<PAGE>   1


                                                                  EXHIBIT 10.2.1

                       APPLIED MOLECULAR EVOLUTION, INC.

                            2000 STOCK INCENTIVE PLAN


<PAGE>   2


                                TABLE OF CONTENTS

<TABLE>
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SECTION 1. PURPOSE..........................................................................1

SECTION 2. DEFINITIONS......................................................................1
        (a)  "Affiliate"....................................................................1
        (b)  "Award"........................................................................1
        (c)  "Board"........................................................................1
        (d)  "Change in Control"............................................................1
        (e)  "Code".........................................................................1
        (f)  "Committee"....................................................................1
        (g)  "Common-Law Employee"..........................................................2
        (h)  "Common Stock".................................................................2
        (i)  "Company"......................................................................2
        (j)  "Consultant"...................................................................2
        (k)  "Employee".....................................................................2
        (l)  "Exchange Act".................................................................2
        (m)  "Exercise Price"...............................................................2
        (n)  "Fair Market Value"............................................................2
        (o)  "Incentive Stock Option" or "ISO"..............................................3
        (p)  "Initial Public Offering" or "IPO".............................................3
        (q)  "Non-Employee Director"........................................................3
        (r)  "Nonstatutory Option" or "NSO".................................................3
        (s)  "Offeree"......................................................................3
        (t)  "Option".......................................................................3
        (u)  "Optionee".....................................................................3
        (v)  "Parent".......................................................................3
        (w)  "Participant"..................................................................3
        (x)  "Plan".........................................................................3
        (y)  "Purchase Price"...............................................................3
        (z)  "Restricted Share".............................................................3
        (aa) "Service"......................................................................3
        (bb) "Stock Award Agreement"........................................................3
        (cc) "Stock Option Agreement".......................................................4
        (dd) "Stock Purchase Agreement".....................................................4
        (ee) "Subsidiary"...................................................................4
        (ff) "10% Stockholder"..............................................................4
        (gg) "Total and Permanent Disability"...............................................4
        (hh) "W-2 Payroll"..................................................................4

SECTION 3. ADMINISTRATION...................................................................4
        (a)  Committees of the Board........................................................4
        (b)  Committee Procedures...........................................................5
        (c)  Authority of the Committee.....................................................5
        (d)  Committee Liability............................................................5

SECTION 4. ELIGIBILITY......................................................................5

SECTION 5. STOCK SUBJECT TO PLAN............................................................5
        (a)  Basic Limitation...............................................................5
        (b)  Additional Shares..............................................................5
</TABLE>


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<TABLE>
<S>                                                                                       <C>
SECTION 6. TERMS AND CONDITIONS OF GRANTS OR SALES..........................................6
        (a)  Stock Purchase Agreement.......................................................6
        (b)  Duration of Offers.............................................................6
        (c)  Purchase Price.................................................................6
        (d)  Restrictions on Transfer of Common Stock.......................................6

SECTION 7. ADDITIONAL TERMS AND CONDITIONS OF RESTRICTED SHARES.............................6
        (a)  Form and Amount of Award.......................................................6
        (b)  Exercisability.................................................................6
        (c)  Effect of Change in Control....................................................7
        (d)  Voting Rights..................................................................7

SECTION 8. TERMS AND CONDITIONS OF OPTIONS..................................................7
        (a)  Stock Option Agreement.........................................................7
        (b)  Number of Shares...............................................................7
        (c)  Exercise Price.................................................................7
        (d)  Exercisability.................................................................7
        (e)  Effect of Change in Control....................................................7
        (f)  Term...........................................................................8
        (g)  Exercise of Options on Termination of Service..................................8
        (h)  No Rights as a Stockholder.....................................................8
        (i)  Modification, Extension and Assumption of Options..............................8
        (j)  Restrictions on Transfer.......................................................8

SECTION 9. FORMS OF PAYMENT.................................................................8
        (a)  General Rule...................................................................8
        (b)  Surrender of Stock.............................................................8
        (c)  Promissory Notes...............................................................9
        (d)  Cashless Exercise..............................................................9
        (e)  Other Forms of Payment.........................................................9

