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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                   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, 2000

                       Commission file number 000-28401

                                 MAXYGEN, INC.
            (Exact name of registrant as specified in its charter)

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

              515 Galveston Drive Redwood City, California 94063
                   (Address of principal executive offices)

                                (650) 298-5300
              Registrant's telephone number, including area code:

                               ----------------

          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)

                               ----------------

   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. Yes [X] No [_]

   As of January 31, 2001 there were 33,663,535 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 January 31,
2001 was approximately $485,479,645.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Designated portions of the registrant's definitive proxy statement for its
2001 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.

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Forward Looking Statements

   This report contains forward-looking statements 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 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 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 28 to 38
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. We are under no duty to update any of the forward-looking
statements after the date of this report or to conform these statements to
actual results.

   Maxygen(TM), MaxyScan(TM), MolecularBreeding(TM), DNAShuffling(TM), and the
Maxygen logo are some of our trademarks. 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 work "partner" and "partnership" does not mean a legal partner or legal
partnership.

                                    PART I

Item 1 BUSINESS

Overview

   We are the leader in the field of directed molecular evolution, the 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 create novel high-value biotechnology products.
Unlike conventional technologies, our approaches require minimal understanding
of complex underlying biological systems and can therefore help develop
products more efficiently, 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 collaborations with eleven recognized leaders in our target
industries including Lundbeck, ALK-Abello, the International AIDS Vaccine
Initiative (IAVI), Novozymes, DuPont, Syngenta, DSM, Rio Tinto, Chevron,
Pfizer and Hercules.

                                       2
<PAGE>

   We will continue to establish strategic collaborations with leaders in our
target industries. We will continue to retain rights in some of our
collaborations to 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 with the aim of capturing a high
percentage of profits on product sales. We have over 40 potential products in
various stages of research, with eight potential products in commercial
development.

   We began operations in 1997 to commercialize technologies originally
conceived at Affymax Research Institute, a subsidiary of what is now
GlaxoSmithKline plc. We were incorporated under the laws of Delaware on May 7,
1996. Our principal executive offices are located at 515 Galveston Drive,
Redwood City, CA 94063. Our telephone number is (650) 298-5300 and our website
is located at www.maxygen.com. Information contained in our website is not a
part of this report.

Acquisition of ProFound Pharma A/S

   On August 10, 2000, we acquired ProFound Pharma A/S, a Danish biotechnology
company located in Copenhagen, Denmark. After our acquisition ProFound changed
its name and corporate form to Maxygen ApS. Maxygen ApS is focused on the
development of improved second-generation protein pharmaceutical products. It
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.

Market Opportunity

   We have a platform of proprietary technologies that helps allow us to
integrate the most powerful tools available in the biotechnology industry to
efficiently develop novel and improved products for human therapeutics and
industrial applications. We are currently working on over 40 different
potential products either on our own or with companies that are leaders in
their fields, including eight potential products that are in the development
stage. 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. The combined sales
of recombinant protein products exceeded $17 billion in 1999. Protein
pharmaceutical products, such as erythropoietin and granulocyte colony
stimulating factor, represent some of the world's highest revenue
pharmaceutical products. The protein therapeutics sector is one of the fastest
growing pharmaceutical markets, with an annual sales growth rate of 10 to 15%.

   Worldwide sales of vaccines in 1998 exceeded $4 billion and are expected to
exceed approximately $10 billion by 2005. The vaccine market is also expected
to increase dramatically over the next several years with the anticipated
success of therapeutic vaccines and the development of novel vaccines that
address significant unmet clinical needs.

   In pharmaceuticals and vaccines, we are focused on developing products for
a number of indications, including multiple forms of cancer, infectious
diseases such as HIV and hepatitis, 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
1999, sales in the chemical industry exceeded $1.6 trillion, with
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 could increase yields and decrease manufacturing costs for multiple known
products. We believe that biocatalytic processes may also have utility for
generating novel materials and molecules.

                                       3
<PAGE>

   The agricultural biotechnology seed market was estimated at approximately
$3 billion in sales in 2000. 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 100 million acres in 2000. In
agriculture, we are applying our technologies to potentially increase crop
yield and qualities, such as enhancing nutritional value for human food or
animal feed, and improve other crop traits.

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 have not been evolved 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 are limited in their ability to rapidly develop
products. This results from two primary causes. First, the genes identified by
genomics have not been evolved 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, stability, difficulty and cost of 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, specificity,
stability, efficiency of enzyme function under industrial manufacturing
conditions and 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 native 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 forms of directed molecular evolution, random mutagenesis and molecular
breeding. Random mutagenesis involves the random mutation of genes, most of
which are harmful to gene function. The mutated genes are then screened to
determine which mutations have resulted in improved attributes. Since random
mutation has a low probability of improving a gene or sequence of complex
biological reactions, screening for positive changes is expensive and time
consuming. The second form of directed molecular evolution is molecular
breeding, which mimics naturally occurring sexual recombination, a process in
which regions of DNA are exchanged between strands of DNA. As molecular
breeding does not require an understanding of the underlying biological
process, and does not generate as many harmful changes as random mutagenesis,
molecular breeding is generally less costly and less time intensive than
genomics, rational design or random mutagenesis.


                                       4
<PAGE>

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 opportunity for developing
characteristics optimally suited for specific commercial purposes. Our
integrated technologies bring together advances in molecular biology and
protein modification to 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
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 allows us to identify new potential products in a more
rapid, cost-effective manner.

   Virtually any product or process that utilizes, or could utilize, DNA or
proteins can potentially be improved for optimal function using our
MolecularBreeding directed molecular evolution technologies. We are therefore
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 MolecularBreeding directed molecular evolution
technologies provide distinctive advantages over traditional biotechnology, as
summarized in the following table.

                     Advantages of Maxygen's Technologies

<TABLE>
<CAPTION>
                                                                Maxygen's
                                                            MolecularBreeding
                                                           Directed Molecular
                                                Modern          Evolution
               Characteristic                Biotechnology    Technologies
               --------------                ------------- -------------------
<S>                                          <C>           <C>
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
</TABLE>

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 (chemicals and agriculture). Our
business strategy is built around two major efforts:

   Expand Our Proprietary Technology Leadership. To expand our technology
leadership, we will continue to develop our core MolecularBreeding directed
molecular evolution technologies by investing significantly in research and
development. We will continue to acquire and license technologies from third
parties that complement our capabilities to more rapidly develop products. We
will protect and build on 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.


                                       5
<PAGE>

   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
  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 product opportunities with the aim of capturing a
  high percentage of profits on product sales.

   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 inception, we have entered into eleven strategic collaborations and
several proof of principle collaborations with commercial entities and have
received six grants from U.S. government agencies. Assuming our research
efforts for existing collaborations are expended for the full research term,
we have total committed funding of over $132 million, of which over $105
million is from our corporate collaborators and approximately $27 million is
from the U.S. government. Of these committed funds, we have earned
approximately $41 million; additionally, we have received $15 million from our
collaborators in consideration for purchase of our equity. Potential milestone
payments from our existing collaborations could exceed $240 million based on
the accomplishment of specific performance goals. These payments are in
addition to earned royalties on product sales.

   In 2000, we were very successful in achieving our goals. We advanced seven
potential products into commercial development, two in human therapeutics and
five in industrial applications. We currently have eight potential products in
development, including six with corporate collaborators and two that are being
funded by Maxygen. We also replenished our broad pipeline of over 40 potential
products. We entered into four new product development collaborations in 2000,
with Lundbeck, Chevron, Rio Tinto and Hercules and entered into additional
collaborations with ALK-Abello and the International AIDS Vaccine Initiative
in early 2001. We also entered into new collaborations in 2000 with the
National Cancer Institute, National Institutes of Health, the Scripps
Institute and with the Karolinska Institute. We had three new patents issue
bringing the total number of patents owned or licensed by us as of December
31, 2000 to 40, with over 400 patent applications worldwide. We also completed
the acquisition of Maxygen ApS to enhance our ability to move pharmaceutical
products forward into pre-clinical development, expand our product portfolio
in protein pharmaceuticals and obtain integrated expertise in directed
glycosylation and directed PEGylation. With the acquisition we now have over
20 potential products in human therapeutics.

Current Fields of Application

   We are currently applying our MolecularBreeding directed molecular
evolution technologies and our other technologies to high-value opportunities
in the fields of human therapeutics (protein pharmaceuticals and
preventative/therapeutic vaccines) and industrial applications (chemicals and
agriculture).

                                       6
<PAGE>

Human Therapeutics

   Human therapeutics, consisting of protein pharmaceuticals and vaccines,
presents us with opportunities in a wide variety of disease indications for
which there is a significant unmet medical need for safe and effective
treatments. The markets for many of these disease indications are very large
and are summarized in the table below.

<TABLE>
<CAPTION>
                                                             Current Estimated
     Therapeutic Area/Market                                Size of Market($US)
     -----------------------                                -------------------
     <S>                                                    <C>
     Cancer................................................   $16 billion
     Infectious disease....................................   $5 billion
     Transplants...........................................   $2.5-3 billion
     Arthritis.............................................   $8-10 billion
     Multiple sclerosis....................................   $1 billion
     Allergy...............................................   $5 billion
</TABLE>

 Protein Pharmaceuticals

   Our protein pharmaceutical business unit is dedicated to becoming the
world's leading provider of improved, proprietary, protein-based therapeutics.

   Market Opportunity. In 1999, worldwide sales of therapeutic proteins made
using recombinant DNA technology were approximately $17 billion. Protein
pharmaceutical products, such as erythropoietin and granulocyte colony
stimulating factor, represent some of the world's highest revenue
pharmaceutical products. The protein therapeutics sector is one of the fastest
growing sectors of the pharmaceutical market, with an annual sales growth rate
of 10 to 15%. However, many presently marketed protein pharmaceuticals have
limitations and harmful side effects. Most protein pharmaceuticals have short
half-lives, which may result in the need for frequent administration of
painful or expensive injections and intravenous treatments. Proteins can also
be immunogenic, potentially leading to adverse side effects or reduced
therapeutic efficacy. Examples of therapeutic proteins made using recombinant
DNA technology, their 1999 sales and potential improvements that could be made
to the proteins currently being marketed are listed below:

<TABLE>
<CAPTION>
   Product                  1999 Sales ($US) Potential Improvement
   -------                  ---------------- ---------------------
   <S>                      <C>              <C>
   Erythropoietin..........   $4.9 billion   Longer half life
   Insulin.................   $3.4 billion   Lower manufacturing cost
   Human growth hormone....   $2.6 billion   Longer half life
   Alpha Interferon........   $1.9 billion   Fewer side effects, longer half life
   Granulocyte colony
    stimulating factor.....   $1.6 billion   Longer half life
   Beta Interferon.........   $490 million   Fewer side effects, longer half life
   Proleukin...............   $100 million   Fewer side effects
</TABLE>

   By applying our broad technology platform, we believe we will be able to
develop potent and safe 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.

   Applying our technology to validated targets can potentially reduce product
development risk as well as accelerate the discovery and early-development
phases of a drug candidate. While protein pharmaceuticals made from naturally
occurring proteins can address large markets, they are often not well suited
for commercialization without modification. Our integrated platform of
proprietary technologies, including our MolecularBreeding directed molecular
evolution technologies and post-translational modification capabilities, can
help transform proteins into more potent, efficient and safer pharmaceuticals
with suitable duration of action.

   Business Strategy. The strategy of our protein pharmaceutical business unit
is to partner and independently develop new and improved therapeutic products.
Biopharmaceuticals at all stages of development--research,

                                       7
<PAGE>

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
therapeutics we maximize our return and decrease our development risk.
Additionally, the speed of our technologies allows many targets to be pursued
simultaneously, thus decreasing portfolio risk.

   Our protein pharmaceuticals business unit was 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 has provided 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, PEGylation and glycosylation. We have also designed and
implemented proprietary 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 modulate immunogenicity and pharmacokinetics.

   In addition, we have a broad strategic relationship with Shearwater
Corporation, 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 business unit is focused on
the development of second-generation, "tailor made", and novel protein
therapeutics. At present, we have over ten active programs aimed at improving
therapeutic proteins, many of which are second-generation versions of
successfully marketed products.

       Examples of Potential Products in Protein Pharmaceutical Pipeline

<TABLE>
<CAPTION>
                                            Partner/Maxygen Estimated Potential
   Product              Disease Indication  Retained Rights    Market ($US)
   -------             -------------------- --------------- -------------------
   <S>                 <C>                  <C>             <C>
   Maxy10.............  CNS, including MS     Lundbeck         $  3 billion
   Maxy12............. Inflammatory disease   Maxygen          $700 million
   Maxy14.............        Cancer          NCI/Maxygen      $  1 billion
   Maxy20.............       Allergy          ALK-Abello       $1.6 billion
   Maxy30.............  Autoimmune disease    Maxygen          $  1 billion
</TABLE>

 Protein Pharmaceutical Alliances.

   ALK-Abello. In February 2001, we established a three-year collaboration
with ALK-Abello 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 will collaborate with ALK-Abello to create therapies
for treating specific

                                       8
<PAGE>

allergies, including allergies to house dust mites and grass, which are the
cause of many common allergies. Treatments for these allergies may provide ALK-
Abello with access to a market with a potential value of $1.6 billion. Under
the terms of the collaboration, we will receive license fees, technology access
fees, research and development funding, and potential milestone payments.
Payments to us could total a maximum of approximately $80 million. We will also
receive royalties on product sales. ALK-Abello will receive exclusive worldwide
rights to commercialize all recombinant human therapeutics developed in the
collaboration.

   Lundbeck. In September 2000, we established a three-year strategic alliance
with H. Lundbeck A/S, a Danish pharmaceutical company, to develop a protein
pharmaceutical product to address central 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 will receive research and development funding as well as license
fees, milestone payments and royalties on product sales. We also retain
development and marketing rights to the product in key Asian markets and global
rights for all indications outside of central nervous system diseases,
including inflammatory disease and cancer.

   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 will use our proprietary technologies to generate novel
recombinant allergens for the treatment and prevention of certain common
allergic conditions that the Karolinska Institute will help screen using sera
and lymphocytes from allergic patients. We will retain commercialization rights
without any future financial obligation for any application of potential
allergy products.

   National Cancer Institute. In February 2000, we entered into a cooperative
research and development agreement (CRADA) with the National Cancer Institute,
National Institute of Health. The CRADA is a three-year research agreement
under which we will work with the National Cancer Institute to develop
therapeutic proteins for the treatment of a certain type of cancer. Under the
agreement we have the right to acquire an exclusive license to intellectual
property developed in the CRADA for commercial use, subject to a non-exclusive
royalty-free license retained by the U.S. government.

