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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K



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

THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2004



Commission file number 000-28401



MAXYGEN, INC.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 77-0449487                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



515 Galveston Drive

Redwood City, California 94063

(Address of principal executive offices)



(650) 298-5300

Registrants telephone number, including area code:

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



None



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



Common Stock, par value $0.0001 per share

(Title of Class)

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ̈



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



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



As of June 30, 2004, the last business day of the registrants most
recently completed second fiscal quarter, 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 National Stock Market as of that date, was
$238,996,518. Shares of common stock held by each executive officer and director and by each person who owned 5% or more of the outstanding common stock have been excluded as such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other purposes.



As of February 28, 2005, there were 35,668,446 shares of the registrants common stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Certain portions of the registrants proxy statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III, Items
10, 11, 12, 13 and 14 of this report. In addition, certain exhibits filed with the registrants prior annual reports, quarterly reports, registration statements and current reports are incorporated by reference into Part IV, Item 15(b) of this
report.



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TABLE OF CONTENTS



|           |  |                                                                                                              |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|Part I     |  |                                                                                                              |  |   
|           |  |                                                                                                             
|Item 1:    |  | Business                                                                                                     |  | 1 
|           |  |                                                                                                             
|Item 2:    |  | Properties                                                                                                   |  | 37
|           |  |                                                                                                             
|Item 3:    |  | Legal Proceedings                                                                                            |  | 37
|           |  |                                                                                                             
|Item 4:    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 38
|           |  |                                                                                                             
|Part II    |  |                                                                                                              |  |   
|           |  |                                                                                                             
|Item 5:    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 39
|           |  |                                                                                                             
|Item 6:    |  | Selected Financial Data                                                                                      |  | 41
|           |  |                                                                                                             
|Item 7:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 44
|           |  |                                                                                                             
|Item 7A:   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 56
|           |  |                                                                                                             
|Item 8:    |  | Financial Statements and Supplementary Data                                                                  |  | 58
|           |  |                                                                                                             
|Item 9:    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 95
|           |  |                                                                                                             
|Item 9A:   |  | Controls and Procedures                                                                                      |  | 95
|           |  |                                                                                                             
|Item 9B:   |  | Other Information                                                                                            |  | 96
|           |  |                                                                                                             
|Part III   |  |                                                                                                              |  |   
|           |  |                                                                                                             
|Item 10:   |  | Directors and Executive Officers of the Registrant                                                           |  | 97
|           |  |                                                                                                             
|Item 11:   |  | Executive Compensation                                                                                       |  | 97
|           |  |                                                                                                             
|Item 12:   |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 97
|           |  |                                                                                                             
|Item 13:   |  | Certain Relationships and Related Transactions                                                               |  | 97
|           |  |                                                                                                             
|Item 14:   |  | Principal Accounting Fees and Services                                                                       |  | 97
|           |  |                                                                                                             
|Part IV    |  |                                                                                                              |  |   
|           |  |                                                                                                             
|Item 15:   |  | Exhibits, Financial Statement Schedules                                                                      |  | 98
|           | 
|Signatures |  | 102                                                                                                         



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This report and the disclosures herein include, on a consolidated basis, the continuing business and operations of Maxygen,
Inc. and its wholly-owned subsidiaries, Maxygen ApS and Maxygen Holdings Ltd., as well as its consolidated subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary. In this report
Maxygen, the Company, we, us and our refer to such consolidated entities, unless, in each case, the context indicates that the disclosure applies only to a named subsidiary. The operations
of Verdia, Inc. prior to its sale on July 1, 2004 are reflected in our financial statements as discontinued operations. Please note that as a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine
Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, Maxygens voting rights in Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a consolidated
subsidiary of Maxygen.



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



Maxygen is a registered
trademark of Maxygen, Inc. MaxyScan and MolecularBreeding are some of our trademarks. Codexis, Thoroughbred and SmartSynth are trademarks of Codexis, Inc. Verdia is a trademark of Verdia, Inc. Other service marks, trademarks and trade names referred
to in this report, and in the documents incorporated by reference in this report, are the property of their respective owners. The use of the word partner and partnership does not mean a legal partner or legal partnership.



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Forward Looking Statements



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



| | · |  | the timing of the filing of INDs
| | - |  | --------------------------------



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



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



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



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



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



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



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



These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from
these predictions. The risk factors set forth below at pages 25 to 37 should be considered carefully in evaluating us and our business.



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



PART I



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



Overview



We are a
biotechnology company focused on using our protein optimization and modification technologies to create and develop novel therapeutic and industrial products. We are a leader in the field of directed molecular evolution, a process by which genes are
modified for specific commercial uses. Our technologies bring together advances in molecular biology and protein modification to help create novel biotechnology products. 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 high-value protein pharmaceutical products. We also seek to capture value from our technologies in the
chemicals industry through our subsidiary Codexis, Inc. Our products will be developed and marketed either through corporate collaborations or independently by Maxygen. To date, we have established strategic collaborations with leading companies
including: Roche in interferon alpha and interferon beta therapies; InterMune in next generation interferon gamma therapies; the International AIDS Vaccine Initiative (IAVI) in HIV; Eli Lilly, Pfizer and DSM in pharmaceutical manufacturing; and
Shearwater Corporation (a subsidiary of Nektar Therapeutics) in protein pharmaceutical PEGylation technologies. Additionally, we have entered into a range of other strategic alliances in industrial applications, including with Novozymes, Chevron,
Sandoz, Cargill and Cargill-Dow. We also have received funding from U.S. government



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organizations including from the Defense Advanced Research Projects Agency (DARPA), the National Institute of Standards and Technology-Advanced Technology
Program, the U.S. Agency for International Development and the U.S. Army Medical Research and Materiel Command.



We plan to continue to establish strategic collaborations with leaders in our target industries. We will also seek to continue to retain rights in our
collaborations to internally develop and market products resulting from our alliances. In addition, we have invested, and will continue to invest, our own funds in specific areas and product opportunities. We currently have four potential high value
protein pharmaceutical products in pre-clinical development at our partners or at Maxygen, with several other potential products in the research phase. In addition, Codexis has five processes that are operating at commercial scale, each process
generating royalty payments.



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



This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen and our
wholly-owned subsidiaries, Maxygen ApS and Maxygen Holdings Ltd., as well as our consolidated subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary. The operations of Verdia,
Inc. (formerly our agriculture subsidiary) prior to its sale on July 1, 2004 are reflected in our financial statements as discontinued operations. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of
Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, Maxygens voting rights in Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a
consolidated subsidiary of Maxygen.



Market Opportunity



We have a platform of proprietary technologies that helps allow us to
integrate the powerful tools available in the biotechnology industry to develop novel and improved products for human therapeutics and industrial applications. We have four potential high value protein pharmaceutical products in pre-clinical
development at our partners or at Maxygen, with several other potential products in the research phase. In addition, Codexis has five processes that are operating at commercial scale, each process generating royalty payments. Our target markets
include protein pharmaceuticals and chemicals. Within these markets, we are focused on specific high-value opportunities.



Human Therapeutics.We have research and development programs in both the protein pharmaceutical and vaccine business areas.



Our primary focus, the therapeutic protein pharmaceutical
market, represents a large and growing opportunity. In 2003, worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $32 billion. Protein pharmaceutical products, such as alpha interferon and granulocyte
colony stimulating factor (G-CSF), represent some of the worlds most profitable pharmaceutical products and the protein therapeutics sector is one of the fastest growing of the pharmaceutical market, with an annual sales growth
rate of 8 to 12%. We have a portfolio of improved protein therapeutics in development.



We also work on novel vaccines, primarily funded through government grants and partnerships. Worldwide sales of all vaccines were estimated to be over $6.2 billion in 2002.



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Industrial Applications.Our chemicals business is operated through our
subsidiary Codexis, Inc. Codexis is a provider of biocatalysis and fermentation processes and products to the life science and fine chemical industries. This business area provides an attractive market opportunity for Codexis.



Sales in the chemical industry exceeded $1.7 trillion in 2000, 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. Codexis focuses on developing novel biocatalytic processes that increase yields and decrease manufacturing costs for multiple currently marketed products. In particular Codexis is focused on
developing proprietary catalysts and processes for the production of several currently marketed pharmaceutical products.



Uses and Limitations of Genes as Products



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



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



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



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



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



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



The Maxygen Solution



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



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



Virtually any product or process that utilizes, or could utilize, DNA or proteins can potentially be improved for optimal function using our technologies. We are currently applying our technologies to adapt genes and
proteins for use in fields as diverse as protein pharmaceuticals, vaccines and chemicals. We have also developed expertise in other technologies that can be applied to optimize protein drugs, in particular directed conjugation technologies. These
include rational approaches to glycosylation and PEGylation of proteins. Such post-translational modifications of proteins have been demonstrated to improve the pharmacokinetics and pharmacodynamics of protein drugs. In addition, these modifications
can improve the solubility, bioavailability and immunogencity profile of protein drugs.



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
through our chemicals subsidiary Codexis. Our business strategy is built around two major efforts:



Commercialize Proprietary Products.    We will continue to strengthen our capabilities to develop high value products in 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 provide our
strategic collaborators with licenses to 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 the pharmaceutical and chemical
industries. We have invested and will continue to invest our own funds in specific, economically attractive, product opportunities.



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Expand Our Proprietary Technology Leadership.    To expand our technology
leadership, we plan to:



| | · |  | continue to develop our core technologies by investing in research and development;
| | - |  | -----------------------------------------------------------------------------------



| | · |  | continue to acquire and license technologies from third parties that complement our capabilities to develop products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| | · |  | protect and build upon our existing patent portfolio and also rely on trade secrets to protect our proprietary technologies; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| | · |  | continue to recruit, and collaborate with, leaders in the field of protein pharmaceuticals and related technologies in various therapeutic indications and industrial segments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Our Progress to Date



Since 1997 we have entered into over 20 strategic collaborations and several
proof of principle collaborations with commercial entities and have received ten grants from U.S. government agencies and philanthropic organizations. Since inception we have received $164.7 million of cash from our collaborators and from government
grants, which includes $55.5 million of funding received by Verdia, our agriculture subsidiary and sole component of our agriculture segment, prior to its disposition, and $4.7 million of deferred revenue relating to continuing operations to be
recognized over approximately the next two years. Approximately $131.9 million was received from our collaborators and $32.8 million was received from government funding. Assuming our research efforts for existing collaborations and grants from
continuing operations continue for their full research terms, as of December 31, 2004, we had total committed funding of approximately $16.6 million remaining to be received over approximately the next two years, of which $12.2 million is to be
received by Codexis. Potential milestone payments from our existing collaborations could exceed $400 million based on the accomplishment of specific performance criteria. We are also entitled to receive royalties on product sales generated from
these collaborations.



In 2004, we were successful in achieving
most of our corporate goals. On July 1, 2004 we sold our agriculture business (Verdia) to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for $64 million in cash. We also enhanced the value of
our human therapeutics business by continuing to advance our pre-clinical protein pharmaceutical product candidates. These product candidates include: an optimized interferon alpha to treat hepatitis C virus infection in collaboration with Roche; an
optimized interferon gamma to treat idiopathic pulmonary fibrosis and other human diseases in collaboration with InterMune; and two internal product candidates, an optimized G-CSF for the treatment of neutropenia and an optimized Factor VII to treat
uncontrolled bleeding. In addition to these four human therapeutic product candidates, we have other product candidates in development for which we continue to seek outside funding for continued development.



Codexis, our chemicals subsidiary, continued to grow its business in 2004.
Codexis is owned by a combination of Maxygen (51.4% Maxygen ownership as of December 31, 2004) and independent investors, and is independently capitalized. In July 2004, Codexis established a multi-year product development collaboration with Pfizer.
In addition to the collaboration Pfizer made a $10 million equity investment in Codexis. During 2004 Codexis also established a research collaboration with Teva Pharmaceutical Industries Ltd. and announced the commercialization of a manufacturing
process with Lonza Group Ltd. Codexis now has over 20 potential products and processes in its research and development pipeline with two product candidates in development. In addition, Codexis has five processes now operating at commercial scale,
each generating royalty payments. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, Maxygens
voting rights in



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Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a consolidated subsidiary of Maxygen.



In 2004, we had eight additional U.S. patents issue and seven
additional foreign patents granted bringing the total number of U.S. and foreign patents owned or licensed by us as of December 31, 2004 to more than 180. We also have over 500 patent applications pending worldwide that are owned by us or licensed
to us.



Current Fields of Application



We are currently applying our technologies to high-value opportunities in
the fields of human therapeutics, with a focus on next generation protein drugs. In addition, our subsidiary Codexis is engaged in the development of bio-based solutions for pharmaceutical chemical process development and manufacturing.



Human Therapeutics



Our human therapeutics business presents us with opportunities in a wide variety of disease indications for which there is a
significant unmet medical need for improved protein drugs that are more efficacious (or effective), safer and/or provide more convenient treatments.



Although our primary focus is on next generation protein therapeutics, we have a small number of limited and focused ongoing vaccine research projects
that are principally funded by third parties.



Protein
Therapeutics



Our goal is to be one of the worlds
leading providers of improved, proprietary, protein-based therapeutics.



Market Opportunity.    With a worldwide market (sales) in 2003 of approximately $32 billion, the area of recombinant DNA produced protein therapeutics is one of the fastest growing sectors of the pharmaceuticals
market. Despite this commercial success, many presently marketed protein pharmaceuticals have deficiencies as therapeutics. For example, some protein drugs have limited pharmacologic half-life and as a result, require frequent, high doses. Other
protein pharmaceuticals have adverse side effects that limit dosing and patient compliance. Proteins can also be immunogenic, potentially leading to adverse events or reduced therapeutic efficacy. Our opportunity and focus is to develop products
with improved attributes.



The need to modify natural proteins
to make them into better drugs is evident in that most FDA-approved protein pharmaceuticals have required some level of engineering to improve pharmacological properties. Some examples of FDA-approved recombinant protein pharmaceuticals that have
been modified are listed below.



|                                                                                                     |  |                                                                               |  |             |  |                                                                                     
|---------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ----------- |  | ------------------------------------------------------------------------------------
|Product/Company (Protein class)                                                                      |  | Modification                                                                  |  | Indication  |  | Improvement                                                                         
|Aranesp/Amgen (Erythropoietin)                                                                       |  | Two amino acid changes to allow for additional glycosylation sites            |  | Anemia      |  | Less frequent dosing                                                                
|                                                                                                     |  |                                                                               | 
|Neulasta/Amgen (G-CSF)                                                                               |  | N-terminal PEGylation                                                         |  | Neutropenia |  | Less frequent dosing                                                                
|                                                                                                     |  |                                                                               | 
|Humalog/Lilly (Insulin)                                                                              |  | Change to amino acid sequence                                                 |  | Diabetes    |  | Faster onset of action                                                              
|                                                                                                     |  |                                                                               | 
|Infergen/Amgen & InterMune (Interferon alpha)                                                        |  | Consensus sequence of four subtypes, additional change to amino acid sequence |  | Hepatitis C |  | Increased potency                                                                   
|                                                                                                     |  |                                                                               | 
|Pegasys/Roche (Interferon alpha)                                                                     |  | Addition of a PEG molecule                                                    |  | Hepatitis C |  | Better pharmacokinetic profile leading to improved efficacy and less frequent dosing
|Sources: Product monographs and Kurtzman, et al. Current Opinion in
Biotechnology 2001, 12: 361-370.



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By applying our technologies, which include our MolecularBreeding directed evolution platform and also
post-translational modification tools, we believe we will be able to develop more potent, safer and/or more convenient protein pharmaceuticals that help address the limitations of current protein pharmaceuticals, as well those currently in
development where clear deficiencies have already been identified. Our goal is to make best in class protein drugs. This strategy has driven some of the most successful commercial franchises in the pharmaceutical industry. For example
Lipitor, a lipid-lowering agent that was the fifth product in its class and approved 11 years after the first product in its class, is now the market leader with worldwide sales of over $10 billion in 2003.



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



Business Strategy.    Our strategy for protein pharmaceuticals is to balance partnering with independent development of our therapeutic products. In furtherance of our internal development activities, we are
selectively building internal pre-clinical and clinical capabilities and establishing relationships with contract research organizations to allow us to move products through the drug approval processes in the United States, Europe, and other
important markets. In parallel, we are working with pharmaceutical and biotechnology companies to develop, manufacture and commercialize biopharmaceutical candidates made using our technologies. By collaborating with leading pharmaceutical companies
and creating better versions of proven protein therapeutics we believe that we can maximize our return and decrease our development risk.



In order to capture value from our pipeline of product opportunities while maintaining a controlled cash burn, we are focusing our efforts on advancing
key product opportunities in areas where we can most effectively compete, such as:



| | · |  | areas where our technology offers greatest advantage; and
| | - |  | ---------------------------------------------------------



| | · |  | areas with focused, accessible markets and/or areas where the clinical development requirements are modest.
| | - |  | -----------------------------------------------------------------------------------------------------------



Products/Pipeline.    We have continued to advance
our product portfolio with significant progress towards the clinic with our MAXY-ALPHA, MAXY-GCSF, MAXY-GAMMA and MAXY-FACTOR VII programs (see below). As a result of a portfolio reprioritization, we terminated our MAXY-BETA (interferon beta)
program in November 2004. At present, we have four active programs aimed at improving therapeutic proteins, each of which are next generation versions of successfully marketed products. All four of the projects are in pre-clinical development and we
currently expect that INDs will be filed on two of these four programs in 2006.



Lead Product Candidates in Our Protein Pharmaceutical Pipeline



|                |  |                                    |  |                                      |  |                                |  |             
|--------------- |  | ---------------------------------- |  | ------------------------------------ |  | ------------------------------ |  | ------------
|Product         |  | Disease Indication                 |  | Total EstimatedPotential Market($US) |  | Partner/MaxygenRetained Rights |  | Status      
|Maxy-Alpha      |  | Hepatitis C                        |  | $2.5 billion                         |  | Roche/Maxygen                  |  | Pre-clinical
|Maxy-GCSF       |  | Neutropenia                        |  | $3.0 billion                         |  | Maxygen                        |  | Pre-clinical
|Maxy-Factor VII |  | Uncontrolled bleeding              |  | $1.7 billion                         |  | Maxygen                        |  | Pre-clinical
|Maxy-Gamma      |  | Fibrosis, Hepatitis C and Oncology |  | $2.6 billion                         |  | InterMune                      |  | Pre-clinical



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



Potential Products
in Research and Development.



MAXY-ALPHA



Optimized interferon alpha to treat hepatitis C



We have used our proprietary technologies and expertise to develop multiple
optimized versions of interferon alpha that are designed to have superior safety and efficacy profiles compared to other interferon alpha products currently on the market. Specifically, these improved interferon alphas have been engineered to induce
enhanced antiviral activity and immune response to clear viruses more effectively in patients who do not respond to existing therapies. In addition to improvements in the drugs mechanism of action, use of PEGylation may allow us to maintain
the convenience and improved efficacy associated with once-weekly dosing.



Status



Based on the current development state
of the project, we expect Roche to file an IND for our improved interferon alpha in 2006. In 2005 we expect our improved interferon alpha to move into cGMP manufacturing and for Roche to complete the necessary pharmacokinetic and pharmacodynamic
studies required for filing the IND. We expect to receive a preclinical milestone payment in 2005 from Roche related to specific pre-clinical advancements.



Scope



Total worldwide sales of interferon alpha therapies for the treatment of hepatitis C virus infection, hepatitis B virus infection and cancer were approximately $3.0 billion worldwide in 2003 (including ribavirin),
with the treatment of hepatitis C virus infection representing approximately two-thirds of the total sales.



Through optimized use of interferon alpha with ribavirin, response rates have improved dramatically over the past decade. However, the efficacy for
hepatitis C virus therapies is still relatively low, especially in patients infected with certain subtypes of hepatitis C virus. Overall, approximately 60 percent of patients respond to combination therapy as measured by clearance of the virus from
the blood. However, in patients infected with certain strains of hepatitis C virus only 40 percent of patients respond to current therapies. In either case, the durability of response is inadequate and many patients will relapse.



Strategy



In 2003, we entered into a broad alliance with Roche to develop novel improved interferon alpha and beta products for a wide
range of indications. Roche licensed from Maxygen worldwide commercialization rights to specific novel interferon alpha and beta product candidates for the treatment of hepatitis C and B virus infections. We received an initial payment, research and
development funding for the first two years of the collaboration and option fees. In addition, we are eligible to receive milestone payments and royalties based on product sales.



The Roche agreement also provides the companies with the option to expand the collaboration to develop other novel
interferon alpha and beta products specifically tailored for indications outside of the treatment of hepatitis C and B virus infections, including oncology, autoimmune diseases, inflammatory diseases, and other infectious diseases such as HIV. We
retain the right to develop such products while Roche may elect to acquire worldwide license and commercialization rights to these product candidates. We also have the option to co-develop in the United States any product to which Roche acquires a
license in exchange for profit sharing or an increased royalty rate.



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MAXY-GCSF



Improved G-CSF to treat neutropenia



We have used our proprietary technologies and expertise to develop an improved version of granulocyte colony stimulating factor (G-CSF) that
is designed to provide improved effectiveness at decreasing the duration of neutropenia over currently marketed products while maintaining the convenience of once per chemotherapy cycle dosing. The profile of our improved G-CSF has been validated in
rat, mouse and primate models of chemotherapy-induced neutropenia.



Status



In September 2004 we established an agreement with
Rentschler Biotechnologie GmbH in Germany for the scale-up and manufacture of clinical supplies of our next generation G-CSF molecule. Since then, we have completed technology transfer for the manufacturing runs in preparation for regulatory
toxicology studies later in 2005. We are moving this program forward towards an expected IND filing in 2006.



Scope



A
first-generation and second-generation G-CSF product currently dominate the market to treat chemotherapy and radiation induced neutropenia. Worldwide sales of G-CSF products exceeded $3 billion in 2004 and are expected to exceed $4 billion in 2005.
An improved G-CSF with greater efficacy presents a significant market opportunity.



Strategy



Even with the currently available
G-CSF products, cancer patients who receive chemotherapy are still at risk for life threatening infections due to the time it takes these drugs to produce a therapeutic effect. An improved G-CSF that reduced the duration of neutropenia while
maintaining once per cycle dosing could meet a significant medical need. We currently retain all rights to our proprietary G-CSF program.



MAXY-FACTOR VII



Improved factor VII for uncontrolled bleeding indications



We have generated several novel factor VIIa (MAXY-VII) molecules that may provide a more effective treatment for uncontrolled bleeding in several
important clinical areas. In preclinical animal models, our lead molecule, MAXY-VII has demonstrated enhanced efficacy and an improved in vivo circulating half-life compared to alternative products. MAXY-VII appears to stimulate more rapid and
increased thrombin generation in blood resulting in a significant reduction in blood loss in relevant preclinical models. We believe our MAXY-VII product candidate may provide significant advantages over currently marketed products and products in
development to treat bleeding episodes in multiple indications such as trauma, hemophilia and intracerebral hemorrhage (ICH).



Status



In November 2004, we announced advancement of our factor VII program into pre-clinical development in anticipation of future clinical development.



Scope



The current worldwide market for factor VII based products is approximately $1.6 billion, predominantly for the treatment of hemophilia. The hemophilia
treatments market is expected to grow at a rate of approximately 8.6% with estimated worldwide 2008 sales of approximately $4.9 billion. Over the last year, new clinical data



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has validated the use of factor VII based products in the treatment of severe bleeding in trauma and surgery and for the treatment of intracranial bleeding
(hemorrhagic stroke). These additional indications represent substantial market opportunities for our factor VII product candidate.



Strategy



Data suggests that our improved factor VII may be useful in a number of indications to treat bleeding episodes in trauma, hemophilia and intracerebral
hemorrhage (ICH). We currently retain all rights to our proprietary factor VII program.



MAXY-GAMMA



Optimized interferon gamma to Treat Idiopathic Pulmonary Fibrosis and Other Severe Diseases



We have created an improved version of interferon gamma to treat a variety of diseases including fibrosis, hepatitis C,
tuberculosis, meningitis, and cancer. We believe that interferon gamma may help in the prevention of excessive scarring or fibrosis of organs such as the liver and the lung.



Status



Our improved interferon gamma is currently in preclinical development at InterMune, which has informed us that it plans to put the improved compound into
the clinic within the next few years.



Scope



Idiopathic pulmonary fibrosis (IPF) is an inflammatory disease that results
in severe scarring or fibrosis of the lungs. In time, this fibrosis can build up to the point where the lungs are unable to provide oxygen to the tissues of the body. An effective treatment for IPF could be a lifesaver for affected
patients who today have no viable treatment options. The average survival rate of a patient with IPF is four to six years after diagnosis. The estimated market for interferon gamma to treat IPF is believed to be up to $2.5 billion annually.



Strategy



We have established a collaboration with InterMune, in which InterMune will develop and market Maxygens improved
version of interferon gamma. Our improved product candidate is designed to have improved efficacy and a less-frequent dosing regimen over InterMunes currently marketed interferon gamma (Actimmune®). Actimmune® is marketed for the treatment of chronic granulomatous disease (CGD) and severe, malignant osteoporosis, and it is in
Phase III clinical trials for the treatment of IPF, multidrug-resistant tuberculosis (MDR TB) and ovarian cancer. Actimmune® is also in Phase II trials in combination with Infergen® for the treatment of Hepatitis C viral infection.



Protein Pharmaceutical Alliances.



Roche.In May 2003, we formed a broad strategic alliance with F. Hoffmann-La Roche Ltd. (Roche) to collaborate
on the global development and commercialization of our portfolio of next-generation interferon alpha and beta variants for a wide range of indications. The collaboration will initially focus on the development of lead candidates for the treatment of
hepatitis B virus (HBV) and hepatitis C virus (HCV) infection that have been designed by us to have novel and superior efficacy compared to currently marketed interferon alpha products. This builds on Roches commitment
to hepatitis, following Pegasys, a new generation interferon that provides significant benefit over conventional interferon therapy in patients infected with HCV.



Roche has licensed from us worldwide commercialization rights to specific novel interferon product candidates for the
treatment of HBV and HCV infection. We received an initial payment and are entitled to research and development funding for the first two years of the collaboration. We are also entitled to receive option fees. In addition, we are eligible to
receive milestone payments and royalties based on product sales.



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The alliance also provides the companies with the option to expand the collaboration to develop other
novel interferon alpha and beta products specifically tailored for indications outside the treatment of HBV and HCV infection, including oncology, autoimmune diseases, inflammatory diseases, and other infectious diseases such as HIV infection. We
retain the right to develop such products while Roche may elect to acquire worldwide license and commercialization rights to these product candidates. We also have the option to co-develop in the United States any product to which Roche acquires a
license in exchange for profit sharing or an increased royalty rate.



The Interferon Alpha Market



Total worldwide sales of interferon alpha therapies for the treatment of hepatitis C virus infection, hepatitis B virus infection and cancer were approximately $3.0 billion worldwide in 2003 (including ribavirin), with the treatment of
hepatitis C virus infection representing approximately two-thirds of the total sales.



About Hepatitis B



HBV is a blood-born virus that attacks the liver and is the most common serious liver infection in the world. The hepatitis B virus is highly contagious
and is relatively easy to transmit from one infected individual to another. It is on the order of 100 times more infectious than the HIV virus.



About Hepatitis C



Hepatitis C is a serious blood-born viral infection that attacks the liver, and in many patients it leads to liver disease, cirrhosis and cancer. It is
the leading cause of liver transplantation. Only identified in 1989, the hepatitis C virus has infected more than 170 million people world-wide, making it more common than the HIV virus.



InterMune.In September 2001, we granted a license to, and established a three-year
collaboration with, InterMune, Inc. to develop and commercialize novel, next-generation interferon gamma products. The main purpose of the collaboration was to develop a next-generation Actimmune® with enhanced pharmacokinetics and a less-frequent dosing regime. Actimmune® (Interferon gamma-1b), is currently being marketed by
InterMune in the United States for the treatment of chronic granulomatous disease (CGD) and severe, malignant osteopetrosis. InterMune is continuing the development of Actimmune® by conducting several advanced stage clinical trials, including a Phase III trial for the treatment of idiopathic
pulmonary fibrosis (IPF), a Phase III trial for ovarian cancer and a Phase II trial in combination with Infergen® for the treatment of Hepatitis C viral infection. Under the terms of the agreement, InterMune has taken product candidates developed by us into pre-clinical development. We have
developed a series of pre-clinical candidates that have been shown in animal models to improve pharmacokinetic properties that should allow a once-per-week dosing regimen. InterMune has exclusive worldwide commercialization rights for these
next-generation interferon gamma product candidates for all human therapeutic indications. We have received up-front license fees and research and development funding from InterMune and in October 2002 we announced that we had received a $1 million
milestone payment from InterMune for successfully achieving drug performance criteria established by InterMune. We are entitled to receive additional development and commercialization milestone payments based upon clinical development, regulatory
approvals and commercial sales. In addition, we are entitled to receive royalties on product sales. The funded research term of the collaboration ended in June 2004.



Rentschler.    In September 2004, we entered into a manufacturing agreement with Rentschler
Biotechnologie GmbH for the scale-up and manufacture of clinical supplies of our MAXY-GCSF next-generation G-CSF product candidate. Rentschler Biotechnologie has over 25 years of expertise in mammalian cell culture technology and proven capabilities
in manufacturing recombinant biopharmaceutical products. It was amongst the pioneers for the development and production of interferon beta-1a and was also the first company to receive market authorization for an interferon biologic.



