our operating expenses will increase in the near term and, consequently, we do not expect to achieve profitability during the next several years.



Our Business and our Ability to Grow Revenues has been Adversely Impacted by the Economic Slowdown and Related Uncertainties Affecting Markets in Which
We Operate.



Adverse economic conditions
worldwide have contributed to a slowdown in the biotechnology industry and impacted our business resulting in:



| | · |  | reduced demand for our technology and the products resulting therefrom;
| | - |  | -----------------------------------------------------------------------



| | · |  | increased competition for a decreasing number of research and development collaborations and joint ventures; and
| | - |  | ----------------------------------------------------------------------------------------------------------------



| | · |  | significant reduction in the ability of biotechnology companies to raise capital.
| | - |  | ---------------------------------------------------------------------------------



Recent political and social turmoil in many parts of the world, including actual incidents and potential
future acts of terrorism and war, may continue to put pressure on global economic conditions. These political, social and economic conditions and uncertainties make it difficult for Maxygen and our existing and potential collaboration partners to
accurately forecast and plan future business activities. This reduced predictability challenges our ability to increase revenues and reach profitability. In particular, it is difficult to develop and implement strategies, sustainable business models
and efficient operations, and effectively manage collaboration relationships due to difficult macroeconomic conditions. If the current economic or market conditions continue or further deteriorate, there could be a material adverse impact on our
financial position, revenues, results of operations and cash flow.



We Need to Contain Costs in Order to Achieve Profitability.



We are continuing our efforts to contain costs and reduce our expense structure. We believe strict cost containment and expense reductions in the near term are essential if our current funds are to be
sufficient to allow us to achieve future profitability. We assess market conditions on an ongoing basis and plan to take appropriate actions as required. Recently we reduced the size of our workforce in order to reduce expenses. If we are not able
to effectively contain our costs and achieve an expense structure commensurate with our business activities and revenues, we may have inadequate levels of cash for future operations or for future capital requirements, which could significantly harm
our ability to operate the business.



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



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



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



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



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



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



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



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



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



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



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



We have experienced substantial growth in the past that has
placed and, if this growth continues, will continue to place a strain on our human and capital resources. If this growth continues, our losses will likely



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increase. The number of our employees increased from 252 at December 31, 2000 to 298 at December 31, 2002. Our revenues increased from $24.5
million in 2000 to $41.8 million in 2002. Our ability to manage our operations effectively requires us to continue to expend funds to enhance our operational, financial and management controls, reporting systems and procedures and to attract and
retain sufficient numbers of talented employees. If we are unable to implement improvements to our management information and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then
management may have access to inadequate information to manage our day-to-day operations. Failure to attract and retain sufficient numbers of talented employees will further strain our human resources and our ability to satisfy our obligations under
collaboration agreements. This would reduce our revenue, increase our losses and harm our reputation in the marketplace.



The Operation of International Locations May Increase Operating Expenses and Divert Management Attention.



Since August 2000, when we acquired Maxygen ApS, a Danish
biotechnology company, we have been operating with international business locations. Expansion into an international operational entity requires additional management attention and resources. We have limited experience in localizing our operations
and in conforming our operations to local cultures, standards and policies. We may have to compete with local companies who understand the local situation better than we do. We may not be successful in expanding into international locations or in
generating revenues from foreign operations. Even if we are successful, the costs of operating internationally are expected to exceed our international revenues for at least the next several years. As we continue to operate internationally, we are
subject to risks of doing business internationally, including the following:



| | · |  | regulatory requirements that may limit or prevent the offering of our products in local jurisdictions;
| | - |  | ------------------------------------------------------------------------------------------------------



| | · |  | government limitations on research and/or research involving genetically engineered products or processes;
| | - |  | ----------------------------------------------------------------------------------------------------------



| | · |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| | · |  | longer payment cycles, different accounting practices and problems in collecting accounts receivable;
| | - |  | -----------------------------------------------------------------------------------------------------



| | · |  | currency exchange risks;
| | - |  | ------------------------



| | · |  | cultural non-acceptance of genetic manipulation and genetic engineering; and
| | - |  | ----------------------------------------------------------------------------



| | · |  | potentially adverse tax consequences.
| | - |  | -------------------------------------



Acquisitions Could Result in Dilution, Operating Difficulties and Other Harmful Consequences.



If appropriate opportunities present themselves, we may
acquire businesses and technologies that complement our capabilities. The process of integrating any acquisition may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:



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



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



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



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



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We do not have
extensive experience in managing this integration process. Moreover, the anticipated benefits of any or all of these acquisitions may not be realized.



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



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



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



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



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



If the Public Rejects Genetically Engineered Products, There Will Be Lower
Demand for Our Products.



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



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



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



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



We face, and will continue to face, intense
competition from organizations such as large and small biotechnology companies, as well as academic and research institutions and government agencies that are



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pursuing competing technologies for modifying DNA and proteins. These organizations may develop technologies that are alternatives to our
technologies. Further, our competitors in the directed molecular evolution field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading
companies within our target markets to produce commercial products.



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



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



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



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



We rely upon trade
secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We
seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose 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 Shut Down Some of Our Operations.



Our ability to develop products depends in part on not infringing patents nor proprietary rights of third parties, and not breaching any
licenses that we have entered into with regard to our technologies and products. Others have filed, and in the future are likely to file, patent applications covering genes or gene fragments or corresponding proteins or peptides that we may wish to
utilize with our proprietary technologies, or products that are similar to products developed with the use of our technologies or alternative methods of generating gene



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diversity. If these patent applications result in issued patents and we wish to use the patented technology, we would need to obtain a
license from the third party.



Third parties may
assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents. We could incur substantial costs and
diversion of 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, and such claims could result in the award of substantial damages against us. In the event of a
successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays
in product introductions while we attempt to develop alternative methods or products or be required to cease commercializing affected products.



We monitor the public disclosures of other companies operating in our industry regarding their technological development efforts. If we
determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical
personnel. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor.



From time to time, Maxygen becomes involved in claims and legal proceedings that arise in the ordinary course of its business. We are
currently subject to two such claims. We do not believe that the resolution of these claims will have a material adverse effect on us.



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



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



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



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



Our future capital requirements will depend on many factors including payments received under collaborative agreements, including joint ventures and government grants, the progress and scope of our collaborative and independent
research and development projects, the extent to which we advance products into clinical trials with our own resources, the effect of any acquisitions, and the filing, prosecution and enforcement of patent claims.



Changes may also occur that would consume available capital
resources significantly sooner than we expect. We may be unable to raise sufficient additional capital. The current difficult economic climate means that the



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current ability of biotechnology companies, including Maxygen, to raise capital is severely limited. If we fail to raise sufficient funds, 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 collaborations and grants, will enable us to maintain our currently planned operations
for at least the next 12 months. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development of our technologies and complete the commercialization of products, if
any, resulting from our technologies.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Destructive Actions By Activists or
Terrorists Could Damage Our Facilities, Interfere with Our Research Activities and Cause Ecological Harm. Any Such Adverse Events Could Damage Our Ability to Develop Products and Generate Adequate Revenue to Continue Operations.



Activists and terrorists have recently shown a willingness to
injure people and damage physical facilities, equipment and biological materials to publicize and/or further their ideological causes. Events in New York City and Washington, D.C. show that the amount of damage terrorists or others are willing and
able to cause can be considerable. Our operations and research activities could be adversely impacted depending upon the nature and extent of such acts. Such damage could include disability or death of our personnel, damage to our physical
facilities, destruction of animals and biological materials, disruption of our communications and/or data management software used for research and/or destruction of research records. Any such damage could delay our research projects and decrease
our ability to conduct future research and development. Damage caused by activist and/or terrorist incidents could also cause the release of hazardous materials, including chemicals, radioactive and biological materials, which could damage our
reputation in the community. Clean up of any such releases could also be time consuming and costly.



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Any
significant interruptions in our ability to conduct our business operations or research and development activities could reduce our revenue and increase our expenses.



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



Our research and development processes involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. Some of these materials may be novel, including
viruses with novel properties and animal models for the study of viruses. Our operations also produce hazardous waste products. Some of our work also involves the development of novel viruses and viral animal models. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We believe that our current operations
comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for
injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental
regulations may impair our research, development, or production efforts. We believe that our current operations comply in all material respects with applicable Environmental Protection Agency regulations.



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



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



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



We May Be Sued for Product Liability.



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



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



The trading prices of life science company stocks in general, and ours in particular, have experienced
significant price fluctuations in the last two years. The valuations of many life science companies without



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consistent product revenues and earnings, including ours, are high based on valuation standards such as price to sales ratios and progress in
product development and/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. Market fluctuations, as well as general political and economic conditions such as
recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to factors including the following:



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



| | · |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------



| | · |  | conditions or trends in the biotechnology and life science industries;
| | - |  | ----------------------------------------------------------------------



| | · |  | changes in the market valuations of other biotechnology or life science companies;
| | - |  | ----------------------------------------------------------------------------------



| | · |  | developments in domestic and international governmental policy or regulations;
| | - |  | ------------------------------------------------------------------------------



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



| | · |  | developments in or challenges relating to patent or other proprietary rights;
| | - |  | -----------------------------------------------------------------------------



| | · |  | period-to-period fluctuations in our operating results;
| | - |  | -------------------------------------------------------



| | · |  | future royalties from product sales, if any, by our strategic partners; and
| | - |  | ---------------------------------------------------------------------------



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



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



In
December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, our chief executive officer, Russell Howard, and our then chief financial officer (now president), Simba Gill, together with certain
underwriters of our initial public offering and secondary public offering of common stock. The lawsuit, 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 a number of companies that had public offerings of securities prior to December 2000. The complaint has been consolidated with other laddering claims in a proceeding
styled In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against Drs. Howard and Gill; the remainder of the
case remains pending. We believe the lawsuit against Maxygen and its officers is without merit and intend to defend against it vigorously.



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



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



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



| | · |  | the success rate of our discovery efforts leading to milestones and royalties;
| | - |  | ------------------------------------------------------------------------------



39



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



| | · |  | general and industry specific economic conditions, which may affect our collaborators research and development expenditures.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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



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



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



Our executive officers, directors and principal stockholders together control approximately 31% of our outstanding common stock, including
GlaxoSmithKline plc, which owns approximately 19% of our outstanding common stock. As a result, these stockholders, if they act together, and GlaxoSmithKline plc by itself, are able to exert a significant degree of influence over our management and
affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of Maxygen and
might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of
other stockholders and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.



We Do Not Completely Control Codexis, and Codexis May Not Make Decisions That Are in the Best Interests of Maxygen Stockholders.



Codexis operates as an independent subsidiary of Maxygen.
While we own 57% of Codexis, we do not have complete control of the operating and other decisions of Codexis. The interests of Codexis and its stockholders may not always coincide with our interests or the interests of our stockholders. Since
Maxygen is required to consolidate the financial statements of Codexis with its own financial statements, Codexis may enter into agreements or conduct its operations in a manner that could have a direct material adverse impact on our financial
statements and results of operations. Since Maxygen and Codexis presently operate from shared facilities, Codexis could conduct its operations in a manner that adversely affects our business or reputation in the community and/or in the biotechnology
industry, making it more difficult to operate in the community, secure additional alliances and maintain existing collaborations. This could have an adverse impact on our ability to conduct business.



40



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##### Table of Contents



|Item 2 |  | PROPERTIES
|------ |  | ----------



We lease an aggregate of 78,460 square feet of office and laboratory facilities in Redwood City, California. Our leases expire on February 24, 2005 with respect to 59,390 square feet, on April 21, 2005 with respect to 7,912 square
feet and on December 10, 2003 with respect to 11,158 square feet. Codexis, Inc. (our chemicals subsidiary) uses approximately 18,000 square feet of such space and Verdia, Inc. (our agriculture subsidiary) uses approximately 14,000 spare feet of such
space.



We lease an aggregate of 25,783 square
feet of office and laboratory facilities in Horsholm, Denmark. Our lease expires on October 31, 2010 but can be earlier terminated by us as of October 31, 2005. Our human therapeutics segment uses substantially all such space.



We believe that our existing facilities are adequate to meet
our needs for the immediate future. We believe that future growth, if any, can be accommodated by leasing additional or alternative space.



For additional information regarding our lease obligations, see Note 7 of the Notes to Consolidated Financial Statements.



|Item 3 |  | LEGAL PROCEEDINGS
|------ |  | -----------------



In December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, our chief executive officer, Russell Howard, and our then chief financial officer (now president), Simba Gill,
together with certain underwriters of our initial public offering and secondary public offering of common stock. The lawsuit, 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 a number of companies that had public offerings of securities prior to December 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. An amended complaint was served on Maxygen and Drs. Howard and Gill in April 2002.



In February 2003, the court dismissed the
Section 10(b) claim against Drs. Howard and Gill; the remainder of the case remains pending.



We believe the lawsuit against Maxygen and its officers is without merit and intend to defend against it vigorously.



We are not currently a party to any other material pending legal proceedings.



|Item 4 |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------ |  | ---------------------------------------------------



There were no submissions of matters to a vote of security holders during the fourth quarter ended December 31, 2002.



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PART II



|Item 5 |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------ |  | ---------------------------------------------------------------------



Price Range of Common Stock



Our common stock has been traded on the Nasdaq National Market under the symbol MAXY since our initial public offering on December 16,
1999. Before such time, there was no public market for our common stock. During the last two fiscal years, through December 31, 2002, the high and low sale prices for our common stock, as reported on the Nasdaq National Market, were as follows:



|                             |  | High |       | Low
|---------------------------- |  | ---- | ----- | ---
|Year ended December 31, 2001 |  |      |       |    
|First Quarter                |  | $    | 25.38 |    
|Second Quarter               |  |      | 22.00 |    
|Third Quarter                |  |      | 19.60 |    
|Fourth Quarter               |  |      | 22.53 |    
|Year ended December 31, 2002 |  |      |       |    
|First Quarter                |  | $    | 18.00 |    
|Second Quarter               |  |      | 12.50 |    
|Third Quarter                |  |      | 12.11 |    
|Fourth Quarter               |  |      | 8.95  |    



On March
26, 2003, there were approximately 390 holders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.



Dividend Policy



We have never declared or paid any dividends on our capital stock. We currently intend to retain future earnings, if any, for development
of our business and, therefore, do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeable future.



Securities Authorized for Issuance Under Equity Compensation Plans



We maintain a 1997 Stock Option Plan (the 1997 Plan), a 1999 Nonemployee Directors Stock Option
Plan, (the Directors Plan), a 2000 Non-Officer Stock Option Plan, (the Non-Officer Plan), a 2000 International Stock Option Plan (the International Plan) and a 1999 Employee Stock Purchase Plan (the
ESPP), pursuant to which we may grant equity awards to eligible persons. The 1997 Plan, the Directors Plan, the Non-Officer Plan, the International Plan and the ESPP are described more fully below.



42



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The following
table gives information about equity awards under our 1997 Plan, Directors Plan, Non-Officer Plan, International Plan and ESPP as of December 31, 2002.



|                                                           |  | (a)                                                                                         |  | (b)                                                                         |       | (c)                                                                                                                                         |          
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and
rights |  | Weighted-average exercise price of outstanding options, warrants and
rights |       | Number of securities remaining available for future issuance under equity compensation
plans (excluding securities reflected in column (a)) |          
|Equity compensation plans approved by security holders     |  | 4,299,696                                                                                   |  | $                                                                           | 26.68 |                                                                                                                                             | 3,469,127
|Equity compensation plans not approved by security holders |  | 4,131,626                                                                                   |  | $                                                                           | 17.09 |                                                                                                                                             | 1,572,532
|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                             |          
|Total                                                      |  | 8,431,322                                                                                   |  | $                                                                           | 21.98 |                                                                                                                                             | 5,041,659
|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                             |          

---

|(1) |  | The 1997 Plan incorporates an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the 1997 Plan will
increase by a number equal to the lesser of (ii) 1,500,000 shares, (ii) 4% of the outstanding shares on the date of the annual increase, or (iii) an amount determined by the board of directors. The ESPP incorporates an evergreen formula pursuant to
which on each January 1, the aggregate number of shares reserved for issuance under the ESPP will increase by a number equal to the lesser of (ii) 200,000 shares, (ii) 0.75% of the outstanding shares on the date of the annual increase, or (iii) an
amount determined by the board of directors.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Of these shares, 595,109 shares remain available for purchase under the ESPP.
|--- |  | -----------------------------------------------------------------------------



|(3) |  | The Non-Officer Plan incorporates an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the
Non-Officer Plan will increase by a number equal to equal to the greater of (i) 250,000 shares or (ii) 0.7% of the outstanding shares on the date of the annual increase, or a lower amount determined by the board of directors. The International Plan
incorporates an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the International Plan will increase by a number equal to equal to 0.6% of the outstanding shares on the date of the
annual increase, or a lower amount determined by the board of directors.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Codexis, a Maxygen consolidated subsidiary, maintains the Codexis 2002 Stock Plan (Codexis Stock Plan). As of December 31, 2002, the Codexis Stock Plan had 381,450 shares of
Codexis common stock available to be issued upon exercise of outstanding options at an exercise price of $0.40 per share. It also had 1,818,550 shares of Codexis common stock remaining available for future issuance. The Codexis Stock Plan was
approved by Codexis stockholders but has not been approved by Maxygen stockholders.



Summary Description of Maxygens Equity Compensation Plans



1997 Stock Option Plan



Maxygens stockholders approved the 1997 Plan on March 30, 1997 and approved amendments to the 1997 Plan on May 25, 2000 and May 31, 2002. Pursuant to the 1997 Plan, the board of directors may
issue incentive stock options to employees, including officers and members of the board of directors who are also employees, and nonqualified stock options to employees, officers, directors, consultants, and advisors of Maxygen. Under the 1997 Plan,
incentive options to purchase Maxygen common stock may be granted to employees at prices not lower than fair value on the date of grant, as determined by the board of directors. Nonstatutory options (options that do not qualify as incentive options)
may be granted to key employees, including directors and consultants, at prices not lower than 85% of fair value on the date of grant (110% in certain cases), as determined by the board of directors. The maximum term of the options granted under the
1997 Plan is ten years. Certain options can be immediately exercisable, at the discretion of the board of directors. Shares issued pursuant to the exercise of an unvested option are subject to Maxygens right of repurchase, which generally
lapses over four years (lapsing at



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a rate of 25% at the end of each year). If not immediately exercisable, options generally vest over four years (either vesting at a rate of
25% at the end of each year, or for grants made in 2002, one installment of 25% at the end of the first year and monthly for the three years thereafter). The 1997 Plan provides for annual increases in the number of shares available for issuance on
the first day of each year, beginning January 1, 2001, equal to the lesser of (i) 1,500,000 shares, (ii) 4% of the outstanding shares on the date of the annual increase, or (iii) an amount determined by the board of directors. At December 31, 2002,
2,841,038 shares remain available under the 1997 Plan.



1999 Nonemployee Directors Stock Option Plan



Maxygens stockholders approved the Directors Plan on December 14, 1999. The Directors Plan reserves a total of 300,000 shares of common stock for issuance thereunder. Each nonemployee director who becomes a
Maxygen director will be automatically granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date upon which such person first becomes a director. At the first board meeting immediately following each annual
stockholders meeting, each non-employee director will automatically be granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the Directors Plan will be equal to the fair market value
of the common stock on the date of grant. Options have a term of ten years. Generally, each initial grant under the Directors Plan will vest as to 25% of the shares subject to the option one year after the date of grant and at a rate of 25% of
the shares at the end of each of the succeeding three years. Each subsequent grant will generally vest in full one year after the date of grant. The Directors Plan will terminate in September 2009, unless terminated earlier in accordance with
the provisions of the Directors Plan. At December 31, 2002, 200,000 shares remain available under the Directors Plan.