 Vaccines

   Our vaccines business unit is dedicated to becoming the 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 vaccines in 1998 exceeded $4 billion
and are expected to exceed approximately $10 billion by 2005. 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 had estimated 1998 sales of $1.5 billion and is expected to have 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 vaccines traditional use as prophylactics for infectious
     diseases.

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

  .  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.

   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

                                       9
<PAGE>

responses. This would 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.

   Business Strategy. The strategy of our vaccines business unit is to partner
and independently develop new and improved preventative and therapeutic
vaccines. We will 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 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 unit has been built primarily through grant funding of
more than $22 million from the U.S. government. This funding has enabled us to
advance key programs and our technology platform as a whole.

   We have also received funding from the National Institute of Standards and
Technology--Advanced Technology Program (NIST--ATP) to develop novel screening
systems for the discovery and development of new AIDS therapies, vaccines and
novel and improved manufacturing processes.

   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 would 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 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.

  .  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 so frequently 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

                                      10
<PAGE>

     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 will be developed both internally by Maxygen, as well as through
corporate collaborations for specific product opportunities.

               Examples of Potential Products in Vaccine Pipeline

<TABLE>
<CAPTION>
                                                               Partner/Maxygen
   Product                              Disease Indication     Retained Rights
   -------                              ------------------     ---------------
   <S>                               <C>                      <C>
   Maxy201..........................           HIV            International AIDS
                                                              Vaccine Initiative
   Maxy1100......................... Treatment of Hepatitis B      Maxygen
   Maxy1200.........................   Treatment of Cancer         Maxygen
</TABLE>

   Our lead product is a therapeutic vaccine in pre-clinical development for
the treatment of cancer. In addition we have approximately ten prophylactic and
therapeutic vaccine candidates in our research pipeline.

 Vaccine Alliances

   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 will provide full
research and development funding to us for at least three years 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. According to the
World Health Organization and UNAIDS, 36.1 million people were living with
HIV/AIDS at the end of 2000. Worldwide, AIDS has become the leading cause of
death among infectious diseases. In 2000, AIDS killed 500,000 children and 2.5
million adults, and despite existing prevention efforts an additional 600,000
children and 4.7 million adults became infected with HIV, the virus that causes
AIDS. 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.

   DARPA. In 1998 and 1999 we received grants from the Defense Advanced
Research Projects Agency (DARPA) to use our MolecularBreeding directed
molecular evolution technologies to (i) evolve a new generation of DNA vectors
for rapid and efficient delivery of antigens for immunization, (ii) generate
new vaccines with a broad spectrum of activity against multiple strains of
several different pathogens and (iii) deliver aerosol-based preventative and
therapeutic agents.

   NIST-ATP. In 1997 we received a grant from the National Institute of
Standards and Technology-Advanced Technology Program (NIST-ATP) to use our
MolecularBreeding directed molecular evolution technologies to develop new
screening systems for use in accelerated discovery and development of new AIDS
therapies and vaccines.

                                       11
<PAGE>

Industrial Applications

 Chemicals

   Our chemicals business unit is dedicated to becoming the global leader in
providing proprietary biologically-based process solutions for the discovery
and manufacture of bulk, specialty and fine chemicals, including
pharmaceutical intermediates and products.

   Market Opportunity. The chemicals industry is comprised of three major
segments: commodity, specialty and fine. Together, 1999 sales in these three
segments exceeded $1.6 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:

<TABLE>
<CAPTION>
                                                                   Estimated
                                                                    Annual
   Product/Process                         Company                Sales ($US)
   ---------------                         -------                -----------
   <S>                       <C>                                 <C>
   Acrylamide............... Nitto                               $100+ million
   Polylactic Acid.......... Cargill-Dow, LLC                    $200 million
   Nicotinates (nitrile
    catalyst)............... Lonza                               $120 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
</TABLE>

   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 our MolecularBreeding directed molecular
evolution technologies are potentially able to overcome such shortcomings.

   Business Strategy. The chemical industry is undergoing a transformation in
the way it produces chemicals and materials. New genomic information from
various organisms will help make renewable resources the preferred energy
basis and carbon source for the manufacture of value-added chemicals and
materials in the years to come.

   Yet genomic information alone is not sufficient to complete the
transformation. New tools, such as the ability to manipulate genes and
pathways in innovative ways, are critical for the development of enzymes that
operate under conditions optimal for chemical processes, essentially serving
to fit the enzyme to the process rather than the process to the enzyme. Our
technologies represent a powerful means for improving the properties of
industrially relevant genes. For example, enhancements in the carbon
efficiency of fermentation processes may be derived from the optimization of
biochemical pathways in vivo. Biocatalysis will complement and in some cases
replace chemical catalysis, offering a more efficient and sustainable process.

   The success of the transformed chemical industry will not only depend on
new technologies to manufacture chemicals, but also on the discovery of new
chemicals and materials with novel functionalities. MolecularBreeding directed
molecular evolution technologies will help develop both new processes and new
chemicals with novel functionalities. Traditionally, this capability was
recognized as adding value only in pharmaceutical discovery, however with
technologies like MolecularBreeding directed molecular evolution technologies,
new molecules and structures that are cost-effective to synthesize may be
developed that will broadly impact the chemical industry.

   The business strategy of our chemicals business unit is to partner for
specific products and processes with leaders in relevant segments of the
chemical industry, ranging from commodity to pharmaceuticals, while

                                      12
<PAGE>

retaining rights within those segments to develop other processes internally
or to partner further down the process development value chain. To date, we
have entered into six collaborations with leading companies in their
respective segments for the development of specific products or processes.
These collaborations provide critical capabilities, revenues and a route to
market, helping to reduce the risk associated with developing a commercial
product. We provide our collaborators with a range of process development
capabilities, from fully integrated processes, single optimized process steps,
to optimized fermentation and biocatalyst evolution to enable competitive
proprietary product development.

   For products and processes where specialized market expertise or
significant capital is necessary, we will primarily work with partners to
reach commercialization. Examples of such products include fuels, bulk
chemicals and polymers, like polyester, specialty products like performance
thermoplastic resins and specialty process chemicals, like pulp and paper
chemicals.

   By retaining commercialization and research rights in our collaborations,
we expect to pursue independent development of high-value chemical products,
as well as enter into additional strategic alliances with leading chemical
companies. Furthermore, as we continue to expand our libraries of tested
biocatalysts, we should be able to address our customers' process needs with
increasing speed. This is critical in certain segments of the chemical
industry, such as the pharmaceutical manufacturing segment, where there is a
very narrow window within which the process chemist must determine the
economic and technical feasibility of a given process.

   Technology Platform. The chemicals business unit is focused on improving
existing chemical processes and creating novel processes for the manufacturing
of bulk, specialty and fine chemical products, including pharmaceuticals. Our
set of proprietary technologies can allow for the "evolution" of enzymes,
multi-enzyme pathways and organisms, overcoming the existing limitations of
enzyme catalysts and enabling the development of economically viable
biocatalytic and fermentative processes. We believe that our approach is
faster, better and less expensive than traditional methods, enabling a new
paradigm in process design in which a biological catalyst can be designed for
a process, rather than the process being designed around a catalyst.

   In addition to our DNAShuffling recombination technologies, we have
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, a specific stereo- or regioisomer are just some of the high-
throughput screening capabilities we have developed to identify conversions
and syntheses of interest. Coupled with the power of DNAShuffling
recombination technologies, our screening systems help enable us to rapidly
develop integrated, commercially viable chemical processes at the relevant
scale.

   We have demonstrated that MolecularBreeding directed molecular evolution
technologies can allow for the creation of new modified enzymes for use as
catalysts and modified metabolic pathways that overcome the limitations of
naturally occurring enzymes. We are currently generating libraries of
proprietary enzymes for use as catalysts, which we believe will offer
significant competitive advantages over existing chemical catalysts. These
enzymes could provide increased yields and decreased manufacturing costs by a
reduction in requirements for raw materials, capital equipment and energy. In
addition, we believe these enzyme catalysts will have applicability in
generating new useful materials and small molecule drug leads.

                                      13
<PAGE>

   Products/Pipeline. Our chemicals business unit 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 products
include specific pharmaceutical intermediates and actives, antibiotics,
vitamins and nutritional compounds and other fine chemicals.

             Examples of Potential Products in Chemicals Pipeline

<TABLE>
<CAPTION>
                                       Partner/Maxygen   Estimated Potential
   Product        Product/Process      Retained Rights       Market ($US)
   -------        ---------------      ---------------   -------------------
   <S>        <C>                      <C>             <C>
   MaxyC11... Industrial enzymes          Novozymes    $1.8 billion
   MaxyC13... Penicillin intermediates    DSM          $300+ million
   MaxyC17... CO\\2\\ abatement           Rio Tinto    $200-$350/ton of coal;
                                                        total coal consumption
                                                        1,400 million tons/yr
   MaxyC19... Approved pharmaceutical     Pfizer       $200 million
   MaxyC23... Methanol                    Chevron      $2 billion to $4 billion
   MaxyC27... Pulp & paper chemicals      Hercules     $13 billion
</TABLE>

We currently have over ten potential products in various stages of research
and three potential products in commercial development.

 Chemical Alliances

   Hercules. In October 2000, we entered into a four-year collaboration with
Hercules Incorporated focused on developing specific high value specialty
chemicals via custom-made biological catalysts for the pulp and paper
industry. Total 1999 worldwide sales of pulp and paper chemicals were
estimated to be over $13 billion. Under the terms of the collaboration, we
will receive full research funding, technology access fees, license fees and
milestone payments, as well as royalties on any product sales.

   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 will be 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, milestones, annual fees and product royalties.

   Pfizer. In September 2000, we extended a May 1998 agreement with Pfizer
Inc. in the area of biochemical manufacturing of a specific pharmaceutical
product. The product generates approximately $200 million in sales per year
for Pfizer. 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 under commercial
development by 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 has agreed to fund additional research and development at
Maxygen to allow us to further improve the performance of the pathway.

   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 CO\\2\\ emissions, which the U.S. Department of Energy estimates
to be approximately 1,400 million tons/yr with an

                                      14
<PAGE>

approximate abatement cost of $200 to $350/ton. In connection with the
collaboration, we will receive research and funding payments and technology
advancement fees. In addition, Maxygen and Rio Tinto each will share revenues
with the other from certain products or processes that are commercialized by
the other.

   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 penicillin
antibiotics. Antibiotics represent one of the largest product classes in the
anti-infectives market, with certain penicillin intermediates, such as PenG and
6-APA, representing annual market opportunities of $200 million to $300 million
in total product sales. We will receive research funding over three years and
will receive royalties from the commercialization of any enzymes developed
through our technologies.

   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 and bulk production
of specific industrial enzymes in fields such as laundry detergents, leather
processing and pulp and paper manufacturing. Novozymes had a market share of
43% of the industrial enzymes market in 1999. The total current industrial
enzymes market (a segment of the chemicals market) is estimated at $1.8
billion, and is expected to grow to over $3 billion by 2008. 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), in 2000 we announced the advancement of an
additional industrial enzyme product candidate into commercial development. We
will receive research funding over five years and will receive royalties from
the commercialization of any enzymes developed through our technologies.

   California Institute of Technology. In 1998, we expanded a research
cooperation with Dr. Frances Arnold's laboratory at the Department of Chemical
Engineering at the California Institute of Technology. Dr. Arnold's research
group focuses on developing evolutionary protein design methods, engineering
new enzymes and pathways, and using the results of laboratory evolution to
elucidate mechanisms of enzyme function and protein adaptation. Dr. Arnold has
collaborated with us since our inception.

   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

   Our agriculture business unit 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.

   Market Opportunity. The agricultural biotechnology seed market was estimated
at approximately $3 billion in sales in 2000. 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 100 million acres in
2000. Biotechnology crops create value by reducing farmer costs and simplifying
farming systems. Some examples of existing biotechnology-based products, an
estimate of their associated technology fees and the increase in 1999 planted
acres of biotechnology crops are listed below:

<TABLE>
<CAPTION>
                                             1999 Planted Acres    Est. 1999
   Crop                         Trait            (Millions)     Tech Fees ($US)
   ----                  ------------------- ------------------ ---------------
   <S>                   <C>                 <C>                <C>
   Soybean.............. Herbicide Tolerance        53.4         $330 million
   Corn.................   Insect Tolerant          18.5         $130 million
   Canola............... Herbicide Tolerance         8.7         $ 50 million
   Cotton............... Herbicide Tolerance         4.0         $ 25 million
   Corn................. Herbicide Tolerance         3.7         $ 20 million
   Cotton...............   Insect Tolerant           3.2         $100 million
</TABLE>

                                       15
<PAGE>

<TABLE>
<CAPTION>
                             1998 Planted Acres 1999 Planted Acres Increase from
   Crop                          (Millions)         (Millions)       1998-1999
   ----                      ------------------ ------------------ -------------
   <S>                       <C>                <C>                <C>
   Corn.....................        20.5               27.4            33.7%
   Cotton...................         6.2                9.1            48.0%
   Soybean..................        35.8               53.4            49.0%
   Canola...................         5.9                8.4            41.7%
</TABLE>

   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 include plants capable of resisting more pests and
diseases, further reducing agrochemical use, as well as crops with improved
nutrient value for both human food and animal feed. Biotechnology research is
also 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.

   Business Strategy. We aim 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.

   Our long-term goal is to develop products on our own but we will initially
enter the market through research and development relationships and through
product development alliances with seed and plant propagation businesses. Our
initial products will focus on non-food crops. We believe 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.

   Technology Platform. We believe our MolecularBreeding directed molecular
evolution technologies can be used to create numerous commercial opportunities
in crop protection and plant quality traits. Existing commercial product
performance can be enhanced by the technology, product concepts that have
failed during development for reasons of inadequate efficacy may be able to be
improved so that they can be commercialized and new product concepts may be
enabled by our technologies.

   While exploiting the advantages of MolecularBreeding directed molecular
evolution technologies to improve and develop new traits, we are committed to
become experts with regard to the use of the following technologies:

  .  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.

   We are devoting a significant share of our internal resources to develop
these technologies.

   Products/Pipeline. Both in collaboration with our partners and internally,
we are working on a broad portfolio of 14 potential products in areas of yield
improvement and quality traits. We have retained significant rights to develop
and market certain applications of the products resulting from the
collaborations. In addition to the existing collaborations, we are currently
pursuing and expect to pursue independent development of high-value
agricultural products, and intend to enter into additional strategic alliances
with leading agriculture companies.

   We currently have two products in development, one through our collaboration
with DuPont and one being developed internally at Maxygen.