SECTION 10. ADJUSTMENTS UPON CHANGES IN COMMON STOCK........................................9
        (a)  General........................................................................9
        (b)  Mergers and Consolidations.....................................................9
        (c)  Reservation of Rights.........................................................10

SECTION 11. WITHHOLDING TAXES..............................................................10
        (a)  General.......................................................................10
        (b)  Common Stock Withholding......................................................10
        (c)  Cashless Exercise/Pledge......................................................10
        (d)  Other Forms of Payment........................................................10

SECTION 12. LEGAL REQUIREMENTS.............................................................11
        (a)  Restrictions on Issuance......................................................11
        (b)  Financial Reports.............................................................11

SECTION 13. ASSIGNMENT OR TRANSFER OF AWARDS...............................................11
        (a)  General.......................................................................11
        (b)  Trusts........................................................................11

SECTION 14. NO EMPLOYMENT RIGHTS...........................................................11

SECTION 15. DURATION AND AMENDMENTS........................................................11
        (a)  Term of the Plan..............................................................11
</TABLE>


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<TABLE>
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        (b)  Right to Amend or Terminate the Plan..........................................12
        (c)  Effect of Amendment or Termination............................................12

SECTION 16. EXECUTION......................................................................12
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                        APPLIED MOLECULAR EVOLUTION, INC.

                            2000 STOCK INCENTIVE PLAN

SECTION 1. PURPOSE.

        The purpose of the Plan is to offer selected employees, directors and
consultants an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, to encourage such persons to remain
in the employ of the Company and to attract new employees with outstanding
qualifications. The Plan seeks to achieve this purpose by providing for the
direct grant or sale of Common Stock and for the grant of Options to purchase
Common Stock. Options granted under the Plan shall only include Nonstatutory
Options. This Plan is intended to satisfy Section 25102(f) of the California
Corporations Code.

SECTION 2. DEFINITIONS.

        (a) "AFFILIATE" shall mean any partner, officer, director or controlling
person of the Company.

        (b) "Award" shall mean any award of an Option, Restricted Share or other
right under the Plan.

        (c) "BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.

        (d) "CHANGE IN CONTROL" shall mean:

                (i) The consummation of a merger or consolidation of the Company
        with or into another entity or any other corporate reorganization, if
        more than 50% of the combined voting power of the continuing or
        surviving entity's securities outstanding immediately after such merger,
        consolidation or other reorganization is owned by persons who were not
        stockholders of the Company immediately prior to such merger,
        consolidation or other reorganization; or

                (ii) The sale, transfer or other disposition of all or
        substantially all of the Company's assets.

        A transaction shall not constitute a Change in Control if: (a) its sole
purpose is to change the state of the Company's incorporation, (b) its sole
purpose is to create a holding company that will be owned in substantially the
same proportions by the persons who held the Company's securities immediately
before such transaction or (c) such transaction constitutes the Company's
initial public offering.

        (e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.

        (f) "COMMITTEE" shall mean a committee consisting of one or more members
of the Board that is appointed by the Board to administer the Plan under Section
3.


                                      -1-
<PAGE>   6

        (g) "COMMON-LAW EMPLOYEE" shall mean an individual paid from W-2 Payroll
of the Company or a Subsidiary. If, during any period, the Company (or
Subsidiary, as applicable) has not treated an individual as a Common-Law
Employee and, for that reason, has not paid such individual in a manner which
results in the issuance of a Form W-2 and withheld taxes with respect to him or
her, then that individual shall not be an eligible Employee for that period,
even if any person, court or government agency determines, retroactively, that
that individual is or was a Common-Law Employee during all or any portion of
that period.

        (h) "COMMON STOCK" means the Company's common stock.

        (i) "COMPANY" shall mean Applied Molecular Evolution, Inc., a Delaware
corporation.

        (j) "CONSULTANT" shall mean an individual who performs bona fide
services to the Company, a Parent or a Subsidiary other than as an Employee or a
member of the Board.

        (k) "EMPLOYEE" shall mean (i) any individual who is a Common-Law
Employee of the Company, a Parent or a Subsidiary, (ii) a member of the Board,
including (without limitation) a Non-Employee Director, or an affiliate of a
member of the Board; (iii) a member of the board of directors of a Subsidiary,
or (iv) a Consultant.