2000 Non-Officer Employee Stock Option Plan



The board of directors adopted the Non-Officer Plan on December 6, 2000. The Non-Officer Plan has not been
approved by Maxygens stockholders as no such approval is required. Under the Non-Officers Plan the board of directors may issue nonqualified stock options to employees (other than executive officers and stockholders owning 10% or more of
Maxygens common stock) and consultants of Maxygen or any of its affiliates. Under the Non-Officer Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement
options in the context of acquisitions), as determined by the board of directors. The maximum term of the options granted under the Non-Officer Plan is ten years. Options vest and become exercisable pursuant to a vesting schedule, generally either
at a rate of 25% at the end of each year, or for grants made in 2002, one installment of 25% and monthly for the three years thereafter. The Non-Officer Plan provides for the issuance of options covering up to 1,500,000 shares of Maxygen common
stock. The Non-Officer Plan also provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2001, equal to the greater of (i) 250,000 shares or (ii) 0.7% of the outstanding shares
on the date of the annual increase, or a lower amount determined by the board of directors. At December 31, 2002, 683,622 shares remain available under the Non-Officer Plan.



2000 International Stock Option Plan



The board of directors adopted the International Plan on April 10, 2000 and amended it on March 1, 2001. The
International Plan has not been approved by Maxygens stockholders as no such approval is required. Under the International Plan the board of directors may issue nonqualified stock options to employees, directors and consultants of non-U.S.
subsidiaries of Maxygen. Under the International Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement options in the context of acquisitions), as determined by
the board of directors. The maximum term of the options granted under the International Plan is ten years. Options vest and become exercisable pursuant to a vesting schedule, generally either at a rate of 25% at the end of each year, or for grants
made in 2002, one installment of 25% and monthly for the three years thereafter. The International Plan provides for the issuance of options covering up to 1,000,000 shares of Maxygen common stock. The International Plan also provides for annual
increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2002, equal to 0.6% of



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the outstanding shares on the date of the annual increase, or a lower amount determined by the board of directors. At December 31, 2002,
888,910 shares remain available under the International Plan.



1999 Employee Stock Purchase Plan



Maxygens stockholders approved the ESPP on December 14, 1999. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A total of 400,000 shares of Maxygen common stock
were initially reserved for issuance under the ESPP. The ESPP permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the
ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or on the purchase date, whichever is lower. The initial offering period commenced on December 16, 1999. In addition, the ESPP provides for
annual increases in the number of shares available for issuance under the purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual
increase, or an amount determined by the board of directors. The ESPP will terminate in September 2019, unless terminated earlier in accordance with the provisions of the ESPP. At December 31, 2002, 595,109 shares remain available for purchase under
the ESPP.



Recent Sales of Unregistered Securities



We made the following unregistered sales of
our securities during the year ended December 31, 2002 that have not already been reported in an earlier quarterly report:



| | (i) |  | On November 1, 2002 we issued 2,917 shares of our common stock to a licensor in partial payment for licenses of technology granted to us.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | On December 31, 2002 we issued 656 shares of our common stock to a consultant in partial payment for consulting services rendered to us.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------



There were no underwriters employed in connection with any of
the transactions set forth above. The issuances of securities described above were deemed to be exempt from registration under the Securities Act of 1933, as amended (the Securities Act) in reliance on Section 4(2) of the Securities Act
and Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of the securities in each such transaction represented their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. The recipients either received adequate information about us or had access, through
employment or other relationships, to such information. The recipients were knowledgeable, sophisticated and experienced in making investment decisions of this kind and received adequate information about us.



Application of Initial Public Offering Proceeds



The effective date of our first registration statement, filed
on Form S-1 under the Securities Act (No. 333-89413) relating to our initial public offering of common stock, was December 15, 1999. Net proceeds to us were approximately $101.0 million. From the effective date through December 31, 2002, the
proceeds were applied toward:



| | · |  | purchases and installation of equipment and build-out of facilities, $20.8 million;
| | - |  | -----------------------------------------------------------------------------------



| | · |  | repayment of indebtedness, $1.3 million;
| | - |  | ----------------------------------------



| | · |  | working capital, $50.2 million; and
| | - |  | -----------------------------------



| | · |  | temporary investments in certificates of deposits, mutual funds and corporate debt securities, $28.7 million.
| | - |  | -------------------------------------------------------------------------------------------------------------



The use of the proceeds from the offering does not represent a
material change in the use of the proceeds described in the registration statement.



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##### Table of Contents



|Item 6 |  | SELECTED FINANCIAL DATA
|------ |  | -----------------------



The following selected financial information is derived from our audited consolidated financial statements. When you read this selected
financial data, it is important that you also read the historical financial statements and related notes included in this report, as well as the section of this report entitled Managements Discussion and Analysis of Financial Condition
and Results of Operations. Historical results are not necessarily indicative of future results. See Note 10 of Notes to Consolidated Financial Statements for information concerning the deemed dividend upon issuance of convertible preferred
stock in August 1999.



|                                                              |  | Year Ended December 31,               |        
|------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                              |  | 1998                                  |        
|                                                              |  | (in thousands, except per share data) |        
|Consolidated Statement of Operations Data:                    |  |                                       |        
|Collaborative research and development revenue                |  | $                                     | 1,077  
|Grant revenue                                                 |  |                                       | 1,646  
|                                                              |  |                                       |        
|Total revenues                                                |  |                                       | 2,723  
|Operating expenses:                                           |  |                                       |        
|Research and development                                      |  |                                       | 7,207  
|General and administrative                                    |  |                                       | 3,010  
|Stock compensation expense                                    |  |                                       | 1,561  
|Acquired in-process research anddevelopment(1)                |  |                                       |       
|Amortization of goodwill and other intangible assets          |  |                                       |       
|                                                              |  |                                       |        
|Total operating expenses                                      |  |                                       | 11,778 
|                                                              |  |                                       |        
|Loss from operations                                          |  |                                       | (9,055 
|Net interest income                                           |  |                                       | 229    
|Equity in net loss of joint venture                           |  |                                       |       
|                                                              |  |                                       |        
|Net loss                                                      |  |                                       | (8,826 
|Deemed dividend upon issuance of convertible preferred stock  |  |                                       |       
|                                                              |  |                                       |        
|Net loss attributable to common stockholders                  |  | $                                     | (8,826 
|                                                              |  |                                       |        
|Basic and diluted net loss per share                          |  | $                                     | (1.31  
|                                                              |  |                                       |        
|Shares used in computing basic and diluted net loss per share |  |                                       | 6,748  
|                                                             
|                                                              |  | December 31,                          |        
|                                                              |  | 1998                                  |        
|                                                              |  | (in thousands)                        |        
|Consolidated Balance Sheet Data:                              |  |                                       |        
|Cash, cash equivalents and investments                        |  | $                                     | 15,306 
|Working capital                                               |  |                                       | 12,264 
|Total assets                                                  |  |                                       | 17,600 
|Non-current portion of equipment financing                    |  |                                       |       
|Accumulated deficit                                           |  |                                       | (12,859
|Total stockholders equity                                    |  |                                       | 11,700 

---

|(1) |  | Acquired in-process research and development related to the acquisition of Maxygen ApS and a privately held California corporation. See Notes 13 and 14 of the Notes
to Consolidated Financial Statements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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QUARTERLY
FINANCIAL DATA

(unaudited)



|                                                              |  | Quarter Ended                         |        
|------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                              |  | March 31,                             |        
|                                                              |  | (in thousands, except per share data) |        
|2002                                                          |  |                                       |        
|Collaborative research and development revenue                |  | $                                     | 8,015  
|Grant revenue                                                 |  |                                       | 1,325  
|                                                              |  |                                       |        
|Total revenues                                                |  |                                       | 9,340  
|Operating expenses:                                           |  |                                       |        
|Research and development                                      |  |                                       | 14,971 
|General and administrative                                    |  |                                       | 3,064  
|Stock compensation expense                                    |  |                                       | 2,177  
|Amortization of goodwill and other intangible assets          |  |                                       | 286    
|                                                              |  |                                       |        
|Total operating expenses                                      |  |                                       | 20,498 
|                                                              |  |                                       |        
|Loss from operations                                          |  |                                       | (11,158
|Net interest income                                           |  |                                       | 2,165  
|Equity in net loss of joint venture                           |  |                                       |       
|                                                              |  |                                       |        
|Net loss                                                      |  | $                                     | (8,993 
|                                                              |  |                                       |        
|Basic and diluted net loss per share                          |  | $                                     | (0.27  
|                                                              |  |                                       |        
|Shares used in computing basic and diluted net loss per share |  |                                       | 33,153 



|                                                              |  | Quarter Ended                         |        
|------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                              |  | March 31,                             |        
|                                                              |  | (in thousands, except per share data) |        
|2001                                                          |  |                                       |        
|Collaborative research and development revenue                |  | $                                     | 5,025  
|Grant revenue                                                 |  |                                       | 1,905  
|                                                              |  |                                       |        
|Total revenues                                                |  |                                       | 6,930  
|Operating expenses:                                           |  |                                       |        
|Research and development                                      |  |                                       | 12,696 
|General and administrative                                    |  |                                       | 3,548  
|Stock compensation expense                                    |  |                                       | 3,543  
|Amortization of goodwill and other intangible assets          |  |                                       | 2,181  
|                                                              |  |                                       |        
|Total operating expenses                                      |  |                                       | 21,968 
|                                                              |  |                                       |        
|Loss from operations                                          |  |                                       | (15,038
|Net interest income                                           |  |                                       | 3,974  
|                                                              |  |                                       |        
|Net loss                                                      |  | $                                     | (11,064
|                                                              |  |                                       |        
|Basic and diluted net loss per share                          |  | $                                     | (0.34  
|                                                              |  |                                       |        
|Shares used in computing basic and diluted net loss per share |  |                                       | 32,184 



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|Item 7 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------ |  | -------------------------------------------------------------------------------------



The following Managements Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking statements that are based upon current expectations. These forward-looking statements fall within the meaning of the federal securities laws that relate to future events or our
future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, can, will, should, expect, plan, anticipate,
believe, estimate, predict, intend, potential or continue or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and
uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including those set forth under Risk Factors That May Affect Results of
Operations and Financial Condition and elsewhere in this report.



Overview



Maxygen was
founded in May 1996 and began operations in March 1997. To date, we have generated revenues from research collaborations with agriculture, pharmaceutical, petroleum, and chemical companies and from government grants. We have strategic collaborations
with leading companies including: Aventis Pasteur in novel vaccines; InterMune in next generation interferon gamma therapies; Lundbeck in interferon beta therapies for nervous system diseases, including multiple sclerosis; ALK-Abelló in
allergy; the International AIDS Vaccine Initiative (IAVI) in HIV; Eli Lilly, Pfizer and DSM in pharmaceutical manufacturing; and Shearwater Corporation (a subsidiary of Nektar Therapeutics) for protein pharmaceutical PEGylation technologies.
Additionally, we have a range of other strategic alliances in industrial applications, as well as funding from U.S. government organizations including from the Defense Advanced Research Projects Agency, the National Institute of Standards and
Technology-Advanced Technology Program, the U.S. Agency for International Development and the U.S. Army Medical Research and Materiel Command.



Revenue from strategic alliances and government grants increased from $24.5 million in 2000 to $30.5 million in 2001 to $41.8 million
in 2002. Revenues may fluctuate from period to period because there can be no assurance that these collaborations will continue for their initial term or beyond.



We have incurred significant losses since our inception. As of December 31, 2002, our accumulated deficit was
$162.7 million and total stockholders equity was $229.2 million. We have invested heavily in establishing our proprietary technologies. These investments have contributed to the increases in our research and development expenses from $38.5
million in 2000 to $54.0 million in 2001 to $62.0 million in 2002. Our total headcount increased from 252 employees at the end of 2000 to 305 at the end of 2001. As of December 31, 2002 we had 298 employees, of whom approximately 85% were engaged in
research and development. We expect to incur additional operating losses over at least the next several years.



On August 10, 2000, we completed our acquisition of Maxygen ApS, a Danish biotechnology company located in Copenhagen, Denmark. Maxygen
ApS is focused on the development of improved second-generation protein pharmaceutical products and has developed broad pre-clinical development capabilities and proprietary technologies and expertise that help to address traditional shortcomings of
protein pharmaceuticals such as half-life, stability and immunogenicity. The transaction was recorded under the purchase method of accounting. We issued 1,102,578 shares of our common stock and granted options to purchase an aggregate of 41,812
shares of our common stock in connection with the acquisition of all the equity securities of Maxygen ApS. Of the 1,102,578 shares of common stock issued, 228,766 shares were issued with repurchase rights that lapse over a three year term. The
consideration, including liabilities assumed of $5.5 million and estimated acquisition costs of $1.0 million, aggregated $71.8 million, of which $3.0 million was allocated to tangible assets, $28.0 million to acquired in-process research and
development, $14.6 million to deferred compensation, $3.5 million to core technology, $705,000 to assembled workforce and $22.0 million to goodwill. The results of operations of Maxygen ApS are included in our operating results after August 10,
2000.



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Critical Accounting
Policies and Estimates



General



Our consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions (see Note 1 of Notes to Consolidated Financial Statements). We believe the following critical accounting
policies reflect the more significant judgments and estimates we make in the preparation of our consolidated financial statements.



Consolidation



The consolidated financial statements include the amounts of Maxygen and our wholly-owned subsidiaries, Maxygen ApS (Denmark), which was
acquired by the Company in August 2000, Maxygen Holdings Ltd. (Cayman Islands) and Verdia, Inc., as well as our majority-owned subsidiary, Codexis, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.



Our ownership in Codexis is approximately 57%,
based upon the voting rights of the issued and outstanding shares of Codexis common and preferred stock. In accordance with EITF Consensus 96-16, Investor Accounting for an Investee When the Investor Has a Majority of the Voting Interest but
the Minority Stockholder or Stockholders Have Certain Approval or Veto Rights and paragraph 1 of ARB No. 51, Consolidated Financial Statements, we have included 100% of the net losses of Codexis in the determination of our
consolidated net loss. We record minority interest in the Consolidated Financial Statements to account for the ownership interest of the minority owner.



Our investment in the joint venture with Delta Pine and Land Company called DeltaMax Cotton LLC in which we have an equity interest of 50%
is being accounted for under the equity method.



Goodwill and Intangible Impairment



In connection with the Maxygen ApS acquisition, we allocated $26.2 million to goodwill and other intangible assets. Prior to our adoption of Statement of Financial Accounting Standard No. 142 Goodwill and Other Intangible
Assets (SFAS 142) effective January 1, 2002, we amortized this goodwill and other intangible assets using the straight-line method over the assets estimated useful lives of three years, the term of expected benefit to Maxygen. We
believed this term was reasonable given that Maxygen ApS was a development stage entity and its technology was at an early stage of development and was yet unproven. Pursuant to our adoption of SFAS 142 effective January 1, 2002, we have ceased
amortizing goodwill.



Goodwill and other
intangible assets are generally evaluated on an individual acquisition or market basis whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. In accordance with
SFAS 142, if certain indicators of impairment exist, we will review our long-lived assets (including goodwill) for impairment based on estimated future discounted cash flows attributable to the assets and other factors to determine the fair value of
the respective assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets will be written down to their estimated fair values. No impairment charges were recorded in 2000, 2001 or
in 2002.



The valuation in connection with the
initial purchase price allocation and the ongoing evaluation for impairment of goodwill and intangible assets requires significant management estimates and judgment. The purchase price allocation process requires management estimates and judgment as
to expectations for various products and business strategies. If any of the significant assumptions differ from the estimates and judgments used in the purchase price allocation, this could result in different valuations for goodwill and intangible
assets. Once it is established, we must test goodwill annually for impairment using a two-step process as required by SFAS No. 142. In addition, in certain circumstances, we must assess if goodwill should be tested for impairment between annual
tests. Intangible assets with definite useful lives must be tested for impairment in accordance



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with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. When we conduct our impairment tests for
goodwill and intangibles, factors that are considered important in determining whether impairment might exist include significant continued under-performance compared to peers, significant changes in the underlying business and products of our
reporting units, or other factors specific to each asset or reporting unit being evaluated. Any changes in key assumptions about the business and its prospects, or changes in market conditions or other externalities, could result in an impairment
charge and such a charge could have a material adverse effect on our consolidated results of operations.



Source of Revenue and Revenue Recognition Policy



We recognize revenues from research collaboration agreements as earned upon our achievement of the
performance requirements of the agreements. Our existing corporate collaboration agreements generally provide for research funding for a specified number of full-time equivalent researchers working in defined research programs. Revenue related to
these payments is earned as the related research work is performed. In addition, these collaborators may make technology advancement payments that are intended to fund further development of our core technology, as opposed to a defined research
program. Such payments are recognized ratably over the applicable funding period. Payments received that are related to future performance are deferred and recognized as revenue as the performance requirements are achieved. As of December 31, 2002,
we have deferred revenues of approximately $10.3 million that we expect to recognize over the next three years.



Revenue related to performance milestones is recognized based upon the achievement of the milestones, as defined in the respective
agreements. Substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event when we have no future performance obligations related to the payment and we judge the event to be the
culmination of a separate earnings process. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Maxygen, such as regulatory approval to market a product. We receive royalties from
licensees, which are based on sales to third parties of licensed products. Royalties are recorded as earned in accordance with the contract terms when third-party results can be reliably measured and collectibility is reasonably assured.



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



Revenue related to grant agreements with various government agencies is recognized as the related research and development expenses are incurred, and when these research and development expenses are within the prior approved funding
amounts. Certain grant agreements provide an option for the government to audit the amount of research and development expenses, both direct and indirect, that have been submitted to the government agency for reimbursement. We believe the overhead
rates we used to calculate our indirect research and development expenses are within the contractual guidelines of allowable costs and are reasonable estimates of our indirect expenses incurred through the term of the agreements.



Our sources of potential revenues for the next several years
are likely to be license, research, technology advancement and milestone payments under existing and possible future collaborative arrangements, government research grants, and royalties from our collaborators based upon revenues received from any
products commercialized under those agreements. See Note 3 of Notes to Consolidated Financial Statements.



Deferred Compensation



Deferred compensation for options granted to employees has been determined as the difference between the deemed fair market value for financial reporting purposes of our common stock on the date the
applicable options were granted and the exercise price. Deferred compensation for options granted to consultants has been



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determined in accordance with Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation (SFAS
123) and Emerging Issues Task Force Issue No. 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18) as the fair value of the equity
instruments issued. Compensation for related options granted to consultants is periodically remeasured as the underlying options vest.



In connection with the grant of stock options to employees before our initial public offering, we recorded deferred stock compensation of
approximately $2.4 million in 1998 and $19.5 million in 1999. These amounts were initially recorded as a component of stockholders equity and are being amortized as charges to operations over the vesting period of the options using a graded
vesting method. We recognized stock compensation expense related to the deferred compensation amortization on these option grants, which are split between research and development expense and general and administrative expense, as shown in the
following table (in thousands):



|                           |  | 2000 |       | 2001 |   | 2002 
|-------------------------- |  | ---- | ----- | ---- | - | -----
|Research and development   |  | $    | 3,682 |      | $ | 2,442
|General and administrative |  |      | 4,107 |      |   | 2,341



In
connection with the grant of stock options to consultants, we recorded stock compensation expense of $2.6 million in 2000, $256,000 in 2001 and $86,000 in 2002, which were included in research and development expense, and $407,000 in 2000, and
$50,000 in 2001 and 2002, which were included in general and administrative expense. Due to the acceleration of executive stock option awards, an additional $1.6 million was recorded in 2000 as stock compensation expense included in research and
development expense. Stock compensation expense relating to the acceleration of options was not material in 2001 and 2002.



In connection with the Maxygen ApS acquisition in August 2000, stock options were granted in exchange for outstanding warrants to purchase
Maxygen ApS securities. In connection with this exchange we recorded aggregate deferred compensation totaling $1.5 million. This amount is being amortized over the remaining vesting period of the options, of which $298,000 was expensed in 2000,
$714,000 in 2001 and $437,000 in 2002. For the shares exchanged that had a right of repurchase, deferred compensation of $13.1 million was recorded. This amount is being amortized to expense over a three-year graded vesting period. A total of $3.3
million was recognized as expense in 2000, $6.2 million in 2001 and $2.8 million in 2002.