                                       16
<PAGE>

 Agriculture Alliances

   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 utilize our MolecularBreeding directed molecular evolution
technologies to improve the yield and quality of several of Syngenta's
strategic crops. With global seed sales of $885 million, Syngenta currently
holds 5% of the $9-11 billion global market in field crop seed and 11% of the
$3-4 billion global market in vegetable and flower seed. We will receive
research and development funding as well as license fees, milestone payments
and royalties on product sales.

   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
MolecularBreeding directed molecular evolution 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 crop seed. With
global seed sales of $1.8 billion, Pioneer Hi-Bred currently holds 18% of the
global market in field crop seed, including 44% of U.S. corn seed sales and
19% of U.S. soybean seed sales. We will receive research and development
funding as well as license fees, milestone payments and royalties on product
sales.

Areas of Exploration

   In addition to our current areas of focus in human therapeutics and
industrial applications, we will continue to evaluate opportunities in new
business areas. We are assessing commercialization opportunities in the areas
of monoclonal antibodies, gene therapy, natural product drugs and small
molecule pharmaceuticals, nutraceuticals, animal health and nutrition
including veterinary vaccines, environmental applications, alternative fuels
and certain other applications. In many instances, initial technology
development and proof of principle models have already been established.
Additional development may be funded through corporate collaborators,
government grants, other external funding or with our own funds for those
products with significant potential.

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.

                                      17
<PAGE>

   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 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.

                                       18
<PAGE>

 Other Technologies

   In addition to our proprietary MolecularBreeding directed molecular
evolution technologies, we have acquired and developed several complementary
technologies to allow 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.

        [Graphical illustration of the MolecularBreeding process showing
                  genes undergoing DNAShuffling and MaxyScan]


 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 significantly reduces 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.

   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

                                       19
<PAGE>

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 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, which, when coupled with
our DNAShuffling recombination technologies, can provide a virtually infinite
amount of new, proprietary gene variants with potential commercial value.

   [Pictorial depiction of the product development process titled "Integrated
Product Development Process". The depiction has five boxes from left to right
across the page. The first box is labeled "Genes" under which is a picture of a
man with a sample vial in his hand. Under the box is a list consisting of the
words "In-house collection", "Partners", "Collaborators" and "Public sources".
The second box is labeled "Diversity Creation" under which is a picture of DNA
and a list consisting of the words "DNAShuffling", "PEGylation" and
"Glycosylation". The third box is labeled "Gene Expression" under which is a
picture of a petri dish streaked with organisms. Under the box is a list
containing the words "Mammalian", "Plants", "Insect", "Fungi" and "Bacterial".
The fourth box is labeled "Assay" under which is a pictorial representation of
a screen and two strands of DNA under the screen. Under the box is a list
containing the words "Mass Spec.", "In vivo animal assays", "In vivo plant
assays", "Bioassays", "Immunochemical assays", "Chemical assays" and
"Biochemical assays". The fifth box is labeled "Improved Products" under which
are four pictures, of a vial of drugs, an intravenous drip, a chemical plant
and a field of crops. Under the pictures is a list containing the words
"Protein Pharmaceuticals", "Vaccines", "Chemicals" and "Agriculture".]

                                       20
<PAGE>

   We use certain equipment and vendor 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 other 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. Impressive results
have been demonstrated in many different systems that have relevance to
multiple commercial applications. 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 to achieve further improvements beyond the limits of modern
biotechnology.

                                       21
<PAGE>

   A summary of representative experiments published by our scientists is set
forth below.

<TABLE>
<CAPTION>
        Example                Property           Activity Increase         Publication
        -------                --------           -----------------         -----------
 <C>                    <S>                     <C>                    <C>
 b-lactamase..........  Increased antibiotic    32,000-fold            Nature (1994)
                         resistance/enzyme
                         activity

 Antibody.............  Increased expression    100-fold               Nature Medicine
                         level                                         (1996)

 Antibody.............  Increased               >440-fold              Nature Medicine
                         antibody/receptor                             (1996)
                         binding

 Green fluorescent      Increased               45-fold                Nature Biotechnology
  protein.............   fluorescence                                  (1996)

 b-galactosidase to
  fucosidase..........  Increase in activity    66-fold activity       Proceedings of the
                                                                       National Academy of
                                                                       Sciences (1997)

                        Increase in             1,000-fold
                         specificity            specificity

 Arsenate pathway                               40-fold                Nature Biotechnology
  (3 genes)...........  Increased bacterial                            (1997)
                         resistance to
                         arsenate

 Cephalosporinase       Increased antibiotic    270-540-fold           Nature (1998)
  family..............   resistance

 Subtilisin protease..  Simultaneous            2 to 4 fold in 3       Nature Biotechnology
                         improvement in 3       properties             (1999)
                         properties

 Human b-interferon                             285,000-fold           Nature Biotechnology
  family..............  Increased activity as                          (1999)
                         measured by
                         antiviral activity
                         on mouse cells

 HSV thymidine kinase                           32-fold                Nature Biotechnology
  family..............  Increased sensitivity                          (1999)
                         to prodrug (AZT)
</TABLE>

Intellectual Property and Technology Licenses

   Pursuant to the technology transfer agreement we entered into with Affymax
Technologies N.V. and Glaxo Group Limited, each a wholly-owned subsidiary of
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.

   We have an extensive patent portfolio including 13 issued U.S. patents
relating to our proprietary MolecularBreeding directed molecular evolution
technologies. Counterpart applications of these U.S. patents are pending in
other major industrialized countries. We have an additional 231 pending U.S.
patent applications and 133 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, chemicals and therapeutic drugs.

                                      22
<PAGE>

   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;

  .  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; and

  .  in vivo and in vitro recombination methods of the above, in a variety of
     formats.

   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.

   We have exclusively licensed patent rights and technology for specific uses
from Novozymes, the California Institute of Technology (Caltech), Stanford
University, the University of Washington and GGMJ Technologies, L.L.C. These
licenses give us rights to eight issued U.S. patents, 21 U.S. pending patent
applications, and 93 additional international or foreign counterpart
applications.

   In addition, we 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
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 pharmaceutical and biopharmaceutical companies such as Ely Lilly and
Company, Pharmacia & Upjohn, Inc. and Amgen Inc. and from genomics 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 we face 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 we face 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

                                       23
<PAGE>

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 the leader in the field of directed molecular evolution. We are aware
that companies such as Diversa Corporation and Advanced Molecular Evolution
have alternative methods for obtaining and generating genetic diversity.
Academic institutions such as Caltech and the University of Washington are
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 MolecularBreeding directed
molecular evolution technologies.

   We are aware that Enchira Biotechnology and Diversa 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.

   On April 27, 2000, we announced that we had initiated an arbitration
proceeding against Enchira 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 the
Development and License Agreement entered into by Enchira and Maxygen in 1997,
pursuant to which we disclosed confidential information regarding our
MolecularBreeding directed molecular evolution technologies to Enchira. An
arbitration hearing was held in November 2000 and on March 8, 2001 we announced
that the arbitrator had found that Enchira had breached three separate
provisions of the Development and License Agreement. The arbitrator found that
the gene shuffling technology that Enchira calls Rachitt, and claims as its
own, "was derived from Maxygen's technologies and has no notable or significant
distinctions from those technologies" and that "Maxygen is the exclusive owner
of the gene shuffling technology contained in Rachitt". The arbitrator also
found that Enchira had misused our confidential information. There will be
further arbitration proceedings to determine the remedies we will receive for
Enchira's breaches of the Agreement.

Employees

   As of January 31, 2001 we had 256 employees, 97 of whom hold Ph.D., Ph.D.
equivalent or M.D. degrees and 196 of whom were engaged in full-time research
activities. We plan to expand our corporate development programs and hire
additional staff as corporate collaborations and government grants are
established. 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.

                                       24
<PAGE>

Directors and Executive Officers

   Our directors and executive officers, and their ages as of January 31,
2001, are as follows:

<TABLE>
<CAPTION>
                 Name                 Age               Position
                 ----                 ---               --------
 <C>                                  <C> <S>
 Russell J. Howard, Ph.D.............  50 Chief Executive Officer and Director
 Simba Gill, Ph.D....................  36 President
 Michael Rabson, Ph.D................  47 General Counsel and Senior Vice
                                          President
 Lawrence Briscoe....................  56 Chief Financial Officer and Senior
                                          Vice President
 John Bedbrook, Ph.D.................  51 President of Agriculture
 Isaac Stein(1)(2)...................  54 Chairman of the Board and Director
 Robert J. Glaser, M.D.(2)...........  82 Director
 M.R.C. Greenwood, Ph.D..............  57 Director
 Gordon Ringold, Ph.D.(1)(2).........  50 Director
 George Poste, D.V.M., Ph.D(1).......  56 Director
</TABLE>
--------
(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 Goodrich & Rosati, P.C. Before
becoming a member, Dr. Rabson was an associate at Wilson Sonsini 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 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., a financial services company 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. Before joining Maxygen, Dr. Bedbrook was chief executive officer
of Plant Science Ventures and was chief technology officer

                                      25
<PAGE>

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.

   Isaac Stein has served as our chairman of the board of directors since June
1998 and 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.

   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
also a director of the ALZA Corporation and Hanger Orthopedic Group, Inc. 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 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. Dr. Greenwood received
her Ph.D. in physiology, developmental biology and neurosciences from
Rockefeller University.

   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.
Dr. Poste was chief science and technology officer at SmithKline Beecham from
1997 to 1999 and was a member of the board of directors of SmithKline Beecham.
Before being appointed as chief science and technology officer, Dr. Poste was
president of research and development at SmithKline Beecham from 1989. Dr.
Poste is also a research professor at the University of Texas, MD Anderson
Cancer Center in Houston, holds the William Pitt Fellowship at Pembroke
College, Cambridge University, and is a Distinguished Visiting Fellow at the
Hoover Institution, Stanford University. He is a Board-certified pathologist.
Dr. Poste received his Doctorate in Veterinary Medicine in 1966 and his Ph.D.
in Virology in 1969 from the University of Bristol and was elected a Fellow of
the Royal Society in 1998.

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

                                      26
<PAGE>

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 similar work. 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 is funding work in Dr. Lederberg's laboratory pertaining to the study
of cell fusion and the generation of genetically diverse recombinants. 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 is
a biochemist by training and a highly successful biotechnology entrepreneur,
who has co-founded and built several companies including 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. Dr. Zaffaroni 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.

   Frances Arnold, Ph.D., is the Dick and Barbara Dickinson Professor of
Chemical Engineering and Biochemistry at the California Institute of
Technology. Dr. Arnold had authored or co-authored more than 130 publications
and has 25 patents issued or pending. Dr. Arnold's research focuses on
engineering new enzymes and pathways by directing their evolution in the
laboratory. A member of the National Academy of Engineering, her numerous
awards include the 2000 Professional Progress Award of the American Institute
of Chemical Engineers, the Office of Naval Research Young Investigator Award,
a Presidential Young Investigator Award and a David and Lucille Packard
Fellowship in Science and Engineering. Maxygen is funding work at Dr. Arnold's
laboratory pertaining to directed molecular evolution. Dr. Arnold provides on-
going guidance in the field of directed molecular evolution and its
applications in the chemical industry.

                                      27
<PAGE>

                                 RISK FACTORS

   You should carefully consider the risks described below, together with all
of the other information included in this report, and the documents
incorporated by reference herein and filed with the SEC, in considering our
business and prospects. The risks and uncertainties described below and
therein 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 for the year ended December 31, 2000. As of
December 31, 2000, we had an accumulated deficit of approximately $83.8
million. We expect to have increasing 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 on the level
of our expenses. To date, we have derived all our revenues from collaborations
and grants and expect to do so 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 research and
development and enhance our core technologies. As a result of our acquisition
of Maxygen ApS, we expect costs to increase further due to expanded
operations, integration costs associated with the acquisition and costs
associated with operating in multiple international locations. As a result, we
expect that our operating expenses will increase significantly in the near
term and, consequently, we will need to generate significant additional
revenues to achieve profitability. Even if we do achieve profitability, we may
not be able to sustain or increase profitability on a quarterly or annual
basis.

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 to develop and
commercialize products. We have entered into collaborative agreements with
other companies to fund the development of certain new products for specific
purposes. These contracts expire after a fixed period of time. If they are not
renewed or if we do not enter into new collaborative agreements, our revenues
will be reduced and our products may not be commercialized.

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

We 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 new and in the early stage of development. We may not develop

                                      28
<PAGE>

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

   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 rapid and substantial growth that has placed and, if
this growth continues as expected, will continue to place a strain on our
human and capital resources. If we are unable to manage this growth
effectively, our losses could increase. The number of our employees increased
from 74 at December 31, 1998 to 143 at December 31, 1999 to 252 at December
31, 2000. Our revenues increased from $2.7 million in 1998 to $14.0 million in
1999 to $24.5 million in 2000. Our ability to manage our operations and growth
effectively requires us to continue to expend funds to enhance our
operational, financial and management controls, reporting systems and
procedures and to attract and retain sufficient numbers of talented employees.
If we are unable to implement improvements to our management information and
control systems in an efficient or timely manner, or if we encounter
deficiencies in existing systems and controls, then management may have access
to inadequate information to manage our day-to-day operations. Failure to
attract and retain sufficient numbers of talented employees will further
strain our human resources and could impede our growth and ability to satisfy
our obligations under collaboration agreements. This would reduce our revenue,
increase our losses and harm our reputation in the marketplace.

                                      29
<PAGE>

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

   We are expanding internationally. We recently acquired Maxygen ApS (then
known as ProFound Pharma A/S), a Danish biotechnology company, and are now
operating with international business locations. Expansion into an
international operational entity will require 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
expand 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;

  .  cultural non-acceptance of genetic manipulation and genetic engineering;
     and

  .  potentially adverse tax consequences.

   To the extent we expand our international operations and have additional
portions of our international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in collecting accounts
receivable and risks relating to foreign currency exchange rate fluctuations.

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

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

  .  diversion of management time (both ours and that of the acquired
     company) from focus on operating the businesses to issues of integration
     and future products 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.

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

   Future acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt, contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could

                                      30
<PAGE>

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 Industries, If We
Focus Our Efforts on Industries That Fail to Produce Viable Product
Candidates, We May Fail to Capitalize on More Profitable Areas.

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

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

   Our success will depend in part upon our ability to develop products
discovered through our MolecularBreeding directed molecular evolution
technologies or other technologies. Governmental authorities could, for social
or other purposes, limit the use of genetic processes or prohibit the practice
of our MolecularBreeding directed molecular evolution technologies or other
technologies. Ethical and other concerns about our MolecularBreeding 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, We Will Have Less
Demand for Our Products.