Vaccines



We have a number of active programs focused on the development of novel
vaccines for the prevention of infectious diseases. This work is primarily being funded by research grants and collaborations.



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Market Opportunity.    Worldwide sales of vaccines were estimated to be over
$6.2 billion in 2002. By 2010, some industry professionals predict the market for therapeutic vaccines alone could reach more than $15 billion. 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 sales of almost $700 million in 2003.



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, allergy, and chronic infectious diseases. This will expand the market
size dramatically beyond the traditional use of vaccines as prophylactics for infectious diseases.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | · |  | Increased travel, which increases the probability that viruses, bacteria and other infectious agents will be disbursed worldwide.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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



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



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.



Business
Strategy.    Our strategy for vaccines is to develop selected vaccine opportunities with Maxygen and grant funding to a point third party funding can be secured to develop new and improved preventative and therapeutic
vaccines. We intend to partner or outlicense potential products and enter into additional collaborations to access additional vaccine product technologies and product development capabilities. By collaborating with leading vaccine companies we seek
to balance our return and our development risk. Additionally, the flexibility of our technologies allows many targets to be pursued, thus decreasing portfolio risk.



Our vaccine business activities have been built primarily through grant funding of more than $25 million from the U.S.
government. This funding has also enabled us to advance key programs and our technology platform as a whole. In the future we expect to fund our vaccine research and development primarily through research grants and other third party funding.



Products/Pipeline.    We are
developing vaccines for the prevention of infectious diseases.



Our Vaccine Pipeline



|             |  |                                       |  |                                                 |  |                       |  |             
|------------ |  | ------------------------------------- |  | ----------------------------------------------- |  | --------------------- |  | ------------
|Product      |  | Disease Indication                    |  | Partner                                         |  | MaxygenRetainedRights |  | Status      
|Maxy-1500    |  | Prevention of Dengue Virus infections |  | Henry JacksonFoundation                         |  | Yes                   |  | Pre-clinical
|             |  |                                       |  |                                                
|Maxy-201     |  | HIV                                   |  | None                                            |  | Yes                   |  | Research    
|             |  |                                       |  |                                                
|Maxy-Malaria |  | Malaria                               |  | U.S. Agency for International Development       |  | Yes                   |  | Research    
|             |  |                                       |  |                                                
|Maxy-EE      |  | Equine Encephalitis                   |  | U.S. Army Medical Research and Materiel Command |  | Yes                   |  | Research    



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---

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



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



Our lead vaccine product candidate is a vaccine to prevent dengue virus
infection and the risk of dengue hemorrhagic fever that is in the pre-clinical development stage. We are collaborating with the Henry Jackson Foundation and U.S. Naval Medical Research on the development of this vaccine. While our lead product
candidate has proven successful in pre-clinical primate studies, we will not initiate clinical development without third-party funding support from an appropriate corporate, government or philanthropic partner.



Vaccine Alliances



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



USAID.    In October 2001, we received a $3.7 million, three-year grant from the U.S. Agency for International Development
(USAID) to support the research and development of a novel, broadly protective malaria vaccine. In September 2004, we received a one-year, $1.2 million extension of this grant from USAID. Under the terms of the agreement, we retain worldwide rights
to commercialize successful vaccine candidates that result from the program.



International AIDS Vaccine Initiative.In February 2001, we established a three-year collaboration to develop novel HIV vaccines with the International AIDS Vaccine Initiative (IAVI) and
DBLV LLC, an entity established and funded by the Rockefeller Foundation. Under the agreement, DBLV has provided research and development funding to us for the three-year initial research term. We retain all rights to commercialize HIV vaccine
candidates made in the research program in all developed countries of the world, as well as in certain markets in the developing world. In recognition of the great need for a vaccine against AIDS in the poorest countries of the world, we have
granted IAVI a royalty-free license to develop and distribute HIV vaccines to those who cannot afford them in developing countries. The funded research term of this collaboration ended in February 2004.



Industrial Applications



ChemicalsCodexis, Inc.



Our chemicals business is operated through our subsidiary Codexis, Inc. Codexis was incorporated in January 2002, and we
contributed our chemicals business to Codexis in March 2002 in exchange for all the capital stock of Codexis. On September 13, 2002, Codexis sold $15 million of Codexis redeemable, convertible preferred stock to investors, of which $5 million was
purchased by Maxygen and $10 million was purchased by several other investors. On October 1, 2002, Codexis sold an additional $10 million of redeemable, convertible preferred stock to several third party investors. On July 26, 2004, in connection
with entry into a collaboration agreement with Pfizer, Codexis sold $10 million of convertible preferred stock to Pfizer. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH
and certain other matters that occurred in the first quarter of 2005, Maxygens voting rights in Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a consolidated subsidiary of
Maxygen.



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Codexis is primarily engaged in the development of bio-based solutions for pharmaceutical chemical
process development and manufacturing. In particular Codexis is focused on developing proprietary catalysts and processes for the production of pharmaceutical products and assisting pharmaceutical customers in managing the life cycle of their
pharmaceutical products. Products in this area include chiral pharmaceuticals, complex natural products and novel pharmaceutical building blocks.



Market Opportunity.Codexis primary area of focus is the pharmaceutical market. Sales of pharmaceuticals were $401
billion in 2002, an 8% increase over 2001. However, earnings growth in the pharmaceutical industry slowed to an increase of 1.8% in 2002. The decrease in industry gross margins was in part due to pricing pressure from generic competition and a
changing regulatory environment. Increases in cost of goods was also due in part to the growing complexity in manufacturing pharmaceutical products. In addition, the number of new drugs approved each year has steadily declined while research and
development costs per approved product continue to rise.



The
forces outlined above have contributed to the pharmaceutical industry increasing its emphasis on more closely managing existing launched products though the entire product cycle  from pre-clinical to post patent expiration. Codexis seeks to
assist the pharmaceutical industry in developing better, cheaper and more efficient processes to manufacture pharmaceutical products.



Together with the pharmaceutical industry, the commodity, specialty and fine chemical segments comprise the broader chemical industry, which had sales of
$1.7 trillion in 2000. Within the latter three segments, approximately $50 billion in sales is 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. Included in the potential market is the manufacturing of major chemicals, plastics, vitamins and 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 evolution platform are potentially able to overcome such shortcomings.



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



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



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



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



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



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



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In addition to DNAShuffling recombination technologies, Codexis has developed expertise in
high-throughput biological and chemical screening systems that mimic the commercial scale environment. Screening for trace amounts of a specific chemical, rheological properties of a polymer, or a specific stereo- or regioisomer are just some of the
high-throughput screening capabilities Codexis has developed to identify conversions and syntheses of interest. Coupled with the power of DNAShuffling recombination technologies, Codexis screening systems help enable it to rapidly develop
integrated, commercially viable chemical processes at the relevant scale.



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



Codexis technologies
help allow for the generation of proprietary catalysts and processes for the production of pharmaceutical products. Codexis can potentially add value to the pharmaceutical industry by using MolecularBreeding directed evolution to assist the industry
in maintaining or improving the margins of pharmaceutical products and generating intellectual property that may help extend the products life cycle. Similarly, Codexis technologies may be useful to first-to-file generic companies who
are seeking to develop intellectual property positions to potentially enhance their competitive advantage.



Codexis plans to capture value through the outlicensing of processes to third parties for subsequent commercialization and the direct sale of
pharmaceutical intermediates and bulk actives to major pharmaceutical companies via its own sales and marketing team. In the case of outlicensing, Codexis expects to receive milestones and royalties on product sales. For direct product sales,
Codexis plans to manufacture its products through third party toll manufacturing agreements and manufacturing joint ventures.



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



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



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



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



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



Our MolecularBreeding directed evolution platform, in combination with
in-house expertise in chemistry and bioengineering, can potentially help discover and develop improved biological catalysts  either enzymes or fermentation strainsthat may enable new chemical processes or may improve existing processes.
Codexis product and service offerings are summarized below:



| | · |  | Research and development contract research;
| | - |  | -------------------------------------------



| | · |  | Thoroughbred catalysts;
| | - |  | -----------------------



| | · |  | SmartSynth process development services for proprietary manufacturing processes;
| | - |  | --------------------------------------------------------------------------------



| | · |  | Intellectual property licensing; and
| | - |  | ------------------------------------



| | · |  | Pharmaceutical products principally comprised of:
| | - |  | -------------------------------------------------



| | · |  | Active pharmaceutical ingredients (APIs); and
| | - |  | ----------------------------------------------



| | · |  | Chemical pharmaceutical intermediates.
| | - |  | --------------------------------------



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Applications of Codexis technologies potentially range from fine and pharmaceutical chemicals to
petrochemical and industrial chemical synthesis. In each of these areas, Codexis believes its technology can add value through: (i) creation of novel intellectual property, (ii) reduction in the cost of manufacturing, (iii) increases in return
on capital employed and (iv) improved product characteristics.



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



Chemical Alliances



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



Teva.    In December 2004 Codexis announced that it had entered into a research collaboration with Teva Pharmaceutical
Industries Ltd. to develop improved processes for the manufacturing of a currently marketed pharmaceutical product. The collaboration aims to improve the productivity of manufacturing process for the product as well as reduce the overall capital
expenditures necessary to produce each unit of the product. Under the terms of the collaboration, Codexis is entitled to receive research and development funding and will be eligible for milestone and royalty payments upon success. Codexis also
granted to Teva exclusive commercialization rights to the improved process for the pharmaceutical product.



Pfizer II.    On July 26, 2004, Codexis entered into a multi-year collaborative research agreement and a license agreement with
Pfizer to discover and develop biocatalysts, and associated processes that use such biocatalysts, in the manufacture of pharmaceutical products for Pfizer. Under the terms of these agreements, Pfizer provided Codexis an upfront technology access fee
and Codexis is entitled to receive research funding over a multi-year period. Codexis is also eligible to receive milestone payments, a license fee if Pfizer exercises its option to acquire a non-exclusive worldwide license to certain Codexis gene
shuffling technologies, and royalties.



Concurrent with the
execution of the multi-year collaborative research agreement and the license agreement, Codexis and Pfizer also entered into a stock purchase agreement in which Pfizer purchased from Codexis convertible preferred stock for gross proceeds of
approximately $10 million.



Sandoz.    In October of 2003, Codexis and Sandoz entered into a research collaboration to develop an improved synthesis of one of Sandozs key active pharmaceutical compounds using Codexis
MolecularBreeding directed evolution platform. Under the terms of the agreement, Codexis received upfront payments and research and development funding. Codexis is entitled to receive future research and development funding and is eligible for
milestone and royalty payments. Codexis has granted Sandoz exclusive commercialization rights to the improved process for the specific pharmaceutical product.



Cargill.    In May of 2003, Codexis announced that it had entered into a multi-year collaboration with Cargill to develop a
novel biochemical platform that may enable production of a broad range of specialty chemicals, polymers and other agricultural raw materials. Building on metabolic pathways developed by Cargill, Codexis will use its proprietary technologies to
enhance the production of 3-hydroxypropionic acid (3-hp) from



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carbohydrate raw material. Cargill and the U.S. Department of Energy will each contribute to research and development funding for three years at Codexis.
Codexis is also eligible for milestone and royalty payments from products commercialized by Cargill.



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



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



Novozymes (formerly a division of Novo Nordisk A/S).    In September 1997, we entered into a five-year strategic collaboration
with Novozymes, the worlds largest producer of industrial enzymes, for the development and bulk production of specific industrial enzymes in fields such as laundry detergents, leather processing and pulp and paper manufacturing. In addition to
providing Novozymes with an improved subtilisin molecule (one of the most studied and highly modified industrial enzyme products) we provided an additional product candidate in 2000. In 2001 we announced the advancement of two further industrial
enzyme product candidates into commercial development bringing to a total of four the number of product candidates in commercial development under the agreement. In November 2001, the companies expanded the market areas addressed by the existing
industrial enzymes collaboration. Under the terms of the expanded relationship, Novozymes is licensed to use our MolecularBreeding directed evolution platform for certain additional industrial enzyme applications. We have received certain minimum
royalty payments and royalty payments on the sales of products developed under the 1997 agreement and are entitled to royalty payments on the sale of any products developed under the 1997 agreement and in the expanded industrial enzyme market areas.
This collaboration was assigned to Codexis in connection with its capitalization in March 2002. The funded research term of the collaboration ended in December 2003.



AgricultureVerdia, Inc.



Our agriculture business was operated through a wholly-owned subsidiary, Verdia, Inc. Verdia was incorporated in March 2002.
Our agriculture business was contributed to Verdia in March 2002 in exchange for all the capital stock of Verdia. On July 1, 2004 Verdia was sold to Pioneer Hi-Bred International, Inc. for $64 million in cash. The operations of Verdia are reflected
as discontinued operations in the financial statements included herein.



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



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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. DNA, a molecule found in the cells of living organisms, codes for this genetic information. 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. Proteins not only form the fabric of cells but
also direct them to perform biological functions, which may in turn influence physical characteristics. Generally, the inherited biological properties or physical characteristics of an organism change only when the DNA in a gene is altered.



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



Mutation and Recombination



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



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



Sexually reproducing organisms also create diversity through the use of 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



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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.



Our MolecularBreeding Directed Evolution Platform



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



Other Technologies



In addition to our proprietary MolecularBreeding directed evolution
platform, we have acquired capabilities with regard to several complementary technologies potentially useful for the development of protein-based products. Two examples of our directed strategies to post-translationally modify protein drugs are our
PEGylation and glycosylation technologies. Over the last few years glycosylation and PEGylation have been validated technically and commercially through the successes of drugs like the PEGgylated interferons (Pegasys and PEG-Intron) and NESP, a
hyper-glycosylated erythropoeitin. These post-translational modifications of proteins have been demonstrated to improve the pharmacokinetics and pharmacodynamics of protein drugs. In addition these modifications can improve the solubility,
bioavailability and immunogencity profile of protein drugs.



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LOGO



Step One: DNAShuffling
Recombination Technologies



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



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



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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 final lead product candidates. Unlike approaches that create random diversity, our MolecularBreeding directed
evolution platform 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;
| | - |  | ----------------------



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



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



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



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



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



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LOGO



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



Demonstrated Successes of Our MolecularBreeding Directed Evolution Platform in Multiple Applications



We have consistently achieved improvement in gene and protein function using
our MolecularBreeding directed evolution platform. These improvements have been demonstrated to permit more useful products and improved manufacturing efficiencies. Our technologies have the ability to generate improvements that would be more
costly, time intensive and, in many cases, difficult if not impossible to achieve using other methods. We have also 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.



Intellectual Property and Technology Licenses



Pursuant to a technology transfer agreement we entered into with Affymax Technologies N.V. and Glaxo Group Limited (each of
which was then a wholly-owned subsidiary of what is now GlaxoSmithKline plc) (included as Exhibit 10.18), we were assigned all rights to the patents, applications and know-how related to our MolecularBreeding directed evolution platform. Affymax
Technologies N.V. and Glaxo Group Limited retain a non-exclusive license under certain patent applications and patents previously owned by Affymax for certain internal research uses. Affymetrix, Inc. retains an exclusive, royalty-free license under
some of the patents and patent applications previously owned by Affymax for use in the diagnostics and research supply markets for specific applications. In addition, Affymax assigned jointly to us and to Affymetrix a family of patent applications
relating to circular PCR techniques.



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We have an extensive patent portfolio of over 70 U.S. patents and over 50 foreign patents relating to our
proprietary MolecularBreeding directed evolution platform. Counterpart applications of the U.S. patents are pending in other major industrialized countries. Additionally, we have over 50 pending U.S. patent applications and over 100 pending foreign
applications relating to our MolecularBreeding directed evolution platform.



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



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



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



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



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



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



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



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



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



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



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



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



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



In addition to the patents that we directly own, we have also exclusively licensed patent rights for specific uses from Novozymes, the California
Institute of Technology (Caltech), the University of Washington, GGMJ Technologies, L.L.C. and the University of Minnesota. These licenses give us rights to an additional 32 issued U.S. patents, 17 granted foreign patents, over 20 pending U.S.
patent applications, and over 50 international or foreign counterpart applications.



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



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



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Competition



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



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



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



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



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



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



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



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



Research and Development Expenses



The majority of our operating expenses to date are
related to research and development. Research and development expenses from continuing operations were $53.3 million in 2004, $44.4 in 2003 and $49.7 in 2002. Additional information required by this item is incorporated herein by reference to
Research and Development Expenses in Note 1 of the Notes to Consolidated Financial Statements. We intend to maintain our strong commitment to research and development as an essential component of our product development effort. Licensed
technology or products and/or newly acquired technology or products developed by third parties is an additional source of potential products.



Geographic Distribution



We have operations in two geographic locations, Denmark and the United States. In addition, certain of our collaborators are based outside the United
States. Additional information required by this item is incorporated herein by reference to Segment Information  Geographic Information in Note 13 of the Notes to Consolidated Financial Statements.



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Segment Reporting



We operate our business in two segments, human therapeutics and chemicals. Additional information required by this item is incorporated herein by
reference to Segment Information in Note 13 of the Notes to Consolidated Financial Statements.



Environment



We seek to
comply with all applicable statutory and administrative requirements concerning environmental quality. We have made, and will continue to make, expenditures for environmental compliance and protection. Expenditures for compliance with environmental
laws have not had, and are not expected to have, a material effect on our capital expenditures, results of operation or competitive position.



Employees



As of January 31, 2004 we had 230 employees, 83 of whom hold Ph.D., Ph.D. equivalent or M.D. degrees and 147 of whom were engaged in full-time research
activities. We plan to expand our corporate development programs and hire additional staff if additional corporate collaborations are established or if existing corporate collaborations are expanded. We continue to search for qualified individuals
with interdisciplinary training and flexibility to address the various aspects and applications of our technologies. None of our employees is represented by a labor union, and we consider our employee relations to be good.



RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION



You should carefully consider the risks described below, together with
all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Maxygen. Additional risks and uncertainties not presently known to us or that
we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your
investment.



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



We have incurred losses since our inception, including a loss applicable to common stockholders of $33.9 million in 2002 and $33.7 million in 2003. During 2004 we recognized income applicable to common stockholders,
primarily due to the sale of Verdia, of $8.3 million, but our loss from continuing operations was $49.1 million. As of December 31, 2004, we had an accumulated deficit of $185.8 million. We expect to incur net losses and negative cash flow from
operating activities 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 revenues and on the level of our expenses. To date, we have derived substantially all our revenues
from collaborations and grants and expect to derive a substantial majority of our revenue from such sources for at least the next several years. Revenues from collaborations and grants are uncertain because our existing agreements have fixed terms
and because our ability to secure future agreements will depend upon our ability to address the needs of current and potential future collaborators. We expect to spend significant amounts to fund development of products and further research and
development to enhance our core technologies. As a result, we expect that our operating expenses will exceed revenues in the near term and we do not expect to achieve profitability during the next several years. If the time required for us to
achieve profitability is longer than we anticipate, we may not be able to continue our business.



We Need to Contain Costs in Order to Achieve Profitability.



We are continuing our efforts to contain costs. We believe strict cost containment in the near term is essential if our current funds are to be sufficient
to allow us to achieve future profitability. We assess market



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conditions on an ongoing basis and plan to take appropriate actions as required. If we are not able to effectively contain our costs and achieve an expense
structure commensurate with our business activities and revenues, we may have inadequate levels of cash for future operations or for future capital requirements, which could significantly harm our ability to operate the business.



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



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



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



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



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



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



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



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



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



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



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



Legislative Actions, Pending and Potential New Accounting Pronouncements and Higher Compliance Costs are Likely to Adversely Impact Our
Future Financial Position and Results of Operations.



Future changes in financial accounting standards, including the requirement that we expense all stock option grants and other stock-based compensation to employees beginning in July 2005, may cause adverse, unexpected



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earnings fluctuations and will adversely affect our financial position and results of operations. The magnitude of the impact of expensing stock-based
compensation will depend in part upon the timing and amount of future equity compensation awards. New accounting pronouncements and varying interpretations of such pronouncements have occurred with frequency in the recent past and may occur in the
future. In addition we may make changes in our accounting policies in the future. Compliance with changing regulation of corporate governance and public disclosure will also result in additional expenses. Changing laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market listing requirements, are creating uncertainty for companies such as ours and compliance costs are
increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving
standards, and this investment will result in increased general and administrative expenses and may cause a diversion of management time and attention from revenue-generating activities to compliance activities.



If We Are Required to Account for Employee Stock Options Using the Fair Value Method, it
Would Significantly Increase Our Net Loss.



There has been
ongoing public debate concerning whether stock options granted to employees should be treated as a compensation expense and, if so, how to properly value such charges. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), Share-Based Payment. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based at their fair values.
Statement 123(R) must be adopted no later than July 1, 2005. We expect to adopt Statement 123(R) on July 1, 2005. The adoption of Statement 123(R)s fair value method will have a significant impact on our result of operations. Such charges will
significantly increase our net loss and will delay our ability to achieve profitability.



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



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



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



In some cases our collaborators already market a product that could be competitive with the product(s) that we are collaborating with them on for an improved version, and could conduct their operations in a manner
that discriminates against the product that we developed.



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.



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



Our ability to develop products depends in part on not infringing patents nor other proprietary rights of third parties, and not breaching any licenses that we have entered into with regard to our technologies and
products. Others have filed, and in the future are likely to file, patent applications covering genes or gene fragments or corresponding proteins or peptides that we may wish to utilize with our proprietary technologies, or products that are similar
to products developed with the use of our technologies or alternative methods of generating gene diversity. If these patent applications result in issued patents and we wish to use the patented technology, we would need to obtain a license from the
third party, which may not be available on acceptable terms, if at all.



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



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



Since Our Voting Control of Codexis Has Recently Fallen Below 50%, We Will No Longer Consolidate Codexis, Which Will Significantly Reduce Our Revenue.



As a result of the issuance of Codexis common stock in connection with
the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, our voting rights in Codexis have been reduced below 50%. As a result, as of the date upon which such rights fell below
50%, we will no longer consolidate the financial results of Codexis with the financial results of Maxygen. This will result in a significant reduction in the revenue (and expenses) of Maxygen in its consolidated financial statements, which currently
include Codexis financial results. Such a reduction in revenue could lead to a reduction in the share price of our stock.



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



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



Our operational requirements were increased as a
result of the increasing independence of Codexis and Verdia (prior to its sale). Until early 2005, we provided a number of operational, financial and/or reporting



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services to Codexis and/or Verdia under services agreements. Such services agreements largely terminated in early 2005 and could lead to issues related to
the appropriate scale of operations. Failure to efficiently manage operational expenses will increase our losses.



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



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



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



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



Changes may also occur that would consume available capital resources significantly sooner than we expect. We may be unable
to raise sufficient additional capital. In difficult economic periods the ability of biotechnology companies to raise capital is severely limited, particularly companies such as Maxygen without human therapeutic products in late clinical
development. If we fail to raise sufficient funds, we may have to curtail or cease operations. We anticipate that existing cash and cash equivalents and income earned thereon, together with anticipated revenues from collaborations, joint ventures
and grants, will enable us to maintain our currently planned operations for at least the next twelve 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. If adequate funds are not available, we will not be able to successfully execute our business plan.



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



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



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



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



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



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



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



Since August 2000, when we acquired Maxygen ApS, a Danish
biotechnology company, we have been operating with international business locations. Operation as an international entity requires additional management attention and resources. We have limited experience in operating internationally and in
conforming our operations to local cultures, standards and policies. We also must compete with local companies who understand the local situation better than we do. Due to these operational impediments we may have trouble generating revenues from
foreign operations. Even if we are successful, the costs of operating internationally are expected to continue to exceed our international revenues for at least the next several years. As we continue to operate internationally, we are subject to
risks of doing business internationally, including the following:



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



| | · |  | local legal and governmental limitations on company-wide employee benefit practices, such as the operation of our employee stock option plan in local jurisdictions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



The Manufacturing of our Products Candidates Present Technological, Logistical and Regulatory Risks, Each of Which May Adversely Affect our Potential Revenues.



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



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



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



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



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



Our Manufacturing Strategy, Which Relies on Third-Party Manufacturers, Exposes us to Additional Risks as a Result of Which We May Lose
Potential Revenues.



We do not currently have the
resources, facilities or experience to manufacture any product candidates or potential products ourselves. Completion of our clinical trials and commercialization of our products will require



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access to, or development of, manufacturing facilities that meet FDA standards to manufacture a sufficient supply of our potential products. We currently
depend on third parties for the scale up and manufacture of our product candidates for preclinical and clinical purposes. If our third party manufacturers are unable to manufacture preclinical or clinical supplies in a timely manner or are unable or
unwilling to satisfy our needs or FDA requirements, it could delay clinical trials, regulatory submissions or commercialization of our potential products, entail higher costs and result in our being unable to sell our products. In addition,
technical problems or other manufacturing delays could delay the advancement of potential products into preclinical or clinical trials or result in the termination of development of particular product candidates, adversely affecting our product
development timetable, which in turn could adversely affect our stock price.



Substantial Sales of Shares May Adversely Impact the Market Price of our Common Stock.



If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, the market price of
our common stock may decline. Our common stock trading volume is low and thus the market price of our common stock is particularly sensitive to trading volume. Our low trading volume may also make it more difficult for us to sell equity or equity
related securities in the future at a time and price that we deem appropriate. Significant sales of our common stock may adversely impact the then-prevailing market price of our common stock.



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 protein
optimization field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce commercial products.



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



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



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



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



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We will be able to protect our proprietary rights from unauthorized use by third parties only to the
extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of biopharmaceutical and biotechnology companies, including our patent positions, are often
uncertain and involve complex legal and factual questions. We apply for patents covering our technologies and potential products as we deem appropriate. However, we may not obtain patents on all inventions for which we seek patents, and any patents
we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Enforcement of our patents against infringers could require us to expend significant amounts with no assurance that we would be successful in any litigation. Others may independently develop similar or alternative
technologies or design around our patented technologies or products. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages.



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



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



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



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



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 potential products involve the application of new technologies
and may be based upon new therapeutic approaches, they may be subject to substantial review by government regulatory authorities and



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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
evolution platform for commercialization in the U.S. or elsewhere. We may not be able to, or our collaborators may not be able to, conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for our
products.



Even if we receive regulatory approval, this
approval may entail limitations on the indicated uses for which we can market a product. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown
problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices.



If Approval of Our Potential Products Is Delayed or Potential Products Do
Not Perform as Expected, Our Stock Price and Ability to Raise Capital Will be Reduced.



The development and regulatory process for human therapeutic products is long and uncertain. Most product candidates fail before entering clinical trials and most clinical trials do not result in a marketed product.
In addition, due to the nature of human therapeutic research and development, the expected timing of product development and initiation of clinical trials and the results of such development and clinical trials are uncertain and subject to change at
any point. This uncertainty may result in research delays; product candidate failures and clinical trial delays and failures. Such delays and failures could drastically reduce the price of our stock and our ability to raise capital. Without
sufficient capital, we would need to reduce operations and could be forced to cease operations.



Preclinical Development is a Long, Expensive and Uncertain Process, and We May Terminate One or More of our Current Preclinical Development Programs.



We may determine that certain preclinical product candidates or programs do
not have sufficient potential to warrant further funding. Accordingly, we may elect to terminate our programs for such product candidates or programs at any time. If we terminate a preclinical program in which we have invested significant resources,
our financial condition and results of operations may be adversely affected, as we will have expended resources on a program that will not provide a return on our investment and we will have missed the opportunity to have allocated those resources
to potentially more productive uses. Termination of such programs could cause the price of our stock to drop drastically.



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



Our future products are expected to include pharmaceutical products. The
continuing efforts of governmental and other third-party payors to contain or reduce the cost of healthcare through various means may adversely affect our ability to successfully commercialize our products. In most foreign markets, the pricing
and/or profitability of prescription pharmaceuticals are subject to governmental control. In the United States, we expect that there will continue to be federal and state proposals to implement similar governmental control. For example, federal
legislation was enacted on December 8, 2003 that provides a new Medicare prescription drug benefit beginning in 2006 and mandates other reforms. Although we cannot predict the full effects on our business of the implementation of this new
legislation, it is possible that the new Medicare benefit, which will be managed by private health insurers, pharmacy benefit managers and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may
further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. These new
and any future cost-



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control initiatives could decrease the price that we would receive for any products we may develop in the future, which would reduce our revenues and
potential profitability.



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



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



We have limited or no control over the resources that any collaborator may
devote to our potential 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 potential products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of
these products. If any of these events occur, we may not be able to develop our technologies or commercialize our potential products.



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



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



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



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



Activists and terrorists have shown a willingness to injure people and
damage physical facilities, equipment and biological materials to publicize and/or further their ideological causes. Bombings in Emeryville, CA also show that biotechnology companies could be a specific target of certain groups. Our operations and
research activities could be adversely impacted depending upon the nature and extent of such acts. Such damage could include disability or death of our personnel, damage to our physical facilities, destruction of animals and biological materials,
disruption of our communications and/or data management software used for research and/or destruction of research records. Any such damage could delay our research projects and decrease our ability to conduct future research and development. Damage
caused by activist and/or terrorist incidents could also cause the release of hazardous materials, including chemicals, radioactive and biological materials, which could damage our reputation in the community. Clean-up of any such releases could
also be time consuming and costly.



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



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



Our research and development processes involve the controlled use and
disposal of hazardous materials, including chemicals, infectious disease agents and 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. 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.



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 and pharmaceutical products. Although we intend in the future to obtain product liability insurance, we do
not have such insurance currently. Any such insurance that we seek to obtain may be prohibitively expensive or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to
protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our collaborators. If we are sued for any injury caused by our products, our liability could exceed our total assets.