Results of Operations



Revenues



Our total
revenues increased from $24.5 million in 2000 to $30.5 million in 2001 and were $41.8 million in 2002. The increase in collaborative research and development revenue was due to additional strategic alliances and the expansion of existing alliances.
The decline in grant revenue reflects the expiration of four U.S. government grants from the Defense Advanced Research Projects Agency that began in 1998 and 1999. In 2003, we expect our consolidated revenue to be in the range of $35 to $40 million
consisting of collaboration revenue, grant revenue and royalties on product sales. This assumes the establishment of new collaborations and that the funded research terms of our collaborations with InterMune and Lundbeck will begin to wind down as
scheduled.



Revenues for each operating segment
are derived from our research collaboration agreements and government research grants and are categorized based on the industry of the product or technology under development.



|                   |  | Year Ended December 31,
|------------------ |  | -----------------------
|                   |  | 2000                   
|Human Therapeutics |  | $                      
|Chemicals          |  |                        
|Agriculture        |  |                        
|                   |  |                        
|Total Revenue      |  | $                      
|                   |  |                        



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The increase
in revenue for each segment was due to additional strategic alliances and the expansion of existing alliances. For Human Therapeutics and Chemicals, these increases are partially offset by the decline in government research grant revenue.



Research and Development Expenses



We have entered into a number of research
and development collaborations to perform research for our collaborators. The major collaborative agreements have similar contractual terms. The agreements generally require us to devote a specified number of full-time equivalent employees to the
research efforts over defined terms generally ranging from three to five years.



The table below lists our major collaborative partners, defined as those contributing greater than 10% of total collaborative research revenue in 2002 for whom we conducted research and development,
together with the date upon which the funded research term of the contract is scheduled to end. Contracts may only be extended by mutual agreement between Maxygen and the collaborative partner.



|Collaborator                        |  | Funded Research Ends
|----------------------------------- |  | --------------------
|Lundbeck A/S                        |  | September 18, 2003  
|Pioneer Hi-Bred International, Inc. |  | December 23, 2003   
|InterMune, Inc.                     |  | September 4, 2004   



We do
not generally track fully burdened research and development costs or capital expenditures by project. However, we estimate, based on full-time equivalent effort, that the percentage of research and development efforts (as measured in hours incurred)
undertaken for collaborative projects funded by our collaborators and government grants was approximately 55% in 2000, 50% in 2001 and 50% in 2002. The percentage of research effort (as measured by hours incurred) undertaken for our own internally
funded research projects was approximately 45% in 2000, 50% in 2001 and 50% in 2002. Due to the nature of our research and our dependence on our collaborative partners to commercialize the results of the research, we cannot predict with any
certainty whether any particular collaboration or research effort will ultimately result in a commercial product and therefore whether we will receive future milestone payments or royalty payments under our various collaborations.



Most of our human therapeutic, agriculture and chemical
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. Human therapeutic product
candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to pass through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals and may prove impracticable to
manufacture in commercial quantities at reasonable costs and with acceptable quality. Chemical and agricultural product candidates may be found ineffective, may cause undesirable side effects or may prove impracticable to manufacture in commercial
quantities at reasonable costs and with acceptable quality. 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 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 titled Risk Factors That May Affect Results of Operations and Financial Condition. Because of these risks and uncertainties, we cannot predict when or whether we
will successfully complete the development of our product candidates or the ultimate product development cost in any particular case.



Our research and development expenses consist primarily of salaries and other personnel-related expenses, facility costs, research
consultants and external collaborative research expenses, supplies and depreciation of facilities and laboratory equipment. Research and development expenses increased from $38.5 million in 2000 to



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$54.0 million in 2001 and to $62.0 million in 2002. The increase is primarily due to our accelerated efforts in all aspects of research and
development, including increased expenditures resulting from our acquisition of Maxygen ApS in August 2000, as well as investments in our technology platform and in the development of product candidates. Stock compensation expense related to
research and development was $11.5 million in 2000, $9.6 million in 2001 and $4.7 million in 2002. The decrease in stock compensation expenses was primarily the result of lower amortization expense related to deferred compensation for the shares
subject to repurchase that were exchanged in connection with the Maxygen ApS acquisition in August 2000. This deferred compensation is being amortized to expense over a three year graded vesting period. The deferred compensation is expected to be
fully amortized to expense by September 2003.



Research and development expenses, excluding stock compensation expense, represented 158% of total revenues in 2000, 177% in 2001, and 148% in 2002. The increase from 2000 to 2001 was primarily due to increased staff necessary to
manage and support our growth plus increased research and development costs resulting from our acquisition of Maxygen ApS and new collaboration agreements. The decrease from 2001 to 2002 was primarily due to the growth in our total revenues.



We expect research and development cost to
increase during 2003 as we increase our efforts on internally funded projects. We expect to continue to devote substantial resources to research and development and we expect research and development expenses to increase in the next several years if
we are successful in advancing our products into clinical trials. To the extent we out-license our products prior to commencement of clinical trials or collaborate with others with respect to clinical trials, increases in research and development
expenses may be reduced or avoided. We intend to manage the level of our expenditures for research and development, including clinical trials, to balance advancing our products against maintaining adequate cash resources for our operations.



General and Administrative Expenses



Our general and administrative expenses
consist primarily of personnel costs for finance, human resources, business development, legal and general management, as well as insurance premiums and professional expenses, such as legal and accounting. General and administrative expenses have
increased from $12.5 million in 2000 to $13.6 million in 2001 and slightly decreased to $13.1 million in 2002. The increase in general and administrative expenses from 2000 to 2001 was the result of increased costs of directors and
officers liability insurance, increased professional fees and additions to finance staff. The slight decrease from 2001 to 2002 was primarily due to receipt of expense reimbursement from litigation with Enchira Biotechnology received in 2002,
partially offset by increased costs of directors and officers liability insurance and increased professional fees. General and administrative stock compensation expense was $4.5 million in 2000, $2.4 million in 2001 and $1.6 million in
2002. The decrease in stock compensation expense was primarily a result of lower amortization expense related to deferred compensation for stock options granted to employees before our initial public offering. This deferred compensation is being
amortized to expense over the vesting period of the options using a graded vesting method. The deferred compensation is expected to be fully amortized to expense by the end of 2004.



General and administrative expenses represented 51% of total revenues for 2000, 44% of total revenues for
2001 and 31% of total revenues in 2002. The decrease between periods was due primarily to the growth in our total revenue between periods.



We expect that our general and administrative expenses may increase modestly in absolute dollar amounts for at least the next several
years as a result of increased professional fees and insurance premiums.



In-Process Research and Development



On May 8, 2000, we acquired certain in-process technology through the acquisition of a privately held California corporation. In connection with the acquisition we issued 39,600 shares of our common stock.



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Pursuant to the terms of the acquisition agreement, 18,500 shares of our common stock are being held in escrow until such time contingencies
regarding the patents related to the acquired technology are resolved. Accordingly, we recorded a charge for acquired in-process research and development of $912,000 representing the fair value of the 21,100 shares delivered to the sellers at
closing, plus certain transaction expenses. Shares in escrow will be valued and accounted for when, and if, the contingencies are resolved and the shares are delivered to the sellers.



On August 10, 2000, we acquired Maxygen ApS for total consideration of approximately $71.8 million, including
$5.5 million for the assumption of liabilities and $1.0 million for estimated acquisition costs. Prior to the acquisition, Maxygen ApS was a Danish privately-held, development-stage company that had minimal revenues since its inception in April
1999. Maxygen ApS is focused on the development of improved second-generation protein pharmaceutical products and has developed broad pre-clinical development capabilities and proprietary technologies and expertise that help to address traditional
shortcomings of protein pharmaceuticals such as half-life, stability and immunogenicity. Approximately $28.0 million of the total purchase price represented the value of in-process research and development projects that were at a pre-clinical stage
of development, had not yet reached technological feasibility, and had no alternative future use. This amount was charged to our operations in the third quarter ended September 30, 2000. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Maxygen ApS are included in the consolidated financial statements from August 10, 2000. See Note 14 of Notes to Consolidated Financial Statements.



The $28.0 million in-process research and development charge
represents the value determined by an independent appraiser, using a discounted cash flow methodology, attributable to the six pre-clinical stage in-process research and development projects of Maxygen ApS that were in progress at the time of
acquisition based on a valuation analysis of such research and development. In-process technology was expensed upon acquisition as technological feasibility had not been established and no alternative future uses existed. To value the in-process
technology we considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income and associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project, in obtaining regulatory approval to market, and the risks related to the viability of and potential changes to future target markets. The charge relates to specific on-going research and development.
Management of Maxygen believes that the allocation of the purchase price to in-process research and development was appropriate given the future potential of this research and development to contribute to the operations of Maxygen. Assuming this
research continues through all stages of clinical development, we project substantial future research and development expenditures related to this technology.



We continue to fund and develop the in-process research and development projects acquired through Maxygen ApS. There can be no assurances
that the in-process projects acquired will achieve technological feasibility or that we will be able to successfully market products based on such technology. Should these in-process projects fail, the value of our investment in these incomplete
technologies would be insignificant or zero. A failure to successfully develop and market these products could result in an impairment charge to goodwill.



As opportunities present themselves, we intend to continue to acquire new technologies and companies. Such acquisitions could lead to
additional direct and indirect expenses that could negatively affect our results of operations.



Amortization of Goodwill and Other Intangible Assets



In connection with the Maxygen ApS acquisition, we allocated $26.2 million to goodwill and other intangible assets. Upon adoption of SFAS
142 in January 2002, we stopped amortizing goodwill and assembled workforce. We will continue to amortize the purchased core technology over its three year useful life. Such amortization will be fully allocated to expense by September 2003.
Amortization expense of $3.4 million in 2000, $8.7 million in 2001 and $1.1 million in 2002 was recorded.



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Net
Interest and Other Income



Net interest
income represents income earned on our cash, cash equivalents and marketable securities net of interest expense. Net interest and other income decreased from $15.3 million in 2000 to $12.9 million in 2001 to $8.1 million in 2002. The decreases were
due to declining interest rates and lower average balances of cash, cash equivalents and marketable securities.



Equity in Net Loss of Joint Venture



Equity in net loss of joint venture reflects Maxygens share of the net loss of its joint venture, DeltaMax Cotton LLC, formed in May
2002, which is accounted for under the equity method of accounting. Equity in net losses of the joint venture was $1.3 million for the year ended December 31, 2002.



Provision for Income Taxes



We incurred net operating losses in 2000, 2001 and 2002, and consequently did not pay any U.S. federal or
state income taxes. As of December 31, 2002, we had net operating loss carryforwards for federal income tax purposes of approximately $62.0 million, which expire in the years 2012 through 2022 and federal research and development tax credits of
approximately $1.4 million, which expire in the years 2012 through 2022.



Utilization of our net operating losses and credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. Such an annual limitation could result in the expiration of the net operating losses and credits before utilization. See Note 12 of Notes to Consolidated Financial Statements.



New Accounting Pronouncements



In January 2002, we adopted Statement of Financing Accounting Standards No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets (Statement 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. We evaluate our intangible assets for impairment whenever events or changes in circumstances
indicate that such assets are impaired or the estimated useful lives are no longer appropriate. If indicators of impairment exist, we will review our long-lived assets for impairment based on estimated future discounted cash flows attributable to
the assets and other factors to determine the fair value of the respective assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair
values.



In June 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (referred to as SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue (referred to as EITF) No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an entitys commitment to an exit plan, as
required under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. The adoption of SFAS 146 is not anticipated to have a material effect on
our financial statements.



In November 2002, the
FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be recorded in
the guarantors balance sheet upon issuance of a guarantee. The Interpretation requires that a guarantor recognize a liability for the fair value of guarantee obligations issued after December 31, 2002. The adoption of FIN 45 is not expected to
have a material effect on our financial statements.



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In December
2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for years ending after December 15, 2002. We have adopted the
disclosure requirements under this statement.



Liquidity and
Capital Resources



Since inception, we have
financed our operations primarily through private placements and public offerings of equity securities, receiving aggregate consideration from such sales totaling $302.5 million and research and development funding from collaborators and government
grants totaling approximately $148.3 million. In addition, our majority-owned subsidiary, Codexis, Inc., received $20 million from a private placement of its equity securities with third party investors. Codexis also received $5 million from a
concurrent private placement from Maxygen. As of December 31, 2002, we had $228.1 million in cash, cash equivalents and investments, $21.7 million of which may only be used for Codexis operations.



Net cash used in operating activities was $12.8 million in
2000, $15.1 million in 2001 and $21.8 million in 2002. Uses of cash in operating activities were primarily to fund net operating losses.



Net cash used in investing activities was $151.1 million in 2000 and $49.1 million in 2001. Net cash provided by investing activities in
2002 was $18.2 million. The cash used during 2000 and 2001 primarily represented purchases of available-for-sale securities. The cash provided during 2002 was primarily from the maturities of available-for-sale securities.



Additions of property and equipment were $5.4 million in 2000,
$10.6 million in 2001 and $4.9 million in 2002. The additions in 2001 are primarily due to the expansion of our offices and laboratories in Redwood City, CA as well as new equipment purchased for Maxygen ApS. We expect to continue to make
significant investments in the purchase of property and equipment to support our operations. We may use a portion of our cash to acquire or invest in businesses, products or technologies, or to obtain the right to use such technologies.



In connection with our joint venture, DeltaMax
Cotton LLC, Maxygen and Delta and Pine Land Company are committed to fund the joint venture in an amount sufficient to pay the anticipated development costs, but neither party is required to provide funding in excess of $15 million. During 2002, we
funded the joint venture through a capital contribution in the amount of $1.4 million, which reflects our 50% ownership interest.



Net cash provided by financing activities was $139.0 million in 2000, $1.3 million in 2001 and $22.9 million in 2002. The 2000 amount
primarily consists of the net proceeds received from the sale of common stock in a public offering in March 2000. The cash provided in 2001 was primarily from the proceeds of the sale of common stock in connection with our Employee Stock Purchase
Plan and the exercise of stock options by employees. This was partially offset by payments on equipment financing obligations of $533,000. The cash provided in 2002 was primarily from the minority investment in Codexis.



The following are contractual commitments at December 31, 2002
associated with debt and lease obligations (in thousands):



|                              |  | Payments Due by Period
|----------------------------- |  | ----------------------
|Contractual Commitments       |  | Total                 
|Operating Leases              |  | $                     
|Long-Term Debt                |  |                       
|                              |  |                       
|Total Contractual Commitments |  | $                     
|                              |  |                       



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Since
inception we have received $116.1 million in funding from our collaborators and from government grants, which includes $10.3 million of deferred revenue to be recognized over the next three years. Approximately $89.5 million was received from our
collaborators and $26.6 million was received from government funding. Assuming our research efforts for existing collaborations and grants are expended for their full research terms, as of December 31, 2002 we had total committed funding of
approximately $30.6 million remaining to be received over the next three years. Potential milestone payments from our existing collaborations could exceed $300 million based on the accomplishment of specific performance criteria. We may also earn
royalties on product sales. In general, the obligation of our corporate collaborators to provide research funding cannot be terminated by either party before the end of the research term unless there has been a material breach of contract or either
party has become bankrupt or insolvent. In the case of such an event, the agreement specifies the rights, if any, that each party will retain.



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



Disclosure of Non-GAAP Financial Measures



When we report our financial results, ordinarily we report
net income (loss) calculated both in accordance with generally accepted accounting principles and also excluding stock compensation expense and amortization of intangible assets (Pro Forma Net Income (Loss)). The latter measure of net
income (loss) is considered a Non-GAAP Financial Measure according to SEC rules.



We believe that Pro Forma Net Income (Loss) provides useful information in understanding our ongoing financial condition. Stock compensation expense and amortization of intangible assets are non-cash
expenses generated as a result of infrequent events that do not have direct operational significance. As a result we believe that Pro Forma Net Income (Loss) provides useful information to investors as to ongoing operations. Management uses Pro
Forma Net Income (Loss) in analyzing the performance of each of our operating business segments and in analyzing the performance of Maxygen as a whole. Due to the usefulness of Pro Forma Net Income (Loss) to our management we believe that it also
provides useful information to investors regarding our financial condition and results of operation.



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|Item 7A    QUANTITATIVE |  | AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|----------------------- |  | ---------------------------------------------



We are exposed to financial market risks, including changes in interest rates and foreign currency exchange. To mitigate some of these
risks, we utilize currency forward contracts. We do not use derivative financial instruments for speculative or trading purposes.



Interest Rate Risk



The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including corporate obligations and money market funds. All securities are held in U.S.
currency except for amounts held in our Danish subsidiary in Danish kroner. As of December 31, 2002, approximately 95% of our total portfolio will mature in one year or less, with the remainder maturing in less than two years.



The following table represents the fair value balance of our
cash, cash equivalents, short-term and long-term investments that are subject to interest rate risk by year of expected maturity and average interest rates as of December 31, 2002 (dollars in thousands):



|                          |  | Expected Maturity |  
|------------------------- |  | ----------------- | -
|                          |  | 2002              |  
|Cash and cash equivalents |  | 67,611            |  
|Average interest rates    |  | 1.66              | %
|                         
|Short-term investments    |  | 149,307           |  
|Average interest rates    |  | 2.40              | %
|                         
|Long-term investments     |  |                  |  
|Average interest rates    |  |                  |  



We did
not hold derivative instruments intended to mitigate interest rate risk as of December 31, 2002, and we have never held such instruments in the past. If market interest rates were to increase by 100 basis points, or 1%, from December 31, 2002
levels, the fair value of our portfolio would decline by approximately $2.4 million. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes ending fair
values include principal plus accrued interest. In addition, we had outstanding debt related to equipment financing of $672,000 as of December 31, 2002, with a range of interest rates of between 11.73% and 12.78%.



Foreign Currency Exchange Risk



A majority of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, in 2000 we acquired a wholly-owned subsidiary in Denmark, Maxygen ApS. The functional currency of Maxygen ApS is the Danish kroner. To protect against reductions in value and the volatility of
future cash flows caused by changes in foreign exchange rates, we have established a cash flow hedging program. Currency forward contracts are utilized in these hedging programs. Our hedging programs reduce, but do not always eliminate, the impact
of foreign currency exchange rate movements. Gains and losses on these foreign currency investments are generally offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to Maxygen.



At December 31, 2002 we had no foreign currency
cash flow forward contracts outstanding.



58



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##### Table of Contents

|Item 8 |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------ |  | -------------------------------------------



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders

Maxygen, Inc.



We have
audited the accompanying consolidated balance sheets of Maxygen, Inc. as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxygen, Inc. at December 31, 2001 and 2002, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.



As discussed in Note 11 to the consolidated financial
statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets.