        (l) "EXCHANGE ACT" shall mean the Securities and Exchange Act of 1934,
as amended.

        (m) "EXERCISE PRICE" shall mean the amount for which one share of Common
Stock may be purchased upon exercise of an Option, as specified by the Board in
the applicable Stock Option Agreement.

        (n) "FAIR MARKET VALUE" shall mean the market price of Common Stock,
determined by the Board as follows:

                (i) If the Shares were traded over-the-counter on the date in
        question but were not traded on the Nasdaq Stock Market or the Nasdaq
        National Market System, then the Fair Market Value shall be equal to the
        mean between the last reported representative bid and asked prices
        quoted for such date by the principal automated inter-dealer quotation
        system on which the Shares are quoted or, if the Shares are not quoted
        on any such system, by the "Pink Sheets" published by the National
        Quotation Bureau, Inc.;

                (ii) If the Shares were traded over-the-counter on the date in
        question and were traded on the Nasdaq Stock Market or the Nasdaq
        National Market System, then the Fair Market Value shall be equal to the
        last-transaction price quoted for such date by the Nasdaq Stock Market
        or the Nasdaq National Market;

                (iii) If the Shares were traded on a stock exchange on the date
        in question, then the Fair Market Value shall be equal to the closing
        price reported by the applicable composite transactions report for such
        date; and


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<PAGE>   7

                (iv) If none of the foregoing provisions is applicable, then the
        Fair Market Value shall be determined by the Board in good faith on such
        basis as it deems appropriate.

        In all cases, the determination of Fair Market Value by the Board shall
be conclusive and binding on all persons.

        (o) "INCENTIVE STOCK OPTION" OR "ISO" shall mean an incentive stock
option described in Code section 422(b).

        (p) "INITIAL PUBLIC OFFERING" or "IPO" shall mean the Company's first
underwritten offering of its Common Stock to the general public on Form S-1 (or
its equivalent) under the Securities Act of 1933, as amended.

        (q) "NON-EMPLOYEE DIRECTOR" shall mean a member of the Board who is not
a Common-Law Employee of the Company or a Subsidiary.

        (r) "NONSTATUTORY OPTION" OR "NSO" shall mean a stock option that is not
an ISO.

        (s) "OFFEREE" shall mean an individual to whom the Board has offered the
right to acquire Common Stock under the Plan (other than upon exercise of an
Option).

        (t) "OPTION" shall mean a Nonstatutory Stock Option granted under the
Plan entitling the holder to purchase Common Stock.

        (u) "OPTIONEE" shall mean an individual who holds an Option.

        (v) "PARENT" shall have the meaning set forth in Section 424(e) of the
Code.

        (w) "PARTICIPANT" shall mean an individual or estate who holds an Award.

        (x) "PLAN" shall mean this 2000 Stock Incentive Plan of Applied
Molecular Evolution, Inc.

        (y) "PURCHASE PRICE" shall mean the consideration for which one share of
Common Stock may be acquired under the Plan (other than upon exercise of an
Option) pursuant to a grant or sale under Section 6, as specified by the Board.

        (z) "RESTRICTED SHARE" shall mean a share of Common Stock sold or
granted to an eligible Employee which is nontransferable and subject to
substantial risk of forfeiture until restrictions lapse.

        (aa) "SERVICE" shall mean service as an Employee.

        (bb) "STOCK AWARD AGREEMENT" shall mean the agreement between the
Company and the recipient of a Restricted Share which contains the terms,
conditions and restrictions pertaining to such Restricted Share.


                                      -3-
<PAGE>   8

        (cc) "STOCK OPTION AGREEMENT" shall mean the agreement between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to an Option.

        (dd) "STOCK PURCHASE AGREEMENT" shall mean the agreement between the
Company and an Offeree who acquires Common Stock under the Plan (other than
pursuant to an Option) that contains the terms, conditions and restrictions
pertaining to the acquisition of such Common Stock.

        (ee) "SUBSIDIARY" shall have the meaning set forth in Section 424(f) of
the Code.