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

   The subject of genetically modified organisms has received negative
publicity in Europe 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 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

                                      31
<PAGE>

competitors have entered into collaborations with leading companies within our
target markets to produce enzymes for commercial purposes.

   Any products that we develop through our proprietary 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 other intellectual property for our
technologies and products in the U.S. and other countries. If we do not
adequately protect our intellectual property, competitors may be able to
practice our technologies and erode our competitive advantage. The laws of
some foreign countries do not protect proprietary rights to the same extent as
the laws of the U.S., and many companies have encountered significant problems
in protecting their proprietary rights in these foreign countries. These
problems can be caused by, for example, a lack of rules and processes for
defending intellectual property rights.

   The patent positions of biopharmaceutical and biotechnology companies,
including our patent position, are generally uncertain and involve complex
legal and factual questions. We will be able to protect our proprietary rights
from unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. We will apply for patents covering our
technologies and products as we deem appropriate. However, we may not obtain
patents on all inventions that we seek to protect with 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. Others may independently develop similar or
alternative technologies or design around our patented technologies.
Furthermore, our existing patents and any future patents we obtain may not be
sufficiently broad to prevent others from developing competing 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 our proprietary information, and we may not be
able to meaningfully protect our trade secrets. In addition, others may
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets.

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

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

                                      32
<PAGE>

   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
effected products.

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

   On April 27, 2000, we announced that we had initiated an arbitration
proceeding against Enchira 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 the
Development and License Agreement entered into by Enchira and Maxygen in 1997,
pursuant to which we disclosed confidential information regarding our
MolecularBreeding directed molecular evolution technologies to Enchira. An
arbitration hearing was held in November 2000 and on March 8, 2001 we
announced that the arbitrator had found that Enchira had breached three
separate provisions of the Development and License Agreement. The arbitrator
found that the gene shuffling technology that Enchira calls Rachitt, and
claims as its own, "was derived from Maxygen's technologies and has no notable
or significant distinctions from those technologies" and that "Maxygen is the
exclusive owner of the gene shuffling technology contained in Rachitt". The
arbitrator also found that Enchira had misused our confidential information.
There will be further arbitration proceedings to determine the remedies we
will receive for Enchira's breaches of the Agreement.

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. There is currently a
shortage of skilled executives, which is likely to continue. As a result,
competition for skilled personnel is intense, and the turnover rate can be
high. Although we believe we will be successful in attracting and retaining
qualified personnel, competition for experienced scientists from numerous
companies and academic and other research institutions may limit our ability
to do so on acceptable terms. Failure to attract and retain personnel could
prevent us from pursuing collaborations or developing our products or core
technologies.

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


                                      33
<PAGE>

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

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

   Changes may also occur that would consume available capital resources
significantly sooner than we expect. We may be unable to raise sufficient
additional capital. If we fail to raise sufficient funds, we will have to
curtail or cease operations. We anticipate that the net proceeds from our
public offerings and interest earned thereon, together with existing cash and
cash equivalents and anticipated cash flows from operations, will enable us to
maintain our currently planned operations for at least the next 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 significant funds under
various U.S. government research and technology development programs. The
government may significantly reduce funding in the future for a number of
reasons. For example, some programs are subject to a yearly appropriations
process in Congress. Additionally, we may not receive funds under existing or
future grants because of budgeting constraints of the agency administering the
program. There can be no assurance that we will receive the entire funding
under our existing or future grants.

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


                                      34
<PAGE>

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

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

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

   The FDA currently applies the same regulatory standards to foods developed
through genetic engineering as 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.

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

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

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

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

   Our future products are expected to include pharmaceutical products. Our
ability and that of our collaborators to commercialize pharmaceutical products
developed with our technologies may depend in part on

                                      35
<PAGE>

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

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

   We work with scientific advisors, 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 to obtain product
liability insurance, this insurance may be prohibitively expensive, or may not
fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our collaborators. If we are
sued for any injury caused by our products, our liability could exceed our
total assets.

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

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

                                      36
<PAGE>

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

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

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

  .  changes in financial estimates by securities analysts;

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

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

  .  developments in domestic and international governmental policy or
     regulations;

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

  .  developments in patent or other proprietary rights;

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

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

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

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

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

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

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

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

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

  .  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

                                      37
<PAGE>

correspondingly reduce our operating expenses. In addition, we plan to
significantly increase operating expenses in 2001. 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 34% 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.

Item 2 PROPERTIES

   We lease an aggregate of 67,302 square feet of office and laboratory
facilities in Redwood City, California. Our leases expire on February 24, 2005
with respect to 31,166 square feet, on March 31, 2005 with respect to 16,714
square feet, on April 21, 2005 with respect to 7,912 square feet and on
February 24, 2005 with respect to 11,510 square feet. We also lease facilities
in Davis, California.

   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.

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

Item 3 LEGAL PROCEEDINGS

   We are not currently a party to any 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, 2000.

                                      38
<PAGE>

                                    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 since our
initial public offering on December 16, 1999 under the symbol MAXY. Before
such time, there was no public market for our common stock. Through December
31, 2000, the high and low sale prices for our common stock, as reported on
the Nasdaq National Market, were as follows:

<TABLE>
<CAPTION>
                                                                  High    Low
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Year ended December 31, 1999
     Fourth Quarter (from December 16, 1999).................... $ 82.00 $31.98
   Year ended December 31, 2000
     First Quarter..............................................  186.00  52.00
     Second Quarter.............................................   80.00  34.00
     Third Quarter..............................................   80.06  40.06
     Fourth Quarter.............................................   53.00  22.00
</TABLE>

   On March 15, 2001 the last reported sale price of our common stock on the
Nasdaq National Market was $12.50 per share. On March 14, 2001, there were
approximately 417 holders of record of our common stock.

Dividend Policy

   We have never declared or paid any cash 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.

Recent Sales of Unregistered Securities

   We made the following unregistered sales of our securities during the
quarter ended December 31, 2000:

  (i)  On November 30, 2000 we issued 373 shares of our common stock to a
       consultant in partial payment for consulting services rendered to us.

  (ii) On December 8, 2000 we issued 378 shares of our common stock to a
       second consultant in partial payment for consulting services rendered
       to us.

   There were no underwriters employed in connection with either 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 as transactions by an issuer not involving a public offering. The
recipients of 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. Both recipients
either received adequate information about us or had access, through
employment or other relationships, to such information. Both 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. A total of 6,900,000 shares
of our common stock were sold at a price of $16.00 per share to an
underwriting syndicate led by

                                      39
<PAGE>

Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc. and Invemed
Associates LLC. Of these 6,900,000 shares, 900,000 were issued upon exercise
of the underwriters' over-allotment option. The offering commenced on December
16, 1999 and closed on December 21, 1999. The initial public offering resulted
in gross proceeds of $110.4 million, $7.7 million of which was applied toward
the underwriting discount. Expenses related to the offering totaled
approximately $1.7 million. Net proceeds to us were approximately $101.0
million. From the time of receipt through December 31, 2000, the proceeds were
applied toward:

  .  purchases and installation of equipment and build-out of facilities,
     $5.4 million;

  .  repayment of indebtedness, $172,000;

  .  working capital, $2.7 million; and

  .  temporary investments in certificates of deposits, mutual funds and
     corporate debt securities, $91.6 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.

                                      40
<PAGE>

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 1 of Notes to Consolidated Financial Statements for
an explanation of the method used to determine the number of shares used in
computing pro forma net loss per share. See Note 9 of Notes to Consolidated
Financial Statements for information concerning the deemed dividend upon
issuance of convertible preferred stock in August 1999.

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                          ------------------------------------
                                           1997     1998      1999      2000
                                          -------  -------  --------  --------
                                           (in thousands, except per share
                                                        data)
<S>                                       <C>      <C>      <C>       <C>
Consolidated Statement of Operations
 Data:
Collaborative research and development
 revenue................................  $   341  $ 1,077  $  8,895  $ 13,299
Grant revenue...........................      --     1,646     5,122    11,166
                                          -------  -------  --------  --------
Total revenues..........................      341    2,723    14,017    24,465
Operating expenses:
  Research and development..............    2,757    7,207    16,094    38,534
  General and administrative............      915    3,010     4,998    12,486
  Stock compensation expense............      863    1,561     5,656    15,891
  Acquired in-process research and
   development..........................      --       --        --     28,959
  Amortization of intangible assets.....      --       --        --      3,419
                                          -------  -------  --------  --------
Total operating expenses................    4,535   11,778    26,748    99,379
                                          -------  -------  --------  --------
Loss from operations....................   (4,194)  (9,055)  (12,731)  (74,914)
Net interest income.....................      161      229     1,413    15,329
                                          -------  -------  --------  --------
Net loss................................   (4,033)  (8,826)  (11,318)  (59,585)
Deemed dividend upon issuance of
 convertible preferred stock............      --       --     (2,200)      --
                                          -------  -------  --------  --------
Net loss attributable to common
 stockholders...........................  $(4,033) $(8,826) $(13,518) $(59,585)
                                          =======  =======  ========  ========
Basic and diluted net loss per share....  $ (0.82) $ (1.31) $  (1.53) $  (1.96)
                                          =======  =======  ========  ========
Shares used in computing basic and
 diluted net loss per share.............    4,917    6,748     8,854    30,339
<CAPTION>
                                                    December 31,
                                          ------------------------------------
                                           1997     1998      1999      2000
                                          -------  -------  --------  --------
                                                   (in thousands)
<S>                                       <C>      <C>      <C>       <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments..  $ 2,693  $15,306  $136,343  $258,015
Working capital.........................    2,152   12,264   132,510   216,388
Total assets............................    3,154   17,600   145,578   301,699
Non-current portion of equipment
 financing..............................      --       --      1,644     1,295
Accumulated deficit.....................   (4,033) (12,859)  (24,177)  (83,762)
Total stockholders' equity..............    2,571   11,700   133,716   282,198
</TABLE>

                                      41
<PAGE>

QUARTERLY FINANCIAL DATA
(unaudited)

<TABLE>
<CAPTION>
                                                   Quarter Ended
                                        -------------------------------------
                                                   June     Sept.
                                        March 31,   30,      30,     Dec. 31,
                                        --------- -------  --------  --------
                                          (in thousands, except per share
                                                       data)
<S>                                     <C>       <C>      <C>       <C>
2000
Collaborative research and development
 revenue...............................  $ 3,046  $ 3,195  $  3,178  $  3,880
Grant revenue..........................    2,368    2,960     2,784     3,054
                                         -------  -------  --------  --------
Total revenues.........................    5,414    6,155     5,962     6,934
Operating expenses:
  Research and development.............    6,246    7,828    11,582    12,878
  General and administrative...........    2,013    2,842     2,881     4,750
  Stock compensation expense...........    4,911    3,192     2,767     5,111
  Acquired in-process research and
   development.........................      --       912    28,047       --
  Amortization of intangible assets....      --       --      1,847     1,572
                                         -------  -------  --------  --------
Total operating expenses...............   13,170   14,774    47,124    24,311
                                         -------  -------  --------  --------
Loss from operations...................   (7,756)  (8,619)  (41,162)  (17,377)
Net interest income....................    2,116    4,275     4,415     4,523
                                         -------  -------  --------  --------
Net loss...............................  $(5,640) $(4,344) $(36,747) $(12,854)
                                         =======  =======  ========  ========
Basic and diluted net loss per share...  $ (0.20) $ (0.14) $  (1.18) $  (0.40)
                                         -------  -------  --------  --------
Shares used in computing basic and
 diluted net loss per share............   28,062   30,188    31,165    31,942

<CAPTION>
                                                   Quarter Ended
                                        -------------------------------------
                                                   June     Sept.
                                        March 31,   30,      30,     Dec. 31,
                                        --------- -------  --------  --------
                                          (in thousands, except per share
                                                       data)
<S>                                     <C>       <C>      <C>       <C>
1999
Collaborative research and development
 revenue...............................  $ 1,330  $ 2,042  $  2,696  $  2,827
Grant revenue..........................      984    1,566     1,075     1,497
Total revenues.........................    2,314    3,608     3,771     4,324
Operating expenses:
  Research and development.............    2,554    4,472     4,307     4,761
  General and administrative...........      700    1,169     1,246     1,883
  Stock compensation expense...........      533      559     1,690     2,874
                                         -------  -------  --------  --------
Total operating expenses...............    3,787    6,200     7,243     9,518
                                         -------  -------  --------  --------
Loss from operations...................   (1,473)  (2,592)   (3,472)   (5,194)
Net interest income....................      170      192       421       630
                                         -------  -------  --------  --------
Net loss...............................   (1,303)  (2,400)   (3,051)   (4,564)
Deemed dividend upon issuance of
 convertible preferred stock...........      --       --     (2,200)      --
                                         -------  -------  --------  --------
Net loss attributable to common
 stockholders..........................  $(1,303) $(2,400) $ (5,251) $ (4,564)
                                         -------  -------  --------  --------
Basic and diluted net loss per share...  $ (0.18) $ (0.31) $  (0.63) $  (0.38)
                                         -------  -------  --------  --------
Shares used in computing basic and
 diluted net loss per share............    7,211    7,813     8,309    12,082
</TABLE>

                                       42
<PAGE>

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" 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. Our current collaborators are Novozymes, DuPont, Pfizer,
Syngenta, DSM, Rio Tinto, Lundbeck, Chevron, Hercules, ALK-Abello and IAVI.
Our government grants are from the Defense Advanced Research Projects Agency
and the National Institute of Standards and Technology-Advanced Technology
Program.

   Revenue under strategic alliances and government grants increased from $2.7
million in 1998 to $14.0 million in 1999 and to $24.5 million in 2000.
Revenues may fluctuate from period to period and there can be no assurance
that these collaboration agreements will continue for their initial term or
beyond.

   We have incurred significant losses since our inception. As of December 31,
2000, our accumulated deficit was $83.8 million and total stockholders' equity
was $282.2 million. We have invested heavily in establishing our proprietary
technologies. These investments have contributed to the increases in operating
expenses from $11.8 million in 1998, to $26.7 million in 1999 and to $99.4
million for 2000. Our total headcount increased from 74 employees at the end
of 1998 to 143 employees at the end of 1999 and to 252 employees at the end of
2000, of whom 77% were engaged in research and development. We expect to incur
additional operating losses over at least the next several years as we
continue to expand our research and development efforts and infrastructure.

   On August 10, 2000, we completed our acquisition of 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 accounted for as a purchase. 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
common stock issued, 228,766 shares were issued with repurchase rights that
lapse over a three year term. The purchase price, 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, $3.4 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.