/s/    ERNST &YOUNG LLP



Palo Alto, California

February 3, 2003



59



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##### Table of Contents



MAXYGEN,
INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                    |  | December 31, |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------
|                                                                                                                                                                    |  | 2001         |         
|ASSETS                                                                                                                                                              |  |              |         
|Current assets:                                                                                                                                                     |  |              |         
|Cash and cash equivalents                                                                                                                                           |  | $            | 48,388  
|Short-term investments                                                                                                                                              |  |              | 157,557 
|Grant and other receivables                                                                                                                                         |  |              | 7,300   
|Prepaid expenses and other current assets                                                                                                                           |  |              | 2,279   
|                                                                                                                                                                    |  |              |         
|Total current assets                                                                                                                                                |  |              | 215,524 
|Property and equipment, net                                                                                                                                         |  |              | 17,340  
|Goodwill                                                                                                                                                            |  |              | 12,192  
|Other intangible assets, net of accumulated amortization of $1,593 and $2,737 at
December 31, 2001 and 2002, respectively                                           |  |              | 1,842   
|Long-term investments                                                                                                                                               |  |              | 28,932  
|Deposits and other assets                                                                                                                                           |  |              | 1,588   
|                                                                                                                                                                    |  |              |         
|Total assets                                                                                                                                                        |  | $            | 277,418 
|                                                                                                                                                                    |  |              |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                |  |              |         
|Current liabilities:                                                                                                                                                |  |              |         
|Accounts payable                                                                                                                                                    |  | $            | 3,398   
|Accrued compensation                                                                                                                                                |  |              | 2,355   
|Accrued legal expenses                                                                                                                                              |  |              | 815     
|Deferred rent                                                                                                                                                       |  |              | 937     
|Other accrued liabilities                                                                                                                                           |  |              | 2,381   
|Deferred revenue                                                                                                                                                    |  |              | 9,093   
|Current portion of equipment financing obligations                                                                                                                  |  |              | 622     
|                                                                                                                                                                    |  |              |         
|Total current liabilities                                                                                                                                           |  |              | 19,601  
|Deferred revenue                                                                                                                                                    |  |              | 3,410   
|Other liabilities                                                                                                                                                   |  |              | 673     
|Minority interest                                                                                                                                                   |  |              |        
|                                                                                                                                                                   
|Commitments and contingencies                                                                                                                                       |  |              |         
|                                                                                                                                                                   
|Stockholders equity:                                                                                                                                               |  |              |         
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and
outstanding at December 31, 2001 and 2002                                     |  |              |        
|Common stock, $0.0001 par value, 100,000,000 shares authorized, 34,026,414 and
34,504,447 shares issued and outstanding at December 31, 2001 and 2002, respectively |  |              | 3       
|Additional paid-in capital                                                                                                                                          |  |              | 389,607 
|Notes receivable from stockholders                                                                                                                                  |  |              | (339    
|Deferred stock compensation                                                                                                                                         |  |              | (8,509  
|Accumulated other comprehensive income                                                                                                                              |  |              | 1,698   
|Accumulated deficit                                                                                                                                                 |  |              | (128,726
|                                                                                                                                                                    |  |              |         
|Total stockholders equity                                                                                                                                          |  |              | 253,734 
|                                                                                                                                                                    |  |              |         
|Total liabilities and stockholders equity                                                                                                                          |  | $            | 277,418 
|                                                                                                                                                                    |  |              |         



See
accompanying notes.



60



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##### Table of Contents



MAXYGEN,
INC.



CONSOLIDATED STATEMENTS OF
OPERATIONS

(in thousands, except per share data)



|                                                              |  | Year ended December 31, |        
|------------------------------------------------------------- |  | ----------------------- | -------
|                                                              |  | 2000                    |        
|Collaborative research and development revenue                |  | $                       | 13,299 
|Grant revenue                                                 |  |                         | 11,166 
|                                                              |  |                         |        
|Total revenues                                                |  |                         | 24,465 
|Operating expenses:                                           |  |                         |        
|Research and development                                      |  |                         | 38,534 
|General and administrative                                    |  |                         | 12,486 
|Stock compensation expense(1)                                 |  |                         | 15,981 
|Acquired in-process research and development                  |  |                         | 28,959 
|Amortization of goodwill and other intangible assets          |  |                         | 3,419  
|                                                              |  |                         |        
|Total operating expenses                                      |  |                         | 99,379 
|                                                              |  |                         |        
|Loss from operations                                          |  |                         | (74,914
|Interest income and other (expense), net                      |  |                         | 15,329 
|Equity in net loss of joint venture                           |  |                         |       
|                                                              |  |                         |        
|Net loss                                                      |  | $                       | (59,585
|                                                              |  |                         |        
|Basic and diluted net loss per share                          |  | $                       | (1.96  
|                                                              |  |                         |        
|Shares used in computing basic and diluted net loss per share |  |                         | 30,339 
|                                                              |  |                         |        
|(1)    Stock compensation expense related to the
following:   |  |                         |        
|Research and development                                      |  | $                       | 11,468 
|General and administrative                                    |  |                         | 4,513  
|                                                              |  |                         |        
|                                                              |  | $                       | 15,981 
|                                                              |  |                         |        





See accompanying notes.





61



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##### Table of Contents



MAXYGEN,
INC.



CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY

(in thousands, except share and per share data)



|                                                                                                                |  | Common Stock |   | Additional Paid-In Capital |        |   | Notes Receivable from Stockholders |   |         | Deferred Stock Compensation |  |   | Accumulated Other Comprehensive Income |   |  | Accumulated Deficit |         |   | Total Stockholders Equity |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------ | - | -------------------------- | ------ | - | ---------------------------------- | - | ------- | --------------------------- |  | - | -------------------------------------- | - |  | ------------------- | ------- | - | -------------------------- | -
|                                                                                                                |  | Shares       |   |                            | Amount |   |                                    |   |         |                             | 
|Balance at January 1, 2000                                                                                      |  | 30,860,781   |   |                            | $      | 3 |                                    | $ | 176,517 |                             |  | $ | (1,411                                 | ) |  | $                   | (17,216 | ) |                            | $
|Issuance of common stock to employees and upon exercise of options for cash and
promissory notes                |  | 194,712      |   |                            |        |  |                                    |   | 1,063   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Options granted to consultants for services rendered                                                            |  |             |   |                            |        |  |                                    |   | 2,944   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Issuance of common stock for services rendered and certain technology
rights                                    |  | 17,146       |   |                            |        |  |                                    |   | 1,001   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Issuance of common stock for follow-on offering at $97.00 per share less issuance costs
of $8,167               |  | 1,500,000    |   |                            |        |  |                                    |   | 137,332 |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Issuance of common stock and options for acquisitions                                                           |  | 1,122,378    |   |                            |        |  |                                    |   | 66,166  |                             |  |   |                                       |   |  |                     | (14,606 | ) |                            |  
|Repurchase of common stock and cancellation of options                                                          |  | (118,281     | ) |                            |        |  |                                    |   | (572    | )                           |  |   | 51                                     |   |  |                     | 513     |   |                            |  
|Payments of stockholder notes                                                                                   |  |             |   |                            |        |  |                                    |   |        |                             |  |   | 584                                    |   |  |                     |        |   |                            |  
|Acceleration of employee stock options                                                                          |  |             |   |                            |        |  |                                    |   | 1,575   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Amortization of deferred compensation                                                                           |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     | 11,429  |   |                            |  
|Components of comprehensive loss:                                                                               |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Net loss                                                                                                        |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Currency translation adjustment                                                                                 |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Change in unrealized gain on available-for-sale securities                                                      |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|                                                                                                                |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Comprehensive loss                                                                                              |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|                                                                                                                |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Balance at December 31, 2000                                                                                    |  | 33,576,736   |   |                            |        | 3 |                                    |   | 386,026 |                             |  |   | (776                                   | ) |  |                     | (19,880 | ) |                            |  
|Issuance of common stock upon exercise of options for cash and for services
rendered                            |  | 340,624      |   |                            |        |  |                                    |   | 1,238   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Issuance of common stock under employee stock purchase plan                                                     |  | 106,471      |   |                            |        |  |                                    |   | 1,075   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Issuance of common stock under 401(k) employer matching contribution                                            |  | 34,525       |   |                            |        |  |                                    |   | 642     |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Stock compensation expense for consultant options, fully vested stock options and
warrant for services rendered |  |             |   |                            |        |  |                                    |   | 384     |                             |  |   |                                       |   |  |                     | (135    | ) |                            |  
|Repurchase of common stock and cancellation of options                                                          |  | (31,942      | ) |                            |        |  |                                    |   | (19     | )                           |  |   |                                        |   |  |                     |         |   |                            |  
|Payments of stockholder notes                                                                                   |  |             |   |                            |        |  |                                    |   |        |                             |  |   | 437                                    |   |  |                     |        |   |                            |  
|Amortization of deferred compensation, net of $261,000 reversed for terminated
employees                        |  |             |   |                            |        |  |                                    |   | 261     |                             |  |   |                                       |   |  |                     | 11,506  |   |                            |  
|Components of comprehensive loss:                                                                               |  |              |   |                            |        |  |                                    |   |         |                             |  |   |                                       |   |  |                     |         |   |                            |  
|Net loss                                                                                                        |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Currency translation adjustment                                                                                 |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Change in unrealized gain on available-for-sale securities                                                      |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|                                                                                                                |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Comprehensive loss                                                                                              |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|                                                                                                                |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Balance at December 31, 2001                                                                                    |  | 34,026,414   |   |                            |        | 3 |                                    |   | 9,607   |                             |  |   | (339                                   | ) |  |                     | (8,509  | ) |                            |  
|Issuance of common stock upon exercise of options for cash and for services
rendered                            |  | 291,869      |   |                            |        |  |                                    |   | 1,924   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Issuance of common stock under employee stock purchase plan                                                     |  | 130,880      |   |                            |        |  |                                    |   | 1,116   |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Issuance of common stock under 401(k) employer matching contribution                                            |  | 70,953       |   |                            |        |  |                                    |   | 677     |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Stock compensation expense for consultant options, and fully vested stock options for
services rendered         |  |             |   |                            |        |  |                                    |   | 92      |                             |  |   |                                       |   |  |                     | (22     | ) |                            |  
|Repurchase of common stock and cancellation of options                                                          |  | (15,669      | ) |                            |        |  |                                    |   | (10     | )                           |  |   |                                        |   |  |                     |         |   |                            |  
|Payments of stockholder notes                                                                                   |  |             |   |                            |        |  |                                    |   |        |                             |  |   | 339                                    |   |  |                     |        |   |                            |  
|Amortization of deferred compensation, net of $85,000 reversed for terminated
employees                         |  |             |   |                            |        |  |                                    |   | 85      |                             |  |   |                                       |   |  |                     | 6,095   |   |                            |  
|Components of comprehensive loss:                                                                               |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Net loss                                                                                                        |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Currency translation adjustment                                                                                 |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|Change in unrealized gain on available-for-sale securities                                                      |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|                                                                                                                |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Comprehensive loss                                                                                              |  |             |   |                            |        |  |                                    |   |        |                             |  |   |                                       |   |  |                     |        |   |                            |  
|                                                                                                                |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  
|Balance at December 31, 2002                                                                                    |  | 34,504,447   |   |                            | $      | 3 |                                    | $ | 393,491 |                             |  | $ |                                       |   |  | $                   | (2,436  | ) |                            | $
|                                                                                                                |  |              |   |                            |        |   |                                    |   |         |                             |  |   |                                        |   |  |                     |         |   |                            |  





62



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##### Table of Contents



MAXYGEN,
INC.



CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)



|                                                                                                                                |  | Year ended December 31, |         
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                                                                |  | 2000                    |         
|Operating activities                                                                                                            |  |                         |         
|Net loss                                                                                                                        |  | $                       | (59,585 
|Adjustments to reconcile net loss to net cash used in operating
activities:                                                     |  |                         |         
|Depreciation and amortization                                                                                                   |  |                         | 1,611   
|Amortization of goodwill and other intangible assets                                                                            |  |                         | 3,418   
|Equity in net loss of joint venture                                                                                             |  |                         |        
|Non-cash stock compensation                                                                                                     |  |                         | 13,004  
|Common stock issued and stock options granted to consultants for services rendered and
for certain technology rights            |  |                         | 3,945   
|Acquired in-process research and development                                                                                    |  |                         | 28,959  
|Changes in operating assets and liabilities:                                                                                    |  |                         |         
|Grant and other receivables                                                                                                     |  |                         | (5,137  
|Prepaid expenses and other current assets                                                                                       |  |                         | (380    
|Deposits and other assets                                                                                                       |  |                         | (770    
|Accounts payable                                                                                                                |  |                         | (3,714  
|Accrued compensation                                                                                                            |  |                         | 1,465   
|Accrued legal expenses                                                                                                          |  |                         | 556     
|Deferred rent                                                                                                                   |  |                         | 205     
|Other accrued liabilities                                                                                                       |  |                         | 2,070   
|Deferred revenue                                                                                                                |  |                         | 1,576   
|Other                                                                                                                           |  |                         | (19     
|                                                                                                                                |  |                         |         
|Net cash used in operating activities                                                                                           |  |                         | (12,796 
|                                                                                                                                |  |                         |         
|Investing activities                                                                                                            |  |                         |         
|Cash acquired in acquisition                                                                                                    |  |                         | 349     
|Purchases of available-for-sale securities                                                                                      |  |                         | (179,120
|Maturities of available-for-sale securities                                                                                     |  |                         | 33,000  
|Sale of available-for-sale securities                                                                                           |  |                         |        
|Investment in joint venture                                                                                                     |  |                         |        
|Acquisition of property and equipment                                                                                           |  |                         | (5,366  
|                                                                                                                                |  |                         |         
|Net cash provided by (used in) investing activities                                                                             |  |                         | (151,137
|                                                                                                                                |  |                         |         
|Financing activities                                                                                                            |  |                         |         
|Borrowings under equipment financing obligations                                                                                |  |                         | 166     
|Repayments under equipment financing obligations                                                                                |  |                         | (172    
|Minority investment                                                                                                             |  |                         |        
|Equity adjustment from foreign currency translation                                                                             |  |                         |        
|Payments received on promissory notes                                                                                           |  |                         | 584     
|Proceeds from issuance of common stock, net of issuance costs                                                                   |  |                         | 138,386 
|                                                                                                                                |  |                         |         
|Net cash provided by financing activities                                                                                       |  |                         | 138,964 
|                                                                                                                                |  |                         |         
|Net increase (decrease) in cash and cash equivalents                                                                            |  |                         | (24,969 
|Cash and cash equivalents at beginning of period                                                                                |  |                         | 136,343 
|                                                                                                                                |  |                         |         
|Cash and cash equivalents at end of period                                                                                      |  | $                       | 111,374 
|                                                                                                                                |  |                         |         
|Schedule of noncash transactions                                                                                                |  |                         |         
|Tangible and intangible assets acquired in acquisition for shares of common stock, net
of cash acquired and liabilities assumed |  | $                       | 53,210  
|Shares issued for technology                                                                                                    |  | $                       | 958     



See
accompanying notes.



63



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##### Table of Contents



MAXYGEN,
INC.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|1. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------



Organization and Principles of Consolidation



Maxygen, Inc. (the Company) was incorporated in Delaware on May 7, 1996. The Company develops and
applies proprietary directed molecular evolution technologies, also known as MolecularBreeding technologies, and other complementary technologies to evolve new or improved properties into single genes, multigene pathways, vectors, and
genomes. Since the technology can be applied to a wide range of genetic targets, the Company will explore commercial opportunities for the directed evolution of human therapeutic products, as well as industrial products. The MolecularBreeding
directed molecular evolution technologies were conceived at Affymax Research Institute (Affymax), a subsidiary of Glaxo Group Ltd. In March 1997, ownership to the MolecularBreeding directed molecular evolution technologies patent
applications and patents were transferred by Affymax to the Company in exchange for the issuance of 5,460,000 shares of common stock.



The Company will require additional financial resources to complete the development and commercialization of its products. Management
plans to continue to finance the Company primarily through issuances of equity securities, collaborative research and development arrangements, government grants, and debt financing.



The consolidated financial statements include the amounts of the Company and its wholly-owned subsidiaries,
Maxygen ApS (Denmark), which was acquired by the Company in August 2000, Maxygen Holdings Ltd. (Cayman Islands) and Verdia, Inc., as well as its majority-owned subsidiary, Codexis, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.



The
Companys ownership in Codexis was approximately 57%, based upon the voting rights of the issued and outstanding shares of Codexis common and preferred stock. In accordance with EITF Consensus 96-16, Investor Accounting for an Investee
When the Investor Has a Majority of the Voting Interest but the Minority Stockholder or Stockholders Have Certain Approval or Veto Rights and paragraph 1 of ARB No. 51, Consolidated Financial Statements, the Company has included
100% of the net losses of Codexis in the determination of the Companys consolidated net loss. The Company records minority interest in the Consolidated Financial Statements to account for the ownership interest of the minority owner.



The investment in the joint venture with Delta
and Pine Land Company called DeltaMax Cotton LLC in which the Company has an equity interest of 50% is being accounted for under the equity method.



Foreign Currency Translation



The functional currency of Maxygen ApS is the Danish kroner. Assets and liabilities of Maxygen ApS are translated at current exchange
rates, and the related revenues and expenses are translated at average exchange rates in effect during the period. Gains and losses from currency translation are included in other comprehensive income (loss). Currency transaction gains or losses are
included in interest income and other, net, and are not significant to the Companys operating results.



Use of Estimates



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.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Cash,
Cash Equivalents and Investments



The
Company considers all highly liquid investments with maturity dates of three months or less, as of the date of purchase, to be cash equivalents. Cash equivalents include marketable debt securities, government and corporate debt obligations. Short
and long-term investments include government and corporate debt obligations.



Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Companys debt securities are
classified as available-for-sale and are carried at estimated fair value in cash equivalents and investments. Unrealized gains and losses are reported as a component of 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 and declines in value deemed to be
other-than-temporary, if any, are included in interest income and expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities are included in interest income.



Derivative Financial Instruments



The Company addresses certain financial exposures through a
program of risk management that includes the use of derivative financial instruments. To date the Company has only entered into foreign currency forward exchange contracts generally expiring within one year to reduce the effects of fluctuating
foreign currency exchange rates on forecasted cash requirements.



On December 22, 2000, the Company entered into derivative contracts for the first time and has recorded those contracts under Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and evaluating effectiveness of hedging relationships. Since
these were the Companys first derivative contracts, no cumulative effect adjustment was required upon adoption of SFAS 133.



All derivatives are recognized on the balance sheet at their fair value. The Company has designated its derivatives as foreign currency
cash flow hedges. Changes in the fair value of derivatives that are highly effective as, and that are designated and qualify as, foreign currency cash flow hedges are recorded in other comprehensive income until the associated hedged transaction
impacts earnings.



The Company formally documents
all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as foreign-currency
hedges to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting
prospectively.



The purpose of the hedging
activities is to minimize the effect of foreign exchange rate movements on the cash flows related to the Companys funding of Maxygen ApS. All foreign currency contracts are denominated in Danish kroner. During 2002, forecasted cash flow
exceeded the actual cash required by Maxygen ApS. Net gains of $293,000 on foreign currency forward contracts was recorded in interest income and other, net, as a result of the appreciation of the Danish Kroner against the US dollar. At December 31,
2002, the Company had $208,000 recorded in other comprehensive income that will be reclassified to research and development expense in January 2003.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





As a
matter of policy, the Company only enters into contracts with counterparties that have at least an A (or equivalent) credit rating. The counterparties to these contracts are major financial institutions. Exposure to credit loss in the
event of nonperformance by any of the counterparties is limited to only the recognized, but not realized, gains attributable to the contracts. Management believes risk of loss is remote and in any event would not be material. Costs associated with
entering into such contracts have not been material to the Companys financial results. The Company does not utilize derivative financial instruments for trading or speculative purposes. At December 31, 2002, the Company had no foreign currency
contracts outstanding in the form of forward exchange contracts or any other derivative instruments.



Concentration of credit risk



Financial instruments that potentially subject the Company to a concentration of credit risk consist of investments and accounts
receivable. The Company is exposed to credit risks in the event of default by the financial issuers or collaborators to the extent of the amount recorded on the balance sheet. A significant portion of the Companys accounts receivable balance
at December 31, 2001 and 2002 consist of balances due from government agencies. Each grant agreement is subject to funding approvals by the U.S. government. Certain grant agreements provide an option for the government to audit the amount of
research and development expenses, both direct and indirect, that have been submitted to the government agency for reimbursement. The Company does not require collateral or other security to support the financial instruments subject to credit risk.



Property and Equipment



Property and equipment, including the cost of purchased
software, are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of the assets (generally three to five years). Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful life of the assets.



Goodwill and Other Intangible Assets



Intangible assets, consisting of purchased core technology, are amortized using the straight-line method over the assets estimated useful lives of three years. Goodwill was amortized over its estimated useful life of three
years until the adoption of FAS 142 in January 1, 2002. See Note 11 for detail of intangible assets acquired.