        (ff) "10% STOCKHOLDER" shall mean an individual who owns more than 10%
of the total combined voting power of all classes of outstanding stock of the
Company, its Parent or any of its Subsidiaries. For purposes of this Subsection
(ee), in determining stock ownership, the attribution rules of Section 424(d) of
the Code shall be applied. For purposes of this Subsection (ee), "outstanding
stock" shall include all stock actually issued and outstanding immediately after
the grant. "Outstanding stock" shall not include Common Stock authorized for
issuance under outstanding Options held by the Employee or by any other person.

        (gg) "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment.

        (hh) "W-2 PAYROLL" shall mean whatever mechanism or procedure that the
Company or a Subsidiary utilizes to pay any individual which results in the
issuance of Form W-2 to the individual. "W-2 Payroll" does not include any
mechanism or procedure which results in the issuance of any form other than a
Form W-2 to an individual, including, but not limited to, any Form 1099 which
may be issued to an independent contractor, an agency employee or a consultant.
Whether a mechanism or procedure qualifies as a "W-2 Payroll" shall be
determined in the absolute discretion of the Company (or Subsidiary, as
applicable), and the Company or Subsidiary determination shall be conclusive and
binding on all persons.

        SECTION 3. ADMINISTRATION.

        (a) COMMITTEES OF THE BOARD. The Plan shall be administered by the
Board. However, any or all administrative functions otherwise exercisable by the
Board may be delegated to a Committee. Members of the Committee shall serve for
such period of time as the Board may determine and shall be subject to removal
by the Board at any time. The Board may also at any time terminate the functions
of the Committee and reassume all powers and authority previously delegated to
the Committee. Any reference to the Board in the Plan shall be construed as a
reference to the Committee (if any) to whom the Board has assigned a particular
function.

        In the event that the Company's Common Stock becomes publicly traded,
the Board may appoint a Committee which, if appointed, shall be comprised solely
of two or more Non-Employee Directors (although Committee functions may be
delegated to officers to the extent the Awards relate to persons who are not
subject to the reporting requirements of Section 16 of the Exchange Act).


                                      -4-
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        (b) COMMITTEE PROCEDURES. The Board shall designate one of the members
of the Committee as chairperson. The Committee may hold meetings at such times
and places as it shall determine. The acts of a majority of the Committee
members present at meetings at which a quorum exists, or acts reduced to or
approved in writing by all Committee members, shall be valid acts of the
Committee.

        (c) AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan,
the Committee shall have full authority and discretion to take any actions it
deems necessary or advisable for the administration of the Plan. The Committee
has authority in its discretion to determine eligible Employees to whom, and the
time or times at which, Awards may be granted and the number of Shares subject
to each Award. Subject to the express provisions of the respective Award
agreements (which need not be identical) and to make all other determinations
necessary or advisable for Plan administration, the Committee has authority to
prescribe, amend and rescind rules and regulations relating to the Plan. All
decisions, interpretations and other actions of the Committee shall be final,
conclusive and binding on all parties who have an interest in the Plan or any
option or shares issued thereunder.

        (d) COMMITTEE LIABILITY. No member of the Board or the Committee will be
liable for any action or determination made in good faith by the Committee with
respect to the Plan or any Award made under the Plan.

SECTION 4. ELIGIBILITY.

        Employees shall be eligible for designation as Participants by the
Board. In addition, certain individuals, other than Employees, shall be eligible
for designation as Participants by the Board if: (i) such individual has a
preexisting personal or business relationship with the Company or any of the
Company's Affiliates, or (ii) such individual could reasonably be assumed to
have the capacity to protect his or her interests in connection with the
transaction by reason of his or her business or financial experience or, subject
to certain conditions set forth in Section 25102(f) of the California
Corporations Code, by reason of the business or financial experience of his or
her professional advisor.

SECTION 5. STOCK SUBJECT TO PLAN.

        (a) BASIC LIMITATION. The stock issuable under the Plan shall be shares
of authorized but unissued or reacquired Common Stock. The maximum number of
shares of Common Stock which may be issued under the Plan shall not exceed
___________ shares, subject to adjustment pursuant to Section 9.

        In any event, the number of Shares which are subject to Awards or other
rights outstanding at any time under the Plan shall not exceed the number of
Shares which then remain available for issuance under the Plan. The Company,
during the term of the Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.