Our Stock Price Has Been, and May Continue to Be, Extremely Volatile, and
an Investment in Our Stock Could Decline in Value.



The
trading prices of life science company stocks in general, and ours in particular, have experienced significant price fluctuations in the last several years. During the twelve-month period ended December 31, 2004, the price of our common stock on the
Nasdaq National Market ranged from $8.28 to $12.79. The valuations of many life science companies without consistent product revenues and earnings, including ours, are high based on valuation standards such as price to sales ratios and progress in
product development and/or clinical trials. Trading prices based on these valuations may not be sustained. Any negative change in the publics perception of the prospects of biotechnology or life science companies could depress our stock price
regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as



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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:



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



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



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



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



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



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



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



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



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



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



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



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



In December 2001 a lawsuit was filed in the U.S. District
Court for the Southern District of New York against Maxygen, Inc., certain officers of the Company, and certain underwriters of the Companys initial public offering and secondary public offering of common stock. The complaint, which alleges
claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called laddering cases that have been commenced against a number of companies that had
public offerings of securities prior to December 2000. The complaint has been consolidated with other laddering claims in a proceeding styled In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the
Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against the officers of the Company; the remainder of the case remains pending. We believe the lawsuit against Maxygen and its officers is without merit and
intend to defend against it vigorously. See also Part II, Item 1, Legal Proceedings in this report.



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
| | - |  | ---------------------------------------------------------------------------------------------------------------



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| | · |  | 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 fluctuate unexpectedly due to unexpected expiration of research contracts or government research grants, failure to obtain anticipated new contracts or other factors, we may not be able
to immediately reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.



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



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



Our
executive officers, directors and principal stockholders together control approximately 29% of our outstanding common stock, including GlaxoSmithKline plc, which owns approximately 18% of our outstanding common stock. As a result, these
stockholders, if they act together, and GlaxoSmithKline plc by itself, could exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of 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. This concentration of ownership could also depress our stock price.



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



As of March 1, 2005, Maxygen had leased an aggregate of 64,892 square feet of office and laboratory facilities in Redwood City, California. Our leases
expire on April 20, 2005 with respect to 7,912 square feet and on February 24, 2007 with respect to 56,980 square feet. Our human therapeutics segment occupies all of such space. Codexis, Inc. (our chemicals subsidiary) leases approximately 39,382
square feet of office and laboratory facilities in Redwood City, California. Codexis lease expires on January 31, 2011.



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



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



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



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



In December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, Inc., our chief executive officer,
Russell Howard and our then chief financial officer, Simba Gill, together with certain underwriters of our initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11, 12(a)(2) and 15
of the Securities Act of 1933 and



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Section 10(b) of the Securities Exchange Act of 1934, is among the so-called laddering cases that have been commenced against over 300 companies
that had public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styled In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the
Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against Drs. Howard and Gill; the remainder of the case remains pending.



In June 2003 we agreed to the terms of a tentative settlement agreement along with other defendant issuers in In re
Initial Public Offering Securities Litigation. The tentative settlement provides that the insurers of the 309 defendant issuers will pay to the plaintiffs $1 billion less any recovery of damages the plaintiffs receive from the defendant
underwriters. If the plaintiffs receive over $5 billion in damages from the defendant underwriters, we will be entitled to reimbursement of various expenses incurred by us as a result of the litigation. As part of the tentative settlement, we will
assign to the plaintiffs excess compensation claims and certain other of our claims against the defendant underwriters based on the alleged actions of the defendant underwriters. The settlement is subject to acceptance by a substantial
majority of defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. On February 15, 2005 the Court tentatively approved the proposed settlement, conditioned
upon the parties altering the proposed settlement to comply with the Private Securities Litigation Reform Acts settlement discharge provision. The settlement does not contemplate any settlement payments by Maxygen.



If the settlement is not accepted by the requisite number of defendants or if
it is not approved by the Court, we intend to defend the lawsuit vigorously. We believe the lawsuit against Maxygen and its officers is without merit. However, the litigation is in the preliminary stage, and we cannot predict its outcome. The
litigation process is inherently uncertain. If the outcome of the litigation is adverse to us and if we are required to pay significant damages, our business would be significantly harmed.



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



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



No matter was submitted to a vote of security holders during the fourth quarter ended December 31, 2004.



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Part II



|Item 5 | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------ | ------------------------------------------------------------------------------------------------------------



Market Information



Our common stock has been traded on the Nasdaq National Market under the symbol MAXY since December 16, 1999. During the last two fiscal years, through
December 31, 2004, the high and low sale prices for our common stock, as reported on the Nasdaq National Market, were as follows:



|                             |  |      |       |     |   |     
|---------------------------- |  | ---- | ----- | --- | - | ----
|                             |  | High |       | Low
|Year ended December 31, 2003 |  |      |       |     |   |     
|First Quarter                |  | $    | 8.20  |     | $ | 6.45
|Second Quarter               |  |      | 12.94 |     |   | 7.00
|Third Quarter                |  |      | 15.48 |     |   | 9.93
|Fourth Quarter               |  |      | 11.10 |     |   | 9.10
|Year ended December 31, 2004 |  |      |       |     |   |     
|First Quarter                |  | $    | 10.79 |     | $ | 8.28
|Second Quarter               |  |      | 12.19 |     |   | 8.46
|Third Quarter                |  |      | 10.65 |     |   | 8.69
|Fourth Quarter               |  |      | 12.79 |     |   | 9.30



Holders



On February 28, 2005, there were approximately 266 holders of record of our
common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.



Dividends



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.



Securities Authorized for Issuance Under Equity Compensation Plans



We maintain a 1997 Stock Option Plan (the 1997 Plan), a 1999 Nonemployee Directors Stock Option Plan (the Directors Plan), a
2000 Non-Officer Stock Option Plan (the Non-Officer Plan), a 2000 International Stock Option Plan (the International Plan) and a 1999 Employee Stock Purchase Plan (the ESPP), pursuant to which we may grant equity
awards to eligible persons. The 1997 Plan, the Directors Plan, the Non-Officer Plan, the International Plan and the ESPP are described more fully in Note 9 of the Notes to Consolidated Financial Statements.



The following table gives information about equity awards under our 1997
Plan, Directors Plan, Non-Officer Plan, International Plan and ESPP as of December 31, 2004.



|                                                           |  |                                                                                         |  |                                                                         |       |                                                                                                                                       |           |       
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------- | --------- | ------
|                                                           |  | (a)                                                                                     |  | (b)                                                                     |       | (c)                                                                                                                                   |          
|Plan category                                              |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights |       | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding
securitiesreflected in column (a)) |          
|Equity compensation plans approved by security holders     |  | 5,182,362                                                                               |  | $                                                                       | 19.14 |                                                                                                                                       | 4,916,973 | (1)(2)
|Equity compensation plans not approved by security holders |  | 3,728,519                                                                               |  | $                                                                       | 14.49 |                                                                                                                                       | 2,552,156 | (3)   
|                                                           |  |                                                                                         |  |                                                                         |       |                                                                                                                                       |           |       
|Total                                                      |  | 8,910,881                                                                               |  | $                                                                       | 17.19 |                                                                                                                                       | 7,469,129 |       
|                                                           |  |                                                                                         |  |                                                                         |       |                                                                                                                                       |           |       



39



---

##### Table of Contents

---

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



|(2) | Of these shares, 732,968 shares remain available for purchase under the ESPP.
|--- | -----------------------------------------------------------------------------



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



Codexis, a
consolidated subsidiary, maintains the Codexis 2002 Stock Plan (Codexis Stock Plan), a stock plan covering shares of Codexis common stock. As of December 31, 2004, the Codexis Stock Plan had 2,617,775 shares of Codexis common stock
available to be issued upon exercise of outstanding options at a weighted-average exercise price of $0.41 per share. It also had 235,377 shares of Codexis common stock remaining available for future issuance. The Codexis Stock Plan was approved by
Codexis stockholders but has not been approved by Maxygen stockholders.



Recent Sales of Unregistered Securities



We
made no unregistered sales of our securities during the year ended December 31, 2004 that have not already been reported in an earlier quarterly report.



40



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##### Table of Contents

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



The following selected financial information is derived from our audited consolidated financial statements. When you read this selected financial data, it is important that you also read the historical financial statements and related notes
included in this report, as well as the section of this report entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. Historical results are not necessarily indicative of future results.



|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                             |  | Year Ended December 31,               |        
|                                                                             |  | 2000                                  |         |   | 2001 |   |         | 2002 |  |   | 2003    |   |  | 2004 |        
|                                                                             |  | (in thousands, except per share data) |        
|Consolidated Statement of Operations Data:                                   |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Collaborative research and development revenue                               |  | $                                     | 2,910   |   |      | $ | 14,362  |      |  | $ | 24,818  |   |  | $    | 20,573  |   |  | $ | 14,333  |  
|Grant revenue                                                                |  |                                       | 11,166  |   |      |   | 5,356   |      |  |   | 3,879   |   |  |      | 2,282   |   |  |   | 1,942   |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total revenues                                                               |  |                                       | 14,076  |   |      |   | 19,718  |      |  |   | 28,697  |   |  |      | 22,855  |   |  |   | 16,275  |  
|Operating expenses:                                                          |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Research and development                                                     |  |                                       | 30,549  |   |      |   | 41,929  |      |  |   | 49,654  |   |  |      | 44,435  |   |  |   | 53,294  |  
|General and administrative                                                   |  |                                       | 9,693   |   |      |   | 11,063  |      |  |   | 10,805  |   |  |      | 11,354  |   |  |   | 14,372  |  
|Stock compensation expense(1)                                                |  |                                       | 15,981  |   |      |   | 12,017  |      |  |   | 6,250   |   |  |      | 1,991   |   |  |   | 355     |  
|Acquired in-process research and development                                 |  |                                       | 28,959  |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Amortization of goodwill and other intangible assets                         |  |                                       | 3,419   |   |      |   | 8,726   |      |  |   | 1,144   |   |  |      | 698     |   |  |   |        |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total operating expenses                                                     |  |                                       | 88,601  |   |      |   | 73,735  |      |  |   | 67,853  |   |  |      | 58,478  |   |  |   | 68,021  |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loss from operations                                                         |  |                                       | (74,525 | ) |      |   | (54,017 | )    |  |   | (39,156 | ) |  |      | (35,623 | ) |  |   | (51,746 | )
|Interest income and other (expense), net                                     |  |                                       | 15,329  |   |      |   | 12,861  |      |  |   | 7,981   |   |  |      | 5,253   |   |  |   | 4,055   |  
|Equity in net loss of minority investee                                      |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | (500    | ) |  |   | (1,395  | )
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loss from continuing operations                                              |  |                                       | (59,196 | ) |      |   | (41,156 | )    |  |   | (31,175 | ) |  |      | (30,870 | ) |  |   | (49,086 | )
|Discontinued operations:                                                     |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loss from discontinued operations                                            |  |                                       | (389    | ) |      |   | (3,808  | )    |  |   | (2,771  | ) |  |      | (1,586  | ) |  |   | (2,769  | )
|Gain on sale of discontinued operations (net of taxes and transaction costs) |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | 61,197  |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) from discontinued operations                                   |  |                                       | (389    | ) |      |   | (3,808  | )    |  |   | (2,771  | ) |  |      | (1,586  | ) |  |   | 58,428  |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss)                                                            |  |                                       | (59,585 | ) |      |   | (44,964 | )    |  |   | (33,946 | ) |  |      | (32,456 | ) |  |   | 9,342   |  
|Subsidiary preferred stock accretion                                         |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | (1,279  | ) |  |   | (1,000  | )
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) applicable to common stockholders                              |  | $                                     | (59,585 | ) |      | $ | (44,964 | )    |  | $ | (33,946 | ) |  | $    | (33,735 | ) |  | $ | 8,342   |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic and diluted income (loss) per share:                                   |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Continuing operations                                                        |  | $                                     | (1.95   | ) |      | $ | (1.26   | )    |  | $ | (0.93   | ) |  | $    | (0.89   | ) |  | $ | (1.40   | )
|Discontinued operations                                                      |  | $                                     | (0.01   | ) |      | $ | (0.12   | )    |  | $ | (0.08   | ) |  | $    | (0.05   | ) |  | $ | 1.66    |  
|Applicable to common stockholders                                            |  | $                                     | (1.96   | ) |      | $ | (1.38   | )    |  | $ | (1.01   | ) |  | $    | (0.98   | ) |  | $ | 0.24    |  
|Shares used in basic and diluted per share calculations                      |  |                                       | 30,339  |   |      |   | 32,610  |      |  |   | 33,582  |   |  |      | 34,519  |   |  |   | 35,176  |  
|(1)    Stock compensation
expense related to the following:                  |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Research and development                                                     |  | $                                     | 11,468  |   |      | $ | 9,626   |      |  | $ | 4,674   |   |  | $    | 1,514   |   |  | $ | 292     |  
|General and administrative                                                   |  |                                       | 4,513   |   |      |   | 2,391   |      |  |   | 1,576   |   |  |      | 477     |   |  |   | 63      |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                             |  | $                                     | 15,981  |   |      | $ | 12,017  |      |  | $ | 6,250   |   |  | $    | 1,991   |   |  | $ | 355     |  
|                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



41



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|                                           |  |                |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|------------------------------------------ |  | -------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                           |  | December 31,   |        
|                                           |  | 2000           |         |   | 2001 |   |          | 2002 |  |   | 2003     |   |  | 2004 |         
|                                           |  | (in thousands) |        
|Consolidated Balance Sheet Data:           |  |                |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Cash, cash equivalents and investments     |  | $              | 258,015 |   |      | $ | 234,877  |      |  | $ | 219,138  |   |  | $    | 191,868  |   |  | $ | 232,893  |  
|Working capital                            |  |                | 214,661 |   |      |   | 196,069  |      |  |   | 209,712  |   |  |      | 115,724  |   |  |   | 211,999  |  
|Total assets                               |  |                | 301,699 |   |      |   | 277,418  |      |  |   | 269,764  |   |  |      | 234,069  |   |  |   | 263,105  |  
|Non-current portion of equipment financing |  |                | 1,295   |   |      |   | 673      |      |  |   | 55       |   |  |      |         |   |  |   | 1,751    |  
|Minority interest                          |  |                |        |   |      |   |         |      |  |   | 20,000   |   |  |      | 21,210   |   |  |   | 32,180   |  
|Accumulated deficit                        |  |                | (83,762 | ) |      |   | (128,726 | )    |  |   | (162,672 | ) |  |      | (195,128 | ) |  |   | (185,786 | )
|Total stockholders equity                 |  |                | 282,198 |   |      |   | 253,734  |      |  |   | 229,199  |   |  |      | 198,224  |   |  |   | 211,341  |  



QUARTERLY FINANCIAL
DATA

(unaudited)



|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | -------- | - | ------- | --------- |  | - | -------- | - |  | - | ------- | -
|                                                                             |  | Quarter Ended                         |        
|                                                                             |  | March 31,                             |         |   | June 30, |   |         | Sept. 30, |  |   | Dec. 31, |  
|                                                                             |  | (in thousands, except per share data) |        
|2004                                                                         |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Collaborative research and development revenue                               |  | $                                     | 4,416   |   |          | $ | 3,220   |           |  | $ | 3,451    |   |  | $ | 3,246   |  
|Grant revenue                                                                |  |                                       | 452     |   |          |   | 341     |           |  |   | 474      |   |  |   | 675     |  
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Total revenues                                                               |  |                                       | 4,868   |   |          |   | 3,561   |           |  |   | 3,925    |   |  |   | 3,921   |  
|Operating expenses:                                                          |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Research and development                                                     |  |                                       | 10,819  |   |          |   | 11,794  |           |  |   | 14,428   |   |  |   | 16,253  |  
|General and administrative                                                   |  |                                       | 2,777   |   |          |   | 3,503   |           |  |   | 3,670    |   |  |   | 4,422   |  
|Stock compensation expense                                                   |  |                                       | 151     |   |          |   | 131     |           |  |   | 65       |   |  |   | 8       |  
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Total operating expenses                                                     |  |                                       | 13,747  |   |          |   | 15,428  |           |  |   | 18,163   |   |  |   | 20,683  |  
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Loss from operations                                                         |  |                                       | (8,879  | ) |          |   | (11,867 | )         |  |   | (14,238  | ) |  |   | (16,762 | )
|                                                                             |  |                                       |         |  
|Interest income and other (expense), net                                     |  |                                       | 574     |   |          |   | 697     |           |  |   | 1,015    |   |  |   | 1,769   |  
|Equity in net losses of minority investee                                    |  |                                       |        |   |          |   | (1,000  | )         |  |   |         |   |  |   | (395    | )
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Loss from continuing operations                                              |  |                                       | (8,305  | ) |          |   | (12,170 | )         |  |   | (13,223  | ) |  |   | (15,388 | )
|                                                                             |  |                                       |         |  
|Discontinued operations:                                                     |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Income (loss) from discontinued operations                                   |  |                                       | (1,543  | ) |          |   | (1,226  | )         |  |   |         |   |  |   |        |  
|Gain on sale of discontinued operations (net of taxes and transaction costs) |  |                                       |        |   |          |   |        |           |  |   | 61,197   |   |  |   |        |  
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Income (loss) from discontinued operations                                   |  |                                       | (1,543  | ) |          |   | (1,226  | )         |  |   | 61,197   |   |  |   |        |  
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Net income (loss)                                                            |  |                                       | (9,848  | ) |          |   | (13,396 | )         |  |   | 47,974   |   |  |   | (15,388 | )
|Subsidiary preferred stock accretion                                         |  |                                       | (250    | ) |          |   | (250    | )         |  |   | (250     | ) |  |   | (250    | )
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Income (loss) applicable to common stockholders                              |  | $                                     | (10,098 | ) |          | $ | (13,646 | )         |  | $ | 47,724   |   |  | $ | (15,638 | )
|                                                                             |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Basic and diluted income (loss) per share:                                   |  |                                       |         |   |          |   |         |           |  |   |          |   |  |   |         |  
|Continuing operations                                                        |  | $                                     | (0.24   | ) |          | $ | (0.35   | )         |  | $ | (0.38    | ) |  | $ | (0.43   | )
|Discontinued operations                                                      |  | $                                     | (0.04   | ) |          | $ | (0.03   | )         |  |   | 1.74     |   |  | $ |        |  
|Applicable to common stockholders                                            |  | $                                     | (0.29   | ) |          | $ | (0.39   | )         |  | $ | 1.35     |   |  | $ | (0.44   | )
|                                                                             |  |                                       |         |  
|Shares used in basic and diluted per share calculations                      |  |                                       | 34,941  |   |          |   | 35,071  |           |  |   | 35,236   |   |  |   | 35,456  |  



42



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|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | -------- | - | ------- | --------- |  | - | -------- | - |  | - | ------ | -
|                                                                             |  | Quarter Ended                         |       
|                                                                             |  | March 31,                             |        |   | June 30, |   |         | Sept. 30, |  |   | Dec. 31, |  
|                                                                             |  | (in thousands, except per share data) |       
|2003                                                                         |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Collaborative research and development revenue                               |  | $                                     | 7,339  |   |          | $ | 3,874   |           |  | $ | 4,633    |   |  | $ | 4,727  |  
|Grant revenue                                                                |  |                                       | 673    |   |          |   | 486     |           |  |   | 419      |   |  |   | 704    |  
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Total revenues                                                               |  |                                       | 8,012  |   |          |   | 4,360   |           |  |   | 5,052    |   |  |   | 5,431  |  
|Operating expenses:                                                          |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Research and development                                                     |  |                                       | 10,871 |   |          |   | 10,597  |           |  |   | 10,974   |   |  |   | 11,993 |  
|General and administrative                                                   |  |                                       | 2,712  |   |          |   | 3,031   |           |  |   | 2,412    |   |  |   | 3,199  |  
|Stock compensation expense                                                   |  |                                       | 731    |   |          |   | 730     |           |  |   | 404      |   |  |   | 126    |  
|Amortization of other intangible assets                                      |  |                                       | 286    |   |          |   | 286     |           |  |   | 126      |   |  |   |       |  
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Total operating expenses                                                     |  |                                       | 14,600 |   |          |   | 14,644  |           |  |   | 13,916   |   |  |   | 15,318 |  
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Loss from operations                                                         |  |                                       | (6,588 | ) |          |   | (10,284 | )         |  |   | (8,864   | ) |  |   | (9,887 | )
|Interest income and other (expense), net                                     |  |                                       | 1,495  |   |          |   | 1,265   |           |  |   | 1,029    |   |  |   | 1,464  |  
|Equity in net loss of minority investee                                      |  |                                       |       |   |          |   |        |           |  |   | (231     | ) |  |   | (269   | )
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Loss from continuing operations                                              |  |                                       | (5,093 | ) |          |   | (9,019  | )         |  |   | (8,066   | ) |  |   | (8,692 | )
|Discontinued operations:                                                     |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Income (loss) from discontinued operations                                   |  |                                       | 1,156  |   |          |   | (985    | )         |  |   | (871     | ) |  |   | (886   | )
|Gain on sale of discontinued operations (net of taxes and transaction costs) |  |                                       |       |   |          |   |        |           |  |   |         |   |  |   |       |  
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Income (loss) from discontinued operations                                   |  |                                       | 1,156  |   |          |   | (985    | )         |  |   | (871     | ) |  |   | (886   | )
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Net income (loss)                                                            |  |                                       | (3,937 | ) |          |   | (10,004 | )         |  |   | (8,937   | ) |  |   | (9,578 | )
|Subsidiary preferred stock accretion                                         |  |                                       | (319   | ) |          |   | (319    | )         |  |   | (319     | ) |  |   | (322   | )
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Income (loss) applicable to common stockholders                              |  | $                                     | (4,256 | ) |          | $ | (10,323 | )         |  | $ | (9,256   | ) |  | $ | (9,900 | )
|                                                                             |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Basic and diluted income (loss) per share:                                   |  |                                       |        |   |          |   |         |           |  |   |          |   |  |   |        |  
|Continuing operations                                                        |  | $                                     | (0.15  | ) |          | $ | (0.26   | )         |  | $ | (0.23    | ) |  | $ | (0.25  | )
|Discontinued operations                                                      |  | $                                     | 0.03   |   |          | $ | (0.03   | )         |  | $ | (0.03    | ) |  | $ | (0.03  | )
|Applicable to common stockholders                                            |  | $                                     | (0.12  | ) |          | $ | (0.30   | )         |  | $ | (0.27    | ) |  | $ | (0.28  | )
|Shares used in basic and diluted per share calculations                      |  |                                       | 34,193 |   |          |   | 34,365  |           |  |   | 34,667   |   |  |   | 34,850 |  



The data provided
above for the quarters in the period from January 1, 2003 until and including March 31, 2004 differs from that supplied in our filed Quarterly Reports on Form 10-Q due to the sale of Verdia on July 1, 2004. The quarterly results above differ from
earlier reported results in that the financial results of Verdia during such periods have been removed from the as filed results and are reflected in the above as discontinued operations.



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



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



Executive Summary



We are a leader in the application of directed molecular evolution, a process by which genes and related proteins are
modified for specific commercial uses. Maxygen began operations in March 1997 with the mission to develop important commercial products through the use of biotechnology. Since then, we have established a focus in human therapeutics, particularly
optimized protein pharmaceuticals.



Our business model focuses
on developing next-generation protein pharmaceuticals that address significant markets, on our own or with partners. We currently have four next-generation protein therapeutic leads in pre-clinical development. The four lead product candidates seek
to address significant opportunities and deficiencies in first-generation marketed protein products. The four product candidates are: an optimized alpha interferon for the treatment of hepatitis C virus infection, partnered with Roche; an optimized
gamma interferon for the treatment of idiopathic pulmonary fibrosis and other indications, partnered with InterMune; and two leads to which we retain all rights: an optimized G-CSF for the treatment of neutropenia and an optimized Factor VII to
treat uncontrolled bleeding. We currently expect that INDs will be filed on two of these programs in 2006.



The successful development of our product candidates is highly uncertain. Product development costs and timelines can vary significantly for each product
candidate and are difficult to accurately predict. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking these approvals,
and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect our business.



In addition to our focus in human therapeutics, we established
two industrial subsidiaries. Our chemicals subsidiary Codexis focuses on the development of biocatalysis and fermentation processes and products for the pharmaceutical industry. Codexis now has five processes operating at commercial scale, each
process generating royalty payments from partners. Codexis also has over 15 potential products and processes in development with partners or in its own research and development pipeline. On July 1, 2004 we completed the sale of Verdia, our
agriculture subsidiary, to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for cash proceeds of $64 million. As a result of the sale of Verdia, the discussion in this section reflects the
results of Verdia as a discontinued operation for all periods presented. During the first quarter of 2005, our voting rights in Codexis were reduced below 50%. As a result, as of such date we will no longer consolidate the financial results of
Codexis with Maxygens financial results.



To date, we
have generated revenues from research collaborations with pharmaceutical, chemical, agriculture and petroleum companies and from government grants. Moving forward, we anticipate establishing additional strategic alliances. However, as our internal
resources and expertise have grown, we have strategically shifted our dependence on collaborative partner funding to advance our product candidates and business to an increased focus on internal product development in order to capture more of the
potential value resulting from our efforts. We believe that this is an important step in building long-term value in Maxygen. However, in the



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immediate term this will mean reduced revenues and increased net loss. For the purposes of this report, our continuing operations consist of the results of
Maxygen, Inc. and our wholly-owned subsidiaries, Maxygen ApS (Denmark) and Maxygen Holdings Ltd. (Cayman Islands), as well as our chemicals subsidiary, Codexis, Inc. Consistent with our strategic shift, revenue from continuing operations from
strategic alliances and government grants decreased from $28.7 million in 2002 to $22.9 million in 2003 to $16.3 million in 2004. As of the first quarter of 2005, Codexis will not be a consolidated subsidiary of Maxygen and our revenue is expected
to decrease accordingly.



We continue to maintain a strong cash
position to fund our expanded internal product development, with cash, cash equivalents and marketable securities totaling $232.9 million as of December 31, 2004. Of this amount, $17.2 million is held by Codexis, with a balance of approximately
$215.7 million held by Maxygen for its therapeutics business.



We have incurred significant losses since our inception. As of December 31, 2004, our accumulated deficit was $185.8 million. We have invested heavily in establishing our proprietary technologies. Our research and development expenses from
continuing operations for 2004 were $53.3 million compared to $44.4 million for 2003. We expect to incur additional operating losses over at least the next several years.



Critical Accounting Policies and Estimates



General



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



Consolidation



The
consolidated financial statements include the amounts of Maxygen and our wholly-owned subsidiaries, Maxygen ApS (Denmark) and Maxygen Holdings Ltd. (Cayman Islands), as well as our consolidated subsidiary, Codexis, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation. The operations of Verdia, Inc. prior to its sale on July 1, 2004 are reflected as discontinued operations.



Our ownership in Codexis was approximately 51.4% as of December 31, 2004, based upon the voting rights of the issued and
outstanding shares of Codexis common and preferred stock. Based upon managements evaluation of the investors rights under EITF Consensus 96-16, Investor Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Stockholder or Stockholders Have Certain Approval or Veto Rights and paragraph 1 of ARB No. 51, Consolidated Financial Statements, we have included 100% of the net losses of Codexis in the determination of
our consolidated net loss. We record minority interest in the Consolidated Balance Sheets to account for the ownership interest of the minority owners.



As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters
that occurred in the first quarter of 2005, our voting rights in Codexis have been reduced below 50%. As of the date upon which such rights fell below 50%, Codexis will no longer be a consolidated subsidiary of Maxygen. We expect that our investment
in Codexis will as of such date be accounted for under the equity method.



On July 15, 2003, Maxygen and several third party investors formed Avidia Research Institute. In conjunction with its initial capitalization, we contributed certain technology to Avidia and invested $500,000. During
2004, we provided a series of loans to Avidia in the aggregate amount of $1.4 million. This loan is scheduled to be converted into equity of Avidia upon a future sale of Avidia equity securities. Our ownership in



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Avidia was approximately 45.9% as of December 31, 2004, based upon the voting rights of the issued and outstanding shares of Avidias common and
preferred stock. Our investment in Avidia is being accounted for under the equity method of accounting and our share of its results are recorded to the extent of our accounting basis in Avidia as a component of equity in net loss of minority
investee in the Consolidated Statements of Operations. As of December 31, 2004 we had recorded losses equal to our investment basis in Avidia. Maxygen is not obligated to fund Avidias operating losses.



Goodwill and Intangible Impairment



In connection with the Maxygen ApS acquisition, we allocated $26.2 million
to 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. In accordance with Statement of Financial Accounting Standard No. 142 Goodwill and Other Intangible Assets (SFAS 142), we review our long-lived assets (including goodwill) for impairment at least
annually based on estimated future discounted cash flows attributable to the assets and other factors to determine the fair value of the respective assets. In the event such cash flows are not expected to be sufficient to recover the recorded value
of the assets, the assets will be written down to their estimated fair values. No impairment charges were recorded in 2002, 2003 or 2004.