Long-Lived Assets



Management generally evaluates long-lived assets, including goodwill and other intangible assets on an individual acquisition or market
basis whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. If indicators of impairment exist, the Company will review its long-lived assets, including purchased
intangible assets, for impairment based on estimated future discounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to
their estimated fair values. No impairment charges have been recorded to date.



Revenue Recognition



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



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Revenue
related to collaborative research with the Companys corporate collaborators is recognized as research services are performed over the related funding periods for each contract. Under these agreements, the Company is required to perform
research and development activities as specified in each respective agreement. The payments received under each respective agreement are generally not refundable and are generally based on a contractual cost per full-time equivalent employee working
on the project. Research and development expenses under the collaborative research agreements approximate or exceed the 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 related 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 are 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 receives royalties from licensees, which are based on third-party sales of licensed products or technologies. Royalties are recorded as earned in accordance with the contract terms when
third-party results can be reliably measured and collectibility is reasonably assured.



The Company was awarded grants from the Defense Advanced Research Projects Agency, National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International
Development and the U.S. Army Medical Research and Materiel Command totaling approximately $35.3 million since inception for various research and development projects. The terms of these grant agreements are three years with various termination
dates, the last of which is June 2005 for existing agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred, and when these research and development expenses are within the prior
approval funding amounts.



Research and
Development Expenses



Research and
development expenses consist of costs incurred for Company-sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses, which include salaries and other personnel-related
expenses, facility costs, supplies and depreciation of facilities and laboratory equipment, as well as research consultants and the cost of funding research at universities and other research institutions, and are expensed as incurred. Costs to
acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred. See Note 4 for detail regarding the Companys sponsored license and research agreements.



The Company does not track or allocate actual costs by
collaboration or project, as the requirement from its collaborative partners is to staff the various projects on a full-time-equivalent (FTE) employee basis. Accordingly, the Company tracks the assignment of these FTEs to each
project over time. Based on the analysis of these FTEs, the percentage of the Companys research effort (as measured in hours incurred, which is consistent with the costs expended) spent on research conducted on behalf of collaborative
partners and government grants was approximately 50% in 2002, 50% in 2001, and 55% in 2000. The percentage of the Companys research effort spent on Company-funded research was approximately 50% in 2002, 50% in 2001, and 45% in 2000.



Stock-Based Compensation



The Company accounts for common stock options granted to
employees using the intrinsic value method and, thus, recognizes no compensation expense for options granted with exercise prices equal to or greater than



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the fair value of the Companys common stock on the date of the grant. In 2000, 2001 and 2002, the Company recognized stock compensation
expense related to certain other stock option grants. See Note 10.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for years ending after December 15,
2002.



As permitted under SFAS No. 148, the
Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations including Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB No. 25. The following table
illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands except per share amounts):



|                                                                                                                                            |  | Year ended December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                                                            |  | 2000                    |        
|Net income, as reported                                                                                                                     |  | $                       | (59,585
|Add: Stock based employee compensation cost included in the determination of net loss as
reported                                           |  |                         | 11,429 
|Deduct: Total stock-based employee compensation expense determined under fair
value-based method for all awards, net of related tax effects |  |                         | (45,902
|                                                                                                                                            |  |                         |        
|Pro forma net loss                                                                                                                          |  | $                       | (94,058
|                                                                                                                                            |  |                         |        
|Net loss per share:                                                                                                                         |  |                         |        
|Basic and dilutedas reported                                                                                                               |  | $                       | (1.96  
|                                                                                                                                            |  |                         |        
|Basic and dilutedpro forma                                                                                                                 |  | $                       | (3.10  
|                                                                                                                                            |  |                         |        



Stock
compensation expense for options granted to non-employees has been determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably
measured. The fair value of options granted to non-employees is periodically remeasured as the underlying options vest. See Note 10.



Net Loss Per Share



Basic and diluted net loss per common share has been computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                                                                               |  | Year ended December 31, |        
|------------------------------------------------------------------------------ |  | ----------------------- | -------
|                                                                               |  | 2000                    |        
|Net loss attributable to common stockholders                                   |  | $                       | (59,585
|                                                                               |  |                         |        
|Basic and diluted:                                                             |  |                         |        
|Weighted-average shares of common stock outstanding                            |  |                         | 32,466 
|Less: weighted-average shares subject to repurchase                            |  |                         | (2,127 
|                                                                               |  |                         |        
|Weighted-average shares used in computing basic and diluted net loss per
share |  |                         | 30,339 
|                                                                               |  |                         |        
|Basic and diluted net loss per share                                           |  | $                       | (1.96  
|                                                                               |  |                         |        



The
Company has excluded outstanding warrants, outstanding stock options and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share, before application of the treasury stock method for options, was approximately 6,652,000 at December 31, 2000, 8,317,000 at December 31, 2001 and 8,830,000 at December 31, 2002.
Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share. See Note 10 for further information on these securities.



Comprehensive Income (Loss)



Comprehensive income (loss) is primarily comprised of net unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments. The components of accumulated other comprehensive income are as follows (in thousands):



|                                                        |  | December 31,
|------------------------------------------------------- |  | ------------
|                                                        |  | 2000        
|Unrealized gain (loss) on available-for-sale securities |  | $           
|Foreign currency translation adjustments                |  |             
|                                                        |  |             
|Accumulated other comprehensive income                  |  | $           
|                                                        |  |             



Recent Accounting Pronouncements



In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which
addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. Statement 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted
Statement 144 on January 1, 2002 and has determined that Statement 144 did not have a significant impact on the Companys financial position and results of operations.



In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
(referred to as SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



nullifies Emerging Issues Task Force Issue (referred to as EITF) No. 94-3 Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at
the date of an entitys commitment to an exit plan, as required under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. The adoption
of SFAS 146 is not anticipated to have a material effect on the Companys financial statements.



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be recorded in the guarantors balance sheet upon issuance of a guarantee. FIN 45 requires that a guarantor recognize a
liability for the fair value of guarantee obligations issued after December 31, 2002. The adoption of FIN 45 is not expected to have a material effect on the Companys financial statements.



In November 2002, the Financial Accounting Standards Board
issued Emerging Issues Task Force (referred to as EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will
perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 provides guidance with respect to
the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement
consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain
deliverables that are excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its Consolidated Financial Statements.



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



The Companys cash equivalents and investments as of December 31, 2002 are as follows (in thousands):



|                                            |  | Amortized Cost |         |   | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Fair Value |  
|------------------------------------------- |  | -------------- | ------- | - | ---------------------- | - | ----------------------- |  | - | -------------------- | -
|Money market funds                          |  | $              | 67,611  |   |                        | $ |                        |  | $ |                     |  
|Corporate debt obligations                  |  |                | 136,076 |   |                        |   | 339                     |  |   | (40                  | )
|Commercial paper                            |  |                | 24,140  |   |                        |   | 23                      |  |   |                     |  
|                                            |  |                |         |   |                        |   |                         |  |   |                      |  
|Total                                       |  |                | 227,827 |   |                        |   | 362                     |  |   | (40                  | )
|Less amounts classified as cash equivalents |  |                | (67,611 | ) |                        |   |                        |  |   |                     |  
|                                            |  |                |         |   |                        |   |                         |  |   |                      |  
|Total investments                           |  | $              | 160,216 |   |                        | $ | 362                     |  | $ | (40                  | )
|                                            |  |                |         |   |                        |   |                         |  |   |                      |  



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Companys cash equivalents and investments as of December 31, 2001 were as follows (in thousands):



|                                            |  | Amortized Cost |         |   | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Fair Value |  
|------------------------------------------- |  | -------------- | ------- | - | ---------------------- | - | ----------------------- |  | - | -------------------- | -
|Money market funds                          |  | $              | 48,388  |   |                        | $ |                        |  | $ |                     |  
|Corporate debt obligations                  |  |                | 150,623 |   |                        |   | 1,733                   |  |   | (27                  | )
|U.S. government agency securities           |  |                | 10,200  |   |                        |   | 28                      |  |   |                     |  
|Commercial paper                            |  |                | 23,875  |   |                        |   | 57                      |  |   |                     |  
|                                            |  |                |         |   |                        |   |                         |  |   |                      |  
|Total                                       |  |                | 233,086 |   |                        |   | 1,818                   |  |   | (27                  | )
|Less amounts classified as cash equivalents |  |                | (48,388 | ) |                        |   |                        |  |   |                     |  
|                                            |  |                |         |   |                        |   |                         |  |   |                      |  
|Total investments                           |  | $              | 184,698 |   |                        | $ | 1,818                   |  | $ | (27                  | )
|                                            |  |                |         |   |                        |   |                         |  |   |                      |  



Realized
gains or losses on the sale of available-for-sale securities for 2000, 2001 and 2002 were insignificant.



At December 31, 2001 and 2002, the contractual maturities of investments were as follows (in thousands):



|                                     |  | At December 31, |         | At December 31,     
|------------------------------------ |  | --------------- | ------- | --------------------
|                                     |  | 2001            |         | 2002                
|                                     |  | Amortized Cost  |         | Estimated Fair Value
|Due within one year                  |  | $               | 156,302 |                     
|Due after one year through two years |  |                 | 28,396  |                     
|                                     |  |                 |         |                     
|                                     |  | $               | 184,698 |                     
|                                     |  |                 |         |                     



|3. |  | Collaborative Agreements
|-- |  | ------------------------



At December 31, 2002, the Company had fifteen active multi-year research and development collaborations with collaborative partners. These
agreements typically include up-front licensing fees, technology advancement fees and research funding, as well as the potential to earn milestone payments and royalties on future product sales or cost savings. The agreements generally require the
Company to devote a specified number of full-time equivalent employees to the research efforts over defined research terms ranging from three to five years. Total revenue recognized under the collaboration agreements was $13.3 million in 2000, $25.1
million in 2001 and $37.4 million in 2002.



The
following table represents the percentage of the Companys total revenue that has been recognized pursuant to the Companys largest non-grant collaborators:



|          |  | December 31, |  
|--------- |  | ------------ | -
|          |  | 2000         |  
|Partner C |  |             |  
|Partner D |  | 3.1          | %
|Partner E |  | 24.5         | %
|Partner F |  | 17.9         | %



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





No other
collaborator has comprised more than 10% of revenue in any period presented. In addition to providing the research funding summarized above, certain of the Companys collaborators have also purchased equity investments in the Company. The
Companys existing collaboration agreements are summarized below.



Delta and Pine Land Company



In May 2002, Verdia, Inc. (then known as MaxyAg, Inc.), a wholly-owned subsidiary of the Company, whose results are reported under the Agriculture segment (see Note 16), established a joint venture with Delta and Pine
Land Company (D&PL) to develop and commercialize transgenic products for the cotton-seed market. The joint venture, called DeltaMax Cotton LLC (DeltaMax), focuses on the creation of gene-based improvements for herbicide
tolerance and pest and disease control in cotton. Under the terms of the joint venture agreement, DeltaMax has contracted certain research activities to Verdia and will in the future contract research and development activities to Verdia, D&PL
and third parties, and license products to D&PL and, potentially, other cotton-seed companies, for commercialization. DeltaMax is 50/50 jointly owned by Verdia and D&PL and such parties will share income earned by the joint venture.



The Companys share of the joint
ventures loss totaled approximately $1.3 million as of December 31, 2002, and is recorded, under the equity method of accounting, as a single line item in the Consolidated Statement of Operations. The Company received a payment of $1.7 million
relating to past research and recognized $1.1 million of this payment as collaborative research and development revenue in 2002. The remaining amount will be recognized ratably over the term of the related research plans. Verdia and D&PL
are committed to fund the joint venture in an amount sufficient to pay the anticipated development costs, but neither party is required to provide funding in excess of $15 million each. During 2002, the Company funded the joint venture in the amount
of $1.4 million as capital contribution, which reflects its 50% ownership interest.



Cargill Dow LLC



In March 2002, the Company established a collaboration with Cargill Dow LLC, to research and develop a novel process for the production of lactic acid. The goal of the collaboration is to further improve Cargill Dows
novel low-cost process for the production of lactic acid from natural sugars derived from annually renewable resources, such as corn. Under the terms of the collaboration, the Company received technology access payments and full research funding,
will continue to receive research and developing funding for the remainder of the research term, and may receive research and commercialization milestones. Codexis will also receive royalties on any sales of products manufactured using its
technologies. Cargill Dow has worldwide commercialization rights for products generated from any improved production process developed in the collaboration. This agreement was assigned to Codexis in connection with its formation in March 2002.



Aventis Pasteur



In November 2001, the Company established a three-year
collaboration with Aventis Pasteur to develop improved vaccines for a specific undisclosed target. Aventis Pasteur is the new name of Pasteur Merieux Connaught. Under the terms of the agreement, the Company received license fees and full research
and development funding. The Company will also receive future license fees and full research and development funding for the research term. In addition, the Company will receive minimum annual royalties and may receive potential milestone and
royalty payments on product sales, if any. Aventis Pasteur will receive exclusive worldwide rights to commercialize the vaccines developed in the collaboration.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





InterMune, Inc.



In
September 2001, Maxygen Holdings Ltd., a wholly-owned subsidiary of the Company, entered into a three-year license and collaboration agreement with InterMune, Inc. (InterMune) to develop and commercialize novel, next-generation
interferon gamma products. Under the terms of the agreement, InterMune has taken product candidates developed by the Company into clinical development. InterMune has funded and will continue to fund optimization and development of the
next-generation interferon gamma products, and will retain exclusive worldwide commercialization rights for all human therapeutic indications. Under the terms of the collaboration agreement, the Company received up-front license fees and research
and development funding and will continue to receive research and development funding and potential development and commercialization milestone payments. In addition, the Company will be entitled to receive royalties on product sales, if any.



ALK-Abelló A/S



In February 2001, the Company established a three-year
collaboration with ALK-Abelló A/S, a wholly-owned subsidiary of Chr. Hansen Holding A/S, Denmark, to research and develop novel recombinant therapeutics for the treatment of specific allergies. The Company is collaborating with
ALK-Abelló to create therapies for treating specific allergies, including allergies to house dust mites and grasses, which are the cause of many common allergies. Under the terms of the collaboration, the Company received license fees,
technology access fees and research and development funding, and will continue to receive technology access fees and research and development funding. The Company will also be entitled to receive potential milestone payments and royalties on any
product sales. ALK-Abelló will receive exclusive worldwide rights to commercialize all recombinant human therapeutics developed in the collaboration.



International AIDS Vaccine Initiative



In February 2001, the Company established a three-year collaboration with the International AIDS Vaccine Initiative and DBLV, LLC, an
entity established and funded by the Rockefeller Foundation to develop novel HIV vaccines. Under the agreement, DBLV has provided full research and development funding to the Company and will continue to provide such funding for at least the three
year initial research term to expand the Companys ongoing program in HIV vaccine development. The Company will retain all rights to commercialize the HIV vaccine candidates in all developed countries of the world, as well as in certain markets
in the developing world.



Hercules
Incorporated



In November 2000, the Company
entered into a four-year collaboration with Hercules Incorporated (Hercules) focused on developing high value specialty chemicals via custom-made biological catalysts. Under the terms of the collaboration, the Company received full
research funding, technology access fees, and license fees. The Company will also be entitled to receive potential milestone payments, as well as royalties on any product sales, if any. The collaboration is focused on a number of high
revenue-generating products in Hercules core business. This agreement was assigned to Codexis in connection with its formation in March 2002. The Company terminated this collaboration agreement in January 2003. See Note 17.



Chevron Research and Technology Co.



In October 2000, the Company entered into a three-year
collaboration with Chevron Research and Technology Co. (Chevron) to develop novel bioprocesses for specific petrochemical products. Under the terms of the agreement, the Company received license fees and will continue to receive full
research funding and technology access fees. In addition, the Company may receive potential milestones and product royalties, if any.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Chevron will receive worldwide commercialization rights. This agreement was assigned to Codexis in connection with its formation in March
2002.



H. Lundbeck A/S



In September 2000, Maxygen ApS, a wholly-owned subsidiary of
the Company, entered into a three-year collaborative research and development agreement with H. Lundbeck A/S (Lundbeck), to develop an improved interferon beta pharmaceutical product that could be used for central nervous system
diseases, including multiple sclerosis. Under the terms of the agreement, the Company received and will continue to receive research and development funding and license fees, and may receive milestone payments and royalties on product sales, if any.
Lundbeck has licensed rights to this product for central nervous system diseases. The Company has retained rights for neurological indications in key Asian markets and global rights for all indications outside of nervous system diseases, including
inflammatory disease and cancer.



Pfizer



In September 2000, the Company extended a
May 1998 agreement with Pfizer Inc. (Pfizer) in the area of biochemical manufacturing of a specific pharmaceutical product. Under the 1998 agreement, the Company improved the selectivity of the biosynthetic pathway that is critical to
the manufacture of this specific Pfizer product, and delivered an improved pathway that is currently under commercial development by Pfizer. In the expanded collaboration, commercial terms were agreed upon for the improved process, with success
earning the Company research and commercial milestones as well as a percentage of all manufacturing cost savings once the optimized commercial process is scaled up at Pfizer. Additionally, Pfizer has agreed to fund additional research and
development to allow the Company to further enhance the performance of the pathway. This agreement was assigned to Codexis in connection with its formation in March 2002.



Technological Resources PTY Limited



In January 2000, the Company entered into a three-year collaborative research and development agreement with
Technological Resources PTY Limited, a wholly-owned subsidiary of Rio Tinto Limited (TRPL), to develop novel enzymatic systems to increase the efficiency of carbon dioxide fixation in connection with the combustion of fossil fuels and
for other purposes. Pursuant to the agreement, the Company received and will continue to receive research and funding payments and technology advancement fees. In addition, the parties will share revenues on certain commercialized products and
processes. This agreement was assigned to Codexis in connection with its formation in March 2002.



Gist-Brocades N.V.



In March 1999, the Company entered into a three-year collaborative research and license agreement with Gist-Brocades N.V., a subsidiary of
DSM N.V. (DSM) to utilize the Companys proprietary technologies to develop certain novel enzymes involved in the manufacture of certain classes of antibiotics. Under the terms of the agreement, the Company received research funding
and may receive royalties from the commercialization of any enzymes developed through the Companys technology. DSM will receive worldwide commercialization rights. This agreement was assigned to Codexis in connection with its formation in
March 2002.



Syngenta



In June 1999, the Company entered into a five-year
collaborative research agreement with Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc, now known as Syngenta (Syngenta) to improve the yield and



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



quality of several of Syngentas strategic crops. The Company received and will continue to receive research and development funding as
well as license fees. In addition, the Company may receive milestone payments and royalties on product sales, if any. Syngenta will receive worldwide commercialization rights. This collaboration was assigned to Verdia from Maxygen in connection with
its capitalization in March 2002. In November 2002, Verdia extended this agreement through March 2006.



On an annual basis, Syngenta will pay an annual technology advancement fee. The technology advancement funding is intended to fund the
Companys continuing development of its core MolecularBreeding directed molecular evolution technologies.



E.I. duPont de Nemours and Company



In December 1998, the Company entered into a five-year collaborative research and license agreement with Pioneer Hi-Bred International,
Inc., a subsidiary of E.I. duPont de Nemours and Company (DuPont) to utilize MolecularBreeding directed molecular evolution technologies to generate novel gene products for use in the development of specific crop protection and quantity
grain traits in corn, soybeans, and certain other crops. The Company received license fees and will continue to receive research and development funding as well as technology access fees. In addition, the Company may receive milestone payments and
royalties on product sales. DuPont will receive worldwide commercialization rights. This collaboration was assigned to Verdia from Maxygen in connection with its capitalization in March 2002.