        (b) ADDITIONAL SHARES. If any outstanding Option or other right to
acquire Common Stock for any reason expires or is canceled, forfeited or
otherwise terminated, the Common Stock allocable to the unexercised portion of
such Option or other right shall again be available for the


                                      -5-
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purposes of the Plan. If shares of Common Stock issued under the Plan are
reacquired by the Company pursuant to any right of repurchase or right of first
refusal, such shares of Common Stock shall again be available for the purposes
of the Plan.

SECTION 6. TERMS AND CONDITIONS OF GRANTS OR SALES.

        (a) STOCK PURCHASE AGREEMENT. Each grant or sale of Common Stock under
the Plan (other than upon exercise of an Option) shall be evidenced by a Stock
Purchase Agreement between the Offeree and the Company. Such grant or sale shall
be subject to all applicable terms and conditions of the Plan and may be subject
to any other terms and conditions that are not inconsistent with the Plan and
that the Board deems appropriate for inclusion in a Stock Purchase Agreement.
The provisions of the various Stock Purchase Agreements entered into under the
Plan need not be identical.

        (b) DURATION OF OFFERS. Any right to acquire Common Stock under the Plan
other than an Option shall automatically expire if not exercised by the Offeree
within thirty (30) days after the grant of such right was communicated by the
Board to the Offeree.

        (c) PURCHASE PRICE. The Purchase Price of Common Stock offered under the
Plan shall be established by the Board and set forth in the Stock Purchase
Agreement and, to the extent required by applicable law, including the
California Corporations Code or the regulations thereunder, shall not be less
than 85% of Fair Market Value (100% for 10% Stockholders). The Purchase Price
shall be payable in a form described in Section 9 or, in the discretion of the
Board, in consideration for past services rendered to the Company or for its
benefit.

        (d) RESTRICTIONS ON TRANSFER OF COMMON STOCK. No Common Stock granted or
sold under the Plan may be sold or otherwise transferred or disposed of by the
Offeree during the one hundred eighty (180) day period following the effective
date of a registration statement covering securities of the Company filed under
the Securities Act of 1933 (unless such restriction is consented to or waived by
the managing underwriter). Subject to the preceding sentence, any Common Stock
granted or sold under the Plan shall be subject to such special conditions,
rights of repurchase, rights of first refusal and other transfer restrictions as
the Board may determine. Such restrictions shall apply in addition to any
general restrictions that may apply to all holders of Common Stock.

SECTION 7. ADDITIONAL TERMS AND CONDITIONS OF RESTRICTED SHARES.

        (a) FORM AND AMOUNT OF AWARD. Each Stock Award Agreement shall specify
the number of shares of Common Stock that are subject to the Award. Restricted
Shares may be awarded in combination with NSOs and such an Award may provide
that the Restricted Shares will be forfeited in the event that the related NSOs
are exercised.

        (b) EXERCISABILITY. Each Stock Award Agreement shall specify the
conditions upon which Restricted Shares shall become vested, in full or in
installments. The exercisability of any Stock Award shall be determined by the
Board in its sole discretion.


                                      -6-
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        (c) EFFECT OF CHANGE IN CONTROL. The Board may determine at the time of
making an Award or thereafter, that such Award shall become fully vested, in
whole or in part, in the event that a Change in Control occurs with respect to
the Company.

        (d) VOTING RIGHTS. Holders of Restricted Shares awarded under the Plan
shall have the same voting, dividend and other rights as the Company's other
stockholders. A Stock Award Agreement, however, may require that the holders
invest any cash dividends received in additional Restricted Shares. Such
additional Restricted Shares shall be subject to the same conditions and
restrictions as the Award with respect to which the dividends were paid. Such
additional Restricted Shares shall not reduce the number of Shares available
under Section 5.

SECTION 8. TERMS AND CONDITIONS OF OPTIONS.

        (a) STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions that are not inconsistent
with the Plan and that the Board deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical.

        (b) NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of shares of Common Stock that are subject to the Option and shall
provide for the adjustment of such number in accordance with Section 10. The
Stock Option Agreement shall also specify that the Option is a Nonstatutory
Option.