The valuation in connection with the initial purchase price allocation and the ongoing evaluation for impairment of goodwill and intangible assets
requires significant management estimates and judgment. The purchase price allocation process requires management estimates and judgment as to expectations for various products and business strategies. If any of the significant assumptions differ
from the estimates and judgments used in the purchase price allocation, this could result in different valuations for goodwill and intangible assets. Once it is established, we must test goodwill annually for impairment using a two-step process as
required by SFAS No. 142. In addition, in certain circumstances, we must assess if goodwill should be tested for impairment between annual tests. Intangible assets with definite useful lives must be tested for impairment in accordance with SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets. When we conduct our impairment tests for goodwill and intangibles, factors that are considered important in determining whether impairment might exist include existing
product portfolio, product development cycle, development expenses, potential royalties and product sales, costs of goods and selling expenses and overall product lifecycle. Any changes in key assumptions about the business and its prospects, or
changes in market conditions or other external events, could result in an impairment charge and such a charge could have a material adverse effect on our consolidated results of operations.



Source of Revenue and Revenue Recognition Policy



We recognize revenues from research collaboration agreements as earned upon
our achievement of the performance requirements of the agreements. Our existing corporate collaboration agreements generally provide for research funding for a specified number of full-time equivalent researchers working in defined research
programs. Revenue related to these payments is earned as the related research work is performed. In addition, these collaborators may make technology advancement payments that are intended to fund further development of our core technology, as
opposed to a defined research program. Such payments are recognized ratably over the applicable funding period. Payments received that are related to future performance are deferred and recognized as revenue as the performance requirements are
achieved. As of December 31, 2004, we have deferred revenues of approximately $4.9 million that we expect to recognize over the next approximately two years.



Revenue related to performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements.
Substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event when we have no future performance obligations related to the payment and we judge the event to be the culmination of a
separate earnings process. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Maxygen, such as



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regulatory approval to market a product. We receive royalties from licensees, which are based on sales to third parties of licensed products. Royalties are
recorded as earned in accordance with the contract terms when third-party results can be reliably measured and collectibility is reasonably assured.



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



The determination of separate units of accounting in arrangements involving
multiple deliverables as required under EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, requires management to exercise judgment as to whether the delivered item has stand alone value to the collaborator and to
estimate whether there is objective and reliable evidence of fair value for the undelivered items. Our collaborative agreements may contain multiple deliverables that require management to determine whether or not the deliverables are separate units
of accounting.



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



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



Stock-Based Compensation
Expense



Stock-based compensation expense for options
granted to employees has been determined as the intrinsic value of any stock options granted with exercise prices below the fair value of the common stock on the date of grant. Compensation expense for options granted to consultants has been
determined in accordance with Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123) and Emerging Issues Task Force Issue No. 96-18 Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18) as the fair value of the equity instruments issued. Compensation expense for related options granted to consultants is periodically
remeasured as the underlying options vest.



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



|                           |  |      |       |      |   |      |  |   |    
|-------------------------- |  | ---- | ----- | ---- | - | ---- |  | - | ---
|                           |  | 2002 |       | 2003 |   | 2004
|Research and development   |  | $    | 1,401 |      | $ | 586  |  | $ | 178
|General and administrative |  |      | 1,525 |      |   | 470  |  |   | 59 



As of December 31,
2004, we had fully amortized to expense all deferred compensation relating to pre-IPO grants of stock options to employees.



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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 was amortized over the remaining vesting period of the options, of which
$437,000 was expensed in 2002 and $8,000 in 2003. This deferred compensation was fully amortized to expense as of December 31, 2003. Also in connection with the Maxygen ApS acquisition, Maxygen shares were exchanged for Maxygen ApS shares. For the
shares exchanged that had a right of repurchase, we recorded deferred compensation of $13.1 million. This amount was amortized to expense over a three-year graded vesting period. A total of $2.8 million was recognized as expense in 2002 and $844,000
in 2003. This deferred compensation was fully amortized to expense as of December 31, 2003.



In connection with the grant of stock options to consultants, we recorded stock compensation expense of $86,000 in 2002, $76,000 in 2003 and $96,000 in 2004, which were included in research and development expense,
and $50,000 in 2002, $7,000 in 2003 and $22,000 in 2004, which were included in general and administrative expense.



Results of Operations



Revenues



Our total revenues from continuing operations have decreased from $28.7 million in 2002 to $22.9 million in 2003 and to $16.3 million in 2004. The decline
in collaborative research and development revenue of $4.2 million from 2002 to 2003 was primarily due to the decrease in partner funding as the funded research terms of the collaborations with InterMune and Lundbeck wound down on schedule, offset in
part by collaborative research and development revenue from our collaboration with Roche, which began in July 2003. The decline in collaborative research and development revenue of $6.2 million from 2003 to 2004 was primarily due to a decrease in
partner funding as the funded research terms of Maxygens collaborations with Lundbeck and ALK-Abelló A/S, and Codexis collaboration with Chevron, wound down on schedule, partially offset by additional revenue from Codexis
collaboration with Pfizer, which commenced in the third quarter of 2004 and a full year of revenue from the Roche collaboration, which began in July 2003. The decline in grant revenue of $1.6 million from 2002 to 2003 primarily reflects the
expiration of two U.S. government grants from the Defense Advanced Research Projects Agency that began in 1998 and 1999 and ended on various dates, the last of which was September 2002. The decline in grant revenue of $340,000 from 2003 to 2004
primarily reflects the recognition of grant revenue in 2003 for a one time study. We expect that our revenue for 2005 will decrease considerably due primarily to the deconsolidation of Codexis during the first quarter of 2005 and our continuing
focus on internally funded rather than collaboratively funded research.



In 2004 we had two major collaborative partners, defined as those contributing greater than 10% of total collaborative research revenue in 2004, for whom we conducted research and development. The funded research term of our collaboration
with Roche is scheduled to end in July 2005. The funded research term of our collaboration with Aventis Pasteur ended in November 2004. In 2004, revenue recognized from Pfizer, represented 9.4% of our total revenues.



Revenues for each operating segment are derived from our research
collaboration agreements and government research grants and are categorized based on the industry of the product or technology under development. After their capitalization in March 2002, the results of Codexis are shown as our chemicals segment.
The following table presents revenues for each operating segment (in thousands):



|                   |  |                         |        |      |   |        |  |   |       
|------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                   |  | Year Ended December 31,
|                   |  | 2002                    |        | 2003 |   | 2004  
|Human Therapeutics |  | $                       | 20,743 |      | $ | 14,430 |  | $ | 11,555
|Chemicals          |  |                         | 7,954  |      |   | 8,425  |  |   | 4,720 
|                   |  |                         |        |      |   |        |  |   |       
|Total Revenue      |  | $                       | 28,697 |      | $ | 22,855 |  | $ | 16,275
|                   |  |                         |        |      |   |        |  |   |       



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The decreased revenue for our human therapeutics segment from 2002 to 2003 primarily reflects the
scheduled winding down of the funded research terms of our collaborations with InterMune and Lundbeck, offset in part by collaborative research and development revenue from our collaboration with Roche, which began in July 2003. The decrease in 2004
revenues for our human therapeutics segment primarily reflects the scheduled winding down of the funded research terms of our collaborations with Lundbeck and ALK-Abelló A/S, partially offset by an increase in revenue from Roche in 2004 since
the collaboration began in July 2003. We expect revenue from our human therapeutics segment to decrease in 2005 as we continue to implement our strategy of concentrating on internally funded research and development and reduce our dependence on
partner funded research and development. The increase in revenue for our chemicals segment from 2002 to 2003 is primarily due to a one-time termination payment of $2.5 million from Hercules received in 2003 to terminate our collaboration agreement
entered into with them in 2000, offset in part by decreased revenue from the termination of that collaboration. The decrease in revenue for our chemicals segment from 2003 to 2004 is primarily due to the one-time termination payment from Hercules
received in 2003 and the scheduled winding down of Codexis collaboration with Chevron, partially offset by additional revenue from Codexis collaboration with Pfizer, which commenced in the third quarter of 2004.



Research and Development Expenses



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



We do not track
fully burdened research and development costs or capital expenditures by project. However, we do estimate, based on full-time equivalent personnel effort, the percentage of research and development efforts (as measured in hours incurred, which
approximates costs) undertaken for projects funded by, on the one hand, our collaborators and government grants and, on the other hand, projects funded by Maxygen. We believe that presenting our research and development expenses in these categories
will provide our investors with meaningful information on how our resources are being used.



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



|                                               |  |                         |        |      |   |        |  |   |       
|---------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                               |  | Year Ended December 31,
|                                               |  | 2002                    |        | 2003 |   | 2004  
|Collaborative projects funded by third parties |  | $                       | 20,461 |      | $ | 12,505 |  | $ | 11,344
|Internal projects                              |  |                         | 29,193 |      |   | 31,930 |  |   | 41,950
|                                               |  |                         |        |      |   |        |  |   |       
|Total                                          |  | $                       | 49,654 |      | $ | 44,435 |  | $ | 53,294
|                                               |  |                         |        |      |   |        |  |   |       



As we do not track
fully burdened research and development costs by project, the expense figures are comprised of the number of hours expended in each category multiplied by the approximate cost per hour of research and development effort. In addition,
project-specific external costs are added to these costs.



Due
to the nature of our research and our dependence on our collaborative partners to commercialize the results of the research, we cannot predict with any certainty whether any particular collaboration or research effort will ultimately result in a
commercial product and therefore whether we will receive future milestone payments or royalty payments under our various collaborations.



Most of our human therapeutic and chemical product development programs are at an early stage and may not result in any marketed products. Product
candidates that may appear promising at early stages of development may not reach the market for a number of reasons. Human therapeutic product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer
to pass through clinical



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trials than had been anticipated, may fail to receive necessary regulatory approvals and may prove impracticable to manufacture in commercial quantities at
reasonable costs and with acceptable quality. Chemical processes and potential products may be found ineffective, may prove impracticable to manufacture in commercial quantities at commercial acceptable specifications at reasonable costs and with
acceptable quality. Furthermore, it is uncertain which of our internally developed product candidates will be subject to future collaborative arrangements. The participation of a collaborative partner may accelerate the time to completion and reduce
the cost to us of a product candidate or it may delay the time and increase the cost to us due to the alteration of our existing strategy. The risks and uncertainties associated with our research and development projects are discussed more fully in
the section of this report titled Risk Factors That May Affect Results of Operations and Financial Condition. Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the development of
our product candidates or the ultimate product development cost in any particular case.



Our research and development expenses from continuing operations consist primarily of salaries and other personnel-related expenses, research consultants and external collaborative research expenses, including
contract manufacturing, facility costs, supplies and depreciation of facilities and laboratory equipment. Research and development expenses decreased from $49.7 million in 2002 to $44.4 million in 2003 then increased to $53.3 million in 2004. The
$5.3 million decrease from 2002 to 2003 was primarily due to contraction of activities in strategic alliances including reduced pre-clinical costs and reduced utilization of research consultants. The $8.9 million increase from 2003 to 2004 was
primarily due to increased expenditures associated with the development of our product candidates, including the manufacture of product candidates in preparation for clinical trials and the termination costs associated with discontinuing clinical
development of our interferon beta program. Stock compensation expense related to research and development was $4.7 million in 2002, $1.5 million in 2003 and $292,000 in 2004. The decrease in stock compensation expenses was primarily the result of
lower amortization expense related to deferred compensation for the shares subject to repurchase that were exchanged in connection with the Maxygen ApS acquisition in August 2000 and to deferred compensation related to options granted to employees
involved in research and development activities before our initial public offering. The deferred compensation relating to the shares subject to repurchase that were exchanged in connection with the Maxygen ApS acquisition in August 2000 was
amortized to expense over a three year graded vesting period and was fully amortized to expense during 2003. The deferred compensation related to options granted to employees involved in research and development activities before our initial public
offering was amortized over the vesting period using a graded vesting method and was fully amortized to expense by the end of 2004.



We expect that our research and development costs will decrease for 2005, due primarily to the deconsolidation of Codexis during the first quarter of
2005, partially offset by an increase in research and development costs in the remainder of our consolidated operations as we increase our efforts on internally funded projects. We expect to continue to devote substantial resources to research and
development and we expect research and development expenses to increase in the next several years if we are successful in advancing our product candidates into clinical trials. To the extent we out-license our product candidates prior to
commencement of clinical trials or collaborate with others with respect to clinical trials, increases in research and development expenses may be reduced or avoided. We intend to manage the level of our expenditures for research and development,
including clinical trials, to balance advancing our product candidates against maintaining adequate cash resources for our operations. Stock compensation expense related to research and development will increase upon our implementation of Financial
Accounting Standards Board Statement No. 123(R).



General
and Administrative Expenses



Our general and
administrative expenses consist primarily of personnel costs for finance, human resources, business development, legal and general management, as well as insurance premiums and professional expenses, such as legal, accounting and commercial
assessment of potential products. General and administrative expenses have increased from $10.8 million in 2002 to $11.4 million in 2003 and to $14.4 million in 2004. The increase



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from 2002 to 2003 was primarily due to receipt of expense reimbursement from litigation with Enchira Biotechnology received in 2002, partially offset by
slightly lower headcount and lower corporate communications expenses in 2003. The increase from 2003 to 2004 was primarily due to professional fees related to an increase in market research and product profile development activity and regulatory
compliance costs. General and administrative stock compensation expense was $1.6 million in 2002, $477,000 in 2003 and $63,000 in 2004. The decrease in stock compensation expense was primarily a result of lower amortization expense related to
deferred compensation for stock options granted to employees before our initial public offering. This deferred compensation was amortized to expense over the vesting period of the options using a graded vesting method and was fully amortized by the
end of 2004.



We expect that our general and administrative
expenses will decrease in 2005, due primarily to the deconsolidation of Codexis during the first quarter of 2005, partially offset by an increase in general and administrative expenses in the remainder of our consolidated operations as a result of
increased professional fees and insurance premiums. Stock compensation expense related to general and administration will increase upon our implementation of Financial Accounting Standards Board Statement No. 123(R).



Amortization of Other Intangible Assets



In connection with the Maxygen ApS acquisition, we allocated $3.4 million to
other intangible assets. We amortized the purchased core technology over its estimated three year useful life. Such technology was fully amortized to expense by September 2003. We recorded amortization expense of $1.1 million in 2002 and $698,000 in
2003.



Interest Income and Other (Expense), net



Interest income and other (expense), net represents
income earned on our cash, cash equivalents and marketable securities, net of interest expense on our equipment leases and currency transaction gains or losses related to the funding of our Danish subsidiary Maxygen ApS. Included in these amounts
are foreign exchange gains of $1.4 million in 2002, $1.8 million in 2003 and $552,000 in 2004. Interest income and other (expense), net decreased from $8.0 million in 2002 to $5.3 million in 2002 and to $4.1 million in 2004. The decrease from 2002
to 2003 was due to declining interest rates and lower average balances of cash, cash equivalents and marketable securities, partially offset by foreign exchange transactions . The decrease from 2003 to 2004 was primarily due to lower foreign
exchange gains in 2004 compared with 2003.



Equity in Losses
of Minority Investee



Equity in losses of minority
investee reflects our share of the net loss of Avidia Research Institute. Avidia Research Institute was formed in July 2003 and is being accounted for under the equity method of accounting. In 2003, we invested $500,000 in Avidia in exchange for
series A convertible preferred stock. In 2004, we provided a $1.4 million loan to Avidia. This loan will be converted into equity of Avidia upon a future sale of Avidia equity securities. The loan has an interest rate of 3% per annum. As of December
31, 2003 and 2004, we had recorded losses equal to our investment basis in Avidia, which includes the $1.4 million loan to Avidia in 2004. Maxygen is not obligated to further fund Avidias operating losses.



Subsidiary Preferred Stock Accretion



On September 13, 2002, Codexis sold $15 million of Codexis series B
convertible preferred stock to investors, of which $5 million was purchased by Maxygen and $10 million was purchased by several unrelated investors. On October 1, 2002, Codexis sold an additional $10 million of series B convertible preferred stock
to unrelated investors. Series B convertible preferred stock includes a redemption provision, which provides that the holders of at least a majority of the outstanding shares of series B convertible preferred stock (excluding the series B
convertible preferred stock held by Maxygen and its affiliates), voting together as a separate class, may



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require Codexis to redeem the series B convertible preferred stock. The redemption price for each share will be payable in cash in exchange for the shares of
series B convertible preferred stock to be redeemed at a sum equal to the applicable original issue price per share plus five percent (5%) of the original issue price per year from the original issue date until the applicable redemption date, plus
declared and unpaid dividends. Notice of redemption can be given at any time on or after the fifth anniversary of the original issue date. In connection with these redemption rights, we recorded accretion of the redemption premium for the series B
convertible preferred stock, excluding the shares owned by Maxygen, in the amount of $1.3 million and $1.0 million for the years ended December 31, 2003 and 2004, respectively. The accretion is recorded as subsidiary preferred stock accretion on the
Consolidated Statement of Operations and as a reduction of additional paid-in capital on the Consolidated Balance Sheets. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from
assets of Codexis.



Provision for Income Taxes



For 2004, we reported an income tax provision of $921,000
attributable to alternative minimum taxes as a result of the sale of Verdia. This amount has been netted against the gain on sale of Verdia and is reflected in gain on sale of discontinued operations in the Consolidated Statement of Operations. For
2003 and 2002, there was no provision for U.S. federal, U.S. state, or foreign income taxes for any period as we incurred operating losses in those periods, for all jurisdictions. In 2004, we reported income due to the sale of Verdia and will
utilize prior net operating loss carryforwards for federal and state income tax purposes. Deferred tax assets and the associated valuation allowance increased by $9.7 million in 2002 and $12.0 million during 2003 due primarily to increases in net
operating losses and tax credit carryforwards. Deferred tax assets and the associated valuation allowance decreased by $10.2 million during 2004 due to the use of net operating loss carryforwards to offset the income due to the sale of Verdia. As of
December 31, 2004, we had net operating loss carryforwards for federal income tax purposes of approximately $50.5 million, which expire in the years 2021 through 2024 and federal research and development tax credit carryforwards of approximately
$2.6 million, which expire in the years 2012 through 2024. Included in our federal net operating loss carryforwards and federal research and development tax credit carryforwards at December 31, 2004 are amounts relating to Codexis, a subsidiary that
is not included in our federal consolidated return. These carryforwards will only be available to offset future federal taxable income of the subsidiary. At December 31, 2004, the federal net operating loss carryforwards relating to Codexis were
approximately $23.0 million and the federal research and development tax credit carryforwards relating to Codexis were approximately $436,000. These carryforwards expire in the years 2021 through 2024.



Utilization of our net operating losses and credits may be subject to
substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses and
credits before utilization. See Note 11 of Notes to Consolidated Financial Statements.



New Accounting Pronouncements



In January
2003, the FASB issued Interpretation No. 46 (or FIN 46), Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. The consolidation requirements of FIN 46 apply to variable interest entities created after January 31, 2003.
Variable interest entities created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation of FIN 46 or revised interpretations of FIN 46 issued by the FASB in December 2003. However,
the revised interpretations must be applied no later than the first quarter of fiscal year 2004. Variable interest entities created after January 1, 2004 must be accounted for under the revised interpretations. There has been no material impact to
our financial statements from potential variable interest entities created after January 31, 2003 or from the adoption of the deferred provisions of the revised interpretations in the first quarter of fiscal year 2004.



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In November 2003, the Emerging Issues Task Force reached consensus on paragraph 18 of Issue No. 03-01
(EITF 03-01), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Effective for years ending after December 15, 2003, EITF 03-01 requires certain disclosures for debt and marketable
equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized.



In November 2004 the FASB delayed the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-01; this delay
does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure requirement of this guidance remains in effect. We do not expect EITF 03-01 to significantly impact our
results of operations or financial position but will reassess the impact once the rules are finalized.



On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which
is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of
Cash Flows. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



Statement 123(R) must be adopted no later than July 1, 2005.
Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123(R) on July 1, 2005.



Statement 123(R) permits public companies to adopt its requirements using one of two methods:



| | 1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We plan to adopt Statement 123 using the modified prospective method.



As permitted by Statement 123, we currently account for
share-based payments to employees using Opinion 25s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method will have a
significant impact on our result of operations, although it will have no impact on our overall cash position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1
to our Notes to Consolidated Financial Statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required
under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the future because they depend upon, among
other things, levels of share-based payments granted in the future, when employees exercise stock options and if and when we become profitable.



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Liquidity and Capital Resources



Since inception, we have financed our continuing operations primarily through private placements and public offerings of
equity securities, receiving aggregate consideration from such sales totaling $302.5 million and committed research and development funding from collaborators and government grants totaling approximately $181.3 million. In addition, on July 1, 2004
we received $64.0 million in cash as proceeds, before estimated income taxes and transaction costs of $1.4 million, from the sale of our agriculture segment, Verdia. Our consolidated subsidiary, Codexis, also has received $35 million from private
placements of its equity securities, $30 million from third party investors and $5 million from Maxygen. As of December 31, 2004, we had $232.9 million in cash, cash equivalents and marketable securities. This includes $17.2 million of which may
only be used for Codexis operations.



Net cash used in
operating activities from continuing operations was $19.5 million in 2002, $23.1 million in 2003 and $34.3 million in 2004. Uses of cash in operating activities were primarily to fund net losses. The increase in cash used in operating activities for
continuing operations from 2002 to 2003 primarily relates to lower revenue in 2003 due to the decrease in partner funding as the funded research terms of the collaborations with InterMune and Lundbeck wound down on schedule and lower interest
income. The increase in cash used in operating activities for continuing operations from 2003 to 2004 primarily relates to increased expenditures in 2004 relating to advancing product candidates into manufacturing and toward clinical trials, lower
interest income in 2004, increased equity in losses of minority investee during 2004, and a smaller net loss in 2003, due partially to a one-time non-recurring $2.5 million payment from Hercules to terminate its collaboration with Codexis recognized
as revenue in the first quarter of 2003.



Net cash provided by
investing activities from continuing operations was $19.9 million in 2002 and $34.6 million in 2004. Net cash used in investing activities in 2003 was $13.8 million. The cash provided during 2002 primarily represented maturities of
available-for-sale securities, net of purchases. Net cash used in investing activities in 2003 primarily represented purchases of available-for-sale securities in excess of maturities. The cash provided during 2004 was primarily related to the
proceeds from the sale of Verdia offset in part by purchases of available-for-sale securities in excess maturities. In connection with the formation of Avidia Research Institute, Maxygen contributed certain intellectual property and invested
$500,000 in July 2003. During 2004, we provided a $1.4 million loan to Avidia. The majority of additions of property and equipment in 2004 relates to Codexis investment in its bioprocessing facility. We expect to continue to make investments
in the purchase of property and equipment to support our operations. We expect to use a portion of our cash to acquire or invest in businesses, products or technologies, or to obtain the right to use such technologies.



Net cash provided for continuing operations by financing activities was $21.6
million in 2002, $2.0 million in 2003 and $16.6 million in 2004. The cash provided in 2002 was primarily from the proceeds from the financing of the minority investment in Codexis. The cash provided in 2003 was primarily from the proceeds of the
sale of common stock in connection with our Employee Stock Purchase Plan (ESPP) and the exercise of stock options by employees of $2.7 million, partially offset by payments on equipment financing obligations of $617,000. The cash
provided in 2004 was primarily from the proceeds from the financing of a minority investment in Codexis from Pfizer of $10.0 million and $4.3 million from the exercise of stock options by employees and the proceeds of the sale of our common stock in
connection with our ESPP.



Cash used for discontinued
operations was $13.1 million in 2002 and $607,000 in 2003. Cash provided from discontinued operations was $2.9 million in 2004. The changes in cash used for in 2002 relates primarily to Maxygens funding of Verdia. The $607,000 cash used for
discontinued operations in 2003 primarily related to the funding of Verdias losses. The $2.9 million cash provided by discontinued operations relates to the deconsolidation of Verdia upon its sale.



In accordance with FAS No. 52, the functional currency for our Danish
operations is its local currency. The effects of foreign exchange rate changes on the translation of the local currency financial statements into U.S.



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dollars are reported as a component of accumulated other comprehensives income (loss) on the Consolidated Balance Sheets. The effect of exchange rate changes
on cash and cash equivalents was a reduction of $582,000 in 2004 and $1.8 million in 2003, and an increase of $1.3 million in 2002.



The following are contractual commitments at December 31, 2004 associated with debt, lease obligations and purchase obligations (in thousands):



|                            |  |                        |        |                |   |          |  |          |       |                 |   |       |  |   |      
|--------------------------- |  | ---------------------- | ------ | -------------- | - | -------- |  | -------- | ----- | --------------- | - | ----- |  | - | -----
|                            |  | Payments Due by Period
|Contractual Obligations     |  | Total                  |        | Lessthan 1year |   | 1-3years |  | 4-5years |       | Morethan 5years
|Long-Term Debt Obligations  |  | $                      | 2,306  |                | $ | 555      |  | $        | 1,278 |                 | $ | 473   |  |   |     
|Operating Lease Obligations |  |                        | 9,603  |                |   | 3,257    |  |          | 3,518 |                 |   | 1,809 |  |   | 1,019
|Purchase Obligations        |  |                        | 4,300  |                |   | 3,536    |  |          | 764   |                 |   |      |  |   |     
|                            |  |                        |        |                |   |          |  |          |       |                 |   |       |  |   |      
|Total                       |  | $                      | 16,209 |                | $ | 7,348    |  | $        | 5,560 |                 | $ | 2,282 |  | $ | 1,019
|                            |  |                        |        |                |   |          |  |          |       |                 |   |       |  |   |      



In February 2004,
Codexis entered into an equipment financing agreement with a financing company for up to $4.8 million of equipment purchases. The financing agreement expires March 31, 2004.The equipment loans will be repaid over 48 months at an
interest rate tied to the prime-lending rate at the time the loans were executed and are secured by the related equipment. As of December 31, 2004, Codexis had $2.3 million outstanding under such equipment loans.



Since inception we have received $164.7 million from our collaborators and
from government grants, which includes $55.5 million of funding received by Verdia, our agriculture subsidiary and sole component of our agriculture segment, prior to its disposition, and $4.7 million of deferred revenue from continuing operations
to be recognized over the next two years. Approximately $131.9 million was received from our collaborators and $32.8 million was received from government funding. Assuming our research efforts for existing collaborations and grants continue for
their full research terms, as of December 31, 2004 we had total committed funding of approximately $16.6 million remaining to be received over the next two years, of which $12.2 million is to be received by Codexis. Potential milestone payments from
our existing collaborations could exceed $400 million based on the accomplishment of specific performance criteria. We may also earn royalties on product sales. In general, the obligation of our corporate collaborators to provide research funding
cannot be terminated by either party before the end of the research term unless there has been a material breach of contract or either party has become bankrupt or insolvent. In the case of such an event, the agreement specifies the rights, if any,
that each party will retain.



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



Discontinued Operations



Included in our results of operations is a gain on sale
of discontinued operations (formerly our agriculture segment) of $61.2 million in 2004. The gain on sale was the result of the sale of Verdia to Pioneer Hi-Bred International, Inc. on July 1, 2004 for $64 million, partially offset by disposition
costs. The results of discontinued operations reflect the results of Verdia until it was sold on July 1, 2004. Our loss from discontinued operations was $2.8 million in 2004, $1.6 million in 2003 and $2.8 million in 2002.



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Collaborative research and development revenue from discontinued operations was $2.7 million in 2004,
$9.9 million in 2003 and $10.0 million in 2002. Collaborative research and development revenue from related party from discontinued operations was $2.5 million in 2004, $3.7 million in 2003 and $2.6 million in 2002. Grant revenue from discontinued
operations was $311,000 in 2004, $714,000 in 2003 and $545,000 in 2002.



Research and development expenses from discontinued operations were $6.2 million in 2004, $12.4 million in 2003 and $12.4 million in 2002. General and administrative expenses from discontinued operations were $616,000 in 2004, $1.2 million
in 2003 and $2.3 million in 2002.



Interest income and other,
net from discontinued operations was $32,000 in 2004, $121,000 in 2003 and $114,000 in 2002. Equity in net loss of joint venture from discontinued operations was $1.5 million in 2004, $2.4 million in 2003 and $1.3 million in 2002.



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



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



Interest Rate Risk



The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing
risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including corporate obligations and money market funds. All securities are held in U.S. currency except
for amounts held in our Danish subsidiary in Danish kroner. As of December 31, 2004, approximately 94% of our total portfolio was to 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, 2004 (dollars in thousands):



|                          |  |                   |         |   |      |   |        |  
|------------------------- |  | ----------------- | ------- | - | ---- | - | ------ | -
|                          |  | Expected Maturity |        
|                          |  | 2004              |         |   | 2005 |  
|Cash and cash equivalents |  | $                 | 40,415  |   |      |   |        |  
|Average interest rates    |  |                   | 1.54    | % |      |   |        |  
|                          |  |                  
|Short-term investments    |  | $                 | 178,883 |   |      |   |        |  
|Average interest rates    |  |                   | 2.11    | % |      |   |        |  
|                          |  |                  
|Long-term investments     |  |                   |         |   |      | $ | 13,595 |  
|Average interest rates    |  |                   |         |   |      |   | 2.92   | %



We did not hold
derivative instruments intended to mitigate interest rate risk as of December 31, 2004, and we have never held such instruments in the past. If market interest rates were to increase by 100 basis points, or 1%, from December 31, 2004 levels, the
fair value of our portfolio would decline by approximately $2.6 million. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes ending fair values include
principal plus accrued interest. In addition, Codexis had outstanding debt related to equipment financing of $2.3 million as of December 31, 2004, with a range of interest rates of between 9.19% and 10.13%.