Novozymes



In September 1997, the Company entered into a five-year
license and collaboration agreement with Novo Nordisk A/S (now known as Novozymes) to use MolecularBreeding directed molecular evolution technologies to develop products in specific industrial enzyme fields. In November 2001, the
companies expanded the market areas addressed by the existing industrial enzymes collaboration. Under the terms of the expanded relationship, Novozymes will be licensed to use MolecularBreeding directed molecular evolution technologies for
additional industrial enzyme applications. The Company received full research funding, certain minimum royalty payments, and may receive royalty payments on the sales of products developed under the agreement and on the sale of products in the
expanded industrial enzyme market areas, if any. In addition, Maxygen will have co-exclusive rights to use the MolecularBreeding directed molecular evolution technologies for certain new industrial enzyme markets. This agreement was assigned to
Codexis in connection with its formation in March 2002.



Other Collaborations



The
Company has recognized revenue in fiscal 2000, 2001 and 2002 under other individually immaterial corporate collaborations for which it has completed all of its research obligations.



|4. |  | Technology Licenses and Research Agreements
|-- |  | -------------------------------------------



The Company has entered into several research agreements to fund research at universities and other research collaborators. These
agreements are generally cancelable by either party upon written notice and may be extended by mutual consent of both parties. Research and development expenses are recognized as the related services are performed, generally ratably over the period
of the service. Expenses under these agreements were approximately $4.9 million in 2000, $3.3 million in 2001 and $4.0 million in 2002.



In 2000, the Company paid $320,000 and issued 16,000 shares of common stock with a fair value of $958,000 in exchange for a technology
license. This amount is included in research and development expense for 2000 as it relates to technology that is in research and development and has no alternative future uses.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|5. |  | Property and Equipment
|-- |  | ----------------------



Property and equipment consisted of the following (in thousands):



|                                               |  | December 31, |       
|---------------------------------------------- |  | ------------ | ------
|                                               |  | 2001         |       
|Leasehold improvements                         |  | $            | 5,226 
|Machinery and laboratory equipment             |  |              | 14,690
|Computer equipment and software                |  |              | 1,727 
|Furniture and fixtures                         |  |              | 1,394 
|                                               |  |              |       
|                                               |  |              | 23,037
|Less accumulated depreciation and amortization |  |              | (5,697
|                                               |  |              |       
|Property and equipment, net                    |  | $            | 17,340
|                                               |  |              |       



|6. |  | Equipment Financing
|-- |  | -------------------



In June 1999, the Company entered into an equipment financing agreement for up to $2.0 million of equipment purchases with a financing
company. In July 1999 through May 2000, the Company financed $2.0 million in equipment purchases structured as loans. The equipment loans are to be repaid over 48 months at interest rates of 11.73% to 12.78% and are secured by the related
equipment. During the first 6 months of the loan terms, the payments consisted of interest only. Accumulated amortization of assets acquired pursuant to these obligations was approximately $915,000 at December 31, 2001 and $1,265,000 at December 31,
2002.



At December 31, 2002, the Companys
future minimum principal payments under the equipment financing arrangements were as follows (in thousands):



|Year ending December 31, |  |  
|------------------------ |  | -
|2003                     |  | $
|2004                     |  |  
|                         |  |  
|                         |  | $
|                         |  |  



|7. |  | Commitments
|-- |  | -----------



The Company has entered into various operating leases for its facilities and certain computer equipment. These leases expire on various
dates in 2003, 2004 and 2005. 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.



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



|Year ending December 31, |  |  
|------------------------ |  | -
|2003                     |  | $
|2004                     |  |  
|2005                     |  |  
|                         |  |  
|                         |  | $
|                         |  |  



Total
rent expense was $2.3 million in 2000, $4.4 million in 2001 and $4.9 million in 2002.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|8. |  | Codexis, Inc.
|-- |  | -------------



The Companys chemicals business is operated through our majority-owned subsidiary Codexis, Inc. Codexis was incorporated in January
2002, and the chemicals business was contributed to Codexis in March 2002 in exchange for all the capital stock of Codexis. On September 13, 2002, Codexis sold $15 million of Codexis preferred stock to investors, of which $5 million was purchased by
Maxygen and $10 million was purchased by several other unrelated investors. On October 1, 2002, Codexis sold an additional $10 million of preferred stock to other unrelated investors. The private placement was Codexis first independent
financing since its establishment as a subsidiary of the Company in January 2002. Prior to its establishment as an independent company, Codexis was the chemicals business unit of the Company, which had been operating since 1997. Codexis
financial position and results of operations are included in Maxygens Chemicals segment (see Note 16).



The minority investors own 6,480,881 shares of the Series B convertible preferred stock. The holders of the Series B convertible preferred
stock will be entitled to receive noncumulative dividends, in preference to any dividend on the Series A convertible preferred stock or common stock, at the rate of 8% of the original purchase price of $3.086 per share per year, when and if declared
by the board of directors. The holders of at least a majority of the outstanding shares of Series B convertible preferred stock (excluding Series B convertible preferred stock held by Maxygen and its affiliates), voting together as a separate class,
may require Codexis to redeem the Series B convertible preferred stock. The redemption price for each share will be payable in cash in exchange for the shares of Series B convertible preferred stock to be redeemed at a sum equal to the applicable
original issue price per share plus five percent (5%) of the original issue price per annum from the original issue date until the applicable redemption date, plus declared and unpaid dividends with respect to such shares. Notice of redemption can
be given at any time after the fifth anniversary of the original issue date.



The funds raised may be used only for Codexis operations and will be used to advance the commercialization of Codexis products, with a primary focus on developing novel biocatalysts and
improved manufacturing processes for pharmaceutical products. Codexis intends to directly supply pharmaceutical intermediates and bulk actives to pharmaceutical companies, in addition to novel biocatalysts and improved manufacturing processes.



Codexis is dedicated to becoming a global leader
in providing high-value chemical products and services to the worldwide life science and fine chemical industries. In particular, Codexis is focused on developing proprietary catalysts and processes for the production of pharmaceutical products.
Codexis proprietary technologies were designed to allow for the rapid discovery and development of catalysts and processes for the efficient and cost-effective synthesis of valuable chemicals.



Codexis primary area of focus is the pharmaceutical
market. Products in this area include chiral pharmaceuticals, complex natural products and novel pharmaceutical building blocks. Codexis also plans to leverage its technologies towards the development of flavor and fragrance molecules and other
high-value industrial chemicals.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Summarized
financial information for Codexis is presented below for the nine months ended December 31, 2002 (in thousands):



|Total revenues             |  | $ | 6,290  |  
|-------------------------- |  | - | ------ | -
|Operating expenses:        |  |   |        |  
|Research and development   |  |   | 10,186 |  
|General and administrative |  |   | 1,120  |  
|                           |  |   |        |  
|Total operating expenses   |  |   | 11,306 |  
|Loss from operations       |  |   | (5,016 | )
|Interest income            |  |   | 123    |  
|                           |  |   |        |  
|Net Loss                   |  | $ | (4,893 | )
|                           |  |   |        |  



|                                       |  | December 31, 2002 |       
|-------------------------------------- |  | ----------------- | ------
|Cash, cash equivalents and investments |  | $                 | 21,678
|Other current assets                   |  |                   | 2,209 
|Property and equipment, net            |  |                   | 3,320 
|                                       |  |                   |       
|Total assets                           |  | $                 | 27,207
|                                       |  |                   |       
|Total liabilities                      |  | $                 | 2,451 
|Redeemable convertible preferred stock |  |                   | 25,279
|Net equity                             |  |                   | (523  
|                                       |  |                   |       
|Total liabilities and equity           |  | $                 | 27,207
|                                       |  |                   |       



|9. |  | Related Party Transactions
|-- |  | --------------------------



The Company issued full recourse loans to certain employees, of which $690,000 was outstanding at December 31, 2001 and none outstanding
at December 31, 2002. These loans bear interest at rates ranging from 4.63% to 6.42% with terms ranging from three to five years. These loans were for the purchase of the Companys common stock and are classified within stockholders
equity. One full recourse loan for $150,000 was made for the purchase of a home and is classified within other assets. This loan bears an interest rate of 5.59% with a term of three years. The outstanding balance of this loan was
$150,000 and $94,000 at December 31, 2001 and 2002, respectively.



|10. |  | Stockholders Equity
|--- |  | --------------------



Convertible Preferred Stock



In accordance with the terms of the collaboration agreement with Syngenta, the Company issued Series E convertible preferred stock in
August 1999 at $6.25 per share. At the date of issuance, the Company believed the per share price of $6.25 represented the fair value of the preferred stock and was in excess of the deemed fair value of its common stock. After the commencement of
the Companys initial public offering process, the Company re-evaluated the deemed fair market value of its common stock as of August 1999 and determined it to be $9.00 per share. Accordingly, the incremental fair value is deemed to be the
equivalent of a preferred stock dividend. The Company recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid in capital of $2,200,000, without any effect on total stockholders equity. The
amount increased the loss allocable to common stockholders in the calculation of basic net loss per share for 1999.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





In
December 1999, the Company completed its initial public offering of common stock under the Securities Act of 1933, in which $101.0 million in net proceeds was realized (including net proceeds from a simultaneous private placement and the exercise of
the underwriters over-allotment option). Upon the completion of the initial public offering, all of the Series A, B, C, D, and E preferred stock outstanding converted into 11,898,031 shares of common stock.



Preferred Stock



The Company is authorized, subject to limitations prescribed
by Delaware law, to provide for the issuance of preferred stock in one or more series, to establish from time to time the number of shares included within each series, to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action
by the stockholders.



Codexis Stock Option
Exchange Program



On November 14, 2002,
Maxygen and Codexis extended offers to eight employees working for Codexis to exchange certain of their existing Maxygen stock options for Codexis stock options to be granted to them six months and one day after the termination of their exchanged
Maxygen stock options. The exchange offers were voluntary and allowed each of the eight employees to choose to accept the exchange or retain all their Maxygen stock options. Each exchange offer was customized to the option holdings of the individual
employee. The exchange offers were extended to the eight employees to better align the interests of the employees with the success of the newly formed Codexis.



All eight affected employees accepted the exchange offer and will be granted new Codexis stock options on May 15, 2003 with exercise
prices at the fair value of Codexis common stock on that date. The new options will be granted under the terms and conditions of the Codexis 2002 Stock Plan.



The total number of shares underlying Maxygen options terminated under the exchange offers was 381,128. The total number of shares
underlying Codexis options to be granted under the exchange offers is 983,000. The average exercise price per share of the Maxygen options that were cancelled was $20.80. The new exercise price of the Codexis options to be granted pursuant to the
exchange offers will be set on May 15, 2003, the option grant date.



Codexis 2002 Stock Plan



Codexis maintains the Codexis 2002 Stock Plan (Codexis Stock Plan) under which the board of directors may issue incentive stock options to employees, including officers and members of the board of directors who are also
employees of the Codexis or any parent or subsidiary of Codexis, and nonstatutory stock options (options that do not qualify as incentive options) and/or restricted stock of Codexis to employees, officers, directors or consultants of Codexis or any
parent or subsidiary. Options granted under the Codexis Stock Plan expire no later than 10 years from the date of grant. For incentive stock options and nonstatutory stock options, the option price shall be at least 100% and 85%, respectively, of
the fair value on the date of grant, as determined by the board of directors. If, at the time Codexis grants an option and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes
of stock of Codexis, the option price shall be at least 110% of the fair value. Except in the case of certain options granted to officers, directors and consultants, options typically vest over a five-year period at a rate of no less than 20% per
year but may be granted with different vesting terms. Except in the case of restricted stock purchased by officers, directors and



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



consultants, restricted stock will generally be subject to a Company right of repurchase that will lapse over a five-year period at a rate of
no less than 20% per year but may be sold subject to a Company right of repurchase with a different lapse rate. Codexis has reserved 2,200,000 shares of common stock for issuance under the Codexis Stock Plan. As of December 31, 2002, the Codexis
Stock Plan had 381,450 shares of Codexis common stock available to be issued upon exercise of outstanding options at an exercise price of $0.40 per share. It also had 1,818,550 shares of Codexis common stock remaining available for future issuance.



401(k) Savings Plan



The Company has a savings plan that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan, participating employees may defer a percentage (not to exceed 100%) of their eligible pretax earnings up to the Internal
Revenue Services annual contribution limit. All employees on the United States payroll of the Company age 18 years or older are eligible to participate in the 401(k) Plan. The Company has not been required to contribute to the 401(k) Plan but
in 2001 elected to match contributions of its participating employees in an amount up to a maximum of the lesser of (i) 50% of the employees 401(k) contribution or (ii) 6% of the employees yearly base salary. The matching
contribution is made in the form of newly issued shares of Company common stock as of each June 30 and December 31. All matching contributions vest immediately. The Company may discontinue such matching contributions at any time. The Companys
matching contribution to the 401(k) Plan was $642,000 in 2001 and $677,000 in 2002.



1997 Stock Option Plan



In 1997, the Company adopted the 1997 Stock Option Plan (the 1997 Plan) under which the board of directors may issue incentive stock options to employees, including officers and members of
the board of directors who are also employees, and nonqualified stock options to employees, officers, directors, consultants, and advisors of the Company. Under the 1997 Plan, incentive options to purchase the Companys common stock may be
granted to employees at prices not lower than fair value on the date of grant, as determined by the board of directors. Nonstatutory options (options that do not qualify as incentive options) may be granted to key employees, including directors and
consultants, at prices not lower than 85% of fair value on the date of grant (110% in certain cases), as determined by the board of directors. The maximum term of the options granted under the 1997 Plan is ten years. Certain options can be
immediately exercisable, at the discretion of the board of directors. Shares issued pursuant to the exercise of an unvested option are subject to the Companys right of repurchase, which generally lapses over four years (lapsing at a rate of
25% at the end of each year). If not immediately exercisable, options generally vest over four years (either vesting at a rate of 25% at the end of each year, or for grants made in 2002, one installment of 25% at the end of the first year and
monthly for the three years thereafter). The 1997 Plan provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2001, equal to the lesser of (i) 1,500,000 shares, (ii) 4% of the
outstanding shares on the date of the annual increase, or (iii) an amount determined by the board of directors. At December 31, 2002, 2,841,038 shares remain available under the 1997 Plan.



1999 Nonemployee Directors Stock Option Plan



In September 1999, the Company adopted the 1999 Nonemployee
Directors Stock Option Plan (the Directors Plan) and reserved a total of 300,000 shares of common stock for issuance thereunder. Each nonemployee director who becomes a director of the Company will be automatically granted a
nonstatutory stock option to purchase 20,000 shares of common stock on the date upon which such person first becomes a director. At the first board meeting immediately following each annual stockholders meeting, each non-employee director will
automatically be granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



price of options under the Directors Plan will be equal to the fair market value of the common stock on the date of grant. Options have
a term of ten years. Generally, each initial grant under the Directors Plan will vest as to 25% of the shares subject to the option one year after the date of grant and at a rate of 25% of the shares at the end of each of the succeeding three
years. Each subsequent grant will generally vest in full one year after the date of grant. The Directors Plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the Directors Plan. At
December 31, 2002, 200,000 shares remain available under the Directors Plan.



2000 International Stock Option Plan



In April 2000, the Company adopted the 2000 International Stock Option Plan (the International Plan) under which the board of directors may issue nonqualified stock options to employees,
directors and consultants of non-U.S. subsidiaries of the Company. Under the International Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement options in the
context of acquisitions), as determined by the board of directors. The maximum term of the options granted under the International Plan is ten years. Options vest and become exercisable pursuant to a vesting schedule, generally either over four
years at a rate of 25% at the end of each year, or for grants made in 2002, one installment of 25% at the end of the first year and monthly for the three years thereafter. The International Plan provides for the issuance of options covering up to
1,000,000 shares of common stock of the Company. The International Plan also provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2002, equal to 0.6% of the outstanding
shares on the date of the annual increase, or a lower amount determined by the board of directors. At December 31, 2002, 888,910 shares remain available under the International Plan.



2000 Non-Officer Employee Stock Option Plan



In December 2000, the Company adopted the 2000 Non-Officer
Stock Option Plan (the Non-Officer Plan) under which the board of directors may issue nonqualified stock options to employees (other than executive officers and stockholders owning 10% or more of the Companys common stock) and
consultants of the Company or any of its affiliates. Under the Non-Officer Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement options in the context of
acquisitions), as determined by the board of directors. The maximum term of the options granted under the Non-Officer Plan is ten years. Options vest and become exercisable pursuant to a vesting schedule, generally either over four years at a rate
of 25% at the end of each year, or for grants made in 2002, one installment of 25% at the end of the first year and monthly for the three years thereafter. The Non-Officer Plan provides for the issuance of options covering up to 1,500,000 shares of
common stock of the Company. The Non-Officer Plan also provides for annual increases in the number of shares available for issuance on the first day of each year, beginning January 1, 2001, equal to the greater of (i) 250,000 shares or (ii) 0.7% of
the outstanding shares on the date of the annual increase, or a lower amount determined by the board of directors. At December 31, 2002, 683,622 shares remain available under the Non-Officer Plan.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Activity
under the 1997 Plan, the Directors Plan, the International Plan and the Non-Officer Plan (collectively, the Plans) was as follows:



|                             |  |                  |   |  | Options Outstanding
|---------------------------- |  | ---------------- | - |  | -------------------
|                             |  | Shares Available |   |  | Number of Shares   
|Balance at January 1, 2000   |  | 1,487,488        |   |  | 2,076,362          
|Shares authorized            |  | 4,000,000        |   |  |                   
|Options granted              |  | (3,264,710       | ) |  | 3,264,710          
|Options exercised            |  |                 |   |  | (127,172           
|Options canceled             |  | 153,907          |   |  | (153,907           
|                             |  |                  |   |  |                    
|                            
|Balance at December 31, 2000 |  | 2,376,685        |   |  | 5,059,993          
|Shares authorized            |  | 1,593,069        |   |  |                   
|Options granted              |  | (3,038,799       | ) |  | 3,038,799          
|Options exercised            |  |                 |   |  | (294,897           
|Options expired              |  | 493,111          |   |  | (493,111           
|Options canceled             |  | 9,312            |   |  | (9,312             
|                             |  |                  |   |  |                    
|                            
|Balance at December 31, 2001 |  | 1,433,378        |   |  | 7,301,472          
|Shares authorized            |  | 4,315,214        |   |  |                   
|Options granted              |  | (3,106,550       | ) |  | 3,106,550          
|Options exercised            |  |                 |   |  | (172,189           
|Options canceled             |  | 1,475,469        |   |  | (1,475,469         
|Options expired              |  | 329,039          |   |  | (329,039           
|                             |  |                  |   |  |                    
|                            
|Balance at December 31, 2002 |  | 4,446,550        |   |  | 8,431,322          
|                             |  |                  |   |  |                    



The
options outstanding and exercisable under the Plans at December 31, 2002 are as follows:



|Exercise Price Range |        | Options Outstanding |                                                        | Options Exercisable
|-------------------- | ------ | ------------------- | ------------------------------------------------------ | -------------------
|                     | Number |                     | Weighted Average Remaining Contractual Life (in Years) |                    
|$  0.20$  0.30      |        | 282,500             |                                                        | 5.4                
|$  0.50$  0.75      |        | 314,816             |                                                        | 6.5                
|$  6.74$  9.93      |        | 1,404,769           |                                                        | 8.7                
|$10.51$15.75        |        | 3,563,420           |                                                        | 8.6                
|$15.84$22.65        |        | 542,517             |                                                        | 7.7                
|$24.23$35.13        |        | 643,565             |                                                        | 7.6                
|$41.25$59.81        |        | 1,560,485           |                                                        | 7.5                
|$62.00$81.00        |        | 68,250              |                                                        | 6.9                
|$162.50              |        | 51,000              |                                                        | 7.2                
|                     |        |                     |                                                        |                    
|                     |        | 8,431,322           |                                                        | 8.1                
|                     |        |                     |                                                        |                    



The
weighted-average grant date fair value of options granted was $35.02 in 2000, $9.25 in 2001 and $5.81 in 2002.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





1999
Employee Stock Purchase Plan



In September
1999, the Company adopted the 1999 Employee Stock Purchase Plan (the Purchase Plan). A total of 400,000 shares of the Companys common stock were initially reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market value of the common
stock on the first day of the offering period or on the purchase date, whichever is lower. The initial offering period commenced on December 16, 1999. In addition, the Purchase Plan provides for annual increases in the number of shares available for
issuance under the purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual increase, or a lower amount determined by the board of
directors. The Purchase Plan will terminate in September 2019, unless terminated earlier in accordance with the provisions of the Purchase Plan. The first purchase under the Purchase Plan occurred on September 29, 2000 when 67,540 shares of
common stock were purchased. In 2001 and 2002, 106,471 shares and 130,880 shares of common stock were purchased pursuant to the Purchase Plan, respectively. The weighted average fair value of purchase rights granted during the year was $7.53 in
2000, $4.45 in 2001 and $3.74 in 2002. At December 31, 2002, 595,109 shares remain available for purchase under the Purchase Plan.