Source of Revenue and Revenue Recognition Policy

   We recognize revenues from research collaboration agreements as earned upon
achievement of the performance requirements of the agreements. Revenue related
to grant agreements is recognized as related

                                      43
<PAGE>

research and development expenses are incurred. Our existing corporate
collaboration agreements generally provide for research funding for a
specified number of full time researchers working in defined research
programs. Revenue related to these payments is earned as the related research
work is performed. In addition, these collaborators generally make technology
advancement payments that are intended to fund development of our core
technology, as opposed to a defined research program. These payments are
recognized ratably over the applicable funding period. Payments received that
are related to future performance are deferred and recognized as revenue as
the performance requirements are achieved. As of December 31, 2000, we have
deferred revenues of approximately $9.0 million. Our sources of potential
revenue for the next several years are likely to be license, research,
technology advancement and milestone payments under existing and possible
future collaborative arrangements, government research grants, and royalties
from our collaborators based on revenues received from any products
commercialized under those agreements. 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 determined in accordance with Statement of Financial
Accounting Standards No. 123 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 $2.6 million in 1997, $2.4 million in 1998 and $19.5 million in
1999. These amounts were initially recorded as a component of stockholders'
equity and are being amortized as charges to operations over the vesting
period of the options using a graded vesting method. We recognized stock
compensation expense of approximately $1.6 million in 1998, $4.9 million in
1999 and $7.8 million in 2000 related to the deferred compensation
amortization on these option grants. In connection with the grant of stock
options to consultants, we recorded stock compensation expense of $0.3 million
in 1998, $0.8 million in 1999 and $3.0 million in 2000. Due to the
acceleration of an executive stock option award, an additional $1.6 million
stock compensation expense was recorded in 2000.

   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. 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.

Results of Operations

 Revenues

   Our total revenues increased from $2.7 million in 1998, to $14.0 million in
1999 and to $24.5 million in 2000. The increase was due primarily to the
increased activity related to our research collaborations with Syngenta and
DuPont in 1999, and DSM, Rio Tinto and Lundbeck in 2000, and increased
activities on existing government grants. We expect our revenues to increase
in 2001 as new projects are initiated under existing collaboration agreements
and as new collaboration arrangements are consummated.

 Research and Development Expenses

   Our research and development expenses consist primarily of salaries and
other personnel-related expenses, facility costs, supplies and depreciation of
facilities and laboratory equipment. Research and development expenses
increased from $7.9 million in 1998, to $19.3 million in 1999 and to $50.0
million in 2000. The

                                      44
<PAGE>

increases from year to year were due primarily to increased staffing and other
personnel-related costs to support our additional collaborative and internal
research efforts. Also included in research and development expenses is
$783,000 in 1999 and $958,000 in 2000 related to the acquisition of certain
technology licenses from research institutions, and stock compensation expense
of $651,000 in 1998, $3.2 million in 1999 and $11.5 million in 2000. We expect
research and development cost to increase in 2001 as new projects are
initiated under existing collaboration agreements and as new collaboration
arrangements are consummated. We expect to continue to devote substantial
resources to research and development, and we expect that research and
development expenses will continue to increase in absolute dollars. The
acquisition of Maxygen ApS will significantly increase our research and
development expense in absolute dollars.

   Research and development expenses represented 289% of total revenues in
1998, 137% of total revenue in 1999 and 204% of total revenue in 2000. The
decrease from 1998 to 1999 was due primarily to the growth in our total
revenue from 1998 and 1999. The increase from 1999 to 2000 was due primarily
to increased staff necessary to manage and support our growth plus increased
research and development costs resulting from our acquisition of Maxygen ApS,
offset in part by the growth in our total revenues. We expect that research
and development expenses will increase in the future.

 General and Administrative Expenses

   Our general and administrative expenses consist primarily of personnel
costs for finance, human resources, business development, legal and general
management, as well as professional expenses, such as legal and accounting.
General and administrative expenses increased from $3.9 million in 1998, to
$7.5 million in 1999 and to $17.0 million in 2000. The increases from year to
year were primarily due to increased staffing necessary to manage and support
our growth, and in 2000, increased costs associated with being a public
company. Also included in general and administrative expenses is stock
compensation expense of $910,000 in 1998, $2.5 million in 1999 and $4.5
million in 2000. We expect that our general and administrative expenses will
increase in absolute dollar amounts as we expand our legal and accounting
staff, add infrastructure and incur additional costs related to being a public
company, including directors' and officers' insurance, investor relations
programs and increased professional fees. We also expect that general and
administrative expenses will increase in absolute dollar amounts due to the
increased costs associated with integrating, operating and coordinating our
recently acquired operations in Denmark.

   General and administrative expenses represented 144% of total revenues for
1998, 53% of total revenues for 1999 and 71% of total revenues for 2000. The
decrease from 1998 to 1999 was due primarily to the growth in our total
revenue from 1998 to 1999. The increase from 1999 to 2000 was due primarily to
increased staffing necessary to manage and support our growth plus increased
costs associated with being a public company, offset in part by the growth in
our total revenues. We expect that general and administrative expenses as a
percentage of total revenue will decrease as our revenue increases and
research and development activities expand more quickly then our general and
administrative expenses.

 In-Process Research and Development

   On May 8, 2000, we acquired certain in-process technology through the
acquisition of a privately held California corporation. In connection with the
acquisition we issued 39,600 shares of our common stock. Pursuant to the terms
of the acquisition, 18,500 shares of our common stock are being held in escrow
until such time as 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. Before the
acquisition, Maxygen ApS was a Danish privately-held, development-stage
company that had minimal

                                      45
<PAGE>

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 are at a pre-clinical
stage of development, had not yet reached technological feasibility and had no
alternative future uses. 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 condensed consolidated financial
statements from August 10, 2000. See Note 12 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, to be attributable to the six pre-clinical stage in-process
research and development projects of Maxygen ApS 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 believes that the allocation of the purchase price to
in-process research and development is appropriate given the future potential
of this research and development to contribute to our operations. Assuming
these research projects continue through all stages of clinical development,
we project substantial future research and development expenditures will be
necessary to complete the projects over the next 6 to 10 years. Further, we do
not expect to complete any of these projects for at least six years.

   There can be no assurance that the in-process projects acquired, as noted
above, 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 have a material adverse affect on our business and
financial condition.

   We expect to incur costs associated with the integration of Maxygen ApS.
There can be no assurance that we will be successful in our efforts to
integrate the operations of Maxygen ApS. 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.

 Goodwill and Other Intangible Assets

   In connection with the Maxygen ApS acquisition, we allocated $26.2 million
to goodwill and other intangible assets and will amortize this goodwill and
other intangible assets over three years, the term of expected benefit. We
believe this term is reasonable given that Maxygen ApS was a development stage
entity and its technology is at an early stage of development and is yet
unproven. In 2000, $3.4 million of amortization expense was recorded on
goodwill and other intangible assets.

   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. If 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. 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 in 1998, 1999 or 2000.

                                      46
<PAGE>

 Net Interest Income

   Net interest income represents income earned on our cash, cash equivalents
and marketable securities net of interest expense. Net interest income
increased from $229,000 in 1998, to $1.4 million in 1999 and to $15.3 million
in 2000. The increase from 1998 to 1999 was due to higher average cash
balances. The increase from 1999 to 2000 was due to higher average balances of
cash, cash equivalents and marketable securities as a result of our public
offerings in December 1999 and March 2000.

 Provision for Income Taxes

   We incurred net operating losses in 1998, 1999 and 2000, and consequently
we did not pay any federal, state or foreign income taxes. As of December 31,
2000, we had a federal net operating loss carryforwards of approximately $11.9
million. We also had federal research and development tax credit carryforwards
of approximately $1.0 million. If not utilized, the net operating losses and
credit carryforwards will expire at various dates beginning in 2011 through
2019. Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the change in the ownership provisions of
the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization. See Note 10 of Notes to Consolidated Financial
Statements.

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 $45.5 million. As of December 31, 2000, we had $258.0 million in
cash, cash equivalents and investments.

   Our operating activities used cash of $2.7 million in 1998, $3.0 million in
1999 and $12.8 million in 2000. Uses of cash in operating activities were
primarily to fund net operating losses.

   Net cash used in investing activities was $760,000 in 1998, $4.5 million in
1999 and $151.1 million in 2000. The cash used in 2000 primarily represented
purchases of available-for-sale securities of $179.1 million, less maturities
of available for sale securities of $33.0 million.

   Additions of property and equipment were $760,000 in 1998, $4.5 million in
1999 and $5.4 million in 2000. We expect to continue to make significant
investments in the purchase of property and equipment to support our expanding
operations. We may use a portion of our cash to acquire or invest in
complementary businesses, products or technologies, or to obtain the right to
use such complementary technologies.

   Financing activities provided cash of $16.1 million in 1998, $128.6 million
in 1999 and $139.0 million in 2000. The 1999 amount primarily consists of the
net proceeds we received from the sale of common stock in our initial public
offering in December 1999. The 2000 amount primarily consists of the net
proceeds we received from the sale of common stock in a follow-on public
offering in March 2000.

   Assuming our research efforts for existing collaborations are expended for
the full research term, as of December 31, 2000 we have total committed
funding of $120.9 million, of which approximately $93.7 million is from our
collaborators and $27.2 million is from government funding. Of these committed
funds, we have $75.4 million remaining to be received over the next four
years. In addition, potential milestone payments from our existing
collaborations could exceed $240 million based on the accomplishment of
specific performance criteria, and we may 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 12 months.
However, it

                                      47
<PAGE>

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.

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. As of December 31,
2000, approximately 86% 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, 2000 (dollars in thousands):

<TABLE>
<CAPTION>
                                                                2001     2002
                                                              --------  -------
   <S>                                                        <C>       <C>
   Cash and cash equivalents................................. $111,374      --
   Average interest rates....................................     6.67%     --
   Short-term investments.................................... $110,805      --
   Average interest rates....................................     6.91%     --
   Long-term investments.....................................      --   $35,836
   Average interest rates....................................      --      6.86%
</TABLE>

   We did not hold derivative instruments intended to mitigate interest rate
risk as of December 31, 2000, and we have never held such instruments in the
past. In addition, we had outstanding debt, consisting of borrowings under an
equipment financing line of credit, of $1.8 million as of December 31, 2000,
with a range of interest rates of between 11.73% and 12.78%.

   At December 31, 1999 our interest rate risk was confined to our cash and
cash equivalents, which have maturities of less than three months. Due to
their very short-term nature, these investments were subject to minimal
interest rate risk.

Foreign Currency Risk

   A substantial majority of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, beginning in fiscal 2000
we began to enter into transactions in 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 balance sheet hedging programs.
Currency forward contracts are utilized in these hedging programs. Our hedging
programs reduce, but do not always entirely eliminate, the impact of foreign
currency exchange rate movements. Gains and losses on these foreign currency
investments would generally be offset by corresponding losses and gains on the
related hedging instruments, resulting in negligible net exposure to Maxygen.

   At December 31, 2000 we had a total of $14.5 million committed in foreign
currency cash flow forward contracts. The fair value of these forward
contracts as at December 31, 2000 was immaterial.

                                      48
<PAGE>

Item 8 FINANCIAL STATEMENTS

               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, 1999 and 2000, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Maxygen, Inc. at December 31, 1999 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States.

                                          /s/ Ernst &Young LLP

Palo Alto, California
February 2, 2001

                                      49
<PAGE>

                                 MAXYGEN, INC.

                          CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1999      2000
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------
Current assets:
  Cash and cash equivalents................................ $136,343  $111,374
  Short-term investments...................................      --    110,805
  Grant and other receivables..............................    3,038     8,425
  Prepaid expenses and other current assets ...............      800     1,180
                                                            --------  --------
    Total current assets ..................................  140,181   231,784
  Property and equipment, net..............................    4,764     9,916
  Goodwill and other intangible assets, net of accumulated
   amortization of $3,418..................................      --     22,760
  Long-term investments....................................      --     35,836
  Deposits and other assets................................      633     1,403
                                                            --------  --------
    Total assets........................................... $145,578  $301,699
                                                            ========  ========

           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------

Current liabilities:
  Accounts payable......................................... $    370  $  2,143
  Accrued compensation.....................................      393     1,859
  Accrued legal............................................      379       935
  Other accrued liabilities................................    1,424     3,698
  Deferred revenue.........................................    4,935     6,228
  Current portion of equipment financing obligations.......      170       533
                                                            --------  --------
    Total current liabilities..............................    7,671    15,396
Deferred revenue...........................................    2,527     2,810
Non-current portion of equipment financing obligations.....    1,664     1,295

Commitments

Stockholders' equity:
  Preferred stock, $0.0001 par value, 5,000,000 shares
   authorized, no shares issued and outstanding at December
   31, 1999 and 2000.......................................      --        --
  Common stock, $0.0001 par value, 70,000,000 and
   100,000,000 shares authorized at December 31, 1999 and
   2000, respectively, 30,860,781 and 33,576,736 shares
   issued and outstanding at December 31, 1999 and 2000,
   respectively............................................        3         3
  Additional paid-in capital ..............................  176,517   386,026
  Notes receivable from stockholders.......................   (1,411)     (776)
  Deferred stock compensation .............................  (17,216)  (19,880)
  Accumulated other comprehensive income (loss)............      --        587
  Accumulated deficit .....................................  (24,177)  (83,762)
                                                            --------  --------
    Total stockholders' equity.............................  133,716   282,198
                                                            --------  --------
    Total liabilities and stockholders' equity............. $145,578  $301,699
                                                            ========  ========
</TABLE>

                            See accompanying notes.

                                       50
<PAGE>

                                 MAXYGEN, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                   ---------------------------
                                                    1998      1999      2000
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Collaborative research and development revenue ..  $ 1,077  $  8,895  $ 13,299
Grant revenue....................................    1,646     5,122    11,166
                                                   -------  --------  --------
Total revenues...................................    2,723    14,017    24,465
Operating expenses:
  Research and development ......................    7,207    16,094    38,534
  General and administrative.....................    3,010     4,998    12,486
  Stock compensation expense(1) .................    1,561     5,656    15,981
  Acquired in-process research and development...      --        --     28,959
  Amortization of goodwill and other intangible
   assets........................................      --        --      3,419
                                                   -------  --------  --------
Total operating expenses.........................   11,778    26,748    99,379
                                                   -------  --------  --------
Loss from operations.............................   (9,055)  (12,731)  (74,914)
Interest income (expense), net...................      229     1,413    15,329
                                                   -------  --------  --------
Net loss.........................................   (8,826)  (11,318)  (59,585)
Deemed dividend upon issuance of convertible
 preferred stock (Note 9)........................      --     (2,200)      --
                                                   -------  --------  --------
Net loss attributable to common stockholders.....  $(8,826) $(13,518) $(59,585)
                                                   -------  --------  --------
Basic and diluted net loss per share.............  $ (1.31) $  (1.53) $  (1.96)
                                                   -------  --------  --------
Shares used in computing basic and diluted net
 loss per share..................................    6,748     8,854    30,339
</TABLE>

--------
(1) Stock compensation expense related to the following:
<TABLE>
<S>                                                       <C>    <C>    <C>
  Research and development............................... $  651 $3,156 $11,468
  General and administrative.............................    910  2,500   4,513
                                                          ------ ------ -------
                                                          $1,561 $5,656 $15,981
                                                          ====== ====== =======
</TABLE>


                            See accompanying notes.