Foreign Currency Exchange Risk



A portion of our operations consist of research and development activities
performed in Denmark by our wholly-owned subsidiary, Maxygen ApS. The functional currency of Maxygen ApS is the Danish kroner. In



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2004, approximately 33% of our operating expenses related to Maxygen ApS. As a result, our financial results may be affected by changes in the foreign
currency exchange rates of the Danish kroner. A decrease in the value of the U.S. dollar against the Danish kroner will result in an increase of our reported operating expenses. To protect against reductions in value and the volatility of future
cash flows caused by changes in foreign currency exchange rates, we from time to time enter into cash flow hedging arrangements. Currency forward contracts are utilized in these hedging arrangements. Our hedging arrangements reduce, but do not
always eliminate, the impact of foreign currency exchange rate movements. Gains and losses on these foreign currency investments are generally offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net
exposure to Maxygen on the amounts hedged.



At December 31,
2004 we had foreign currency contracts outstanding in the form of forward exchange contracts totaling $5.8 million which will be settled over the next twelve months with an average exchange rate of 6.1329 Danish kroner to the U.S. dollar. As of
December 31, 2004, a 10% decrease in the value of the U.S. dollar relative to the Danish kroner would result in an additional $0.7 million gain on these contracts. During 2004, we recognized $0.3 million in foreign exchange gains from hedge
contracts; these gains were offset against operating expenses. We did not have any foreign exchange contracts outstanding at December 31, 2003.



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



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS



The Board of Directors and Stockholders of

Maxygen, Inc.



We have audited the accompanying consolidated balance sheets of Maxygen,
Inc. as of December 31, 2003 and 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Maxygen, Inc. at December 31, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2004 in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Maxygen, Inc.s internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2005 expressed an unqualified opinion
thereon.



/s/    ERNST & YOUNG LLP



Palo Alto, California

March 11, 2005



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING



The Board of Directors and Stockholders of

Maxygen, Inc.



We have audited managements assessment, included in the accompanying
Annual Report on Internal Control Over Financial Reporting, that Maxygen, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Maxygen Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our
audit.



We conducted our audit in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.



In our
opinion, managements assessment that Maxygen, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Maxygen,
Inc maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Maxygen, Inc. as of December 31, 2003 and 2004, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2004 of Maxygen, Inc. and our report
dated March 11, 2005 expressed an unqualified opinion thereon.



/s/    ERNST & YOUNG LLP



Palo Alto, California

March 11, 2005



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MAXYGEN, INC.



CONSOLIDATED
BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                    |  |              |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                    |  | December 31, |         
|                                                                                                                                                                    |  | 2003         |          |   | 2004 |  
|A S S E T S                                                                                                                                                         |  |              |          |   |      |   |          |  
|Current assets:                                                                                                                                                     |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                           |  | $            | 21,353   |   |      | $ | 40,415   |  
|Short-term investments                                                                                                                                              |  |              | 91,116   |   |      |   | 178,883  |  
|Accounts receivable and other receivables                                                                                                                           |  |              | 3,528    |   |      |   | 1,735    |  
|Due from Verdia                                                                                                                                                     |  |              | 1,442    |   |      |   |         |  
|Prepaid expenses and other current assets                                                                                                                           |  |              | 4,868    |   |      |   | 7,046    |  
|Assets of discontinued operations                                                                                                                                   |  |              | 7,316    |   |      |   |         |  
|                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total current assets                                                                                                                                                |  |              | 129,623  |   |      |   | 228,079  |  
|Property and equipment, net                                                                                                                                         |  |              | 11,509   |   |      |   | 7,677    |  
|Goodwill                                                                                                                                                            |  |              | 12,192   |   |      |   | 12,192   |  
|Long-term investments                                                                                                                                               |  |              | 79,399   |   |      |   | 13,595   |  
|Deposits and other long-term assets                                                                                                                                 |  |              | 1,346    |   |      |   | 1,562    |  
|                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total assets                                                                                                                                                        |  | $            | 234,069  |   |      | $ | 263,105  |  
|                                                                                                                                                                    |  |              |          |   |      |   |          |  
|L I A B I L I T I E
S  A N D  S T O C K H O L D E R
S  E Q U I T Y                                                                                                 |  |              |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                |  |              |          |   |      |   |          |  
|Accounts payable                                                                                                                                                    |  | $            | 1,599    |   |      | $ | 1,712    |  
|Accrued compensation                                                                                                                                                |  |              | 2,439    |   |      |   | 5,324    |  
|Accrued program termination costs                                                                                                                                   |  |              |         |   |      |   | 2,209    |  
|Other accrued liabilities                                                                                                                                           |  |              | 1,904    |   |      |   | 2,144    |  
|Deferred revenue                                                                                                                                                    |  |              | 4,776    |   |      |   | 3,215    |  
|Taxes payable                                                                                                                                                       |  |              |         |   |      |   | 921      |  
|Current portion of equipment financing obligations                                                                                                                  |  |              | 55       |   |      |   | 555      |  
|Liabilities of discontinued operations                                                                                                                              |  |              | 3,126    |   |      |   |         |  
|                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                                           |  |              | 13,899   |   |      |   | 16,080   |  
|Non-current deferred revenue                                                                                                                                        |  |              | 695      |   |      |   | 1,718    |  
|Non-current equipment financing obligations                                                                                                                         |  |              |         |   |      |   | 1,751    |  
|Other long-term liabilities                                                                                                                                         |  |              | 41       |   |      |   | 35       |  
|Minority interest                                                                                                                                                   |  |              | 21,210   |   |      |   | 32,180   |  
|Commitments and contingencies                                                                                                                                       |  |              |          |   |      |   |          |  
|                                                                                                                                                                    |  |             
|Stockholders equity:                                                                                                                                               |  |              |          |   |      |   |          |  
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2003 and
2004                                     |  |              |         |   |      |   |         |  
|Common stock, $0.0001 par value, 100,000,000 shares authorized, 34,909,799 and 35,636,333 shares issued and outstanding at December 31, 2003
and 2004, respectively |  |              | 3        |   |      |   | 3        |  
|Additional paid-in capital                                                                                                                                          |  |              | 394,966  |   |      |   | 399,314  |  
|Deferred stock compensation                                                                                                                                         |  |              | (251     | ) |      |   |         |  
|Accumulated other comprehensive loss                                                                                                                                |  |              | (1,366   | ) |      |   | (2,190   | )
|Accumulated deficit                                                                                                                                                 |  |              | (195,128 | ) |      |   | (185,786 | )
|                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                          |  |              | 198,224  |   |      |   | 211,341  |  
|                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                                                          |  | $            | 234,069  |   |      | $ | 263,105  |  
|                                                                                                                                                                    |  |              |          |   |      |   |          |  



See accompanying notes.



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MAXYGEN, INC.



CONSOLIDATED
STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                             |  | Year ended December 31, |        
|                                                                             |  | 2002                    |         |   | 2003 |   |         | 2004 | 
|Collaborative research and development revenue                               |  | $                       | 24,818  |   |      | $ | 20,573  |      |  | $ | 14,333  |  
|Grant revenue                                                                |  |                         | 3,879   |   |      |   | 2,282   |      |  |   | 1,942   |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                               |  |                         | 28,697  |   |      |   | 22,855  |      |  |   | 16,275  |  
|Operating expenses:                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Research and development                                                     |  |                         | 49,654  |   |      |   | 44,435  |      |  |   | 53,294  |  
|General and administrative                                                   |  |                         | 10,805  |   |      |   | 11,354  |      |  |   | 14,372  |  
|Stock compensation expense(1)                                                |  |                         | 6,250   |   |      |   | 1,991   |      |  |   | 355     |  
|Amortization of other intangible assets                                      |  |                         | 1,144   |   |      |   | 698     |      |  |   |        |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                     |  |                         | 67,853  |   |      |   | 58,478  |      |  |   | 68,021  |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Loss from operations                                                         |  |                         | (39,156 | ) |      |   | (35,623 | )    |  |   | (51,746 | )
|Interest income and other (expense), net                                     |  |                         | 7,981   |   |      |   | 5,253   |      |  |   | 4,055   |  
|Equity in net loss of minority investee                                      |  |                         |        |   |      |   | (500    | )    |  |   | (1,395  | )
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Loss from continuing operations                                              |  |                         | (31,175 | ) |      |   | (30,870 | )    |  |   | (49,086 | )
|Discontinued operations:                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Loss from discontinued operations                                            |  |                         | (2,771  | ) |      |   | (1,586  | )    |  |   | (2,769  | )
|Gain on sale of discontinued operations (net of taxes and transaction costs) |  |                         |        |   |      |   |        |      |  |   | 61,197  |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from discontinued operations                                   |  |                         | (2,771  | ) |      |   | (1,586  | )    |  |   | 58,428  |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                            |  |                         | (33,946 | ) |      |   | (32,456 | )    |  |   | 9,342   |  
|Subsidiary preferred stock accretion                                         |  |                         |        |   |      |   | (1,279  | )    |  |   | (1,000  | )
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) applicable to common stockholders                              |  | $                       | (33,946 | ) |      | $ | (33,735 | )    |  | $ | 8,342   |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic and diluted income (loss) per share:                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Continuing operations                                                        |  | $                       | (0.93   | ) |      | $ | (0.89   | )    |  | $ | (1.40   | )
|Discontinued operations                                                      |  | $                       | (0.08   | ) |      | $ | (0.05   | )    |  | $ | 1.66    |  
|Applicable to common stockholders                                            |  | $                       | (1.01   | ) |      | $ | (0.98   | )    |  | $ | 0.24    |  
|Shares used in basic and diluted per share calculations                      |  |                         | 33,582  |   |      |   | 34,519  |      |  |   | 35,176  |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|(1)    Stock compensation expense related to the following:                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Research and development                                                     |  | $                       | 4,674   |   |      | $ | 1,514   |      |  | $ | 292     |  
|General and administrative                                                   |  |                         | 1,576   |   |      |   | 477     |      |  |   | 63      |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                             |  | $                       | 6,250   |   |      | $ | 1,991   |      |  | $ | 355     |  
|                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  



See accompanying notes.



61



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##### Table of Contents

MAXYGEN, INC.



CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share and per share data)



|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------ | - | ------------------------ | ------ | - | -------------------------------- | - | ------- | -------------------------- |  | - | ------------------------------------------- | - |  | ------------------ | ------ | - | ------------------------ | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                                                        |  | Common Stock |   | AdditionalPaid-InCapital |        |   | Notes ReceivablefromStockholders |   |         | Deferred StockCompensation |  |   | Accumulated OtherComprehensiveIncome (Loss) |   |  | AccumulatedDeficit |        |   | TotalStockholdersEquity |  
|                                                                                                        |  | Shares       |   |                          | Amount |   |                                  |   |         |                            | 
|Balance at January 1, 2002                                                                              |  | 34,026,414   |   |                          | $      | 3 |                                  | $ | 389,607 |                            |  | $ | (339                                        | ) |  | $                  | (8,509 | ) |                          | $ | 1,698  |   |  | $ | (128,726 | ) |  | $ | 253,734 |  
|Issuance of common stock upon exercise of options for cash and for services rendered                    |  | 291,869      |   |                          |        |  |                                  |   | 1,924   |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 1,924   |  
|Issuance of common stock under employee stock purchase plan                                             |  | 130,880      |   |                          |        |  |                                  |   | 1,116   |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 1,116   |  
|Issuance of common stock under 401(k) employer matching contribution                                    |  | 70,953       |   |                          |        |  |                                  |   | 677     |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 677     |  
|Stock compensation expense for consultant options, and fully vested stock options for services rendered |  |             |   |                          |        |  |                                  |   | 92      |                            |  |   |                                            |   |  |                    | (22    | ) |                          |   |       |   |  |   |         |   |  |   | 70      |  
|Repurchase of common stock                                                                              |  | (15,669      | ) |                          |        |  |                                  |   | (10     | )                          |  |   |                                             |   |  |                    |        |   |                          |   |       |   |  |   |         |   |  |   | (10     | )
|Payments of stockholder notes                                                                           |  |             |   |                          |        |  |                                  |   |        |                            |  |   | 339                                         |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 339     |  
|Amortization of deferred compensation, net of $85,000 reversed for terminated employees                 |  |             |   |                          |        |  |                                  |   | 85      |                            |  |   |                                            |   |  |                    | 6,095  |   |                          |   |       |   |  |   |         |   |  |   | 6,180   |  
|Components of comprehensive loss:                                                                       |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Net loss                                                                                                |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   | (33,946  | ) |  |   | (33,946 | )
|Currency translation adjustment                                                                         |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   | 585    |   |  |   |         |   |  |   | 585     |  
|Change in unrealized gain(loss) on available-for-sale securities                                        |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   | (1,470 | ) |  |   |         |   |  |   | (1,470  | )
|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Comprehensive loss                                                                                      |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   | (34,831 | )
|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2002                                                                            |  | 34,504,447   |   |                          |        | 3 |                                  |   | 393,491 |                            |  |   |                                            |   |  |                    | (2,436 | ) |                          |   | 813    |   |  |   | (162,672 | ) |  |   | 229,199 |  
|Issuance of common stock upon exercise of options for cash and for services rendered                    |  | 299,447      |   |                          |        |  |                                  |   | 1,853   |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 1,853   |  
|Issuance of common stock under employee stock purchase plan                                             |  | 99,441       |   |                          |        |  |                                  |   | 608     |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 608     |  
|Issuance of common stock under 401(k) employer matching contribution                                    |  | 48,356       |   |                          |        |  |                                  |   | 522     |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 522     |  
|Stock compensation expense for consultant options, and fully vested stock options for services rendered |  |             |   |                          |        |  |                                  |   | 46      |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 46      |  
|Repurchase of common stock                                                                              |  | (41,892      | ) |                          |        |  |                                  |   | (17     | )                          |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | (17     | )
|Subsidiary preferred stock accretion                                                                    |  |             |   |                          |        |  |                                  |   | (1,279  | )                          |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | (1,279  | )
|Amortization of deferred compensation                                                                   |  |             |   |                          |        |  |                                  |   | (258    | )                          |  |   |                                            |   |  |                    | 2,185  |   |                          |   |       |   |  |   |         |   |  |   | 1,927   |  
|Components of comprehensive loss:                                                                       |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Net loss                                                                                                |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   | (32,456  | ) |  |   | (32,456 | )
|Currency translation adjustment                                                                         |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   | (1,975 | ) |  |   |         |   |  |   | (1,975  | )
|Change in unrealized gain (loss) on available-for-sale securities                                       |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   | (204   | ) |  |   |         |   |  |   | (204    | )
|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Comprehensive loss                                                                                      |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   | (34,635 | )
|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2003                                                                            |  | 34,909,799   |   |                          |        | 3 |                                  |   | 394,966 |                            |  |   |                                            |   |  |                    | (251   | ) |                          |   | (1,366 | ) |  |   | (195,128 | ) |  |   | 198,224 |  
|Issuance of common stock upon exercise of options for cash and for services rendered                    |  | 631,372      |   |                          |        |  |                                  |   | 4,382   |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 4,382   |  
|Issuance of common stock under employee stock purchase plan                                             |  | 62,700       |   |                          |        |  |                                  |   | 411     |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 411     |  
|Issuance of common stock under 401(k) employer matching contribution                                    |  | 39,241       |   |                          |        |  |                                  |   | 443     |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 443     |  
|Stock compensation expense for consultant options, and fully vested stock options for services rendered |  |             |   |                          |        |  |                                  |   | 117     |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | 117     |  
|Repurchase of common stock                                                                              |  | (6,779       | ) |                          |        |  |                                  |   | (5      | )                          |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | (5      | )
|Subsidiary preferred stock accretion                                                                    |  |             |   |                          |        |  |                                  |   | (1,000  | )                          |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   |         |   |  |   | (1,000  | )
|Amortization of deferred compensation                                                                   |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    | 251    |   |                          |   |       |   |  |   |         |   |  |   | 251     |  
|Components of comprehensive loss:                                                                       |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Net income                                                                                              |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   |       |   |  |   | 9,342    |   |  |   | 9,342   |  
|Currency translation adjustment                                                                         |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   | (126   | ) |  |   |         |   |  |   | (126    | )
|Change in unrealized gain(loss) on available-for-sale securities                                        |  |             |   |                          |        |  |                                  |   |        |                            |  |   |                                            |   |  |                    |       |   |                          |   | (698   | ) |  |   |         |   |  |   | (698    | )
|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Comprehensive income                                                                                    |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   | 8,518   |  
|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2004                                                                            |  | 35,636,333   |   |                          | $      | 3 |                                  | $ | 399,314 |                            |  | $ |                                            |   |  | $                  |       |   |                          | $ | (2,190 | ) |  | $ | (185,786 | ) |  | $ | 211,341 |  
|                                                                                                        |  |              |   |                          |        |   |                                  |   |         |                            |  |   |                                             |   |  |                    |        |   |                          |   |        |   |  |   |          |   |  |   |         |  



See accompanying notes.



62



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##### Table of Contents

MAXYGEN, INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                                     |  | Year ended December 31, |         
|                                                                                                                     |  | 2002                    |          |   | 2003 |   |          | 2004 | 
|Operating activities                                                                                                 |  |                         |          |   |      |   |          |      |  |   |          |  
|Net income (loss)                                                                                                    |  | $                       | (33,946  | ) |      | $ | (32,456  | )    |  | $ | 9,342    |  
|Loss from discontinued operations                                                                                    |  |                         | 2,771    |   |      |   | 1,586    |      |  |   | 2,769    |  
|Gain on sale of discontinued operations                                                                              |  |                         |         |   |      |   |         |      |  |   | (61,197  | )
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Loss from continuing operations                                                                                      |  |                         | (31,175  | ) |      |   | (30,870  | )    |  |   | (49,086  | )
|Adjustments to reconcile loss from continuing operations to net cash used in operating activities:                   |  |                         |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                                                        |  |                         | 5,178    |   |      |   | 6,050    |      |  |   | 6,160    |  
|Amortization of intangible assets                                                                                    |  |                         | 1,144    |   |      |   | 698      |      |  |   |         |  
|Equity in losses of minority investee                                                                                |  |                         |         |   |      |   | 500      |      |  |   | 1,395    |  
|Non-cash stock compensation                                                                                          |  |                         | 6,835    |   |      |   | 1,929    |      |  |   | 696      |  
|Common stock issued and stock options granted to consultants for services rendered and for certain technology rights |  |                         | 1,285    |   |      |   | 335      |      |  |   | 567      |  
|Changes in operating assets and liabilities:                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Accounts receivable and other receivables                                                                            |  |                         | 3,897    |   |      |   | (197     | )    |  |   | 1,793    |  
|Prepaid expenses and other current assets                                                                            |  |                         | (2,303   | ) |      |   | (285     | )    |  |   | (1,482   | )
|Deposits and other assets                                                                                            |  |                         | (374     | ) |      |   | 909      |      |  |   | (216     | )
|Accounts payable                                                                                                     |  |                         | (1,958   | ) |      |   | 159      |      |  |   | 113      |  
|Accrued compensation                                                                                                 |  |                         | 153      |   |      |   | 154      |      |  |   | 2,885    |  
|Accrued program termination costs                                                                                    |  |                         |         |   |      |   |         |      |  |   | 2,209    |  
|Other accrued liabilities                                                                                            |  |                         | 243      |   |      |   | (2,431   | )    |  |   | 234      |  
|Taxes payable                                                                                                        |  |                         |         |   |      |   |         |      |  |   | 921      |  
|Deferred revenue                                                                                                     |  |                         | (2,381   | ) |      |   | (20      | )    |  |   | (538     | )
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities                                                                                |  |                         | (19,456  | ) |      |   | (23,069  | )    |  |   | (34,349  | )
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Investing activities                                                                                                 |  |                         |          |   |      |   |          |      |  |   |          |  
|Purchases of available-for-sale securities                                                                           |  |                         | (140,462 | ) |      |   | (194,190 | )    |  |   | (166,482 | )
|Maturities of available-for-sale securities                                                                          |  |                         | 164,943  |   |      |   | 184,009  |      |  |   | 143,813  |  
|Investment in minority investee                                                                                      |  |                         |         |   |      |   | (500     | )    |  |   | (1,395   | )
|Acquisition of property and equipment                                                                                |  |                         | (4,595   | ) |      |   | (3,098   | )    |  |   | (2,559   | )
|Proceeds from the sale of Verdia                                                                                     |  |                         |         |   |      |   |         |      |  |   | 61,197   |  
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                                                  |  |                         | 19,886   |   |      |   | (13,779  | )    |  |   | 34,574   |  
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Financing activities                                                                                                 |  |                         |          |   |      |   |          |      |  |   |          |  
|Repayments under equipment financing obligation                                                                      |  |                         | (623     | ) |      |   | (617     | )    |  |   | (445     | )
|Borrowings under equipment financing obligation                                                                      |  |                         |         |   |      |   |         |      |  |   | 2,696    |  
|Minority investment                                                                                                  |  |                         | 20,000   |   |      |   | (69      | )    |  |   | 9,970    |  
|Payments received on promissory notes                                                                                |  |                         | 339      |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of common stock                                                                               |  |                         | 1,836    |   |      |   | 2,675    |      |  |   | 4,335    |  
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                                            |  |                         | 21,552   |   |      |   | 1,989    |      |  |   | 16,556   |  
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash provided from (used for) discontinued operations                                                                |  |                         | (13,090  | ) |      |   | (607     | )    |  |   | 2,863    |  
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                                                         |  |                         | 1,320    |   |      |   | (1,781   | )    |  |   | (582     | )
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                                 |  |                         | 10,212   |   |      |   | (37,247  | )    |  |   | 19,062   |  
|Cash and cash equivalents at beginning of period                                                                     |  |                         | 48,388   |   |      |   | 58,600   |      |  |   | 21,353   |  
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                                                                           |  | $                       | 58,600   |   |      | $ | 21,353   |      |  | $ | 40,415   |  
|                                                                                                                     |  |                         |          |   |      |   |          |      |  |   |          |  



See accompanying notes.



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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 is a biotechnology company focused on using its protein
optimization and modification technologies to create and develop novel therapeutic and industrial products. The Company is a leader in the field of directed molecular evolution, a process by which genes are modified for specific commercial uses. The
Companys technologies bring together advances in molecular biology and protein modification to help create novel biotechnology products.



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



The consolidated financial statements include the amounts of the Company and its wholly-owned subsidiaries, Maxygen ApS
(Denmark), which was acquired by the Company in August 2000 and Maxygen Holdings Ltd. (Cayman Islands), as well as its consolidated subsidiary, Codexis, Inc. All significant intercompany balances and transactions have been eliminated in
consolidation. The financial results of Verdia, Inc. prior to its sale on July 1, 2004 are reflected as discontinued operations.



The Companys ownership in Codexis as of December 31, 2004 was approximately 51.4%, based upon the voting rights of the issued and outstanding shares
of Codexis common and preferred stock. In accordance with EITF Consensus 96-16, Investor Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Stockholder or Stockholders Have Certain Approval or
Veto Rights and paragraph 1 of ARB No. 51, Consolidated Financial Statements, the Company has included 100% of the net losses of Codexis in the determination of the Companys consolidated net loss. The Company records minority
interest in the Consolidated Financial Statements to account for the ownership interest of the minority owner. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and
certain other matters that occurred in the first quarter of 2005, the Companys voting rights in Codexis have been reduced below 50%. As a result, as of the date upon which such rights fell below 50%, the Company will no longer consolidate the
financial results of Codexis. The Company expects that its investment in Codexis will, as of such date, be accounted for under the equity method.



On September 13, 2002, Codexis sold $15 million of Codexis series B convertible preferred stock to investors, of which $5 million was purchased by Maxygen
and $10 million was purchased by several unrelated investors. On October 1, 2002, Codexis sold an additional $10 million of series B convertible preferred stock to unrelated investors. The Series B convertible preferred stock includes a redemption
provision, which provides that the holders of at least a majority of the outstanding shares of series B convertible preferred stock (excluding the series B convertible preferred stock held by Maxygen and its affiliates), voting together as a
separate class, may require Codexis to redeem the series B convertible preferred stock. The redemption price for each share will be payable in cash in exchange for the shares of series B convertible preferred stock to be redeemed at a sum equal to
the applicable original issue price per share plus five percent (5%) of the original issue price per year from the original issue date until the applicable redemption date, plus declared and unpaid dividends. Notice of redemption can be given at any
time on or after the fifth anniversary of the original issue date. In connection with these redemption rights, Maxygen has recorded accretion of the redemption premium for the series B convertible preferred stock, excluding the shares owned by
Maxygen, in the amount of $1.3 million and $1.0 million for the years ended December 31, 2003 and 2004, respectively. The accretion is recorded as subsidiary preferred stock accretion on the Consolidated Statement of Operations and as a reduction of
additional paid-in capital on the



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Consolidated Balance Sheets. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets
of Codexis. Codexis had 8,101,101 shares of series B convertible preferred stock outstanding at December 31, 2004, and the total redemption value of these outstanding shares was $26.6 million and $27.8 million at December 31, 2003 and 2004,
respectively; the total redemption value less the redemption value relating to Maxygens shares is included in minority interest on the Consolidated Balance Sheets.



The Companys investment in Avidia Research Institute, formed by the Company and several outside investors in July,
2003, in which the Company has an equity interest of 45.9%, is being accounted for under the equity method of accounting.



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, except for
property, plant and equipment, equity and retained earnings (deficit), which are translated at historical exchange rates. Revenues and expenses are translated at average exchange rates in effect during the period. Gains and losses from currency
translation are included in accumulated other comprehensive loss. Currency transaction gains or losses are included in interest income and other (expense), net.



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.



Reclassifications



Certain previously reported amounts have been reclassified to conform with the current year presentation. These reclassifications, when made, did not have
any affect on loss applicable to common stockholders, total assets or total liabilities and stockholders equity.



Cash, Cash Equivalents and Investments



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



Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet date. The Companys debt securities are classified as available-for-sale and are carried at estimated fair value in cash equivalents and investments. Unrealized
gains and losses are reported as a component of accumulated other comprehensive loss in stockholders equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income and other (expense), net. 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 and other (expense), net.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Derivative Financial Instruments



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



The Company accounts for derivative instruments under the provisions, of 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.



All derivatives are recognized on the balance sheet at their fair value based on quoted market prices for similar
instruments. 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 accumulated other comprehensive loss until the associated hedged transaction impacts earnings.



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



The purpose of the hedging activities is to minimize the effect of foreign currency exchange rate movements on the cash flows related to the
Companys funding of Maxygen ApS research and development expenses. All foreign currency contracts are denominated in Danish kroner. During 2002, forecasted cash flow exceeded the actual cash required by Maxygen ApS. As a result, net
gains of $293,000 on foreign currency forward contracts were recorded in interest income and other, net, as a result of the appreciation of the Danish kroner against the US dollar. There were no outstanding foreign currency contracts as of December
31, 2003. At December 31, 2004, the Company had foreign currency contracts outstanding in the form of forward exchange contracts totaling $5.8 million.



As a matter of policy, the Company only enters into contracts with counterparties that have at least an A (or equivalent) credit rating. The
counterparties to these contracts are major financial institutions. Exposure to credit loss in the event of nonperformance by any of the counterparties is limited to only the recognized, but not realized, gains attributable to the contracts.
Management believes risk of loss is remote and in any event would not be material. Costs associated with entering into such contracts have not been material to the Companys financial results. The Company does not utilize derivative financial
instruments for trading or speculative purposes.



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 portion of the Companys accounts receivable balance at December 31, 2003 and 2004 consisted of balances due from



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



government agencies. Each grant agreement is subject to funding approvals by the U.S. government. Certain grant agreements provide an option for the
government to audit the amount of research and development expenses, both direct and indirect, that have been submitted to the government agency for reimbursement. The Company does not require collateral or other security to support the financial
instruments subject to credit risk.



Property and Equipment



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



Goodwill and Other Intangible Assets



In
connection with the Maxygen ApS acquisition, the Company allocated $26.2 million to 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. In accordance with Statement of Financial Accounting Standard No. 142 Goodwill and Other Intangible Assets (SFAS
142), the Company reviews its long-lived assets (including goodwill) for impairment at least annually based on estimated future discounted cash flows attributable to the assets and other factors to determine the fair value of the respective assets.
In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets will be written down to their estimated fair values. No impairment charges were recorded in 2002, 2003 or 2004.



The valuation in connection with the initial purchase price allocation and
the ongoing evaluation for impairment of goodwill and intangible assets requires significant management estimates and judgment. The purchase price allocation process requires management estimates and judgment as to expectations for various products
and business strategies. If any of the significant assumptions differ from the estimates and judgments used in the purchase price allocation, this could result in different valuations for goodwill and intangible assets. Once it is established, the
Company must test goodwill annually for impairment using a two-step process as required by SFAS No. 142. In addition, in certain circumstances, the Company must assess if goodwill should be tested for impairment between annual tests. Intangible
assets with definite useful lives must be tested for impairment in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. When the Company conducts its impairment tests for goodwill and intangibles,
factors that are considered important in determining whether impairment might exist include existing product portfolio, product development cycle, development expenses, potential royalties and product sales, costs of goods and selling expenses and
overall product lifecycle. Any changes in key assumptions about the business and its prospects, or changes in market conditions or other external events, could result in an impairment charge and such a charge could have a material adverse effect on
the Companys consolidated results of operations.



Long-Lived Assets



The Company reviews
long-lived assets including intangible assets with finite lives for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable, such as a significant industry
downturn, significant decline in the market value of the Company, or significant reductions in projected future cash flows. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



disposition is less than its carrying amount. The amount of the impairment loss, if any, is determined using discounted cash flows. In assessing the
recoverability of long-lived assets, including intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets.