Fair value disclosures



Pro forma net loss information is required to be disclosed by SFAS 123 and has been determined as if the Company has accounted for its
employee stock options and common stock purchase rights under the fair market value method of that statement.



For 2000, 2001 and 2002 the Company calculated the fair value using the Black-Scholes option pricing model. The following assumptions were
used:



|                                      |  | 2000         |  | 2001         |  | 2002        
|------------------------------------- |  | ------------ |  | ------------ |  | ------------
|Expected dividend yield               |  | 0%           |  | 0%           |  | 0%          
|Risk-free interest rate rangeOptions |  | 5.4% to 6.5% |  | 3.6% to 5.0% |  | 2.6% to 4.4%
|Risk-free interest rate rangeESPP    |  | 5.8% to 6.2% |  | 3.5% to 6.3% |  | 1.7% to 4.1%
|Expected lifeOptions                 |  | 4 years      |  | 4 years      |  | 4 years     
|Expected lifeESPP                    |  | 0.8 years    |  | 0.4 years    |  | 0.7 years   
|Expected volatility                   |  | 0.9          |  | 0.8          |  | 0.7         



Options
granted to consultants are periodically re-valued as they vest in accordance with SFAS 123 and EITF 96-18 using a Black-Scholes model and the following weighted-average assumptions for 2000: estimated volatility of 0.9, risk-free interest rates of
4.4% to 6.2%, no dividend yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. The assumptions for 2001 and 2002 estimated volatility of 0.7, risk-free interest rates of 4.4% to 5.6%, no
dividend yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. The Company recorded total compensation expense of $3.0 million in 2000, $250,000 in 2001, and $70,000 in 2002 related to the
Black-Scholes revaluation of options grants to consultants in prior years. In addition, in 2000 the Company recorded $1.6 million stock compensation related to the acceleration of an executive stock option award. Stock compensation expense relating
to the acceleration of stock options was considered immaterial for 2001 and 2002.



During the years ended December 31, 1997, 1998 and 1999, in connection with the grant of certain stock options to employees, the Company recorded deferred stock compensation of $2.6 million, $2.4
million and $19.5 million, respectively, representing the difference between the exercise price and the deemed fair value of



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the Companys common stock for financial reporting purposes on the date such stock options were granted. Deferred compensation is
included as a reduction of stockholders equity and is being amortized to expense on a graded vesting method. During the years ended December 31, 2000, 2001 and 2002, the Company recorded amortization of deferred stock compensation expense of
approximately $7.8 million, $4.6 million and $2.7 million, respectively.



In addition, the Company recorded $14.6 million of deferred compensation upon the assumption of the outstanding Maxygen ApS options and the issuance of restricted stock to founders in connection with
the August 2000 acquisition of Maxygen ApS. See Note 14. The deferred compensation is being amortized over the remaining vesting term of the options. The deferred compensation pertaining to the restricted stock is being amortized using the graded
vesting method. A total of $3.6 million, $6.9 million and $3.2 million for deferred compensation expense was recognized in the year ended December 31, 2000, 2001, and 2002 respectively, in connection with the Maxygen ApS options.



Common Stock



At December 31, 2000, 2001 and 2002, there were 1,627,866;
995,113 and 398,637 shares of restricted common stock subject to the Companys lapsing right of repurchase at a weighted-average price of $7.97, $3.78 and $3.36, respectively.



At December 31, 2002, the Company has reserved shares of common stock for future issuance as follows:



|2000 Non-Officer Employee Stock Option Plan  |  | 3,500,000 
|-------------------------------------------- |  | ----------
|2000 International Stock Option Plan         |  | 2,204,158 
|1999 Employee Stock Purchase Plan            |  | 595,109   
|1999 Nonemployee Directors Stock Option Plan |  | 300,000   
|1997 Stock Option Plan                       |  | 6,873,717 
|                                             |  |           
|                                             |  | 13,472,984
|                                             |  |           



|11. |  | Intangible Assets
|--- |  | -----------------



In July 2001, the Financing Accounting Standard Board issued Statement of Financial Accounting Standards (referred to as SFAS) No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 specifies criteria that intangible assets acquired in a purchase business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 requires, among other things, that the assembled workforce be reclassified to goodwill and that goodwill (including assembled
workforce) and intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually in accordance with SFAS 142. The Company has no intangible assets with indefinite lives. SFAS 142 also requires
that intangible assets with definite useful lives be amortized over their respective useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Company adopted the provisions of SFAS 141 and SFAS 142 effective January 1, 2002.



SFAS 141 provides that, upon adoption of SFAS 142, the Company is required to evaluate existing intangible assets and goodwill that were
acquired in a purchase business combination prior to June 30, 2001, and make necessary reclassifications to conform with the new criteria in SFAS 141. As a result, the Company reclassified assembled workforce with a net carrying value of $378,000 to
goodwill on January 1, 2002.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Upon
adoption of SFAS 142, the Company reassessed the useful lives and residual values of all intangible assets (excluding goodwill and assembled workforce) acquired in purchase business combinations. No adjustments to amortization periods were
necessary.



The provisions of SFAS 142 also
required the completion of a transitional impairment test within six months of adoption, with any impairments treated as a cumulative effect of change in accounting principle. During the quarter ended June 30, 2002, the Company completed the
transitional impairment test, which did not result in indictors of impairment of recorded goodwill.



In addition, the Company must perform an impairment test at least annually. Any impairment loss from the annual test will be recognized as
a part of operations. The Company completed its annual impairment test as of October 1, 2002, which did not result in impairment of recorded goodwill.



A reconciliation of reported net loss to adjusted net loss, as if SFAS 142 had been implemented as of January 1, 2000, is as follows (in
thousands, except per share data):



|                                                                |  | 2000 |         |   | 2001 |   |         | 2002 | 
|--------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Reported net loss                                               |  | $    | (59,585 | ) |      | $ | (44,964 | )    | 
|                                                                |  |      |         |   |      |   |         |      | 
|Add back: goodwill (including assembled workforce amortization) |  |      | 2,970   |   |      |   | 7,581   |      | 
|                                                                |  |      |         |   |      |   |         |      | 
|Adjusted net loss                                               |  | $    | (56,615 | ) |      | $ | (37,383 | )    | 
|                                                                |  |      |         |   |      |   |         |      | 
|Basic and diluted net loss per share:                           |  |      |         |   |      |   |         |      | 
|Reported net loss                                               |  | $    | (1.96   | ) |      | $ | (1.38   | )    | 
|Goodwill (incl. assembled workforce) amortization               |  |      | 0.10    |   |      |   | 0.23    |      | 
|                                                                |  |      |         |   |      |   |         |      | 
|Adjusted net loss                                               |  | $    | (1.86   | ) |      | $ | (1.15   | )    | 
|                                                                |  |      |         |   |      |   |         |      | 



Intangible assets subject to amortization consist of purchased core technology as follows (in thousands):



|                         |  | December 31, |      
|------------------------ |  | ------------ | -----
|                         |  | 2000         |      
|Gross carrying value     |  | $            | 3,435
|Accumulated amortization |  |              | (448 
|                         |  |              |      
|Net carrying value       |  | $            | 2,987
|                         |  |              |      



Annual
amortization expense of the intangible assets shown above is as follows (in thousands):



|For the year ended December 31, 2000 (actual) |  | $ | 448  
|--------------------------------------------- |  | - | -----
|For the year ended December 31, 2001 (actual) |  | $ | 1,145
|For the year ended December 31, 2002 (actual) |  | $ | 1,144



For the
year ended December 31, 2003, we expect to amortize $698,000 to expense for intangible assets.



|12. |  | Income Taxes
|--- |  | ------------



There has been no provision for U.S. federal, U.S. state, or foreign income taxes for any period as the Company has incurred operating
losses in all periods and for all jurisdictions. Foreign pre-tax loss was $2.8 million in 2000, $6.1 million in 2001 and $1.8 million in 2002.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys
deferred tax assets are as follows (in thousands):



|                                 |  | December 31, |        
|-------------------------------- |  | ------------ | -------
|                                 |  | 2001         |        
|Net operating loss carryforwards |  | $            | 13,500 
|Research credits                 |  |              | 2,300  
|Other                            |  |              | 6,070  
|                                 |  |              |        
|Total deferred tax assets        |  |              | 21,870 
|Valuation allowance              |  |              | (21,870
|                                 |  |              |        
|Net deferred tax assets          |  | $            |       
|                                 |  |              |        



Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $5.0 million during 2000, $10.8 million during 2001 and $9.7 million during 2002.



As of December 31, 2002, the Company had net operating loss carryforwards for federal income tax purposes of approximately $62.0 million
that expire in the years 2012 through 2022 and federal research and development tax credits of approximately $1.4 million that expire in the years 2012 through 2022. As of December 31, 2002, the Company had net operating loss carryforwards for state
income tax purposes of approximately $8.0 million that expire in the years 2005 through 2012 and state research and development tax credits of approximately $2.0 million that have no expiration date.



Approximately $4.1 million of the valuation allowance for
deferred tax assets relates to benefits of stock options deductions that, when recognized, will be allocated directly to contributed capital.



Utilization of the Companys net operating loss may be subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.



A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the
accompanying statements of operations is as follows:



|                                           |  | December 31, |        
|------------------------------------------ |  | ------------ | -------
|                                           |  | 2001         |        
|U.S. federal taxes benefit                 |  |              |        
|At statutory rate                          |  | $            | (15,288
|Non-deductible acquired in-process R&D     |  |              |       
|Non-deductible goodwill                    |  |              | 2,967  
|Non-deductible deferred compensation       |  |              | 3,938  
|Effect of differences in foreign tax rates |  |              | 2,059  
|Unutilized net operating losses            |  |              | 6,324  
|                                           |  |              |        
|Total                                      |  | $            |       
|                                           |  |              |        



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|13. |  | Acquisition of Technology
|--- |  | -------------------------



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



|14. |  | Acquisition of ProFound Pharma A/S
|--- |  | ----------------------------------



On August 10, 2000, the Company completed its acquisition of Maxygen ApS (then known as ProFound Pharma A/S), a Danish biotechnology
company located in Copenhagen, Denmark. Before the acquisition, Maxygen ApS was a privately-held, development-stage company that had minimal revenues since its inception in April 1999. Maxygen ApS is focused on the development of improved
second-generation protein pharmaceutical products and has developed broad pre-clinical development capabilities and proprietary technologies and expertise that help to address traditional shortcomings of protein pharmaceuticals such as half-life,
stability and immunogenicity. The Company acquired all of the equity securities of Maxygen ApS in exchange for 1,102,578 shares of its common stock and options to purchase an aggregate of 41,812 shares of its common stock. Of the 1,102,578 common
stock issued, 228,766 shares were issued with repurchase rights that lapse over a three-year vesting term. The transaction was accounted for as a purchase and the results of Maxygen ApS are included in consolidated results of operations from the
date of acquisition.



The total purchase price of
Maxygen ApS is as follows (in thousands):



|Fair value of common stock issued                                          |  | $ | 63,378  |  
|-------------------------------------------------------------------------- |  | - | ------- | -
|Assumption of Maxygen ApS options at fair value                            |  |   | 1,960   |  
|Assumed liabilities                                                        |  |   | 5,487   |  
|Acquisition expenses                                                       |  |   | 1,000   |  
|                                                                           |  |   |         |  
|Total consideration                                                        |  | $ | 71,825  |  
|Less:  Deferred stock compensation related to unvested options             |  |   | (1,456  | )
|Deferred stock compensation related to issuance of restricted common
stock |  |   | (13,149 | )
|                                                                           |  |   |         |  
|Allocable purchase price                                                   |  | $ | 57,220  |  
|                                                                           |  |   |         |  



The
purchase price allocation was as follows (in thousands):



|                                    |  | Amount
|----------------------------------- |  | ------
|Tangible net assets                 |  | $     
|Intangible assets acquired:         |  |       
|In-process research and development |  |       
|Assembled workforce                 |  |       
|Core technology                     |  |       
|Goodwill                            |  |       
|                                    |  |       
|                                    |  | $     
|                                    |  |       



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Prior to
the Companys adoption of FAS 142 effective January 1, 2002, the Company amortized goodwill, assembled workforce and core technology using the straight-line method over the assets estimated useful lives of three years, the term of
expected benefit. Pursuant to the Companys adoption of FAS 142 on January 1, 2002, the Company reclassified assembled workforce to goodwill, which is no longer being amortized. The Company continued to amortize the core technology over its
remaining useful life.



A valuation of the
purchased assets was undertaken to assist the Company in determining the fair value of each identifiable intangible asset and in allocating the purchase price among the acquired assets, including the portion of the purchase price attributed to
in-process research and development projects. Standard valuation procedures and techniques were utilized in determining the fair value of the technology in the development stage. The Company considered, among other factors, the stage of development
of each project, the time and resources needed to complete each project, expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in completing the project and obtaining regulatory approval to
market, and the risks related to the viability of and potential changes to future target markets. The analysis resulted in $28.0 million of the purchase price being charged to acquired in-process research and development. There can be no assurance
that the in-process projects acquired, as noted above, will achieve technological feasibility or that the Company will be able to successfully market products based on such technology. Should these in-process projects fail, the value of the
Companys investment in these incomplete technologies would be insignificant or zero. A failure to successfully develop and market these products could have a material adverse affect on the Companys business, financial condition or
results of operations.



The deferred compensation
amount represents the intrinsic value of the unvested stock options assumed in the transaction plus the fair value of the restricted common stock issued. The amortization period of the options is the remaining future vesting period of the unvested
options. The deferred compensation related to the restricted common stock is amortized using a graded vesting method.



The following unaudited pro forma summary consolidated operations information of the Company is presented excluding the charge for
in-process research and development, as if the acquisition of Maxygen ApS had occurred at the beginning of 2000 and does not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of 2000 or of the
results that may occur in the future.



|                                     |  | Year ended December 31, 2000             |        
|------------------------------------ |  | ---------------------------------------- | -------
|                                     |  | (in thousands, except per share amounts) |        
|Total revenues                       |  | $                                        | 24,535 
|Total operating expenses             |  |                                          | (93,834
|Net loss                             |  |                                          | (53,933
|Basic and diluted net loss per share |  | $                                        | (1.74  



|15. |  | Litigation
|--- |  | ----------



In December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, Inc., certain
officers of the Company, and 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 a number of companies that had public offerings of securities prior to December 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



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against the officers of the Company; the
remainder of the case remains pending.



The
complaint seeks damages in an unspecified amount. The Company believes that the claims alleged against the Company and its officers are without merit and intends to defend the action vigorously. The Company does not expect the outcome of this matter
to have a material effect on its financial position or results from operations.



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



|16. |  | Segment Information
|--- |  | -------------------



The Company has four reportable segments: human therapeutics, agriculture, chemicals and all other. The Company has determined its
reportable operating segments based upon how the business is managed and operated. The accounting policies of the segments described above are the same as those described in Note 1.



Segment Earnings



The Company evaluates the performance of its operating segments without considering the effects of net interest expense and income,
amortization of intangibles and stock compensation expense, all which are managed by corporate headquarters. Corporate administrative costs are allocated based on headcount.



|                            |  | Year Ended December 31, |        
|--------------------------- |  | ----------------------- | -------
|                            |  | 2000                    |        
|Human therapeutics          |  | $                       | (10,934
|Chemicals                   |  |                         | (15,232
|Agriculture                 |  |                         | (389   
|All other                   |  |                         |       
|                            |  |                         |        
|Total segment loss          |  | $                       | (26,555
|                            |  |                         |        
|Interest income, net        |  |                         | 15,329 
|Stock compensation          |  |                         | (15,981
|Amortization of intangibles |  |                         | (3,419 
|Acquired in-process R&D     |  |                         | (28,959
|                            |  |                         |        
|Total net loss              |  | $                       | (59,585
|                            |  |                         |        



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Segment Revenue



Revenues for each operating segment are
derived from the Companys research collaboration agreements and government grants and are categorized based on the industry of the product or technology under development.



|                   |  | Year Ended December 31,
|------------------ |  | -----------------------
|                   |  | 2000                   
|                   |  | (in thousands)         
|Human therapeutics |  | $                      
|Chemicals          |  |                        
|Agriculture        |  |                        
|                   |  |                        
|Total revenue      |  | $                      
|                   |  |                        



Identifiable Assets



The following table presents identifiable
assets for each reporting segment:



|                   |  | December 31,  
|------------------ |  | --------------
|                   |  | 2001          
|                   |  | (in thousands)
|Human therapeutics |  | $             
|Chemicals          |  |               
|Agriculture        |  |               
|All other          |  |               
|                   |  |               
|Total assets       |  | $             
|                   |  |               



Geographic
Information



The Companys primary
country of operation is the United States, its country of domicile. Revenues are attributed to countries based on the location of collaborators. Long-lived assets include property and equipment and intangible assets.



|                        |  | Year Ended December 31,
|----------------------- |  | -----------------------
|                        |  | 2000                   
|                        |  | (in thousands)         
|Revenues                |  |                        
|United States           |  | $                      
|Denmark                 |  |                        
|United Kingdom          |  |                        
|Other foreign countries |  |                        
|                        |  |                        
|Total revenue           |  | $                      
|                        |  |                        



|                        |  | December 31,
|----------------------- |  | ------------
|                        |  | 2001        
|Long-Lived Assets       |  |             
|United States           |  | $           
|Denmark                 |  |             
|                        |  |             
|Total long-lived assets |  | $           
|                        |  |             



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Major Customers



Major customers that represent more than
10% of total Company revenue are presented in the following table:



|                   |  | 2000 |   |  | 2001 |   |  | 2002 |  
|------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|Human Therapeutics |  |      |   |  |      |   |  |      |  
|Partner A          |  | 10.3 | % |  |     |   |  |     |  
|Partner B          |  | 11.8 | % |  | 5.4  | % |  |     |  
|Partner C          |  |     |   |  |     |   |  | 14.9 | %
|Partner D          |  | 3.1  | % |  | 10.8 | % |  | 12.3 | %
|                  
|Agriculture        |  |      |   |  |      |   |  |      |  
|Partner E          |  | 24.5 | % |  | 19.9 | % |  | 14.4 | %
|Partner F          |  | 17.9 | % |  | 15.3 | % |  | 9.6  | %



|17. |  | Subsequent Events
|--- |  | -----------------



In January 2003, Codexis terminated its collaboration agreement with Hercules Incorporated in exchange for a termination payment of $2.5
million and assignment of all program technology to Codexis.



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|Item 9 |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------ |  | ------------------------------------------------------------------------------------



None.