                                       51
<PAGE>

                                 MAXYGEN, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              (In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
                      Convertible                                        Notes                   Accumulated
                    Preferred Stock       Common Stock     Additional Receivables    Deferred       Other
                   -------------------  ------------------  Paid-In       from        Stock     Comprehensive Accumulated
                     Shares     Amount    Shares    Amount  Capital   Stockholders Compensation    Income       Deficit
                   -----------  ------  ----------  ------ ---------- ------------ ------------ ------------- -----------
<S>                <C>          <C>     <C>         <C>    <C>        <C>          <C>          <C>           <C>
Balance at
January 1, 1998..    2,790,000  $ --     7,660,000   $ 1    $  8,668    $  (279)    $  (1,776)      $ --       $  (4,033)
Issuance of
Series A
convertible
preferred stock
to investors at
$2.00 per share
for cash.........        5,000    --           --    --           10        --            --          --             --
Issuance of
Series B
convertible
preferred stock
to investors at
$3.00 per share
for cash, less
issuance cost of
$36..............    3,666,667      1          --    --       10,966        --            --          --             --
Issuance of
Series C
convertible
preferred stock
to a collaborator
for cash at $5.00
per share........    1,000,000    --           --    --        5,000        --            --          --             --
Options granted
to consultants
for services
rendered.........          --     --           --    --          209        --            --          --             --
Issuance of
common stock to
consultants for
cash and services
and to employees
upon exercise of
stock options for
cash and
promissory notes
 .................          --     --     1,570,500   --          477       (269)          --          --             --
Deferred stock
compensation.....          --     --           --    --        2,386        --         (2,386)        --             --
Amortization of
deferred stock
compensation.....          --     --           --    --          --         --          1,561         --             --
Net loss and
comprehensive
loss.............          --     --           --    --          --         --            --          --          (8,826)
                   -----------  -----   ----------   ---    --------    -------     ---------       -----      ---------
Balance at
December 31,
1998.............    7,461,667      1    9,230,500     1      27,706       (548)       (2,601)        --         (12,859)
Issuance of
common stock to
employees upon
exercise of
options for cash
and promissory
notes............          --     --     2,640,650   --        1,645       (863)          --          --             --
Options granted
to consultants
for services
rendered.........          --     --           --    --          875        --            --          --             --
Issuance of
common stock for
services rendered
and certain
technology
rights...........          --     --       191,600   --          845        --            --          --             --
Issuance of
Series D
convertible
preferred stock
to investors at
$5.50 per share
for cash, less
issuance costs of
$37..............    3,636,364    --           --    --       19,963        --            --          --             --
Issuance of
Series E
convertible
preferred stock
to a collaborator
at $6.25 per
share............      800,000    --           --    --        5,000        --            --          --             --
Issuance of
common stock for
initial public
offering at
$16.00 per share
less issuance
costs of $9,403..          --     --     6,900,000     1     100,996        --            --          --             --
Conversion of
convertible
preferred stock
to common stock..  (11,898,031)    (1)  11,898,031     1         --         --            --          --             --
Deferred stock
compensation.....          --     --           --    --       19,487        --        (19,487)        --             --
Amortization of
deferred stock
compensation.....          --     --           --    --          --         --          4,872         --             --
Net loss and
comprehensive
loss.............          --     --           --    --          --         --            --          --         (11,318)
                   -----------  -----   ----------   ---    --------    -------     ---------       -----      ---------
Balance at
December 31,
1999.............          --     --    30,860,781     3     176,517     (1,411)      (17,216)        --         (24,177)
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........          --     --           --    --          --         --            --          --         (59,585)
 Currency
 translation
 adjustment......          --     --           --    --          --         --            --           66            --
 Change in
 unrealized gain
 on available-
 for-sale
 securities......          --     --           --    --          --         --            --          521            --
 Comprehensive
 loss............          --     --           --    --          --         --            --          --             --
                   -----------  -----   ----------   ---    --------    -------     ---------       -----      ---------
Balance at
December 31,
2000.............          --   $ --    33,576,736   $ 3    $386,026    $  (776)    $ (19,880)      $ 587      $ (83,762)
                   ===========  =====   ==========   ===    ========    =======     =========       =====      =========
<CAPTION>
                       Total
                   Stockholders'
                      Equity
                   -------------
<S>                <C>
Balance at
January 1, 1998..    $   2,571
Issuance of
Series A
convertible
preferred stock
to investors at
$2.00 per share
for cash.........           10
Issuance of
Series B
convertible
preferred stock
to investors at
$3.00 per share
for cash, less
issuance cost of
$36..............       10,967
Issuance of
Series C
convertible
preferred stock
to a collaborator
for cash at $5.00
per share........        5,000
Options granted
to consultants
for services
rendered.........          209
Issuance of
common stock to
consultants for
cash and services
and to employees
upon exercise of
stock options for
cash and
promissory notes
 .................          208
Deferred stock
compensation.....          --
Amortization of
deferred stock
compensation.....        1,561
Net loss and
comprehensive
loss.............       (8,826)
                   -------------
Balance at
December 31,
1998.............       11,700
Issuance of
common stock to
employees upon
exercise of
options for cash
and promissory
notes............          782
Options granted
to consultants
for services
rendered.........          875
Issuance of
common stock for
services rendered
and certain
technology
rights...........          845
Issuance of
Series D
convertible
preferred stock
to investors at
$5.50 per share
for cash, less
issuance costs of
$37..............       19,963
Issuance of
Series E
convertible
preferred stock
to a collaborator
at $6.25 per
share............        5,000
Issuance of
common stock for
initial public
offering at
$16.00 per share
less issuance
costs of $9,403..      100,997
Conversion of
convertible
preferred stock
to common stock..          --
Deferred stock
compensation.....          --
Amortization of
deferred stock
compensation.....        4,872
Net loss and
comprehensive
loss.............      (11,318)
                   -------------
Balance at
December 31,
1999.............      133,716
Issuance of
common stock to
employees and
upon exercise of
options for cash
and promissory
notes............        1,063
Options granted
to consultants
for services
rendered.........        2,944
Issuance of
common stock for
services rendered
and certain
technology
rights...........        1,001
Issuance of
common stock for
follow-on
offering at
$97.00 per share
less issuance
costs of $8,167..      137,332
Issuance of
common stock and
options for
acquisitions.....       51,560
Repurchase of
common stock and
cancellation of
options..........          (8)
Payments of
stockholder
notes............          584
Acceleration of
employee stock
options..........        1,575
Amortization of
deferred
compensation.....       11,429
Components of
comprehensive
loss:............
 Net loss........      (59,585)
 Currency
 translation
 adjustment......           66
 Change in
 unrealized gain
 on available-
 for-sale
 securities......          521
 Comprehensive
 loss............      (58,998)
                   -------------
Balance at
December 31,
2000.............    $ 282,198
                   =============
</TABLE>

                            See accompanying notes.

                                       52
<PAGE>

                                 MAXYGEN, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                 ----------------------------
                                                  1998      1999      2000
                                                 -------  --------  ---------
<S>                                              <C>      <C>       <C>
Operating activities
Net loss........................................ $(8,826) $(11,318) $ (59,585)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation and amortization.................     178       729      1,611
  Amortization of intangible assets.............     --        --       3,418
  Non-cash stock compensation...................   1,561     4,862     13,004
  Common stock issued and stock options granted
   to consultants for services rendered and for
   certain technology rights....................     332     1,730      3,945
  Acquired in-process research and development..     --        --      28,959
  Changes in operating assets and liabilities:
    Grant and other receivables.................    (590)   (2,438)    (5,137)
    Prepaid expenses and other current assets...    (239)     (529)      (380)
    Deposits and other assets...................    (422)     (211)      (770)
    Accounts payable............................     365       (96)    (3,714)
    Accrued liabilities.........................     208     1,757      4,296
    Deferred revenue............................   4,691     2,572      1,576
    Other.......................................      53      (105)       (19)
                                                 -------  --------  ---------
Net cash used in operating activities...........  (2,689)   (3,047)   (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
Acquisition of property and equipment...........    (760)   (4,492)    (5,366)
                                                 -------  --------  ---------
Net cash used in investing activities...........    (760)   (4,492)  (151,137)
                                                 -------  --------  ---------
Financing activities
Proceeds from issuance of convertible preferred
 stock, net of issuance costs...................  14,477    24,963        --
Proceeds from notes payable.....................   1,500       --         --
Borrowings under equipment financing
 obligations....................................     --      1,834        166
Repayments under equipment financing
 obligations....................................     --        --        (172)
Payments received on promissory notes...........     --        --         584
Proceeds from issuance of common stock, net of
 issuance costs.................................      85   101,779    138,386
                                                 -------  --------  ---------
Net cash provided by financing activities.......  16,062   128,576    138,964
                                                 -------  --------  ---------
Net increase (decrease) in cash and cash
 equivalents....................................  12,613   121,037    (24,969)
Cash and cash equivalents at beginning of
 period.........................................   2,693    15,306    136,343
                                                 -------  --------  ---------
Cash and cash equivalents at end of period...... $15,306  $136,343  $ 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
Issuance of common stock in exchange for note
 receivable..................................... $   269  $    863  $     --
Conversion of note payable to preferred stock... $ 1,500  $    --   $     --
</TABLE>

                            See accompanying notes.

                                       53
<PAGE>

                                 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", 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
pharmaceuticals, 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, all
rights to the MolecularBreeding directed molecular evolution technologies 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. If the financing arrangements contemplated by
management are not consummated, the Company may have to seek other sources of
capital or reevaluate its operating plans.

   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, and Maxygen Holdings Ltd. (Cayman). All
significant intercompany balances and transactions have been eliminated in
consolidation.

 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.

 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 equity securities, municipal, government and
debt obligations. Short and long-term investments include municipal,
government and 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'

                                      54
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

   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. The
Company is exposed to market risk, such as changes in interest rates and
currency exchange rates.

   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 entered into only foreign currency forward exchange contracts
generally expiring within one year to reduce the effects of fluctuating
foreign currency exchange rates on forecasted cash requirements.

   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 discontinues
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
and are with a large financial institution rated as strong investment grade by
a major rating agency. At December 31, 2000, these cash flow hedges were
highly effective.

   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. The contracts have varying maturities with none exceeding 12
months. 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, 2000, the Company had foreign currency contracts in the form of
forward exchange contracts in the amount of $14.5 million.


                                      55
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 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, 1999 and 2000 consist of balances due from government agencies.

 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
six years or the estimated useful life of the assets.

 Goodwill and Other Intangible Assets

   Goodwill and other intangible assets are amortized using the straight-line
method over the assets' estimated useful lives of three years. See Note 12 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
goodwill) 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

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") that was adopted in the quarter ended December 31, 2000. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements and specifically
addresses revenue recognition for non-refundable technology access fees. The
Company's revenue recognition policies comply with SAB 101 and thus the
adoption did not have any effect on its results of operations.

   Revenue related to collaborative research with the Company's corporate
collaborators is recognized as research services are performed over the related
funding periods for each contract. Under these agreements, the Company is
required to perform research and development activities as specified in each
respective agreement. The payments received under each respective agreement are
not refundable and are generally based on a contractual cost per full-time
equivalent employee working on the project. Research and development expenses
under the collaborative research agreements approximate or exceed the revenue
recognized under such agreements over the term of the respective agreements.
Deferred revenue may result when the Company does not incur the required level
of effort during a specific period in comparison to funds received under the
respective contracts. Milestone payments, if any, will be recognized pursuant
to collaborative agreements upon the achievement of specified research
milestones. Royalties, if any, will be recognized when earned.


                                       56
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The Company was awarded Defense Advanced Research Projects Agency grants and
National Institute of Standards and Technology-Advanced Technology Program
grants totaling approximately $27.2 million since inception for various
research and development projects. The terms of these grant agreements are
three years. Revenue related to grant agreements is recognized as related
research and development expenses are incurred.

 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 as well as 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.

 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 the fair value of
the Company's common stock on the date of the grant. In 1998, 1999 and 2000,
the Company recognized deferred stock compensation related to certain stock
option grants. See Note 9. Pro forma information required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") is also included in Note 9.

   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.

 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. Unaudited pro forma basic and
diluted net loss per common share has been computed for the years ended
December 31, 1998 and 1999 as described above, and also gives effect to the
conversion of the convertible preferred stock that automatically converted to
common stock immediately before the completion of the Company's initial public
offering (using the if-converted method) from the original date of issuance.

                                       57
<PAGE>

                                 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):

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                   ---------------------------
                                                    1998      1999      2000
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Net loss attributable to common stockholders...... $(8,826) $(13,518) $(59,585)
                                                   =======  ========  ========
Basic and diluted:
  Weighted-average shares of common stock
   outstanding....................................   8,789    10,879    32,466
  Less: weighted-average shares subject to
   repurchase.....................................  (2,041)   (2,025)   (2,127)
                                                   -------  --------  --------
  Weighted-average shares used in computing basic
   and diluted net loss per share.................   6,748     8,854    30,339
                                                   =======  ========  ========
Basic and diluted net loss per share.............. $ (1.31) $  (1.53) $  (1.96)
                                                   =======  ========  ========
Pro forma: (unaudited)
  Share used above................................   6,748     8,854
  Pro forma adjustment to reflect weighted effect
   of conversion
   of convertible preferred stock (unaudited).....   5,014     9,395
                                                   -------  --------
  Shares used in computing pro forma basic and
   diluted net loss per share (unaudited).........  11,762    18,249
                                                   =======  ========
  Pro forma basic and diluted net loss per share
   (unaudited).................................... $ (0.75) $  (0.74)
                                                   =======  ========
</TABLE>

   The Company has excluded all convertible preferred stock, outstanding stock
options and shares subject to repurchase from the calculation of diluted loss
per common share because all such securities are antidilutive for all 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 11,305,000 at December 31, 1998, 2,601,000 at
December 31, 1999 and 6,652,000 at December 31, 2000. Such securities, had they
been dilutive, would have been included in the computations of diluted net loss
per share. See Note 9 for further information on these securities.