Revenue Recognition



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



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



Revenue related to collaborative research payments 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 typically required to perform research and development activities as specified in each respective agreement. Generally, the payments
received are not refundable and are based on a contractual cost per full-time equivalent employee working on the project. Research and development expenses under the collaborative research agreements approximate or exceed the research funding
revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not incur the required level of effort during a specific period in comparison to funds received under the
respective contracts. Payments received relating to substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event because the Company has no future performance obligations related to
the payment. Incentive milestone payments are triggered either by the results of the Companys research efforts or by events external to the Company, such as regulatory approval to market a product.



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



The Company has been awarded grants from the Defense Advanced Research
Projects Agency (DARPA), National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International Development and the U.S. Army Medical Research and Materiel Command for various research and
development projects. The terms of each of these grant agreements are three years with various termination dates, the last of which is September 2005 for existing agreements. 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



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



The Company does not track fully burdened research and development costs or capital expenditures by project. However, the Company does estimate, based on
full-time equivalent personnel effort, the percentage of research and development efforts (as measured in hours incurred, which approximates costs) undertaken for projects funded by, on the one hand, the Companys collaborators and government
grants and, on the other hand, projects funded by Maxygen.



The
following table presents the Companys approximate research and development expenses by funding category (in thousands):



|                                               |  |                         |        |      |   |        |  |   |       
|---------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                               |  | Year Ended December 31,
|                                               |  | 2002                    |        | 2003 |   | 2004  
|Collaborative projects funded by third parties |  | $                       | 20,461 |      | $ | 12,505 |  | $ | 11,344
|Internal projects                              |  |                         | 29,193 |      |   | 31,930 |  |   | 41,950
|                                               |  |                         |        |      |   |        |  |   |       
|Total                                          |  | $                       | 49,654 |      | $ | 44,435 |  | $ | 53,294
|                                               |  |                         |        |      |   |        |  |   |       



As the Company does
not track fully burdened research and development costs by project, the expense figures are comprised of the number of hours expended in each category multiplied by the approximate cost per hour of research and development effort. In addition,
project-specific external costs are added to these costs.



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 2002, 2003 and 2004, the Company recognized stock compensation expense related to certain other stock option grants. See Note 9.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                            |  | Year ended December 31, |        
|                                                                                                                                            |  | 2002                    |         |   | 2003 |   |         | 2004 | 
|Net income (loss), as reported                                                                                                              |  | $                       | (33,946 | ) |      | $ | (32,456 | )    |  | $ | 9,342   |  
|Add: Stock based employee compensation cost included in the determination of net loss as reported                                           |  |                         | 5,744   |   |      |   | 1,909   |      |  |   | 236     |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                         | (26,920 | ) |      |   | (15,623 | )    |  |   | (10,240 | )
|                                                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Pro forma net loss                                                                                                                          |  | $                       | (55,122 | ) |      | $ | (46,170 | )    |  | $ | (662    | )
|                                                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss) per common share:                                                                                                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic and dilutedas reported                                                                                                               |  | $                       | (1.01   | ) |      | $ | (0.94   | )    |  | $ | 0.27    |  
|                                                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic and dilutedpro forma                                                                                                                 |  | $                       | (1.64   | ) |      | $ | (1.34   | )    |  | $ | (0.02   | )
|                                                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  



The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or
vesting restrictions that are inherent in the Companys employee options. Use of an option valuation model, as required by SFAS No. 123, includes highly subjective assumptions based on long-term predictions, including the expected stock price
volatility and average life of each option grant. The Companys employee stock options have characteristics significantly different from those of freely traded options, and changes in the subjective input assumptions can materially affect the
Companys estimate of the fair value of those options. The Black-Scholes weighted average estimated fair values of stock options granted during the years ended December 31, 2002, 2003 and 2004 were $5.81, $4.30 and $4.93 per share,
respectively.



Stock compensation expense for options granted
to non-employees has been determined in accordance with SFAS No. 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.



As of July 1, 2005 the Company is required to adopt FASB Statement No. 123(R) and will begin to account for its stock-based employee compensation using fair value based accounting (see Recent Accounting
Pronouncements below).



Income (Loss) Per Common Share



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



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                                                    |  |                         |         |   |      |   |         |      |  |   |        |  
|----------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                    |  | Year ended December 31, |        
|                                                                                    |  | 2002                    |         |   | 2003 |   |         | 2004 | 
|Income (loss) applicable to common stockholders                                     |  | $                       | (33,946 | ) |      | $ | (33,735 | )    |  | $ | 8,342  |  
|                                                                                    |  |                         |         |   |      |   |         |      |  |   |        |  
|Basic and diluted:                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Weighted-average shares of common stock outstanding                                 |  |                         | 34,262  |   |      |   | 34,734  |      |  |   | 35,177 |  
|Less: weighted-average shares subject to repurchase                                 |  |                         | (680    | ) |      |   | (215    | )    |  |   | (1     | )
|                                                                                    |  |                         |         |   |      |   |         |      |  |   |        |  
|Weighted-average shares used in computing basic and diluted Income (loss) per share |  |                         | 33,582  |   |      |   | 34,519  |      |  |   | 35,176 |  
|                                                                                    |  |                         |         |   |      |   |         |      |  |   |        |  
|Basic and diluted income (loss) per common share                                    |  | $                       | (1.01   | ) |      | $ | (0.98   | )    |  | $ | 0.24   |  
|                                                                                    |  |                         |         |   |      |   |         |      |  |   |        |  



In accordance with FAS
128, Earnings Per Share, the Company has excluded all outstanding stock options, outstanding warrants and shares subject to repurchase from the calculation of diluted income (loss) per common share because all such securities are
antidilutive to loss from continuing operations for all applicable periods presented. The total number of shares excluded from the calculations of diluted income (loss) per share, prior to application of the treasury stock method for options, was
approximately 8,830,000 at December 31, 2002, 9,605,028 at December 31, 2003 and 8,910,876 at December 31, 2004.



Accumulated Other Comprehensive Loss



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



|                                                   |  |              |     |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | ------------ | --- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | December 31, |    
|                                                   |  | 2002         |     |   | 2003 |   |        | 2004 | 
|Unrealized gain on available-for-sale securities   |  | $            | 361 |   |      | $ | 200    |      |  | $ | 5      |  
|Unrealized losses on available-for-sale securities |  |              | (39 | ) |      |   | (82    | )    |  |   | (585   | )
|Foreign currency translation adjustments           |  |              | 283 |   |      |   | (1,484 | )    |  |   | (2,306 | )
|Changes in foreign currency contracts              |  |              | 208 |   |      |   |       |      |  |   | 696    |  
|                                                   |  |              |     |   |      |   |        |      |  |   |        |  
|Accumulated other comprehensive loss               |  | $            | 813 |   |      | $ | (1,366 | )    |  | $ | (2,190 | )
|                                                   |  |              |     |   |      |   |        |      |  |   |        |  



Recent Accounting
Pronouncements



In January 2003, the FASB issued
Interpretation No. 46 (or FIN 46), Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a majority of the entitys residual returns or both. The consolidation requirements of FIN 46 apply to variable interest entities created after January 31, 2003. Variable interest
entities created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or revised interpretations issued by the FASB in December 2003. However, the revised interpretations must be
applied no later than the first quarter of fiscal year 2004. Variable interest entities created after January 1, 2004 must be accounted for under the revised interpretations. There has been no material impact to the Companys financial
statements from potential variable interest entities created after January 31, 2003 or from the adoption of the deferred provisions in the first quarter of fiscal year 2004.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In November 2003, the Emerging Issues Task Force reached consensus on paragraph 18 of Issue No. 03-01
(EITF 03-01), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Effective for years ending after December 15, 2003, EITF 03-01 requires certain disclosures for debt and marketable
equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized.



In November 2004 the FASB delayed the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-01; this delay
does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure requirement of this guidance remains in effect. The Company does not expect EITF 03-01 to significantly
impact its results of operations or financial position but will reassess the impact once the rules are finalized.



On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



Statement 123(R) must be adopted no later than July 1, 2005.
Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on July 1, 2005.



Statement 123(R) permits public companies to adopt its requirements using one of two methods:



| | 1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company plans to adopt Statement 123 using the modified prospective
method.



As permitted by Statement 123, the Company currently
accounts for share-based payments to employees using Opinion 25s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method
will have a significant impact on the Companys result of operations, although it will have no impact on the Companys overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share in Note 1 to the Companys Consolidated Financial Statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash



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flows in periods after adoption. The Company cannot estimate what those amounts will be in the future because they depend upon, among other things, levels of
share-based payments granted in the future, when employees exercise stock options and if and when the Company becomes profitable.



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



The Companys cash equivalents and investments as of December 31, 2003 were as follows (in thousands):



|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  
|------------------------------------------- |  | ------------- | ------- | - | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------- | -
|                                            |  | AmortizedCost |         |   | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value |  
|Money market funds                          |  | $             | 21,353  |   |                      | $ |                      |  | $ |                    |   |  | $ | 21,353  |  
|Corporate debt obligations                  |  |               | 162,777 |   |                      |   | 195                   |  |   | (82                 | ) |  |   | 162,890 |  
|U.S. government agency securities           |  |               | 7,620   |   |                      |   | 5                     |  |   |                    |   |  |   | 7,625   |  
|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  
|Total                                       |  |               | 191,750 |   |                      |   | 200                   |  |   | (82                 | ) |  |   | 191,868 |  
|Less amounts classified as cash equivalents |  |               | (21,353 | ) |                      |   |                      |  |   |                    |   |  |   | (21,353 | )
|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  
|Total investments                           |  | $             | 170,397 |   |                      | $ | 200                   |  | $ | (82                 | ) |  | $ | 170,515 |  
|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  



The Companys
cash equivalents and investments as of December 31, 2004 were as follows (in thousands):



|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  
|------------------------------------------- |  | ------------- | ------- | - | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------- | -
|                                            |  | AmortizedCost |         |   | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value |  
|Money market funds                          |  | $             | 37,505  |   |                      | $ |                      |  | $ |                    |   |  | $ | 37,505  |  
|Corporate debt obligations                  |  |               | 164,959 |   |                      |   | 2                     |  |   | (536                | ) |  |   | 164,425 |  
|U.S. government agency securities           |  |               | 16,586  |   |                      |   |                      |  |   | (23                 | ) |  |   | 16,563  |  
|Commercial paper                            |  |               | 14,423  |   |                      |   | 3                     |  |   | (26                 | ) |  |   | 14,400  |  
|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  
|Total                                       |  |               | 233,473 |   |                      |   | 5                     |  |   | (585                | ) |  |   | 232,893 |  
|Less amounts classified as cash equivalents |  |               | (40,415 | ) |                      |   |                      |  |   |                    |   |  |   | (40,415 | )
|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  
|Total investments                           |  | $             | 193,058 |   |                      | $ | 5                     |  | $ | (585                | ) |  | $ | 192,478 |  
|                                            |  |               |         |   |                      |   |                       |  |   |                     |   |  |   |         |  



Realized gains or
losses on the sale of available-for-sale securities for 2002, 2003 and 2004 were insignificant. The change in unrealized holding gains (losses) on available-for-sale securities included in accumulated other comprehensive income (loss) were
unrealized losses of $1.5 million in 2002, $204,000 in 2003 and $698,000 in 2004. The Company intends to hold the securities until maturity and therefore does not believe any of the unrealized losses are other than temporary.



At December 31, 2004 the contractual maturities of investments were as
follows (in thousands):



|                                     |  |               |         |                     |   |        
|------------------------------------ |  | ------------- | ------- | ------------------- | - | -------
|                                     |  | AmortizedCost |         | EstimatedFair Value
|Due within one year                  |  | $             | 179,419 |                     | $ | 178,883
|Due after one year through two years |  |               | 13,639  |                     |   | 13,595 
|                                     |  |               |         |                     |   |        
|                                     |  | $             | 193,058 |                     | $ | 192,478
|                                     |  |               |         |                     |   |        



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



The Company had seventeen collaborations that generated revenue during 2002, 2003 and/or 2004. These agreements typically include up-front licensing fees,
technology advancement fees and research funding, as well



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



as the potential to earn milestone payments and royalties on future product sales or cost savings. The agreements generally require the Company to devote a
specified number of full-time equivalent employees to the research efforts over defined research terms ranging from three to five years. Total revenue recognized under these collaboration agreements was $24.8 million in 2002, $20.6 million in 2003
and $14.3 million in 2004.



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



|          |  |              |   |  |      |   |  |      |  
|--------- |  | ------------ | - |  | ---- | - |  | ---- | -
|          |  | December 31, |  
|          |  | 2002         |   |  | 2003 |   |  | 2004 |  
|Partner A |  |             |   |  | 12.2 | % |  | 35.0 | %
|Partner B |  | 5.6          | % |  | 9.1  | % |  | 13.4 | %
|Partner C |  | 9.2          | % |  | 11.5 | % |  | 2.2  | %
|Partner D |  | 21.7         | % |  | 4.8  | % |  | 3.0  | %
|Partner E |  | 18.0         | % |  | 8.8  | % |  |     |  
|Partner F |  | 7.3          | % |  | 13.3 | % |  |     |  



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 securities in the Company or one of its
subsidiaries. The Companys collaboration agreements that generated revenue in 2002, 2003 and/or 2004 are summarized below.



Pfizer II



On July 26, 2004, Codexis entered into a multi-year collaborative research agreement and a license agreement with Pfizer to discover and develop
biocatalysts, and associated processes that use such biocatalysts, in the manufacture of pharmaceutical products for Pfizer. Under the terms of these agreements, Pfizer provided Codexis an upfront technology access fee and is entitled to receive
research funding over a multi-year period. Codexis is also eligible to receive milestone payments, a license fee if Pfizer exercises its option to acquire a non-exclusive worldwide license to certain Codexis gene shuffling technologies, and
royalties.



Concurrent with the execution of the multi-year
collaborative research agreement and the license agreement, Codexis and Pfizer also entered into a stock purchase agreement in which Pfizer purchased from Codexis series C convertible preferred stock for gross proceeds of approximately $10 million.



Sandoz



In October 2003, Codexis and Sandoz entered into a research collaboration to
develop an improved synthesis of one of Sandozs key active pharmaceutical compounds using Codexis MolecularBreeding directed evolution platform. Under the terms of the agreement, Codexis received upfront payments and research and
development funding. Codexis is entitled to receive future research and development funding and is eligible for milestone and royalty payments. Codexis has granted Sandoz exclusive commercialization rights to the improved process for the specific
pharmaceutical product.



Roche



In May 2003, the Company formed a broad strategic alliance with F.
Hoffmann-La Roche Ltd. (Roche) to collaborate on the global development and commercialization of the Companys portfolio of next-generation interferon alpha and beta variants for a wide range of indications. The collaboration will
initially focus on the



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



development of lead candidates for the treatment of hepatitis B virus (HBV) and hepatitis C virus (HCV) infection that have been
designed by the Company to have novel and superior efficacy compared to currently marketed interferon alpha products.



Roche has licensed from the Company worldwide commercialization rights to specific novel interferon product candidates for the treatment of HBV and HCV
infection. The Company received an initial payment and is entitled to research and development funding for the first two years of the collaboration. The Company is also entitled to receive option fees. In addition, the Company is eligible to receive
milestone payments and royalties based on product sales.



The
alliance also provides the companies with the option to expand the collaboration to develop other novel interferon alpha and beta products specifically tailored for indications outside of the treatment of HBV and HCV infection, including oncology,
autoimmune diseases, inflammatory diseases, and other infectious diseases such as HIV infection. The Company retains the right to develop such products while Roche may elect to acquire worldwide license and commercialization rights to these product
candidates. The Company also has the option to co-develop in the United States any product to which Roche acquires a license in exchange for profit sharing or an increased royalty rate.



Cargill



In May 2003, Codexis announced that it had entered into a multi-year collaboration with Cargill to develop a novel biochemical platform that may enable
production of a broad range of specialty chemicals, polymers and other agricultural raw materials. Building on metabolic pathways developed by Cargill, Codexis will use its proprietary technologies to enhance the production of 3-hydroxypropionic
acid (3-hp) from carbohydrate raw material. Cargill and the U.S. Department of Energy will each contribute to research and development funding for three years at Codexis. Codexis is also eligible for milestone and royalty payments from products
commercialized by Cargill.



Rio Tinto



In February 2003, Codexis extended its collaboration with Technological
Resources Pty Limited, a wholly-owned subsidiary of Rio Tinto Corporation plc, one of the worlds leading mining companies, which was entered into in January 2000. The collaboration is focused on developing enzymatic systems to increase the
efficiency of carbon dioxide fixation in connection with the combustion of fossil fuels and for other purposes. Increased efficiency could play a significant role in the reduction of CO2emissions. In connection with the collaboration, we have received research and funding payments and technology advancement fees. Codexis and Rio Tinto will
also each share revenues with the other from certain products or processes that are commercialized by the other. This collaboration was assigned to Codexis in connection with its capitalization in March 2002. The collaboration ended in May
2004.



Eli Lilly



In January 2003, Codexis entered into a multi-year collaboration with Eli
Lilly and Company focused on the development of improved fermentations for several of Eli Lillys natural product drugs. Under the terms of the collaboration, Eli Lilly has provided Codexis with up-front technology access funding and research
funding. In December 2004, Codexis received notice from Eli Lilly that pursuant to its rights under the agreement, Eli Lilly had decided to terminate the multi-year collaboration agreement effective January 2005.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cargill Dow LLC



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



Aventis Pasteur



In
November 2001, the Company established a three-year collaboration with Aventis Pasteur to develop improved vaccines for a specific undisclosed target. Under the terms of the agreement, the Company has received license fees and research and
development funding. The Company is entitled to receive potential milestone payments based on success-based milestones, clinical trials, regulatory approvals and commercial sales and royalty payments on product sales. Aventis Pasteur will receive
exclusive worldwide rights to commercialize the vaccines developed in the collaboration. The funded research term of this collaboration ended in November 2004.



InterMune, Inc.



In September 2001, Maxygen Holdings Ltd. entered into a three-year license and collaboration agreement with InterMune, Inc. (InterMune) to
develop and commercialize novel, next-generation interferon gamma products. Under the terms of the agreement, InterMune has taken product candidates developed by the Company into pre-clinical development. InterMune has funded and will continue to
fund optimization and development of the next-generation interferon gamma products, and will retain exclusive worldwide commercialization rights for all human therapeutic indications. Under the terms of the collaboration agreement, the Company
received up-front license fees and research and development funding and is entitled to receive potential development and commercialization milestone payments. In addition, the Company is entitled to receive royalties on product sales, if any. The
funded research term of this collaboration ended in June 2004.



ALK-Abelló A/S



In February 2001, the
Company established a three-year collaboration with ALK-Abelló A/S, a wholly-owned subsidiary of Chr. Hansen Holding A/S, Denmark, to research and develop novel recombinant therapeutics for the treatment of specific allergies. The Company is
collaborating with ALK-Abelló to create therapies for treating specific allergies, including allergies to house dust mites and grasses, which are the cause of many common allergies. Under the terms of the collaboration, the Company received
license fees, technology access fees and research and development funding. The Company may also be entitled to receive potential milestone payments and royalties on any product sales. The funded research term of this collaboration ended in February
2004.



International AIDS Vaccine Initiative



In February 2001, the Company established a three-year collaboration with
the International AIDS Vaccine Initiative and DBLV, LLC, an entity established and funded by the Rockefeller Foundation to develop novel HIV vaccines. Under the agreement, DBLV has provided research and development funding to the Company to



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



expand the Companys ongoing program in HIV vaccine development. The Company retains all rights to commercialize the HIV vaccine candidates made in the
research program in all developed countries of the world, as well as in certain markets in the developing world. The funded research term of this collaboration ended in February 2004.



Hercules Incorporated



In November 2000, the Company entered into a four-year collaboration with Hercules Incorporated (Hercules) focused on developing high value
specialty chemicals via custom-made biological catalysts. Under the terms of the collaboration, the Company received research funding, technology access fees, and license fees. The collaboration was focused on a number of high revenue-generating
products in Hercules core business. This agreement was assigned to Codexis in connection with its capitalization in March 2002. Codexis terminated this collaboration agreement in January 2003 in exchange for a termination payment of $2.5
million and assignment of all program technology to Codexis.



Chevron Research and Technology Co.



In
October 2000, the Company entered into a three-year collaboration with Chevron Research and Technology Co. (Chevron) to develop novel bioprocesses for specific petrochemical products. Under the terms of the agreement, the Company
received license fees, research funding and technology access fees. In addition, the Company may receive potential milestones and product royalties, if any. Chevron will receive worldwide commercialization rights. This agreement was assigned to
Codexis in connection with its capitalization in March 2002. The funded research term of the collaboration ended in January 2004.



H. Lundbeck A/S



In September 2000, Maxygen ApS, a wholly-owned subsidiary of the Company, entered into a three-year collaborative research and development agreement with
H. Lundbeck A/S (Lundbeck), to develop an improved interferon beta pharmaceutical product that could be used for central nervous system diseases, including multiple sclerosis. Under the terms of the agreement, the Company received
research and development funding and license fees. As a result of the strategic prioritization of Lundbecks portfolio and the Companys growing focus and expertise in the development of type I interferons, in October 2003, the companies
agreed to terminate the research program and transfer to Maxygen all rights held by Lundbeck with regard to the improved interferon beta. In November 2004 the Company substantially terminated its interferon beta program.



Pfizer I



In September 2000, the Company extended a May 1998 agreement with Pfizer
Inc. 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 in commercial operation at Pfizer. In the expanded collaboration, commercial terms were agreed upon for the improved process, with success earning us research and commercial milestones as well as a
percentage of all manufacturing cost savings once the optimized commercial process is scaled up at Pfizer. In September 2002 Codexis announced that it had received its first commercial payment in connection with the collaboration. To date, the
Company has received two milestone payments for developing the improved second-generation manufacturing process. This collaboration was assigned to Codexis in connection with its capitalization in March 2002. The funded research term of the
collaboration ended in March 2002.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 technologies to develop certain novel enzymes involved in the manufacture of certain classes of antibiotics. Under the terms of the agreement, the Company received research
funding and may receive royalties from the commercialization of any enzymes developed through the Companys technology. DSM will receive worldwide commercialization rights. This collaboration was assigned to Codexis in connection with its
capitalization in March 2002. The funded research term of the collaboration ended in June 2002.



Novozymes



In September 1997, the Company entered into a five-year license and collaboration agreement with Novo Nordisk A/S (now known as Novozymes) to
use the Companys MolecularBreeding directed evolution platform to develop products in specific industrial enzyme fields. In November 2001, the companies expanded the market areas addressed by the existing industrial enzymes collaboration.
Under the terms of the expanded relationship, Novozymes is licensed to use the Companys MolecularBreeding directed evolution platform for additional industrial enzyme applications. The Company received research funding, certain minimum royalty
payments, and may receive royalty payments on the sales of products developed under the agreement and on the sale of products in the expanded industrial enzyme market areas, if any. This collaboration was assigned to Codexis in connection with its
capitalization in March 2002. The funded research term of the collaboration ended in December 2003.



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



The Company has entered into several research agreements to fund research at universities and other research collaborators. These agreements are generally
cancelable by either party upon written notice and may be extended by mutual consent of both parties. Research and development expenses are recognized as the related services are performed, generally ratably over the period of the service. Expenses
under these agreements were approximately $3.5 million in 2002, $2.3 million in 2003 and $1.3 million in 2004.



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



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



|                                               |  |              |         |   |      |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                               |  | December 31, |        
|                                               |  | 2003         |         |   | 2004 |  
|Leasehold improvements                         |  | $            | 6,457   |   |      | $ | 6,526   |  
|Machinery and laboratory equipment             |  |              | 17,499  |   |      |   | 18,144  |  
|Computer equipment and software                |  |              | 2,369   |   |      |   | 2,650   |  
|Furniture and fixtures                         |  |              | 1,211   |   |      |   | 1,211   |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  |              | 27,536  |   |      |   | 28,531  |  
|Less accumulated depreciation and amortization |  |              | (16,027 | ) |      |   | (20,854 | )
|                                               |  |              |         |   |      |   |         |  
|Property and equipment, net                    |  | $            | 11,509  |   |      | $ | 7,677   |  
|                                               |  |              |         |   |      |   |         |  



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



In June 1999, the Company entered into an equipment financing agreement for up to $2.0 million of equipment purchases with a financing company. In July
1999 through May 2000, the Company financed $2.0



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million in equipment purchases structured as loans. The equipment loans were to be repaid over 48 months at interest rates of 11.73% to 12.78% and were
secured by the related equipment. During the first six months of the loan terms, the payments consisted of interest only. As of December 31, 2004, these equipment financing arrangements had been repaid in full.



In February 2004, Codexis entered into an equipment financing agreement with
a financing company for up to $4.8 million of equipment purchases. The financing agreement expires on March 31, 2005. The equipment loans will be repaid over 48 months from the date of each drawdown at an interest rate tied to the prime lending rate
at the time of each drawdown. The loans are secured by the related equipment. In connection with this financing agreement, Codexis issued to the financing company, a warrant to purchase 46,176 shares of Codexis common stock at $0.40 per share
which was expensed upon issuance. As of December 31, 2004 Codexis had outstanding loan balances totaling $2.3 million. Any obligations under this equipment financing agreement are solely obligations of Codexis and repayments are to be made solely
from assets of Codexis.



At December 31, 2004, Codexis
future principal payments under the equipment financing arrangements were as follows (in thousands):



|                         |  |   |      
|------------------------ |  | - | -----
|Year ending December 31, |  |  
|2005                     |  | $ | 555  
|2006                     |  |   | 609  
|2007                     |  |   | 669  
|2008                     |  |   | 473  
|                         |  |   |      
|                         |  | $ | 2,306
|                         |  |   |      



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



The Company has entered into various operating leases for its facilities, certain computer equipment and service agreements and several contract
manufacturing arrangements. The leases expire on various dates in 2005 through 2011. The facilities leases also include scheduled rent increases. The scheduled rent increases are recognized on a straight-line basis over the term of the leases. The
computer equipment and service agreements and contract manufacturing arrangements expire on various dates in 2005 through 2006.



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



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31, |  |  
|2005                     |  | $ | 6,793 
|2006                     |  |   | 2,959 
|2007                     |  |   | 1,323 
|2008                     |  |   | 893   
|2009                     |  |   | 916   
|Thereafter               |  |   | 1,019 
|                         |  |   |       
|                         |  | $ | 13,903
|                         |  |   |       



Total rent expense was
$4.9 million in 2002, $4.7 million in 2003 and $4.0 million in 2004.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



The Companys chemicals business is operated through its consolidated subsidiary Codexis, Inc. Codexis was incorporated in January 2002, and the
Companys chemicals business was contributed to Codexis in March 2002 in exchange for all the capital stock of Codexis. Prior to its establishment as an independent company, Codexis was the chemicals business unit of the Company, which had been
operating since 1997. Codexis financial position and results of operations are included in the Companys Chemicals segment (see Note 13).



Summary financial data for Codexis is presented below for the years ended December 31, 2003 and 2004 (in thousands):



|                                                |  |                                |        |   |      |   |         |  
|----------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -
|                                                |  | For the year endedDecember 31, |       
|                                                |  | 2003                           |        |   | 2004 |  
|Total revenues                                  |  | $                              | 8,425  |   |      | $ | 4,720   |  
|Total operating expenses                        |  | $                              | 15,712 |   |      | $ | 18,028  |  
|Interest income and other                       |  | $                              | 301    |   |      | $ | 112     |  
|Net loss                                        |  | $                              | (6,986 | ) |      | $ | (13,196 | )
|                                                | 
|                                                |  | December 31,                   |       
|                                                |  | 2003                           |        |   | 2004 |  
|Cash, cash equivalents and investments          |  | $                              | 15,430 |   |      | $ | 17,248  |  
|Other current assets                            |  |                                | 1,626  |   |      |   | 750     |  
|Property and equipment, net                     |  |                                | 3,242  |   |      |   | 3,225   |  
|Other assets                                    |  |                                |       |   |      |   | 1,510   |  
|                                                |  |                                |        |   |      |   |         |  
|Total assets                                    |  | $                              | 20,298 |   |      | $ | 22,733  |  
|                                                |  |                                |        |   |      |   |         |  
|Total liabilities                               |  | $                              | 2,452  |   |      | $ | 8,060   |  
|Redeemable convertible series B preferred stock |  |                                | 26,529 |   |      |   | 27,779  |  
|Stockholders deficit                           |  |                                | (8,683 | ) |      |   | (13,106 | )
|                                                |  |                                |        |   |      |   |         |  
|Total liabilities and equity                    |  | $                              | 20,298 |   |      | $ | 22,733  |  
|                                                |  |                                |        |   |      |   |         |  



|9. | Stockholders Equity
|-- | --------------------



Codexis Redeemable Convertible Preferred Stock



On September 13, 2002, Codexis sold $15 million of Codexis series B convertible preferred stock to investors, of which $5 million was purchased by Maxygen
and $10 million was purchased by several unrelated investors. On October 1, 2002, Codexis sold an additional $10 million of series B convertible preferred stock to unrelated investors. Series B convertible preferred stock includes a redemption
provision, which provides that the holders of at least a majority of the outstanding shares of this series B convertible preferred stock (excluding the series B convertible preferred stock held by Maxygen and its affiliates), voting together as a
separate class, may require Codexis to redeem the series B convertible preferred stock. The redemption price for each share will be payable in cash in exchange for the shares of series B convertible preferred stock to be redeemed at a sum equal to
the applicable original issue price per share plus five percent (5%) of the original issue price per year from the original issue date until the applicable redemption date, plus declared and unpaid dividends. Notice of redemption can be given at any
time on or after the fifth anniversary of the original issue date. In connection with these redemption rights, Maxygen has recorded accretion of the redemption premium for the series B convertible preferred stock, excluding the shares owned by
Maxygen, in the amount of $1.3 million and $1.0 million for the



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



years ended December 31, 2003 and 2004, respectively. The accretion is recorded as subsidiary preferred stock accretion on the Consolidated Statement of
Operations and as a reduction of additional paid-in capital on the Consolidated Balance Sheets. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets of Codexis. Codexis had
8,101,101 shares of this series of convertible preferred stock outstanding at December 31, 2004, and the redemption value of the outstanding shares was $26.6 million and $27.8 million at December 31, 2003 and 2004, respectively and is expected to be
$29.1 million, $30.3 million, $31.6 million, and $32.8 million at the end of 2005, 2006, 2007, and 2008, respectively.