        (c) EXERCISE PRICE. An Option's Exercise Price shall be established by
the Board and set forth in a Stock Option Agreement. The Exercise Price of a
Nonstatutory Option shall not be less than 85% of the Fair Market Value (110%
for 10% Stockholders) on the date of grant. The Exercise Price shall be payable
in a form described in Section 9. Notwithstanding the foregoing, an Option may
be granted with an exercise price lower than that set prescribed in this
paragraph if the Option grant is attributable to the issuance or assumption of
an option in a transaction to which Code section 424(a) applies.

        (d) EXERCISABILITY. Each Stock Option Agreement shall specify the date
when all or any installment of the Option is to vest or become exercisable. The
vesting of any Option shall be determined by the Board in its sole discretion. A
Stock Option Agreement may permit an Optionee to exercise an Option before it is
vested, subject to the Company's right of repurchase over any shares acquired
under the unvested portion of the Option (an "early exercise"), which right of
repurchase shall lapse at the same rate the Option would have vested had there
been no early exercise.

        (e) EFFECT OF CHANGE IN CONTROL. The Board may determine, at the time of
granting an Option or thereafter, that such Option shall become fully
exercisable as to all shares of Common Stock subject to such Option in the event
that a Change in Control occurs with respect to the Company.


                                      -7-
<PAGE>   12

        (f) TERM. The Stock Option Agreement shall specify the term of the
Option. The term shall not exceed ten (10) years from the date of grant. Subject
to the preceding sentence, the Board at its sole discretion shall determine when
an Option is to expire.

        (g) EXERCISE OF OPTIONS ON TERMINATION OF SERVICE. Each Option shall set
forth the extent to which the Optionee shall have the right to exercise the
Option following termination of the Optionee's Service with the Company and its
Subsidiaries. Such provisions shall be determined in the sole discretion of the
Board, need not be uniform among all Options issued pursuant to the Plan, and
may reflect distinctions based on the reasons for termination of Service.

        (h) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Common Stock
covered by an Option until such person becomes entitled to receive such Common
Stock by filing a notice of exercise and paying the Exercise Price pursuant to
the terms of such Option.

        (i) MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the
limitations of the Plan, the Board may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding Options (whether granted
by the Company or another issuer) in return for the grant of new Options for the
same or a different number of shares of Common Stock and at the same or a
different Exercise Price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, impair the Optionee's rights
or increase the Optionee's obligations under such Option.

        (j) RESTRICTIONS ON TRANSFER. No shares of Common Stock issued upon
exercise of an Option may be sold or otherwise transferred or disposed of by the
Optionee during the one hundred eighty (180) day period following the effective
date of a registration statement covering securities of the Company filed under
the Securities Act of 1933 (unless such restriction is consented to or waived by
the managing underwriter). Subject to the preceding sentence, any Common Stock
issued upon exercise of an Option shall be subject to such rights of repurchase,
rights of first refusal and other transfer restrictions as the Board may
determine. Such restrictions shall apply in addition to any restrictions that
may apply to holders of Common Stock generally. Any right to repurchase an
Optionee's Common Stock at the original Exercise Price upon termination of the
Optionee's Service may be exercised only within ninety (90) days after the
termination of the Optionee's Service for cash or for cancellation of
indebtedness incurred in purchasing the Common Stock.

SECTION 9. FORMS OF PAYMENT.

        (a) GENERAL RULE. The entire Purchase Price or Exercise Price shall be
payable in cash or cash equivalents acceptable to the Company at the time of
exercise or purchase, except as otherwise provided in this Section 9.

        (b) SURRENDER OF STOCK. To the extent that a Stock Option Agreement or
Stock Purchase Agreement so provides, payment may be made all or in part with
Common Stock that has already been owned by the Optionee or the Optionee's
representative for any time period specified by the Board and that are
surrendered to the Company in good form for transfer. Such


                                      -8-
<PAGE>   13

Common Stock shall be valued at Fair Market Value on the date when the new
Common Stock is purchased under the Plan.

        (c) PROMISSORY NOTES. To the extent that a Stock Option Agreement or
Stock Purchase agreement so provides, payment may be made all or in part with a
full recourse promissory note executed by the Optionee of Offeree. The interest
rate and other terms and conditions of such note shall be determined by the
Board. The Board may require that the Optionee pledge his or her Common Stock to
the Company for the purpose of securing the payment of such note. In no event
shall the stock certificate(s) representing such Common Stock be released to the
Optionee or Offeree until such note is paid in full, unless otherwise provided
in the Stock Option Agreement or Stock Purchase Agreement.