2. Cash Equivalents and Investments

   The Company's cash equivalents and investments as of December 31, 2000 are
as follows (in thousands):

<TABLE>
<CAPTION>
                                                Gross      Gross    Estimated
                                  Amortized   Unrealized Unrealized   Fair
                                    Cost        Gains      Losses     Value
                                  ---------   ---------- ---------- ---------
   <S>                            <C>         <C>        <C>        <C>
   Money market funds............  $ 42,992     $ --       $ --     $  42,992
   Corporate debt obligations....    92,502       518        (62)      92,958
   Commercial paper..............   122,000        65        --       122,065
                                  ---------     -----      -----    ---------
     Total.......................   257,494       583        (62)     258,015
   Less amounts classified as
    cash equivalents.............  (111,374)      --         --      (111,374)
                                  ---------     -----      -----    ---------
   Total investments.............  $146,120     $ 583       $(62)   $ 146,641
                                  =========     =====      =====    =========
</TABLE>

   At December 31, 1999, cash equivalents consisted of money market funds and
amortized costs were equal to fair market value. Realized gains or losses on
the sale of available-for-sale securities for 1998, 1999 and 2000 were
insignificant.

                                       58
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   At December 31, 2000, the contractual maturities of investments were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                       Estimated
                                                             Amortized   Fair
                                                               Cost      Value
                                                             --------- ---------
     <S>                                                     <C>       <C>
     Due within one year.................................... $110,475  $110,805
     Due after one year.....................................   35,645    35,836
                                                             --------  --------
                                                             $146,120  $146,641
                                                             ========  ========
</TABLE>

3. Collaborative Agreements

   At December 31, 2000, the Company had nine active multi-year research and
development collaborations with collaborative partners. These agreements
generally 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 employees to the research
efforts over defined terms ranging from three to five years. Total revenue
recognized under the collaboration agreements was $1.1 million in 1998, $8.9
million in 1999 and $13.3 million in 2000.

   Assuming the Company's research efforts for existing collaborations are
expended for the full research term, the Company has total committed funding of
approximately $93.7 million from their collaborators. The Company can receive
potential milestone payments from existing collaborations, which could exceed
$240 million, based on the accomplishment of specific performance criteria, in
addition to earned royalties on product sales or cost savings.

   In general, our research obligations and the obligations of our corporate
partners to provide research funding cannot be terminated before the end of the
research term unless there has been a material breach of the 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.

   The following table represents the percentage of the Company's collaborative
revenue that has been recognized pursuant to the Company's largest
collaborators:

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                               1998  1999  2000
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Partner A................................................ 50.5%  5.1%  3.8%
     Partner B................................................ 15.2%  2.1%  0.6%
     Partner C................................................  5.8% 67.5% 45.1%
     Partner D................................................  --   17.9% 33.0%
</TABLE>

   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. These equity purchases and other significant terms of current
and prior collaborators are described below.

 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, Hercules will retain exclusive worldwide commercialization
rights for specific

                                       59
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

applications of products generated in the collaboration. The Company will
retain rights to all applications of products not exclusively licensed to
Hercules. The collaboration is focused on a number of high revenue-generating
products in Hercules' core business.

 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, Chevron
will receive worldwide commercialization rights.

 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 a protein pharmaceutical product that
could be used for central nervous system diseases, including multiple
sclerosis. 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 central
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
Pfizer's 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.

 Technological Resources PTY Limited

   In January 2000, the Company entered into a three-year collaborative
research and development agreement with Technological Resources PTY Limited, a
wholly-owned subsidiary of Rio Tinto Limited ("TRPL"), to develop novel
enzymatic systems to increase the efficiency of carbon dioxide fixation in
connection with the combustion of fossil fuels and for other purposes more
generally for use in chemical bioprocessing and other applications. Pursuant to
the agreement, the parties will share revenues on certain commercialized
products and processes.

 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 quality of several
of Syngenta's strategic crops. Syngenta will receive worldwide
commercialization rights.

   On an annual basis beginning in the second year of the agreement, Syngenta
must either pay an annual technology advancement fee or purchase shares of the
Company's stock at a 50% premium to the then current fair value. If Syngenta
elects to buy stock, the resulting premium will be accounted for as technology

                                       60
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

advancement funding. The technology advancement funding is intended to fund the
Company's continuing development of its core MolecularBreeding directed
molecular evolution technology.

   In August 1999, in conjunction with the agreement, Syngenta purchased
800,000 shares of Series E convertible preferred stock at $6.25 per share
(subsequently converted to common stock upon the Company's initial public
offering). The Company recorded a deemed dividend of $2.2 million at the date
of issuance. The deemed dividend is further described in Note 9.

 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. DuPont will
receive worldwide commercialization rights.

   In December 1998, in conjunction with the agreement, DuPont purchased
1,000,000 shares of Series C convertible preferred stock at $5.00 per share,
which was the fair value of the preferred stock on the date of issuance
(subsequently converted to common stock upon the Company's initial public
offering). Furthermore, in December 1999, DuPont purchased 312,500 shares of
the Company's common stock at the initial public offering price of $16.00.

 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 MolecularBreeding directed molecular
evolution technologies to develop certain novel enzymes involved in the
manufacture of certain classes of antibiotics. Under the terms of the
agreement, DSM will receive worldwide commercialization rights.

 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.

 Other Collaborations

   The Company has recognized revenue in fiscal 1998, 1999 and 2000 under other
corporate collaborations for which it has completed all of its research
obligations.

4. Sponsored License and Research Agreements

   The Company has entered into several research agreements to fund research at
universities and other organizations. 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 $702,000 in 1998, $1.1
million in 1999 and $4.9 million in 2000.

                                       61
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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. In 1999 the Company issued 175,000 shares of common stock with a fair
value of $783,000 to research institutions in exchange for technology licenses.
This amount is included in research and development expense for 1999 as the
related technology is in research and development and has no alternative future
uses.

5. Property and Equipment

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

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------  -------
     <S>                                                        <C>     <C>
     Leasehold improvements ................................... $1,352  $ 2,249
     Machinery and laboratory equipment .......................  3,719    8,536
     Computer equipment and software...........................    266    1,019
     Furniture and fixtures ...................................    374      670
                                                                ------  -------
                                                                 5,711   12,474
     Less accumulated depreciation and amortization ...........   (947)  (2,558)
                                                                ------  -------
     Property and equipment, net............................... $4,764  $ 9,916
                                                                ======  =======
</TABLE>

6. Equipment Financing

   In June 1999, the Company entered into an equipment financing agreement for
up to $2.0 million 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 consist of interest only. Accumulated amortization
of assets acquired pursuant to these obligations was approximately $226,000 at
December 31, 1999 and $1.4 million at December 31, 2000.

   At December 31, 2000, the Company's future minimum principal payments under
the equipment financing arrangements are as follows (in thousands):

<TABLE>
<CAPTION>
     Year ended
     December 31,
     ------------
     <S>                                                                  <C>
      2001............................................................... $  533
      2002...............................................................    622
      2003...............................................................    618
      2004...............................................................     55
                                                                          ------
                                                                          $1,828
                                                                          ======
</TABLE>

7. Commitments

 Facility Leases

   The Company leases facilities under operating leases that commenced in 1999
and 2000. The leases expire for specified facilities in 2002 and 2005. The
leases contain a renewal option on the facilities under the portion of the
lease that expires in 2002. These leases also include scheduled rent increases.
The scheduled rent increases

                                       62
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

are recognized on a straight-line basis over the term of the lease. Minimum
annual rental commitments under operating leases are as follows (in thousands):

<TABLE>
<CAPTION>
     Year ended
     December 31,
     ------------
     <S>                                                                 <C>
      2001.............................................................. $ 3,258
      2002..............................................................   3,899
      2003..............................................................   4,229
      2004..............................................................   4,392
      2005..............................................................   1,311
                                                                         -------
                                                                         $17,089
                                                                         =======
</TABLE>

   Total rent expense was $147,000 in 1998, $1.3 million in 1999 and $2.3
million in 2000.

8. Related Party Transactions

   In February 1997, the Company entered into a services and facility
agreement, which was amended in September 1998 and February 1999, with Affymax
Research Institute ("ARI"), a related party. Under the agreement, ARI provided
certain accounting, human resources, materials management, facility, safety,
library, and information technology services, as well as the use of designated
space in the ARI facility for specified periods. In exchange, the Company
agreed to pay ARI $417,000 for the period from February 1, 1997 to December 31,
1997, $667,000 for the period from January 1, 1998 to December 31, 1998, and
$135,000 for the period from January 1, 1999 to April 1, 1999. These expenses
were determined by ARI based upon the relative percentage of effort expended by
ARI personnel on the Company's affairs and the relative use of facilities and
fixed assets of ARI. Management believes that the charges from ARI were
reasonable and would not have been materially different on a stand-alone basis.
In addition, ARI agreed to transfer title of fixed assets with a carrying value
of approximately $55,000 to the Company. The agreement expired in April 1999.

   The Company issued full recourse loans to certain employees, of which $1.6
million was outstanding at December 31, 1999 and $926,000 was outstanding at
December 31, 2000. These loans bear interest at rates ranging from 4.83% to
6.42% with terms ranging from three to five years. The loans were for the
purchase of the Company's common stock and are classified in stockholders'
equity. One full recourse loan for $150,000 was made for the purchase of a home
and is classified as other assets.

9. Stockholders' Equity

 Convertible Preferred Stock

   In connection 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.

   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

                                       63
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

 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 at 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 at 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 (vesting at a rate of 25%
at the end of each year). 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 1,500,000 shares, 4% of the
outstanding shares on the date of the annual increase or an amount determined
by the board of directors. At December 31, 2000, 402,455 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 each 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 year. 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, 2000, 275,000 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

                                       64
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 over four years at
a rate of 25% at the end of each year. The International Plan provides for the
issuance of options covering up to 1,000,000 shares of common stock of the
Company. At December 31, 2000, 401,230 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 over four years at
a rate of 25% at the end of each year. 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, 2000, 1,298,000 shares
remain available under the Non-Officer Plan.

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

<TABLE>
<CAPTION>
                                                           Options Outstanding
                                                           ---------------------
                                                                       Weighted-
                                                                        Average
                                                                       Exercise
                                                 Shares    Number of   Price Per
                                               Available     Shares      Share
                                               ----------  ----------  ---------
   <S>                                         <C>         <C>         <C>
   Balance at January 1, 1998.................    248,450   1,791,550   $ 0.20
   Shares authorized..........................  3,860,000         --       --
   Options granted............................ (1,537,120)  1,537,120   $ 0.30
   Options exercised..........................        --   (1,495,500)  $ 0.22
   Options canceled...........................     38,500     (38,500)  $ 0.24
                                               ----------  ----------
   Balance at December 31, 1998...............  2,609,830   1,794,670   $ 0.27
   Shares authorized..........................  1,800,000         --       --
   Options granted............................ (2,986,830)  2,986,830   $ 3.25
   Options exercised..........................        --   (2,640,650)  $ 0.62
   Options canceled...........................     64,488     (64,488)  $ 0.35
                                               ----------  ----------
   Balance at December 31, 1999...............  1,487,488   2,076,362   $ 4.11
   Shares authorized..........................  4,000,000         --       --
   Options granted............................ (3,264,710)  3,264,710   $51.27
   Options exercised..........................        --     (127,172)  $ 0.73
   Options canceled...........................    153,907    (153,907)  $23.01
                                               ----------  ----------
   Balance at December 31, 2000...............  2,376,685   5,059,993   $34.05
                                               ==========  ==========
</TABLE>

                                       65
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The options outstanding and exercisable under the Plans at December 31, 2000
are as follows:

<TABLE>
<CAPTION>
                                       Options                     Options
                                     Outstanding                 Exercisable
                                     -----------              -------------------
                                      Weighted
                                       Average
                                      Remaining    Weighted             Weighted
                                     Contractual   Average              Average
       Exercise Price                   Life       Exercise             Exercise
           Range          Number     (in years)     Price     Number     Price
       --------------    ---------   -----------   --------   -------   --------
      <S>                <C>         <C>           <C>        <C>       <C>
      $  0.20--$  0.30     532,263       6.3       $  0.25    388,562    $ 0.24
      $  0.50--$  0.75     440,447       8.6       $  0.71     59,930    $ 0.66
      $  7.50--$ 11.00     775,875       8.9       $  7.95    226,380    $ 7.88
      $ 16.00--$ 22.65     133,332       6.8       $ 18.07     22,330    $16.00
      $ 24.23--$ 35.13     815,940       9.9       $ 30.25        --        --
      $ 41.25--$ 59.81   2,190,636       9.6       $ 53.98      2,500    $46.50
      $ 62.00--$ 81.00      80,500       9.3       $ 68.61        --        --
      $162.50--$162.50      91,000       9.2       $162.50        --        --
                         ---------                            -------
                         5,059,993       9.0       $ 34.05    699,702    $ 3.42
                         =========                            =======
</TABLE>

   The weighted-average grant date fair value of options granted was $2.13 in
1998, $10.02 in 1999 and $35.02 in 2000.

 1999 Employee Stock Purchase Plan

   In September 1999, the Company's board of directors adopted the 1999
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 400,000 shares
of the Company's common stock have been 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 such amount as may be 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. The weighted average fair value
of purchase rights granted during the year was $7.53.

 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.

                                       66
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   For fiscal years 1998 and 1999, the fair value of the options were estimated
at the date of grant using the minimum value method. For fiscal 2000, the
Company calculated the fair value using the Black-Scholes option pricing model.
The following assumptions were used:

<TABLE>
<CAPTION>
                                            1998         1999         2000
                                        ------------ ------------ ------------
   <S>                                  <C>          <C>          <C>
   Expected dividend yield.............      0%           0%           0%
   Risk-free interest rate range--
    Options............................ 4.4% to 5.6% 5.1% to 6.2% 5.4% to 6.5%
   Risk-free interest rate range--
    ESPP...............................     --           --       5.8% to 6.2%
   Expected life--Options .............   5 years      5 years      4 years
   Expected life--ESPP ................     --           --        0.8 years
   Expected volatility.................     --           --           0.9
</TABLE>

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The effect
of SFAS 123 will not be fully reflected until fiscal 2002. The Company's pro
forma net loss information is as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                 ---------------------------
                                                  1998      1999      2000
                                                 -------  --------  --------
   <S>                                           <C>      <C>       <C>
   Net loss attributable to common
    stockholders--as reported................... $(8,826) $(13,518) $(59,585)
                                                 =======  ========  ========
   Net loss attributable to common
    stockholders--pro forma..................... $(8,871) $(13,669) $(90,567)
                                                 =======  ========  ========
   Basic and diluted net loss per share--as
    reported.................................... $ (1.31) $  (1.53) $  (1.96)
                                                 =======  ========  ========
   Basic and diluted net loss per share--pro
    forma....................................... $ (1.31) $  (1.54) $  (2.99)
                                                 =======  ========  ========
</TABLE>

   In March through December 1998, the Company granted options to purchase
173,000 shares of common stock, of which options to purchase 86,500 shares were
fully vested, to consultants for services rendered. In addition, in September
1998, 75,000 shares of common stock were issued to consultants for services at
a deemed fair value of $2.25 per share. Stock compensation expense of $364,000
was recognized in 1998 related to these transactions. During the year ended
December 31, 1999, the Company issued 15,000 shares of common stock for
services rendered at a deemed fair market value of $4.00 per share and granted
options to purchase 87,000 shares of common stock to consultants for services
rendered. Stock compensation expense of $928,000 was recognized in 1999 related
to these transactions. During the year ended December 31, 2000, the Company
issued 1,146 shares of common stock to consultants for services rendered. Stock
compensation expense of $43,000 was recognized in 2000 related to these
transactions. 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. In 2000 the Company recorded total compensation expense of
$3.0 million 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.