Codexis Convertible Preferred Stock



In July 2004, in conjunction with entry into a research collaboration between Codexis and Pfizer, Pfizer purchased $10 million of series C convertible
preferred stock. This series of convertible preferred stock does not have a redemption provision.



Maxygen Preferred Stock



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



Codexis Stock Option Exchange Program



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



All eight affected employees accepted the exchange offer and were granted new Codexis stock options on May 16, 2003 with exercise prices of $0.40 per share representing the fair value of Codexis common stock on the date of grant. The
new options were granted under the terms and conditions of the Codexis 2002 Stock Plan.



The total number of shares underlying Maxygen options terminated under the exchange offers was 381,128. The total number of shares underlying Codexis options granted under the exchange offers was 983,000. The average
exercise price per share of the Maxygen options that were cancelled was $20.80.



Codexis 2002 Stock Plan



Codexis maintains the Codexis 2002 Stock Plan (Codexis Stock Plan) under which the board of directors of Codexis may issue incentive stock options to employees, including officers and members of the board of directors who are
also employees of the Codexis or any parent or subsidiary of Codexis, and nonstatutory stock options (options that do not qualify as incentive options) and/or restricted stock of Codexis to employees,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



officers, directors or consultants of Codexis or any parent or subsidiary. Options granted under the Codexis Stock Plan expire no later than 10 years from
the date of grant. For incentive stock options and nonstatutory stock options, the option price shall be at least 100% and 85%, respectively, of the fair value on the date of grant, as determined by the board of directors. If, at the time Codexis
grants an option and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of Codexis, the option price shall be at least 110% of the fair value. Except in the case of
certain options granted to officers, directors and consultants, options typically vest over a five-year period at a rate of no less than 20% per year but may be granted with different vesting terms. Except in the case of restricted stock purchased
by officers, directors and consultants, restricted stock will generally be subject to a Codexis right of repurchase that will lapse over a five-year period at a rate of no less than 20% per year but may be sold subject to a Codexis right of
repurchase with a different lapse rate. As of December 31, 2004, Codexis had reserved 3,000,000 shares of common stock for issuance under the Codexis Stock Plan. As of December 31, 2004, the Codexis Stock Plan had 2,617,775 shares of Codexis common
stock available to be issued upon exercise of outstanding options at a weighted-average exercise price of $0.41 per share. It also had 235,377 shares of Codexis common stock remaining available for future issuance.



Codexis accounts for stock option grants under APB Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25). The Company did not recognize any expense for options granted by Codexis as all of the requirements for a non-compensatory plan under APB 25 were satisfied as of the date of grant.
Further, the per share exercise prices of the options granted by Codexis were set at the fair market value of the underlying stock on the date of the grant. The fair market value of the underlying Codexis common stock was determined by the Codexis
Board of Directors on the applicable dates of grant. The Board determined the fair market value after the consideration of a number of factors, including Codexis scientific, product development and business development progress, the overall
financing environment for emerging companies at the applicable time, the completion and price of Codexis Series B preferred stock financing in October 2002, the completion and price of Codexis Series C preferred stock sale of Pfizer in
July 2004, and the rights and privileges of the preferred stock versus the common stock underlying the options. The Codexis Boards analysis also included consideration of the aggregate liquidation preference held by holders of Codexis
preferred stock over holders of Codexis common stock.



401(k) Savings Plan



The Company has a savings
plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan, participating employees may defer a percentage (not to exceed 100%) of their eligible pretax
earnings up to the Internal Revenue Services annual contribution limit. All employees on the United States payroll of the Company age 18 years or older are eligible to participate in the 401(k) Plan. The Company has not been required to
contribute to the 401(k) Plan but beginning in 2001 elected to match contributions of its participating employees in an amount up to a maximum of the lesser of (i) 50% of the employees 401(k) yearly contribution or (ii) 6% of the
employees yearly base salary. The matching contribution is made in the form of newly issued shares of Company common stock as of each June 30 and December 31. All matching contributions vest immediately. The Company may discontinue such
matching contributions at any time. The fair value of the Companys matching contribution to the 401(k) Plan was $677,000 in 2002, $522,000 in 2003 and $443,000 in 2004.



1997 Stock Option Plan



The Companys stockholders approved the 1997 Stock Option Plan (the 1997 Plan) on March 30, 1997 and approved amendments to the 1997 Plan
on May 25, 2000 and May 31, 2002. Pursuant to the 1997 Plan, the



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. No options may be granted under the 1997 Plan after March 1, 2007. Under the 1997 Plan, incentive options to purchase Company common stock may be
granted to employees at prices not lower than fair value on the date of grant, as determined by the board of directors. Nonstatutory options (options that do not qualify as incentive options) may be granted to key employees, including directors and
consultants, at prices not lower than 85% of fair value on the date of grant (110% in certain cases), as determined by the board of directors. The maximum term of the options granted under the 1997 Plan is ten years. Options generally vest over four
years (generally vesting at a rate of 25% at the end of each year for grants made prior to January 1, 2002 and for grants made after January 1, 2002, one installment of 25% at the end of the first year and monthly for the three years thereafter). In
addition, a number of grants made in 2003 vest over three years, 16.67% on July 1, 2003 and monthly for the two and a half years thereafter. The 1997 Plan provides for annual increases in the number of shares available for issuance on the first day
of each year equal to the lesser of (i) 1,500,000 shares, (ii) 4% of the outstanding shares on the date of the annual increase, or (iii) an amount determined by the board of directors. At December 31, 2004, 4,019,005 shares remained available for
future option grants under the 1997 Plan.



1999 Nonemployee
Directors Stock Option Plan



The Companys
stockholders approved the 1999 Nonemployee Directors Stock Option Plan (the Directors Plan) on December 14, 1999. The Directors Plan reserves a total of 300,000 shares of common stock for issuance thereunder. Each nonemployee
director who becomes a Company director is automatically granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date upon which such person first becomes a director. At the first board meeting immediately following each
annual stockholders meeting, each non-employee director is automatically granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the Directors Plan is 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 vests as to 25% of the shares subject to the option at the end of each year. Each subsequent grant generally vests
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, 2004, 165,000 shares remained available for
future option grants under the Directors Plan.



2000
International Stock Option Plan



The board of directors
adopted the 2000 International Stock Option Plan (the International Plan) on April 10, 2000 and amended it on March 1, 2001. The International Plan has not been approved by the Companys stockholders as no such approval is required.
Under the International Plan the board of directors may issue nonqualified stock options to employees, directors and consultants of non-U.S. subsidiaries of the Company. No options may be granted under the International Plan after April 10, 2010.
Under the International Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement options in the context of acquisitions), as determined by the board of directors.
The maximum term of the options granted under the International Plan is ten years. Options vest and become exercisable pursuant to a vesting schedule, generally either at a rate of 25% at the end of each year for grants made prior to January 1,
2002, or for grants made in 2002, one installment of 25% at the end of the first year and monthly for the three years thereafter. In addition, a number of grants made in 2003 vest over three years, 16.67% on July 1, 2003 and monthly for the two and
a half years thereafter. The International Plan also provides for annual increases in the number of shares available for issuance on the first day of each year equal to 0.6% of the outstanding shares on the date of the annual increase, or a lower
amount determined by the board of directors. At December 31, 2004, 1,560,609 shares remained available for future option grants under the International Plan.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



2000 Non-Officer Employee Stock Option Plan



The board of directors adopted the 2000 Non-Officer Stock Option Plan (the
Non-Officer Plan) on December 6, 2000. The Non-Officer Plan has not been approved by the Companys stockholders as no such approval is required. Under the Non-Officers Plan the board of directors may issue nonqualified stock
options to employees (other than executive officers and stockholders owning 10% or more of the Companys common stock) and consultants of the Company or any of its affiliates. No options may be granted under the Non-Officer Plan after December
6, 2010. Under the Non-Officer Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement options in the context of acquisitions), as determined by the board of
directors. The maximum term of the options granted under the Non-Officer Plan is ten years. Options vest and become exercisable pursuant to a vesting schedule, generally either at a rate of 25% at the end of each year for grants made prior to
January 1, 2002, or for grants made after January 1, 2002, one installment of 25% at the end of the first year and monthly for the three years thereafter. In addition, a number of grants made in 2003 vest over three years, 16.67% on July 1, 2003 and
monthly for the two and a half years thereafter. The Non-Officer Plan provides for annual increases in the number of shares available for issuance on the first day of each year equal to the greater of (i) 250,000 shares and (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, 2004, 991,547 shares remained available for future option grants 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:



|                             |  |                  |   |  |                     |   |  |                                        |      
|---------------------------- |  | ---------------- | - |  | ------------------- | - |  | -------------------------------------- | -----
|                             |  |                  |   |  | Options Outstanding
|                             |  | Shares Available |   |  | Number of Shares    |   |  | Weighted-AverageExercisePrice PerShare
|Balance at December 31, 2001 |  | 1,433,378        |   |  | 7,301,472           |   |  | $                                      | 27.29
|Shares authorized            |  | 4,315,214        |   |  |                    |   |  |                                        |     
|Options granted              |  | (3,106,550       | ) |  | 3,106,550           |   |  | $                                      | 10.75
|Options exercised            |  |                 |   |  | (172,189            | ) |  | $                                      | 4.25 
|Options canceled             |  | 1,804,508        |   |  | (1,804,508          | ) |  | $                                      | 25.82
|                             |  |                  |   |  |                     |   |  |                                        |      
|Balance at December 31, 2002 |  | 4,446,550        |   |  | 8,431,325           |   |  | $                                      | 21.98
|Shares authorized            |  | 1,837,203        |   |  |                    |   |  |                                        |     
|Options granted              |  | (2,897,869       | ) |  | 2,897,869           |   |  | $                                      | 8.51 
|Options exercised            |  |                 |   |  | (223,054            | ) |  | $                                      | 5.38 
|Options canceled             |  | 1,542,875        |   |  | (1,542,875          | ) |  | $                                      | 24.50
|                             |  |                  |   |  |                     |   |  |                                        |      
|Balance at December 31, 2003 |  | 4,928,759        |   |  | 9,563,265           |   |  | $                                      | 17.79
|Shares authorized            |  | 1,855,849        |   |  |                    |   |  |                                        |     
|Options granted              |  | (1,567,791       | ) |  | 1,567,791           |   |  | $                                      | 10.07
|Options exercised            |  |                 |   |  | (700,831            | ) |  | $                                      | 7.12 
|Options canceled             |  | 1,519,344        |   |  | (1,519,344          | ) |  | $                                      | 18.40
|                             |  |                  |   |  |                     |   |  |                                        |      
|Balance at December 31, 2004 |  | 6,736,161        |   |  | 8,910,881           |   |  | $                                      | 17.19
|                             |  |                  |   |  |                     |   |  |                                        |      



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The options outstanding and exercisable under the Plans at December 31, 2004 are as follows:



|                     |  |                     |  |                                                    |  |                              |        |        |           |                               |   |       
|-------------------- |  | ------------------- |  | -------------------------------------------------- |  | ---------------------------- | ------ | ------ | --------- | ----------------------------- | - | ------
|                     |  | Options Outstanding |  | Options Exercisable                               
|Exercise Price Range |  | Number              |  | WeightedAverageRemainingContractualLife (in Years) |  | WeightedAverageExercisePrice |        | Number |           | WeightedAverage ExercisePrice
|$0.20$0.30          |  | 202,750             |  | 3.2                                                |  | $                            | 0.27   |        | 202,750   |                               | $ | 0.27  
|$0.50$0.75          |  | 252,642             |  | 4.6                                                |  | $                            | 0.72   |        | 252,642   |                               | $ | 0.72  
|$6.74$9.95          |  | 2,788,024           |  | 8.3                                                |  | $                            | 7.92   |        | 1,277,056 |                               | $ | 7.39  
|$10.22$15.75        |  | 3,808,062           |  | 7.6                                                |  | $                            | 11.84  |        | 2,259,112 |                               | $ | 12.44 
|$15.84$21.56        |  | 345,125             |  | 6.5                                                |  | $                            | 17.77  |        | 265,611   |                               | $ | 17.78 
|$24.23$32.00        |  | 393,815             |  | 5.9                                                |  | $                            | 29.73  |        | 392,908   |                               | $ | 29.75 
|$41.81$62.00        |  | 1,044,463           |  | 5.5                                                |  | $                            | 55.59  |        | 984,835   |                               | $ | 55.61 
|$65.19$81.00        |  | 25,000              |  | 5.3                                                |  | $                            | 65.19  |        | 25,000    |                               | $ | 65.19 
|$162.50              |  | 51,000              |  | 5.2                                                |  | $                            | 162.50 |        | 51,000    |                               | $ | 162.50
|                     |  |                     |  |                                                    |  |                              |        |        |           |                               |   |       
|                     |  | 8,910,881           |  | 7.3                                                |  | $                            | 17.19  |        | 5,710,914 |                               | $ | 20.82 
|                     |  |                     |  |                                                    |  |                              |        |        |           |                               |   |       



Options exercisable at
December 31, 2002 and 2003 were 3,055,050 and 5,112,140, respectively.



The weighted-average grant date fair value of options granted was $5.81 in 2002, $4.30 in 2003, and $4.93 in 2004.



1999 Employee Stock Purchase Plan



The Companys stockholders approved the 1999 Employee Stock Purchase Plan (the Purchase Plan) on December 14, 1999. The ESPP is intended
to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A total of 400,000 shares of the Companys common stock were initially reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the Purchase Plan is equal to 85% of the lower of (i) the fair market value
of the common stock on the first day of the offering period or (ii) the fair market value of the common stock on the purchase date. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the
purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual increase, or a lower amount determined by the board of directors. The Purchase
Plan will terminate in September 2019, unless terminated earlier in accordance with the provisions of the Purchase Plan. The initial offering period commenced on December 16, 1999 and the first purchase under the Purchase Plan occurred on September
29, 2000 when 67,540 shares of common stock were purchased. In 2002, 2003 and 2004, 130,880 shares, 99,441 shares and 62,700 shares of common stock were purchased pursuant to the Purchase Plan, respectively. The weighted average fair value of
purchase rights granted during the year was $3.74 in 2002, $3.06 in 2003, and $1.02 in 2004. At December 31, 2004, 732,968 shares remained available for purchase under the Purchase Plan.



Fair value disclosures



Pro forma net loss information is required to be disclosed by SFAS Statement 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For 2002, 2003 and 2004 the Company calculated the fair value using the Black-Scholes option pricing
model. The following assumptions were used:



|                                      |  |              |  |                |  |               
|------------------------------------- |  | ------------ |  | -------------- |  | --------------
|                                      |  | 2002         |  | 2003           |  | 2004          
|Expected dividend yield               |  | 0%           |  | 0%             |  | 0%            
|Risk-free interest rate rangeOptions |  | 2.6% to 4.4% |  | 1.84% to 2.81% |  | 2.75% to 3.51%
|Risk-free interest rate rangeESPP    |  | 1.7% to 4.1% |  | 3.33% to 5.28% |  | 2.75% to 4.45%
|Expected lifeOptions                 |  | 4 years      |  | 4 years        |  | 4 years       
|Expected lifeESPP                    |  | 0.7 years    |  | 0.7 years      |  | 0.9 years     
|Expected volatility                   |  | 0.7          |  | 0.6            |  | 0.6           



Options granted to
consultants are periodically re-valued as they vest in accordance with SFAS Statement 123 and EITF 96-18 using a Black-Scholes model and the following weighted-average assumptions for 2002: estimated volatility of 0.7, risk-free interest rates of
4.4% to 5.6%, no dividend yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. The assumptions for 2003: estimated volatility of 0.6, risk-free interest rates of 4.0% to 5.2%, no dividend
yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. The assumptions for 2004: estimated volatility of 0.6, risk-free interest rates of 4.0% to 5.2%, no dividend yield, and an expected life of
the option equal to the full term, generally ten years from the date of grant. The Company recorded total compensation expense of $70,000 in 2002 , $57,000 in 2003 and $48,000 in 2004 related to the Black-Scholes revaluation of options grants to
consultants. Stock compensation expense relating to the acceleration of stock options was immaterial for 2002, 2003 and 2004.



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 was amortized to expense using a graded vesting method. During the years ended December 31, 2002, 2003 and 2004, the Company recorded
amortization of deferred stock compensation expense of approximately $2.7 million, $1.1 million and $237,000 respectively. The deferred compensation relating to such option grants was fully amortized by December 31, 2004.



In addition, the Company recorded $14.6 million of deferred compensation in
2000 upon the exchange of outstanding Maxygen ApS warrants and the exchange of restricted stock with founders in connection with the August 2000 acquisition of Maxygen ApS. The deferred compensation was amortized over the vesting term of the
options. The deferred compensation relating to the restricted stock was amortized using the graded vesting method. A total of $3.2 million and $852,000 of deferred compensation expense was recognized in the year ended December 31, 2002, and 2003
respectively, in connection with the Maxygen ApS exchange. The deferred compensation relating to the restricted stock was fully amortized in 2003.



Common Stock



At December 31, 2002 and 2003, there were 398,637 shares and 41,614 shares of common stock outstanding subject to the Companys lapsing right of
repurchase at a weighted-average price of $3.36 and $0.75, respectively. There were no shares of common stock outstanding subject to the Companys lapsing right of repurchase as of December 31, 2004.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2004, the Company had reserved shares of common stock for future issuance as follows:



|                                             |  |           
|-------------------------------------------- |  | ----------
|2000 Non-Officer Employee Stock Option Plan  |  | 3,716,968 
|2000 International Stock Option Plan         |  | 2,563,707 
|1999 Employee Stock Purchase Plan            |  | 732,968   
|1999 Nonemployee Directors Stock Option Plan |  | 300,000   
|1997 Stock Option Plan                       |  | 9,066,367 
|                                             |  |           
|                                             |  | 16,380,010
|                                             |  |           



|10. | Intangible Assets
|--- | -----------------



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



|                         |  |              |        |   |      |   |        |      |  |   |        |  
|------------------------ |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                         |  | December 31, |       
|                         |  | 2002         |        |   | 2003 |   |        | 2004 | 
|Gross carrying value     |  | $            | 3,435  |   |      | $ | 3,435  |      |  | $ | 3,435  |  
|Accumulated amortization |  |              | (2,737 | ) |      |   | (3,435 | )    |  |   | (3,435 | )
|                         |  |              |        |   |      |   |        |      |  |   |        |  
|Net carrying value       |  | $            | 698    |   |      | $ |       |      |  | $ |       |  
|                         |  |              |        |   |      |   |        |      |  |   |        |  



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



|                                              |  |   |      
|--------------------------------------------- |  | - | -----
|For the year ended December 31, 2002 (actual) |  | $ | 1,144
|For the year ended December 31, 2003 (actual) |  | $ | 698  
|For the year ended December 31, 2004 (actual) |  | $ |     



The intangible assets
were fully amortized as of December 31, 2003.



The Company must
perform an impairment test of recorded goodwill at least annually. Any impairment loss from the annual test will be recognized as a part of operations. The Company completed its annual impairment test as of October 1, 2003 and October 1, 2004, which
did not result in impairment of recorded goodwill.



|11. | Income Taxes
|--- | ------------



In 2004 the Company is reporting taxable income due to the Companys sale of Verdia. The Company will utilize prior year federal and state net
operating loss carryforwards to reduce the federal and state taxable income to zero for regular tax purposes, however, for federal purposes, will be subject to alternative minimum tax of approximately $921,000 and has reported an income tax
provision of $921,000. This amount has been netted against the gain on sale of Verdia and is reflected in gain on sale of discontinued operations in the Consolidated Statement of Operations. In 2003 and prior, there has been no provision for U.S.
federal, U.S. state or foreign income taxes for any period as the Company has incurred operating losses in all prior periods and for all jurisdictions. The Companys total deferred tax assets have decreased due to the utilization of the prior
year federal and state net operating losses used to offset the gain from the sale of Verdia and the loss of the unutilized tax assets of Verdia at the time of sale. Therefore, there is a corresponding decrease in the valuation allowance to fully
offset the deferred tax assets. Foreign pre-tax loss was $1.8 million in 2002, $10.6 million in 2003 and $21.8 million in 2004.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                 |  |              |         |   |      |   |         |  
|-------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                 |  | December 31, |        
|                                 |  | 2003         |         |   | 2004 |  
|Net operating loss carryforwards |  | $            | 32,500  |   |      | $ | 17,800  |  
|Research credits                 |  |              | 5,000   |   |      |   | 4,500   |  
|Capitalized research             |  |              | 5,500   |   |      |   | 5,500   |  
|Other                            |  |              | 500     |   |      |   | 5,500   |  
|                                 |  |              |         |   |      |   |         |  
|Total deferred tax assets        |  |              | 43,500  |   |      |   | 33,300  |  
|Valuation allowance              |  |              | (43,500 | ) |      |   | (33,300 | )
|                                 |  |              |         |   |      |   |         |  
|Net deferred tax assets          |  | $            |        |   |      | $ |        |  
|                                 |  |              |         |   |      |   |         |  



Realization of
deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. Deferred tax assets and the associated valuation
allowance increased by $9.7 million during 2002 and by $12.0 million during 2003. The valuation allowance decreased $10.2 million during 2004.



As of December 31, 2004, the Company had net operating loss carryforwards for federal income tax purposes of approximately $50.5 million, which expire in
the years 2021 through 2024 and federal research and development tax credit carryforwards of approximately $2.6 million, which expire in the years 2012 through 2024. Included in the Companys federal net operating loss carryforwards and federal
research and development tax credit carryforwards at December 31, 2004 are amounts relating to Codexis, a subsidiary that is not included in the Companys federal consolidated return. These carryforwards will only be available to offset future
federal taxable income of Codexis. At December 31, 2004, the federal net operating loss carryforwards relating to Codexis were approximately $23.0 million and the federal research and development tax credit carryforwards relating to Codexis were
approximately $436,000. These carryforwards expire in the years 2021 through 2024. As of December 31, 2004, the Company had net operating loss carryforwards for state income tax purposes of approximately $1.7 million that expire in the years 2013
through 2014 and state research and development tax credits of approximately $2.7 million that have no expiration date.



Approximately $5.1 million of the valuation allowance for deferred tax assets relates to benefits of stock options deductions that, when recognized, will
be allocated directly to additional paid-in capital.



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



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A reconciliation of income taxes at the statutory federal income tax rate to income taxes included in
the Consolidated Statements of Operations is as follows (in thousands):



|                                     |  |              |         |   |      |   |         |  
|------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                     |  | December 31, |        
|                                     |  | 2003         |         |   | 2004 |  
|U.S. federal taxes (benefit)         |  |              |         |   |      |   |         |  
|At statutory rate                    |  | $            | (11,035 | ) |      | $ | 3,270   |  
|Alternative minimum tax              |  |              |        |   |      |   | 921     |  
|Non-deductible deferred compensation |  |              | 219     |   |      |   |        |  
|Unutilized net operating losses      |  |              | (1,184  | ) |      |   | 7,624   |  
|Other                                |  |              |        |   |      |   | (694    | )
|Change in Valuation Allowance        |  |              | 12,000  |   |      |   | (10,200 | )
|                                     |  |              |         |   |      |   |         |  
|Total                                |  | $            |        |   |      | $ | 921     |  
|                                     |  |              |         |   |      |   |         |  



|12. | Litigation
|--- | ----------



In December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, Inc., its chief executive officer,
Russell Howard and its then chief financial officer, Simba Gill, together with certain underwriters of Maxygens initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11,
12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called laddering cases that have been commenced against over 300 companies that had public offerings of securities in
1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styled In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003,
the court dismissed the Section 10(b) claim against Drs. Howard and Gill; the remainder of the case remains pending.



In June 2003 the Company agreed to the terms of a tentative settlement agreement along with other defendant issuers in In re Initial Public Offering
Securities Litigation. The tentative settlement provides that the insurers of the 309 defendant issuers will pay to the plaintiffs $1 billion less any recovery of damages the plaintiffs receive from the defendant underwriters. If the plaintiffs
receive over $5 billion in damages from the defendant underwriters, we will be entitled to reimbursement of various expenses incurred by us as a result of the litigation. As part of the tentative settlement, the Company will assign to the plaintiffs
excess compensation claims and certain other of its claims against the defendant underwriters based on the alleged actions of the defendant underwriters. The settlement is subject to acceptance by a substantial majority of defendants and
execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. On February 15, 2005 the Court tentatively approved the proposed settlement, conditioned upon the parties altering the
proposed settlement to comply with the Private Securities Litigation Reform Acts settlement discharge provision. The settlement does not contemplate any settlement payments by Maxygen.



If the settlement is not accepted by the requisite number of defendants or if
it is not approved by the Court, the Company intends to defend the lawsuit vigorously. The Company believes the lawsuit against Maxygen and its officers is without merit. However, the litigation is in the preliminary stage, and the Company cannot
predict its outcome. The litigation process is inherently uncertain. If the outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, the Companys business would be significantly harmed.



The Company is not currently a party to any other material
pending legal proceedings.



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



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|13. | Segment Information
|--- | -------------------



On July 1, 2004, the Company sold Verdia, the sole component of its agriculture segment, to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary
of E.I. du Pont de Nemours and Company. The operations of Verdia prior to its sale are reflected in the Companys financial statements as discontinued operations. Thus the agriculture segment data provided in earlier reports is now reflected as
discontinued operations (see Note 15). The Company has determined its reportable operating segments based upon how the business is managed and operated. The accounting policies of the segments described above are the same as those described in Note
1. Corporate administrative costs are generally allocated based on headcount.