PART III



|Item 10 |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|------- |  | --------------------------------------------------



The information required by this item, other than concerning our executive officers, is incorporated by reference from the sections
captioned Proposal No. 1. Election of Directors, Board of Directors Meetings and Committees and Directors Compensation and Section 16(a) Beneficial Ownership Reporting Compliance contained in our proxy statement
for the 2003 Annual Meeting of Stockholders to be filed on or before April 30, 2003. Information required by Item 10 concerning our executive officers is set forth in Part I of this report.



|Item 11 |  | EXECUTIVE COMPENSATION
|------- |  | ----------------------



The information required by this item is incorporated by reference from the section captioned Executive Compensation contained
in our proxy statement for the 2003 Annual Meeting of Stockholders to be filed on or before April 30, 2003.



|Item 12 |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|------- |  | --------------------------------------------------------------



The information required by this item is incorporated by reference from the section captioned Security
Ownership of Certain Beneficial Owners and Management contained in our proxy statement for the 2003 Annual Meeting of Stockholders to be filed on or before April 30, 2003.



|Item 13 |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|------- |  | ----------------------------------------------



The information required by this item is incorporated by reference from the section captioned Related Party Transactions
contained in our proxy statement for the 2003 Annual Meeting of Stockholders to be filed on or before April 30, 2003.



|Item 14 |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



Quarterly evaluation of our Disclosure Controls and Internal Controls.Within the 90 days prior to the date
of this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (Disclosure Controls), and our internal controls and procedures for financial reporting
(Internal Controls). This evaluation (the Controls Evaluation) was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer
(CFO). Rules adopted by the Securities and Exchange Commission (SEC) require that in this section of the report we present the conclusions of our CEO and CFO about the effectiveness of our Disclosure Controls and Internal
Controls based upon and as of the date of the Controls Evaluation.



CEO and CFO Certifications.Appearing immediately following the Signatures section of this report there are two separate forms of Certifications of our CEO and CFO. The first form of
Certification is required by Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification). The section of the report that you are currently reading is the information concerning the Controls Evaluation referred to in the
Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.



Disclosure Controls and Internal Controls.Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities



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Exchange Act of 1934 (the Exchange Act), such as this report, is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure. Internal Controls are procedures that are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.



Limitations on the Effectiveness of
Controls.Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls 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 are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Maxygen have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Scope of the Controls Evaluation.The CEO/CFO evaluation of our Disclosure Controls and our Internal
Controls included a review of the controls objectives and design, the controls implementation by Maxygen and the effect of the controls on the information generated for use in this report. In the course of the Controls Evaluation, we
sought to identify errors, controls problems or acts of fraud. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our quarterly reports on Form 10-Q and our annual
reports on Form 10-K. Our Internal Controls are also evaluated on an ongoing basis by personnel in our Finance department and by our independent auditors in connection with their audit and review activities. The overall goals of these various
evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary. Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems
that change (including with improvements and corrections) as conditions warrant.



Among other matters, we sought in our evaluation to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, or whether we had identified any acts of
fraud involving personnel who have a significant role in our Internal Controls. This information was important both for the Controls Evaluation generally and because items 5 and 6 in the Section 302 Certifications of our CEO and CFO require that the
CEO and CFO disclose that information to our Audit Committee and to our independent auditors and to report on related matters in this section of the report.



In accord with SEC requirements, our CEO and CFO note that, since the date of the Controls Evaluation to the date of this report, there
have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.



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##### Table of Contents



Conclusions.    Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information
relating to Maxygen and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide
reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.



94



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##### Table of Contents

PART IV



|Item 15 |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|------- |  | ---------------------------------------------------------------



Upon written request, we will provide, without charge, a copy of this annual report on Form 10-K, including
the consolidated financial statements, financial statement schedules and any exhibits for our most recent fiscal year. All requests should be sent to:



Maxygen, Inc.

Investor Relations

515 Galveston Drive

Redwood City, CA 94063

(650) 298-5300



In addition, the Securities and Exchange Commission maintains a website that provides access to all filings made electronically by us at www.sec.gov.



We make available on our website all reports filed with the Securities and Exchange Commission, including our
reports on Form 10-K, 10-Q and 8-K, as soon as reasonably practicable after they have been filed. Our website is located at www.maxygen.com. Information contained on our website is not a part of this annual report.



The following documents are being filed as part of this
report:



a)Financial
Statements.



|                                                  |  | Page
|------------------------------------------------- |  | ----
|Report of Ernst & Young LLP, Independent Auditors |  | 59  
|Consolidated Balance Sheets                       |  | 60  
|Consolidated Statements of Operations             |  | 61  
|Consolidated Statements of Stockholders Equity   |  | 62  
|Consolidated Statements of Cash Flows             |  | 63  
|Notes to Consolidated Financial Statements        |  | 64  



Financial statement schedules have been omitted because they are either presented elsewhere, are inapplicable or are immaterial as defined in the instructions.



b)  We did not file any reports on Form 8-K during 2002.



c)Exhibits.



|Exhibit Number |  | Description of Exhibit                                                                                                                                                                             
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|2.1            |  | Exchange Agreement, dated as of April 12, 2000 (the Exchange Agreement),
by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound Pharma A/S (ProFound) and the shareholders of ProFound (1)
|              
|2.2            |  | Amendment No. 1 to the Exchange Agreement, dated as of July 31, 2000, by and among
Maxygen, Inc., Maxygen Holdings Ltd., ProFound and the shareholders of ProFound (1)                             
|              
|3.1            |  | Amended and Restated Certificate of Incorporation (2)                                                                                                                                              
|              
|3.2            |  | Amended and Restated Bylaws (2)                                                                                                                                                                    
|              
|4.1            |  | Specimen Common Stock Certificate (Exhibit 4.1 to Amendment No. 1)
(3)                                                                                                                             
|              
|4.2            |  | Amended and Restated Registration Rights Agreement among Maxygen and certain Maxygen
stockholders dated as of November 13, 2000 (4)                                                                
|              
|*10.1          |  | Form of Executive Officer and Director Indemnification Agreement (Exhibit 10.7)
(3)                                                                                                                



95



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##### Table of Contents

|Exhibit Number |   |  | Description of Exhibit                                                                                                                                                                                         
|-------------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|*10.2          |   |  | Form of Executive Officer Change of Control Plan (Exhibit 10.1)
(5)                                                                                                                                            
|              
|*10.3          |   |  | Form of Amendment No. 1 to Executive Officer Change of Control
Plan                                                                                                                                            
|              
|*10.4          |   |  | Verdia Change of Control Agreement                                                                                                                                                                             
|              
|*10.5          |   |  | 1997 Stock Option Plan, as amended, with applicable option agreement
(6)                                                                                                                                       
|              
|*10.6          |   |  | 1999 Nonemployee Directors Stock Option Plan, as amended, with applicable option
agreement (Exhibit 10.3) (5)                                                                                                  
|              
|*10.7          |   |  | 1999 Employee Stock Purchase Plan, as amended (Exhibit 10.11)
(4)                                                                                                                                              
|              
|*10.8          |   |  | 2000 International Stock Option Plan, as amended, with applicable option agreement
(Exhibit 10.6) (7)                                                                                                          
|              
|*10.9          |   |  | 2000 Non-Officer Stock Option Plan, as amended, with applicable option agreement
(8)                                                                                                                           
|              
|*10.10         |   |  | Form of Promissory Note issued in connection with exercise of stock options (Exhibit
10.10) (3)                                                                                                                
|              
|10.11          |   |  | Lease between Metropolitan Life Insurance Company and Maxygen dated as of October 21,
1998 (Exhibit 10.4) (3)                                                                                                  
|              
|10.12          |   |  | First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan
Life Insurance Company and Maxygen (Exhibit 10.5) (3)                                                                       
|              
|10.13          |   |  | Second Amendment to Lease dated as of October 24, 2000 by and between Metropolitan
Life Insurance Company and Maxygen (Exhibit 10.6) (4)                                                                       
|              
|10.14          |   |  | Lease between Metropolitan Life Insurance Company and Maxygen dated April 21, 2000
(Exhibit 10.2) (2)                                                                                                          
|              
|10.15          |   |  | Lease Agreement between ProFound Pharma A/S and The Science Park in Horsholm dated
May 5, 2000 (9)                                                                                                             
|              
|10.16          |   |  | Sublease between Cygnus, Inc. and Maxygen dated March 30, 2001 (Exhibit 10.2)
(5)                                                                                                                              
|              
|10.17          | + |  | Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo
Group Limited dated March 14, 1997, as amended, effective March 1, 1998 (Exhibit 10.3 to Amendment No. 2) (3)                 
|              
|10.18          | + |  | License and Collaboration Agreement between Maxygen and Novo Nordisk A/S effective as
of September 17, 1997, as amended June 29, 1998, July 29, 1998, and April 19, 1999 (Exhibit 10.11 to Amendment No. 2) (3)
|              
|10.19          | + |  | Collaborative Research and License Agreement entered into as of December 23, 1998 by
and between Pioneer Hi-Bred International, Inc. and Maxygen (Exhibit 10.12 to Post-Effective Amendment No. 1) (3)         
|              
|10.20          | + |  | Agreement between Maxygen and Gist-Brocades B.V. entered into March 15, 1999 (Exhibit
10.13 to Amendment No. 2) (3)                                                                                            
|              
|10.21          | + |  | Collaboration Agreement effective as of June 18, 1999 by and between Zeneca Limited
and Maxygen (Exhibit 10.14 to Amendment No. 2) (3)                                                                         
|              
|10.22          | + |  | Collaborative Research and Development Agreement made as of January 19, 2000 between
Technological Resources Pty Limited and Maxygen (Exhibit 10.15 to Amendment No. 1) (10)                                   
|              
|10.23          | + |  | Cooperative Research and Development Agreement between the National Cancer Institute,
National Institutes of Health dated February 24, 2000 (Exhibit 10.20) (10)                                               
|              
|21.1           |   |  | List of Subsidiaries                                                                                                                                                                                           
|              
|23.1           |   |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                             
|              
|24.1           |   |  | Power of Attorney (included on signature page)                                                                                                                                                                 



96



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##### Table of Contents

---

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



|+ |  | Confidential treatment has been granted with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately
filed with the Securities and Exchange Commission.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(1) |  | 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 August 15, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference to the corresponding or indicated exhibit to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June
30, 2000, filed with the Securities and Exchange Commission on August 14, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference to the indicated exhibit to Maxygens Registration Statement on Form S-1, as amended (No. 333-89413) initially filed with the
Securities and Exchange Commission on October 20, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Incorporated by reference to the indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2000, filed
with the Securities and Exchange Commission on March 21, 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Incorporated by reference to the indicated exhibit to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2001,
filed with the Securities and Exchange Commission on August 14, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2002, filed with the
Securities and Exchange Commission on August 14, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Incorporated by reference to exhibit 10.6 to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on March 25, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) |  | Incorporated by reference to the exhibit 99.3 to Maxygens Registration Statement on Form S-8 (No. 333-57486) filed with the Securities and Exchange Commission
on March 23, 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(9) |  | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended September 30, 2000, filed with
the Securities and Exchange Commission on November 14, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) |  | Incorporated by reference to the indicated exhibit to Maxygens Registration Statement on Form S-1, as amended (No. 333-31580) initially filed with the
Securities and Exchange Commission on March 3, 2000.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



97



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##### Table of Contents

SIGNATURES



Pursuant
to the requirements of Section 13 or 15(d) 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.



|March 27, 2003 |  |  |  | MAXYGEN, INC.
|-------------- |  |  |  | -------------
|              
|               |  |  |  | By:          
|               |  |  |  |              



POWER
OF ATTORNEY



KNOW ALL MEN BY THESE PRESENTS,
that each person whose signature appears below constitutes and appoints Michael Rabson and Lawrence W. Briscoe or either of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him
or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.



Pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, this Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|Signature                                     |  | Title                                                                |  | Date          
|--------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|/s/    RUSSELL J.
HOWARDRussell J. Howard     |  | Chief Executive Officer and Director (Principal Executive Officer)   |  | March 27, 2003
|                                             
|/s/    LAWRENCE W.
BRISCOELawrence W. Briscoe |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 27, 2003
|                                             
|/s/    ISAAC
STEINIsaac Stein                 |  | Chairman of the Board                                                |  | March 27, 2003
|                                             
|/s/    ROBERT J.
GLASERRobert J. Glaser       |  | Director                                                             |  | March 27, 2003
|                                             
|/s/    M.R.C.
GREENWOODM.R.C. Greenwood       |  | Director                                                             |  | March 27, 2003
|                                             
|/s/    ERNEST
MARIOErnest Mario               |  | Director                                                             |  | March 27, 2003
|                                             
|/s/    GORDON
RINGOLDGordon Ringold           |  | Director                                                             |  | March 27, 2003
|                                             
|/s/    GEORGE
POSTEGeorge Poste               |  | Director                                                             |  | March 27, 2003



98



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##### Table of Contents



FORM OF
CERTIFICATION PURSUANT TO

SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002



I, Russell J. Howard, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Maxygen, Inc.;
| | -- |  | -----------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     
|-----
|Date:
|     



99



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##### Table of Contents



FORM OF
CERTIFICATION PURSUANT TO

SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002



I, Lawrence W. Briscoe, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Maxygen, Inc.;
| | -- |  | -----------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     
|-----
|Date:
|     



100



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##### Table of Contents



CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002



I, Russell J.
Howard, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge the Annual Report of Maxygen, Inc. on Form 10-K for the annual period ended December 31,
2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and
results of operations of Maxygen, Inc.



By:

/s/    RUSSELL J. HOWARDName:    Russell J. HowardTitle:    Chief Executive OfficerDate:    March 27, 2003




I,
Lawrence W. Briscoe, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge the Annual Report of Maxygen, Inc. on Form 10-K for the annual period ended
December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Maxygen, Inc.



By:

/s/    LAWRENCE W. BRISCOEName:    Lawrence W. BriscoeTitle:    Chief Financial OfficerDate:    March 27, 2003




101



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##### Table of Contents



EXHIBIT
INDEX



|Exhibit Number |   |  | Description of Exhibit                                                                                                                                                                                         
|-------------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|2.1            |   |  | Exchange Agreement, dated as of April 12, 2000 (the Exchange Agreement),
by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound Pharma A/S (ProFound) and the shareholders of ProFound (1)            
|              
|2.2            |   |  | Amendment No. 1 to the Exchange Agreement, dated as of July 31, 2000, by and among
Maxygen, Inc., Maxygen Holdings Ltd., ProFound and the shareholders of ProFound (1)                                         
|              
|3.1            |   |  | Amended and Restated Certificate of Incorporation (2)                                                                                                                                                          
|              
|3.2            |   |  | Amended and Restated Bylaws (2)                                                                                                                                                                                
|              
|4.1            |   |  | Specimen Common Stock Certificate (Exhibit 4.1 to Amendment No. 1)
(3)                                                                                                                                         
|              
|4.2            |   |  | Amended and Restated Registration Rights Agreement among Maxygen and certain Maxygen
stockholders dated as of November 13, 2000 (4)                                                                            
|              
|*10.1          |   |  | Form of Executive Officer and Director Indemnification Agreement (Exhibit 10.7)
(3)                                                                                                                            
|              
|*10.2          |   |  | Form of Executive Officer Change of Control Plan (Exhibit 10.1)
(5)                                                                                                                                            
|              
|*10.3          |   |  | Form of Amendment No. 1 to Executive Officer Change of Control
Plan                                                                                                                                            
|              
|*10.4          |   |  | Verdia Change of Control Agreement                                                                                                                                                                             
|              
|*10.5          |   |  | 1997 Stock Option Plan, as amended, with applicable option agreement
(6)                                                                                                                                       
|              
|*10.6          |   |  | 1999 Nonemployee Directors Stock Option Plan, as amended, with applicable option
agreement (Exhibit 10.3) (5)                                                                                                  
|              
|*10.7          |   |  | 1999 Employee Stock Purchase Plan, as amended (Exhibit 10.11)
(4)                                                                                                                                              
|              
|*10.8          |   |  | 2000 International Stock Option Plan, as amended, with applicable option agreement
(Exhibit 10.6) (7)                                                                                                          
|              
|*10.9          |   |  | 2000 Non-Officer Stock Option Plan, as amended, with applicable option agreement
(8)                                                                                                                           
|              
|*10.10         |   |  | Form of Promissory Note issued in connection with exercise of stock options (Exhibit
10.10) (3)                                                                                                                
|              
|10.11          |   |  | Lease between Metropolitan Life Insurance Company and Maxygen dated as of October 21,
1998 (Exhibit 10.4) (3)                                                                                                  
|              
|10.12          |   |  | First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan
Life Insurance Company and Maxygen (Exhibit 10.5) (3)                                                                       
|              
|10.13          |   |  | Second Amendment to Lease dated as of October 24, 2000 by and between Metropolitan
Life Insurance Company and Maxygen (Exhibit 10.6) (4)                                                                       
|              
|10.14          |   |  | Lease between Metropolitan Life Insurance Company and Maxygen dated April 21, 2000
(Exhibit 10.2) (2)                                                                                                          
|              
|10.15          |   |  | Lease Agreement between ProFound Pharma A/S and The Science Park in Horsholm dated
May 5, 2000 (9)                                                                                                             
|              
|10.16          |   |  | Sublease between Cygnus, Inc. and Maxygen dated March 30, 2001 (Exhibit 10.2)
(5)                                                                                                                              
|              
|10.17          | + |  | Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo
Group Limited dated March 14, 1997, as amended, effective March 1, 1998 (Exhibit 10.3 to Amendment No. 2) (3)                 
|              
|10.18          | + |  | License and Collaboration Agreement between Maxygen and Novo Nordisk A/S effective as
of September 17, 1997, as amended June 29, 1998, July 29, 1998, and April 19, 1999 (Exhibit 10.11 to Amendment No. 2) (3)
|              
|10.19          | + |  | Collaborative Research and License Agreement entered into as of December 23, 1998 by
and between Pioneer Hi-Bred International, Inc. and Maxygen (Exhibit 10.12 to Post-Effective Amendment No. 1) (3)         



---

##### Table of Contents

|Exhibit Number |   |  | Description of Exhibit                                                                                                                                                      
|-------------- | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              
|10.20          | + |  | Agreement between Maxygen and Gist-Brocades B.V. entered into March 15, 1999 (Exhibit
10.13 to Amendment No. 2) (3)                                                         
|              
|10.21          | + |  | Collaboration Agreement effective as of June 18, 1999 by and between Zeneca Limited
and Maxygen (Exhibit 10.14 to Amendment No. 2) (3)                                      
|              
|10.22          | + |  | Collaborative Research and Development Agreement made as of January 19, 2000 between
Technological Resources Pty Limited and Maxygen (Exhibit 10.15 to Amendment No. 1) (10)
|              
|10.23          | + |  | Cooperative Research and Development Agreement between the National Cancer Institute,
National Institutes of Health dated February 24, 2000 (Exhibit 10.20) (10)            
|              
|21.1           |   |  | List of Subsidiaries                                                                                                                                                        
|              
|23.1           |   |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                          
|              
|24.1           |   |  | Power of Attorney (included on signature page)                                                                                                                              

---

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



|+ |  | Confidential treatment has been granted with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately
filed with the Securities and Exchange Commission.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(1) |  | 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 August 15, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference to the corresponding or indicated exhibit to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June
30, 2000, filed with the Securities and Exchange Commission on August 14, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference to the indicated exhibit to Maxygens Registration Statement on Form S-1, as amended (No. 333-89413) initially filed with the
Securities and Exchange Commission on October 20, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Incorporated by reference to the indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2000, filed
with the Securities and Exchange Commission on March 21, 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Incorporated by reference to the indicated exhibit to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2001,
filed with the Securities and Exchange Commission on August 14, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2002, filed with the
Securities and Exchange Commission on August 14, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Incorporated by reference to exhibit 10.6 to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on March 25, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) |  | Incorporated by reference to the exhibit 99.3 to Maxygens Registration Statement on Form S-8 (No. 333-57486) filed with the Securities and Exchange Commission
on March 23, 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(9) |  | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended September 30, 2000, filed with
the Securities and Exchange Commission on November 14, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) |  | Incorporated by reference to the indicated exhibit to Maxygens Registration Statement on Form S-1, as amended (No. 333-31580) initially filed with the
Securities and Exchange Commission on March 3, 2000.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------