   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 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, 1998,
1999 and 2000, the Company recorded amortization of deferred stock compensation
expense of approximately $1.6 million, $4.9 million and $7.8 million,
respectively.

                                       67
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 12. 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 deferred compensation expense was recognized in the year
ended December 31, 2000 in connection with the Maxygen ApS options.

 Common Stock

   At December 31, 1998, 1999 and 2000, there were 1,064,250, 2,692,718 and
1,627,866 shares of restricted common stock subject to the Company's lapsing
right of repurchase at a weighted-average price of $0.23, $0.61 and $7.97,
respectively.

   At December 31, 2000, the Company has reserved shares of common stock for
future issuance as follows:

<TABLE>
   <S>                                                                 <C>
   2000 Non-Officer Employee Stock Option Plan........................ 1,500,000
   2000 International Stock Option Plan............................... 1,000,000
   1999 Employee Stock Purchase Plan..................................   332,460
   1999 Nonemployee Directors Stock Option Plan.......................   300,000
   1997 Stock Option Plan ............................................ 4,636,678
                                                                       ---------
                                                                       7,769,138
                                                                       =========
</TABLE>

10. Income Taxes

   At December 31, 2000, the Company had federal and state net operating loss
carryforwards of approximately $11.9 million and $7.8 million, respectively.
The Company also had federal and California research and development tax credit
carryforwards of approximately $1.0 million and $0.8 million, respectively. The
net operating loss and credit carryforwards will expire at various dates
beginning in the year 2011 through 2019, if not utilized. The state of
California net operating losses will begin to expire in the year 2006.

   Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

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

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                               1999      2000
                                                              -------  --------
   <S>                                                        <C>      <C>
   Net operating loss carryforwards ......................... $ 4,000  $  4,500
   Research credits..........................................     700     1,510
   Capitalized research and development......................     300       360
   Deferred revenue..........................................   1,000     2,610
   Other.....................................................     100     2,100
                                                              -------  --------
   Total deferred tax assets ................................   6,100    11,080
   Valuation allowance ......................................  (6,100)  (11,080)
                                                              -------  --------
   Net deferred tax assets................................... $   --   $    --
                                                              =======  ========
</TABLE>

                                       68
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $2.7 million during 1999 and by $5.0 million during 2000.

11. 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.

12. 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 operation from the date of acquisition.

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

<TABLE>
   <S>                                                                <C>
   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
                                                                      =======
</TABLE>

                                       69
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                            Amount  Useful Lives
                                                            ------- ------------
   <S>                                                      <C>     <C>
   Tangible net assets.....................................  $2,995     --
   Intangible assets acquired:
     In-process research and development...................  28,047     --
     Assembled workforce...................................     705       3
     Core technology.......................................   3,435       3
     Goodwill .............................................  22,038       3
                                                            -------
                                                            $57,220
                                                            =======
</TABLE>

   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 will be 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 1999 and does not purport to be indicative of what would have
occurred had the acquisition been made as of the beginning of 1999 or of the
results that may occur in the future.

<TABLE>
<CAPTION>
                                                               Year ended
                                                              December 31,
                                                            ------------------
                                                              1999      2000
                                                            --------  --------
                                                             (in thousands,
                                                            except per share
                                                                amounts)
   <S>                                                      <C>       <C>
   Total revenues ......................................... $ 14,017  $ 24,535
   Total operating expenses................................  (41,167)  (93,834)
   Net loss................................................  (27,857)  (53,933)
   Basic and diluted net loss per share.................... $  (1.44) $  (1.74)
</TABLE>

                                       70
<PAGE>

                                 MAXYGEN, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. Subsequent Events--unaudited

 Collaboration Agreement with ALK-Abello A/S

   In February 2001, the Company established a three-year collaboration with
ALK-Abello 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 will collaborate with ALK-Abello to create
therapies for treating specific allergies, including allergies to house dust
mites and grass, which are the cause of many common allergies. Under the terms
of the collaboration, the Company will receive license fees, technology access
fees, research and development funding, and potential milestone payments. Such
payments to the Company could total a maximum of approximately $80 million. The
Company will also be entitled to receive royalties on product sales, if any.
ALK-Abello will receive exclusive worldwide rights to commercialize all
recombinant human therapeutics developed in the collaboration.

 Collaboration Agreement with 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 will provide full research and development funding to the
Company for at least three years 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.

                                       71
<PAGE>

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 2001 annual meeting of
stockholders to be filed on or before April 30, 2001. 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 2001 annual meeting of stockholders to be filed on or before April 30,
2001.

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 2001 annual meeting of
stockholders to be filed on or before April 30, 2001.

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 2001 annual meeting of stockholders to be filed on or before
April 30, 2001.

                                      72
<PAGE>

                                    PART IV

Item 14 EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
        REPORTS ON FORM 8-K

   Upon written request, Maxygen 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.
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.

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
   <S>                                                                      <C>
   Report of Ernst & Young LLP, Independent Auditors.......................  49
   Consolidated Balance Sheets.............................................  50
   Consolidated Statements of Operations...................................  51
   Consolidated Statement of Stockholders' Equity..........................  52
   Consolidated Statements of Cash Flows...................................  53
   Notes to Consolidated Financial Statements..............................  54
</TABLE>

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

   (b) The following reports on Form 8-K were filed during the year ended
December 31, 2000.

    (1) On August 15, 2000, Maxygen filed a report on Form 8-K reporting
        the acquisition of ProFound Pharma A/S.

    (2) On October 24, 2000, Maxygen filed a report on Form 8-K/A that
        amended the report on Form 8-K filed on August 15, 2000.

   (c) Exhibits.

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Exhibit
 -------                         ----------------------
 <C>     <S>
 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 November 13, 2000

</TABLE>

                                      73
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Exhibit
 -------                         ----------------------
 <C>     <S>
 *10.1   1997 Stock Option Plan, as amended, with applicable option agreement

  10.2   Form of Promissory Note dated March 14, 1997 executed by each of
          Russell J. Howard and Isaac Stein in favor of Maxygen(3)

  10.3+  Technology Transfer Agreement among Maxygen, Affymax Technologies N.V.
          and Glaxo Wellcome plc dated March 14, 1997, as amended, effective
          March 1, 1998 (Exhibit 10.3 to Amendment No. 2)(3)

  10.4   Lease between Metropolitan Life Insurance Company and Maxygen dated
          October 21, 1998(3)

  10.5   First Amendment to Lease dated as of February 26, 1999 by and between
          Metropolitan Life Insurance Company and Maxygen(3)

  10.6   Second Amendment to Lease dated as of October 24, 2000 by and between
          Metropolitan Life Insurance Company and Maxygen

  10.7   Lease between Metropolitan Life Insurance Company and Maxygen dated
          April 21, 2000 (Exhibit 10.2)(2)

  10.8   Lease Agreement between ProFound Pharma A/S and The Science Park in
          Horsholm dated May 5, 2000 (Exhibit 10.1)(4)

 *10.9   Form of Officer and Director Indemnification Agreement (Exhibit
          10.7)(3)

 *10.10  1999 Nonemployee Directors Stock Option Plan, as amended, with
          applicable option agreement

 *10.11  1999 Employee Stock Purchase Plan, as amended

 *10.12  Form of Promissory Note issued in connection with exercise of stock
          options (Exhibit 10.10)(3)

  10.13+ 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)

  10.14+ 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)

  10.15+ Agreement between Maxygen and Gist-Brocades B.V. entered into March
          15, 1999 (Exhibit 10.13 to Amendment No. 2)(3)

  10.16+ Collaboration Agreement effective as of June 18, 1999 by and between
          Zeneca Limited and Maxygen (Exhibit 10.14 to Amendment No. 2)(3)

  10.17+ 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)(5)

 *10.18  Promissory Note dated April 22, 1999, executed by Joseph Affholter and
          Roxanne Affholter in favor of Maxygen (Exhibit 10.6)(3)

 *10.19  Letter Agreement dated January 28, 2000, between Maxygen and Joseph A.
          Affholter (Exhibit 10.16)(5)

 *10.20  Exclusive Consulting Agreement dated January 28, 2000, between Maxygen
          and Joseph A. Affholter (Exhibit 10.17)(5)

 *10.21  Promissory Note dated January 28, 2000, executed by Joseph A.
          Affholter and Roxanne B. Affholter in favor of Maxygen (Exhibit
          10.18)(5)

 *10.22  Pledge Agreement dated January 28, 2000, among Joseph A. Affholter,
          Roxanne B. Affholter and Maxygen (Exhibit 10.19)(5)

</TABLE>

                                       74
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                         Description of Exhibit
 -------                        ----------------------
 <C>     <S>
 10.23+  Cooperative Research and Development Agreement between the National
          Cancer Institute, National Institutes of Health dated February 24,
          2000 (Exhibit 10.20)(5)

 21.1    List of Subsidiaries

 23.1    Consent of Ernst & Young LLP, Independent Auditors

 24.1    Power of Attorney (included on signature page)
</TABLE>
--------
 *  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 corresponding or 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,
    2000.

(4) Incorporated by reference to the indicated exhibit 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.

(5) 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.

                                      75
<PAGE>

                                  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.

                                          MAXYGEN, INC.

March 20, 2001                                    /s/ Russell J. Howard
                                          By: _________________________________
                                                     Russell J. Howard
                                                  Chief Executive Officer

                               POWER OF ATTORNEY

   KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael Rabson and Lawrence 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.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
       /s/ Russell J. Howard           Chief Executive Officer      March 20, 2001
______________________________________  and Director (Principal
          Russell J. Howard             Executive Officer)

        /s/ Lawrence Briscoe           Chief Financial Officer      March 20, 2001
______________________________________  (Principal Financial and
           Lawrence Briscoe             Accounting Officer)

          /s/ Isaac Stein              Chairman of the Board        March 20, 2001
______________________________________
             Isaac Stein

        /s/ Robert J. Glaser           Director                     March 20, 2001
______________________________________
           Robert J. Glaser

        /s/ M.R.C. Greenwood           Director                     March 20, 2001
______________________________________
           M.R.C. Greenwood

         /s/ Gordon Ringold            Director                     March 20, 2001
______________________________________
            Gordon Ringold

          /s/ George Poste             Director                     March 20, 2001
______________________________________
             George Poste
</TABLE>

                                      76
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Exhibit
 -------                         ----------------------
 <C>     <S>
   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 November 13, 2000

 *10.1   1997 Stock Option Plan, as amended, with applicable option agreement

  10.2   Form of Promissory Note dated March 14, 1997 executed by each of
          Russell J. Howard and Isaac Stein in favor of Maxygen(3)

  10.3+  Technology Transfer Agreement among Maxygen, Affymax Technologies N.V.
          and Glaxo Wellcome plc dated March 14, 1997, as amended, effective
          March 1, 1998 (Exhibit 10.3 to Amendment No. 2)(3)

  10.4   Lease between Metropolitan Life Insurance Company and Maxygen dated
          October 21, 1998(3)

  10.5   First Amendment to Lease dated as of February 26, 1999 by and between
          Metropolitan Life Insurance Company and Maxyge(3)

  10.6   Second Amendment to Lease dated as of October 24, 2000 by and between
          Metropolitan Life Insurance Company and Maxygen

  10.7   Lease between Metropolitan Life Insurance Company and Maxygen dated
          April 21, 2000 (Exhibit 10.8)(2)

  10.8   Lease Agreement between ProFound Pharma A/S and The Science Park in
          Horsholm dated May 5, 2000 (Exhibit 10.1)(4)

 *10.9   Form of Officer and Director Indemnification Agreement (Exhibit
          10.7)(3)

 *10.10  1999 Nonemployee Directors Stock Option Plan, as amended, with
          applicable option agreement

 *10.11  1999 Employee Stock Purchase Plan, as amended

 *10.12  Form of Promissory Note issued in connection with exercise of stock
          options (Exhibit 10.10)(3)

  10.13+ 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)

  10.14+ 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)

  10.15+ Agreement between Maxygen and Gist-Brocades B.V. entered into March
          15, 1999 (Exhibit 10.13 to Amendment No. 2)(3)

  10.16+ Collaboration Agreement effective as of June 18, 1999 by and between
          Zeneca Limited and Maxygen (Exhibit 10.14 to Amendment No. 2)(3)

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Exhibit
 -------                         ----------------------
 <C>     <S>
  10.17+ 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)(5)

 *10.18  Promissory Note dated April 22, 1999, executed by Joseph Affholter and
          Roxanne Affholter in favor of Maxygen (Exhibit 10.6)(3)

 *10.19  Letter Agreement dated January 28, 2000, between Maxygen and Joseph A.
          Affholter (Exhibit 10.16)(5)

 *10.20  Exclusive Consulting Agreement dated January 28, 2000, between Maxygen
          and Joseph A. Affholter (Exhibit 10.17)(5)

 *10.21  Promissory Note dated January 28, 2000, executed by Joseph A.
          Affholter and Roxanne B. Affholter in favor of Maxygen (Exhibit
          10.18)(5)

 *10.22  Pledge Agreement dated January 28, 2000, among Joseph A. Affholter,
          Roxanne B. Affholter and Maxygen (Exhibit 10.19)(5)

  10.23+ Cooperative Research and Development Agreement between the National
          Cancer Institute, National Institutes of Health dated February 24,
          2000 (Exhibit 10.20)(5)

  21.1   List of Subsidiaries

  23.1   Consent of Ernst & Young LLP, Independent Auditors

  24.1   Power of Attorney (included on signature page)
</TABLE>
--------
*   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 corresponding or 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,
    2000.

(4) Incorporated by reference to the indicated exhibit 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.

(5) 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.