Segment Earnings



|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|-------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | ------------------------- |  | - | ------- | -
|                                                               |  | HumanTherapeutics |         |   | Chemicals(Codexis) |   |         | Maxygen, Inc.Consolidated | 
|                                                               |  | (in thousands)    |        
|2002                                                           |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Segment loss                                                   |  | $                 | (24,391 | ) |                    | $ | (7,371  | )                         |  | $ | (31,762 | )
|Stock compensation                                             |  |                   | (6,250  | ) |                    |   |        |                           |  |   | (6,250  | )
|Amortization of intangibles                                    |  |                   | (1,144  | ) |                    |   |        |                           |  |   | (1,144  | )
|Interest income and other (expense), net                       |  |                   | 7,858   |   |                    |   | 123     |                           |  |   | 7,981   |  
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Loss applicable to common stockholders  continuing operations |  | $                 | (23,927 | ) |                    | $ | (7,248  | )                         |  | $ | (31,175 | )
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|2003                                                           |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Segment loss                                                   |  | $                 | (25,655 | ) |                    | $ | (7,279  | )                         |  | $ | (32,934 | )
|Stock compensation                                             |  |                   | (1,983  | ) |                    |   | (8      | )                         |  |   | (1,991  | )
|Amortization of intangibles                                    |  |                   | (698    | ) |                    |   |        |                           |  |   | (698    | )
|Interest income and other (expense), net                       |  |                   | 4,952   |   |                    |   | 301     |                           |  |   | 5,253   |  
|Equity in losses of minority investee                          |  |                   | (500    | ) |                    |   |        |                           |  |   | (500    | )
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Loss from continuing operations                                |  |                   | (23,884 | ) |                    |   | (6,986  | )                         |  |   | (30,870 | )
|Subsidiary preferred stock accretion                           |  |                   |        |   |                    |   | (1,279  | )                         |  |   | (1,279  | )
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Loss applicable to common stockholders  continuing operations |  | $                 | (23,884 | ) |                    | $ | (8,265  | )                         |  | $ | (32,149 | )
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|2004                                                           |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Segment loss                                                   |  | $                 | (38,113 | ) |                    | $ | (13,278 | )                         |  | $ | (51,391 | )
|Stock compensation                                             |  |                   | (325    | ) |                    |   | (30     | )                         |  |   | (355    | )
|Interest income and other (expense), net                       |  |                   | 3,943   |   |                    |   | 112     |                           |  |   | 4,055   |  
|Equity in losses of minority investee                          |  |                   | (1,395  | ) |                    |   |        |                           |  |   | (1,395  | )
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Loss from continuing operations                                |  |                   | (35,890 | ) |                    |   | (13,196 | )                         |  |   | (49,086 | )
|Subsidiary preferred stock accretion                           |  |                   |        |   |                    |   | (1,000  | )                         |  |   | (1,000  | )
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  
|Loss applicable to common stockholders  continuing operations |  | $                 | (35,890 | ) |                    | $ | (14,196 | )                         |  | $ | (50,086 | )
|                                                               |  |                   |         |   |                    |   |         |                           |  |   |         |  



2003 was the first
full year the Company tracked depreciation expense by segment. In 2003 depreciation expense for the two segments was $4,755,000 for human therapeutics and $1,295,000 for chemicals. In 2004 depreciation expense for the two segments was $4,648,000 for
human therapeutics and $1,512,000 for chemicals.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Segment Revenue



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



|                   |  |                         |        |      |   |        |  |   |       
|------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                   |  | Year Ended December 31,
|                   |  | 2002                    |        | 2003 |   | 2004  
|                   |  | (in thousands)         
|Human therapeutics |  | $                       | 20,743 |      | $ | 14,430 |  | $ | 11,555
|Chemicals          |  |                         | 7,954  |      |   | 8,425  |  |   | 4,720 
|                   |  |                         |        |      |   |        |  |   |       
|Total revenue      |  | $                       | 28,697 |      | $ | 22,855 |  | $ | 16,275
|                   |  |                         |        |      |   |        |  |   |       



Identifiable Assets and Acquisition
of Property and Equipment



The following table presents
identifiable assets for each reporting segment:



|                   |  |              |                |      |   |        
|------------------ |  | ------------ | -------------- | ---- | - | -------
|                   |  | December 31,
|                   |  | 2003         |                | 2004
|                   |  |              | (in thousands)
|Human therapeutics |  | $            | 206,455        |      | $ | 240,372
|Chemicals          |  |              | 20,298         |      |   | 22,733 
|                   |  |              |                |      |   |        
|Total assets       |  | $            | 226,753        |      | $ | 263,105
|                   |  |              |                |      |   |        



The following table
presents acquisition of property and equipment for each reporting segment:



|                   |  |                |       |      |   |      
|------------------ |  | -------------- | ----- | ---- | - | -----
|                   |  | December 31,  
|                   |  | 2003           |       | 2004
|                   |  | (in thousands)
|Human therapeutics |  | $              | 1,884 |      | $ | 1,065
|Chemicals          |  |                | 1,214 |      |   | 1,494
|                   |  |                |       |      |   |      
|Total acquisitions |  | $              | 3,098 |      | $ | 2,559
|                   |  |                |       |      |   |      



Geographic Information



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



|                        |  |                         |        |      |   |        |  |   |       
|----------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                        |  | Year Ended December 31,
|                        |  | 2002                    |        | 2003 |   | 2004  
|                        |  | (in thousands)         
|Revenues                |  |                         |        |      |   |        |  |   |       
|United States           |  | $                       | 16,542 |      | $ | 13,904 |  | $ | 12,220
|Denmark                 |  |                         | 9,259  |      |   | 5,630  |  |   | 390   
|France                  |  |                         | 1,600  |      |   | 2,082  |  |   | 2,182 
|Austria                 |  |                         |       |      |   | 192    |  |   | 1,065 
|Australia               |  |                         | 917    |      |   | 855    |  |   | 244   
|Other foreign countries |  |                         | 379    |      |   | 192    |  |   | 174   
|                        |  |                         |        |      |   |        |  |   |       
|Total revenue           |  | $                       | 28,697 |      | $ | 22,855 |  | $ | 16,275
|                        |  |                         |        |      |   |        |  |   |       



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                        |  |                |        |      |   |       
|----------------------- |  | -------------- | ------ | ---- | - | ------
|                        |  | December 31,  
|                        |  | 2003           |        | 2004
|                        |  | (in thousands)
|Long-Lived Assets       |  |                |        |      |   |       
|United States           |  | $              | 48,118 |      | $ | 48,929
|Denmark                 |  |                | 5,596  |      |   | 5,780 
|                        |  |                |        |      |   |       
|Total long-lived assets |  | $              | 53,714 |      | $ | 54,709
|                        |  |                |        |      |   |       



Major Customers



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



|                   |  |      |   |  |      |   |  |      |  
|------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                   |  | 2002 |   |  | 2003 |   |  | 2004 |  
|Human Therapeutics |  |      |   |  |      |   |  |      |  
|Partner A          |  |     |   |  | 12.2 | % |  | 35.0 | %
|Partner B          |  | 5.6  | % |  | 9.1  | % |  | 13.4 | %
|Partner C          |  | 9.2  | % |  | 11.5 | % |  | 2.2  | %
|Partner D          |  | 21.7 | % |  | 4.8  | % |  | 3.0  | %
|Partner E          |  | 18.0 | % |  | 8.8  | % |  |     |  
|                   |  |      |  
|Chemicals          |  |      |   |  |      |   |  |      |  
|Partner F          |  | 7.3  | % |  | 13.3 | % |  |     |  



|14. | Avidia Research Institute
|--- | -------------------------



On July 15, 2003, the Company and several third party investors formed Avidia Research Institute. In conjunction with its initial capitalization, the
Company contributed certain technology to Avidia and invested $500,000. During 2004, the Company provided a series of loans to Avidia in the aggregate amount of $1.4 million. This loan is scheduled to be converted into equity of Avidia upon a future
sale of Avidia equity securities. The loan has an interest rate of 3% per annum. Maxygen is not obligated to fund Avidias operating losses. The Company has an equity interest of 45.9% in Avidia based upon the voting rights of the issued and
outstanding shares of Avidias common and preferred stock. The Companys investment in Avidia is being accounted for under the equity method of accounting and the Companys share of Avidias results are recorded to the extent of
the Companys accounting basis in Avidia as a component of equity in net loss of minority investee in the Consolidated Statements of Operations. As of December 31, 2004 the Company had recorded losses equal to its investment basis.



|15. | Discontinued Operations
|--- | -----------------------



On July 1, 2004 the Company completed the sale of Verdia, its agriculture subsidiary and sole component of its agriculture segment, to Pioneer Hi-Bred
International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for $64 million in cash, before estimated income taxes and transaction costs of $1.4 million. Results of discontinued operations provided below reflect the
results of Verdia until and including July 1, 2004.



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summarized balance sheet information for the discontinued operations as of December 31, 2003 is as
follows (in thousands):



|                                       |  |                  |      
|-------------------------------------- |  | ---------------- | -----
|                                       |  | December 31,2003
|ASSETS                                 |  |                  |      
|Current assets                         |  | $                | 5,555
|Property and equipment, net            |  |                  | 935  
|Deposits and other assets              |  |                  | 826  
|                                       |  |                  |      
|Assets of discontinued operations      |  | $                | 7,316
|                                       |  |                  |      
|                                       | 
|LIABILITIES                            |  |                  |      
|Current liabilities                    |  | $                | 2,949
|Other liabilities                      |  |                  | 177  
|                                       |  |                  |      
|Liabilities of discontinued operations |  | $                | 3,126
|                                       |  |                  |      



Summary operating
results for the discontinued operations through the date of disposition are as follows (in thousands):



|                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                  |  | 2002 |        |   | 2003 |   |        | 2004 | 
|Collaborative research and development revenue                    |  | $    | 10,001 |   |      | $ | 9,933  |      |  | $ | 2,721  |  
|Collaborative research and development revenue from related party |  |      | 2,569  |   |      |   | 3,723  |      |  |   | 2,454  |  
|Grant revenue                                                     |  |      | 545    |   |      |   | 714    |      |  |   | 311    |  
|                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Total revenues                                                    |  |      | 13,115 |   |      |   | 14,370 |      |  |   | 5,486  |  
|Operating expenses:                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Research and development                                          |  |      | 12,351 |   |      |   | 12,434 |      |  |   | 6,165  |  
|General and administrative                                        |  |      | 2,319  |   |      |   | 1,240  |      |  |   | 616    |  
|                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Total operating expenses                                          |  |      | 14,670 |   |      |   | 13,674 |      |  |   | 6,781  |  
|                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Income (loss) from operations of discontinued operations          |  |      | (1,555 | ) |      |   | 696    |      |  |   | (1,295 | )
|Interest income and other, net                                    |  |      | 114    |   |      |   | 121    |      |  |   | 32     |  
|Equity in net loss of joint venture                               |  |      | (1,330 | ) |      |   | (2,403 | )    |  |   | (1,506 | )
|                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Income (loss) from discontinued operations                        |  | $    | (2,771 | ) |      | $ | (1,586 | )    |  | $ | (2,769 | )
|                                                                  |  |      |        |   |      |   |        |      |  |   |        |  



Verdias
investment in its joint venture with Delta and Pine Land Company called DeltaMax Cotton LLC in which Verdia had an equity interest of 50% as of July 1, 2004 was accounted for under the equity method of accounting. As a result of the Companys
sale of Verdia on July 1, 2004, Verdias portion of the DeltaMax loss as of July 1, 2004 is included in the income (loss) from discontinued operations in the Consolidated Statement of Operations and Verdias investment in DeltaMax as of
December 31, 2003 is included in the assets of discontinued operations in the Consolidated Balance Sheets.



|16. | Sale of Verdia
|--- | --------------



On July 1, 2004, the Company completed the sale of Verdia, its agriculture subsidiary and sole component of its agriculture segment to Pioneer Hi-Bred
International, Inc., a wholly-owned subsidiary of E.I. du Pont de



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MAXYGEN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Nemours and Company, for $64 million in cash, less estimated income taxes and transaction costs of $1.4 million. The operating results of Verdia have been
reclassified as discontinued operations for all periods presented (see Note 15). The Company has recorded a gain from the sale of Verdia as follows (in thousands):



|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Cash received from sale                       |  | $ | 64,000 |  
|Less: Basis in Verdia                         |  |   | (1,419 | )
|Less: Estimated income tax expense            |  |   | (921   | )
|Less: transaction costs:                      |  |   |        |  
|Compensation related expense                  |  |   | (325   | )
|Legal, accounting and other fees and expenses |  |   | (138   | )
|                                              |  |   |        |  
|Gain from disposal of discontinued operations |  | $ | 61,197 |  
|                                              |  |   |        |  



|17. | Guarantees and Indemnifications
|--- | -------------------------------



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



As permitted under Delaware law and in accordance with the Companys
Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Companys request in such capacity. The indemnification agreements
with the Companys officers and directors terminate upon termination of their employment, but the termination does not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount
of potential future indemnification is unlimited; however, the Companys director and officer insurance policy reduces the Companys exposure and may enable the Company to recover a portion of any future amounts paid. The Company believes
that the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2004.



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



Not applicable.



|Item 9A | CONTROLS AND PROCEDURES
|------- | -----------------------



Company management is required to perform two evaluations each quarter, and one additional evaluation each year, in connection with its disclosure controls and procedures (Disclosure Controls) and its internal control over
financial reporting (Internal Control). This Controls and Procedures section describes those evaluations, their limitations and the conclusions of Company management based on such evaluations.



Controls Evaluations.    Company management, with
the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has (i) evaluated the effectiveness of our Disclosure Controls as of December 31, 2004, (ii) assessed the effectiveness of our Internal
Control as of December 31, 2004 and (iii) evaluated whether any change in Internal Control that occurred in the most recently completed fiscal quarter has materially affected, or is reasonably likely to materially affect, our Internal Control.



CEO and CFO
Certifications.    Appearing as Exhibits 31.1 and 31.2 of this report are the certifications of our CEO and CFO that are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section
includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.



Definition of Disclosure Controls.    Disclosure
Controls are controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.



Definition of Internal
Control.    Internal Control consists of the control processes designed with the objective of providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles (GAAP) and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only
in accordance with authorizations of management and directors and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements.



Limitations on the Effectiveness of
Controls.    Our management, including our CEO and CFO, does not expect that our Disclosure Controls and Internal Control will prevent all error and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Maxygen have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The design of any system of



95



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controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Scope of the Controls Evaluation.    The CEO/CFO evaluation of our Disclosure Controls included a review of the controls
objectives and design, the controls implementation by Maxygen and the effect of the controls on the information generated for use in this report. In the course of the controls evaluation, we sought to identify errors, controls problems or acts
of fraud. Elements of our controls are also evaluated on an ongoing basis by personnel in our Finance department. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and to make modifications as necessary.
Our intent in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.



Among other matters, we sought in our evaluation to determine whether there were any significant deficiencies or material
weaknesses in our Internal Control, or whether we had identified any acts of fraud involving personnel who have a significant role in our Internal Control. This information was important both for the controls evaluation generally and because item 5
in the certifications of our CEO and CFO require that the CEO and CFO disclose that information to our Audit Committee and to our independent registered public accounting firm.



Quarterly Reports



Quarterly Evaluation of Disclosure Controls.    Based upon the controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls were effective as of December 31, 2004 to ensure that material information relating to Maxygen and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our
periodic reports are being prepared.



Quarterly Evaluation
of Changes in Internal Control.    During the most recently completed fiscal quarter there have been no significant changes in our Internal Control that has materially affected, or is reasonably likely to materially affect,
our Internal Control.



Annual Report Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002



Annual Report on Internal
Control Over Financial Reporting:    Company management is responsible for establishing and maintaining adequate Internal Control. Management assessed the effectiveness of our Internal Control as of December 31, 2004. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on the assessment using those criteria,
management believes that, as of December 31, 2004, our Internal Control was effective.



Our independent registered public accounting firm, Ernst & Young LLP, have audited the consolidated financial statements included in this annual report and have audited managements assessment of our Internal
Control as well as on the effectiveness of our Internal Control. The report on the audit of Internal Control appears on page 59 of this report and the report on the audit of the consolidated financial statements appears on page 58 of this report.



|Item 9B | OTHER INFORMATION
|------- | -----------------



There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2004 that was not reported.



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PART III



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



The information required by this item relating to our executive officers, directors and nominees, audit committee financial expert, identification of the
audit committee, changes to the procedures by which security holders may recommend board nominees, and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from our proxy statement for the 2005 Annual
Meeting of Stockholders to be filed on or before April 30, 2005.



Code of
Ethics



We have adopted a written code of ethics that
applies to our senior financial officers, including our principal executive officer, principal financial officer and principal accounting officer. We have posted the text of such code of ethics on our website (www.maxygen.com). We intend to satisfy
the disclosure requirement of Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of our code of ethics that applies to our principal executive officer, principal financial officer, or principal accounting officer by posting
such information on our website (www.maxygen.com).



|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 2005 Annual Meeting of Stockholders to be filed on or before April 30, 2005.



|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 2005 Annual Meeting of Stockholders to be filed on or before April 30, 2005.



|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 2005 Annual Meeting of Stockholders to be filed on or before April 30, 2005.



|Item 14 | PRINCIPAL ACCOUNTING FEES AND SERVICES
|------- | --------------------------------------



The information required by this item is incorporated by reference from the section captioned Ratification of Selection of Independent Registered
Public Accounting Firm contained in our proxy statement for the 2005 Annual Meeting of Stockholders to be filed on or before April 30, 2005.



Pre-Approval of Non-Audit Services



During the quarter ended December 31, 2004, the Audit Committee approved the engagement of Ernst & Young LLP to provide specified (i) audit-related
consultation regarding its financial statements, (ii) consultation in connection with the implementation of Section 404 of the Sarbanes-Oxley Act, (iii) tax services and reporting in connection with our expatriate employees, (iv) statutory account
services in Denmark, (v) access to an online accounting research tool and (vi) due diligence services to Codexis in connection with a proposed acquisition.



The Audit Committee has determined that the rendering of these non-audit services by Ernst & Young LLP is compatible with maintaining their
independence.



97



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##### Table of Contents

PART IV



|Item 15 | EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|------- | ---------------------------------------



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



Maxygen, Inc.

Investor Relations

515 Galveston Drive

Redwood City, CA 94063

(650) 298-5300



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



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



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



Financial Statements.



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Public Accounting Firm on Consolidated Financial Statements                    |  | 58  
|Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting |  | 59  
|Consolidated Balance Sheets                                                                          |  | 60  
|Consolidated Statements of Operations                                                                |  | 61  
|Consolidated Statement of Stockholders Equity                                                       |  | 62  
|Consolidated Statements of Cash Flows                                                                |  | 63  
|Notes to Consolidated Financial Statements                                                           |  | 64  



Financial Statement
Schedules.



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



Exhibits.



|              |  |                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                             
|              | 
|2.1           |  | Exchange Agreement, dated as of April 12, 2000 (the Exchange Agreement), by and among Maxygen, Inc., Maxygen Holdings Ltd.,
ProFound Pharma A/S (ProFound) and the shareholders of ProFound (1)
|              | 
|2.2           |  | Amendment No. 1 to the Exchange Agreement, dated as of July 31, 2000, by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound and the
shareholders of ProFound (1)                             
|              | 
|2.3           |  | Agreement and Plan of Merger, dated June 2, 2004, by and among Pioneer Hi-Bred International, Inc., Tango Merger Sub, Inc., Maxygen, Inc.
and Verdia, Inc. (2)                                     
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation (3)                                                                                                                                              



98



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|              |  |                                                                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                             
|3.2           |  | Amended and Restated Bylaws (3)                                                                                                                                                                                                                    
|              | 
|4.1           |  | Specimen Common Stock Certificate (Exhibit 4.1 to Amendment No. 1) (4)                                                                                                                                                                             
|              | 
|4.2           |  | Amended and Restated Registration Rights Agreement among Maxygen and certain Maxygen stockholders dated as of November 13, 2000
(5)                                                                                                                
|              | 
|4.3           |  | Loan and Security Agreement, dated February 12, 2004, by and between Lighthouse Capital Partners V, L.P. and Codexis, Inc.
(6)                                                                                                                     
|              | 
|*10.1         |  | Form of Executive Officer and Director Indemnification Agreement (Exhibit 10.7) (4)                                                                                                                                                                
|              | 
|*10.2         |  | Form of Executive Officer Change of Control Plan (Exhibit 10.1) (7)                                                                                                                                                                                
|              | 
|*10.3         |  | Form of Amendment No. 1 to Executive Officer Change of Control Plan (Exhibit 10.3) (8)                                                                                                                                                             
|              | 
|*10.4         |  | 1997 Stock Option Plan, as amended, with applicable option agreement (9)                                                                                                                                                                           
|              | 
|*10.5         |  | 1999 Nonemployee Directors Stock Option Plan, as amended, with applicable option agreement (Exhibit 10.3) (7)                                                                                                                                      
|              | 
|*10.6         |  | 1999 Employee Stock Purchase Plan, as amended (Exhibit 10.11) (5)                                                                                                                                                                                  
|              | 
|*10.7         |  | 2000 International Stock Option Plan, as amended, with applicable option agreement (10)                                                                                                                                                            
|              | 
|*10.8         |  | 2000 Non-Officer Stock Option Plan, as amended, with applicable option agreement (11)                                                                                                                                                              
|              | 
|10.9          |  | Lease between Metropolitan Life Insurance Company and Maxygen dated as of October 21, 1998 (Exhibit 10.4) (4)                                                                                                                                      
|              | 
|10.10         |  | First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan Life Insurance Company and Maxygen (Exhibit 10.5)
(4)                                                                                                           
|              | 
|10.11         |  | Second Amendment to Lease dated as of October 24, 2000 by and between Metropolitan Life Insurance Company and Maxygen (Exhibit 10.6)
(5)                                                                                                           
|              | 
|10.12         |  | Third Amendment to Lease dated October 22, 2003 by and between Metropolitan Life Insurance Company and Maxygen (12) (Exhibit
10.15)                                                                                                                
|              | 
|10.13         |  | Fourth Amendment to Lease dated December 15, 2004 by and between Metropolitan Life Insurance Company and Maxygen                                                                                                                                   
|              | 
|10.14         |  | Lease between Metropolitan Life Insurance Company and Maxygen dated December 15, 2004                                                                                                                                                              
|              | 
|10.15         |  | Lease between Metropolitan Life Insurance Company and Maxygen dated April 21, 2000 (Exhibit 10.2) (3)                                                                                                                                              
|              | 
|10.16         |  | Lease Agreement between ProFound Pharma A/S and The Science Park in Horsholm dated May 5, 2000 (13)                                                                                                                                                
|              | 
|10.17         |  | Lease between Metropolitan Life Insurance Company and Codexis, Inc. dated as of October 2003 (12) (Exhibit 10.16)                                                                                                                                  
|              | 
|10.18+        |  | Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo Group Limited dated March 14, 1997, as amended, effective
March 1, 1998 (Exhibit 10.3 to Amendment No. 2) (4)                                                     
|              | 
|10.19+        |  | 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) (4) (assigned to Codexis in March 2002)
|              | 
|10.20+        |  | Agreement between Maxygen and Gist-Brocades B.V. entered into March 15, 1999 (Exhibit 10.13 to Amendment No. 2) (4) (assigned to Codexis in
March 2002)                                                                                            



99



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|              |  |                                                                                                                               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                        
|              | 
|*10.21        |  | Description of Executive Officer Cash Bonus Program (14)                                                                      
|              | 
|*10.22        |  | Description of Goldstein Reimbursement Arrangement (15)                                                                       
|              | 
|21.1          |  | List of Subsidiaries                                                                                                          
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm                                                                      
|              | 
|24.1          |  | Power of Attorney (included on signature page)                                                                                
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|              | 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

---

|* | 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 Exhibit 2.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on July 2, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to the indicated exhibit to Maxygens Registration Statement on Form S-1, as amended (No. 333-89413) initially filed with the Securities and Exchange
Commission on October 20, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to the indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 21, 2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to Exhibit 4.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended March 31, 2004, filed with the Securities
and Exchange Commission on May 7, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to the indicated exhibit to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2001, filed with the
Securities and Exchange Commission on August 14, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference to the indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2002, filed with the
Securities and Exchange Commission on March 27, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(9) | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2002, filed with the Securities
and Exchange Commission on August 14, 2002.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



100



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|(11) | Incorporated by reference to the exhibit 99.3 to Maxygens Registration Statement on Form S-8 (No. 333-57486) filed with the Securities and Exchange Commission on March 23,
2001.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) | Incorporated by reference to indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2003, filed with the Securities and
Exchange Commission on March 12, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(13) | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended September 30, 2000, filed with the Securities
and Exchange Commission on November 14, 2000.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(14) | Incorporated by reference to Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on December 13, 2004.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(15) | Incorporated by reference to Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on February 7, 2005.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



101



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|               |  |  |  |               |  |                          |  |                        
|-------------- |  |  |  | ------------- |  | ------------------------ |  | -----------------------
|               |  |  |  | MAXYGEN, INC.
|               |  |  | 
|March 14, 2004 |  |  |  | By:           |  | /s/    RUSSELL J. HOWARD
|               |  |  |  |               |  |                          |  | 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 W. Briscoe or either of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him or her and in his or her
name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                              |  |                                                                      |  |               
|--------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|Signature                                     |  | Title                                                                |  | Date          
|                                              |  |                                                                     
|/s/    RUSSELL J.
HOWARDRussell J. Howard     |  | Chief Executive Officer and Director (Principal Executive Officer)   |  | March 14, 2005
|                                              |  |                                                                     
|/s/    LAWRENCE W.
BRISCOELawrence W.
Briscoe |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 14, 2005
|                                              |  |                                                                     
|/s/    ISAAC STEINIsaac Stein                 |  | Chairman of the Board                                                |  | March 14, 2005
|                                              |  |                                                                     
|/s/    M.R.C. GREENWOODM.R.C. Greenwood       |  | Director                                                             |  | March 14, 2005
|                                              |  |                                                                     
|/s/    ERNEST MARIOErnest Mario               |  | Director                                                             |  | March 14, 2005
|                                              |  |                                                                     
|/s/    GORDON RINGOLDGordon Ringold           |  | Director                                                             |  | March 14, 2005
|                                              |  |                                                                     
|/s/    JAMES R. SULATJames R. Sulat           |  | Director                                                             |  | March 14, 2005



102



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                             
|2.1           |  | Exchange Agreement, dated as of April 12, 2000 (the Exchange Agreement), by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound Pharma A/S (ProFound) and the
shareholders of ProFound (1)
|              | 
|2.2           |  | Amendment No. 1 to the Exchange Agreement, dated as of July 31, 2000, by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound and the shareholders of ProFound (1)                             
|              | 
|2.3           |  | Agreement and Plan of Merger, dated June 2, 2004, by and among Pioneer Hi-Bred International, Inc., Tango Merger Sub, Inc., Maxygen, Inc. and Verdia, Inc. (2)                                     
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation (3)                                                                                                                                              
|              | 
|3.2           |  | Amended and Restated Bylaws (3)                                                                                                                                                                    
|              | 
|4.1           |  | Specimen Common Stock Certificate (Exhibit 4.1 to Amendment No. 1) (4)                                                                                                                             
|              | 
|4.2           |  | Amended and Restated Registration Rights Agreement among Maxygen and certain Maxygen stockholders dated as of November 13, 2000 (5)                                                                
|              | 
|4.3           |  | Loan and Security Agreement, dated February 12, 2004, by and between Lighthouse Capital Partners V, L.P. and Codexis, Inc. (6)                                                                     
|              | 
|*10.1         |  | Form of Executive Officer and Director Indemnification Agreement (Exhibit 10.7) (4)                                                                                                                
|              | 
|*10.2         |  | Form of Executive Officer Change of Control Plan (Exhibit 10.1) (7)                                                                                                                                
|              | 
|*10.3         |  | Form of Amendment No. 1 to Executive Officer Change of Control Plan (Exhibit 10.3) (8)                                                                                                             
|              | 
|*10.4         |  | 1997 Stock Option Plan, as amended, with applicable option agreement (9)                                                                                                                           
|              | 
|*10.5         |  | 1999 Nonemployee Directors Stock Option Plan, as amended, with applicable option agreement (Exhibit 10.3) (7)                                                                                      
|              | 
|*10.6         |  | 1999 Employee Stock Purchase Plan, as amended (Exhibit 10.11) (5)                                                                                                                                  
|              | 
|*10.7         |  | 2000 International Stock Option Plan, as amended, with applicable option agreement (10)                                                                                                            
|              | 
|*10.8         |  | 2000 Non-Officer Stock Option Plan, as amended, with applicable option agreement (11)                                                                                                              
|              | 
|10.9          |  | Lease between Metropolitan Life Insurance Company and Maxygen dated as of October 21, 1998 (Exhibit 10.4) (4)                                                                                      
|              | 
|10.10         |  | First Amendment to Lease dated as of February 26, 1999 by and between Metropolitan Life Insurance Company and Maxygen (Exhibit 10.5) (4)                                                           
|              | 
|10.11         |  | Second Amendment to Lease dated as of October 24, 2000 by and between Metropolitan Life Insurance Company and Maxygen (Exhibit 10.6) (5)                                                           
|              | 
|10.12         |  | Third Amendment to Lease dated October 22, 2003 by and between Metropolitan Life Insurance Company and Maxygen (12) (Exhibit 10.15)                                                                
|              | 
|10.13         |  | Fourth Amendment to Lease dated December 15, 2004 by and between Metropolitan Life Insurance Company and Maxygen                                                                                   
|              | 
|10.14         |  | Lease between Metropolitan Life Insurance Company and Maxygen dated December 15, 2004                                                                                                              
|              | 
|10.15         |  | Lease between Metropolitan Life Insurance Company and Maxygen dated April 21, 2000 (Exhibit 10.2) (3)                                                                                              
|              | 
|10.16         |  | Lease Agreement between ProFound Pharma A/S and The Science Park in Horsholm dated May 5, 2000 (13)                                                                                                



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                             
|10.17         |  | Lease between Metropolitan Life Insurance Company and Codexis, Inc. dated as of October 2003 (12) (Exhibit 10.16)                                                                                                                                  
|              | 
|10.18+        |  | Technology Transfer Agreement among Maxygen, Affymax Technologies N.V. and Glaxo Group Limited dated March 14, 1997, as amended, effective March 1, 1998 (Exhibit 10.3 to Amendment No. 2)
(4)                                                     
|              | 
|10.19+        |  | 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) (4) (assigned to Codexis in March 2002)
|              | 
|10.20+        |  | Agreement between Maxygen and Gist-Brocades B.V. entered into March 15, 1999 (Exhibit 10.13 to Amendment No. 2) (4) (assigned to Codexis in March 2002)                                                                                            
|              | 
|*10.21        |  | Description of Executive Officer Cash Bonus Program (14)                                                                                                                                                                                           
|              | 
|*10.22        |  | Description of Goldstein Reimbursement Arrangement (15)                                                                                                                                                                                            
|              | 
|21.1          |  | List of Subsidiaries                                                                                                                                                                                                                               
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                           
|              | 
|24.1          |  | Power of Attorney (included on signature page)                                                                                                                                                                                                     
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                 
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                 
|              | 
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                     

---

|* | 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 Exhibit 2.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on July 2, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to the indicated exhibit to Maxygens Registration Statement on Form S-1, as amended (No. 333-89413) initially filed with the Securities and Exchange
Commission on October 20, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to the indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 21, 2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to Exhibit 4.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended March 31, 2004, filed with the Securities
and Exchange Commission on May 7, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to the indicated exhibit to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2001, filed with the
Securities and Exchange Commission on August 14, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(8) | Incorporated by reference to the indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2002, filed with the Securities
and Exchange Commission on March 27, 2003.
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|(9) | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2002, filed with the Securities and
Exchange Commission on August 14, 2002.
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|(10) | Incorporated by reference to exhibit 10.6 to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2001, filed with the Securities and
Exchange Commission on March 25, 2002.
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|(11) | Incorporated by reference to the exhibit 99.3 to Maxygens Registration Statement on Form S-8 (No. 333-57486) filed with the Securities and Exchange Commission on March 23,
2001.
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|(12) | Incorporated by reference to indicated exhibit to Maxygens Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2003, filed with the Securities and
Exchange Commission on March 12, 2004.
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|(13) | Incorporated by reference to exhibit 10.1 to Maxygens Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended September 30, 2000, filed with the Securities
and Exchange Commission on November 14, 2000.
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|(14) | Incorporated by reference to Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on December 13, 2004.
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|(15) | Incorporated by reference to Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on February 7, 2005.
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