        (d) CASHLESS EXERCISE. To the extent that a Stock Option Agreement so
provides and a public market for the Common Stock exists, payment may be made
all or in part by delivery (on a form acceptable to the Board) of an irrevocable
direction to a securities broker to sell Common Stock and to deliver all or part
of the sale proceeds to the Company in payment of the aggregate Exercise Price.

        (e) OTHER FORMS OF PAYMENT. To the extent provided in the Stock Option
Agreement, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.

SECTION 10. ADJUSTMENTS UPON CHANGES IN COMMON STOCK.

        (a) GENERAL. In the event of a subdivision of the outstanding Common
Stock, a declaration of a dividend payable in Common Stock, a declaration of an
extraordinary dividend payable in a form other than Common Stock in an amount
that has a material effect on the value of Common Stock, a combination or
consolidation of the outstanding Common Stock into a lesser number of shares, a
recapitalization, a reclassification or a similar occurrence, the Board shall
make appropriate adjustments, subject to the limitations set forth in Section
10(c), in one or more of (i) the number of shares of Common Stock available for
future grants of Options or other rights to acquire Common Stock under Section
5, (ii) the number of shares of Common Stock covered by each outstanding Option
or other right to acquire Common Stock or (iii) the Exercise Price of each
outstanding Option or the Purchase Price of each other right to acquire Common
Stock.

        (b) MERGERS AND CONSOLIDATIONS. In the event that the Company is a party
to a merger or consolidation, outstanding Options or other rights to acquire
Common Stock shall be subject to the agreement of merger or reorganization. Such
agreement, without an Optionee's consent, may provide for:

                (i) The continuation of such outstanding Options by the Company
        (if the Company is the surviving corporation);

                (ii) The assumption of the Plan and such outstanding Options by
        the surviving corporation or its parent;


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<PAGE>   14

                (iii) The substitution by the surviving corporation or its
        parent of options with substantially the same terms for such outstanding
        Options; or

                (iv) The cancellation of such outstanding Options without
        payment of any consideration, provided that in such event vesting of
        Options will accelerate in full.

        (c) RESERVATION OF RIGHTS. Except as provided in this Section 10, an
Optionee or Offeree shall have no rights by reason of (i) any subdivision or
consolidation of shares of stock of any class, (ii) the payment of any dividend,
or (iii) any other increase or decrease in the number of shares of stock of any
class. Any issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number of shares
of Common Stock subject to an Option, or the number of shares subject to any
other right to acquire Common Stock and/or the Exercise Price or Purchase Price.
The grant of an Option or other right to acquire Common Stock pursuant to the
Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure, to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.

SECTION 11. WITHHOLDING TAXES.

        (a) GENERAL. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Committee for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.

        (b) COMMON STOCK WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any shares of Common Stock that
otherwise would be issued to him or her or by surrendering all or a portion of
any shares of Common Stock that he or she previously acquired. Notwithstanding
the previous sentence in this Section 11(b), the maximum amount that may be
subject to common stock withholding under this Section 11(b) shall be determined
by the Committee based upon the minimum rates of federal, state and employment
withholding applicable under the circumstances. Shares of Common Stock that are
withheld or surrendered pursuant to this Section 11 shall be valued at their
Fair Market Value on the date when taxes otherwise would be withheld in cash.
Any payment of taxes by assigning shares of Common Stock to the Company may be
subject to restrictions, including any restrictions required by rules of any
federal or state regulatory body or other authority.

        (c) CASHLESS EXERCISE/PLEDGE. The Committee may provide that if Company
shares of Common Stock are publicly traded at the time of exercise, arrangements
may be made to meet the Optionee's withholding obligation by cashless exercise
or pledge.

        (d) OTHER FORMS OF PAYMENT. The Committee may permit such other means of
tax withholding as it deems appropriate.


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<PAGE>   15

SECTION 12. LEGAL REQUIREMENTS.

        (a) RESTRICTIONS ON ISSUANCE. Common Stock shall not be issued under the
Plan unless the issuance and delivery of such Common Stock complies with (or is
exempt from) all applicable requirements of law, including (without limitation)
the Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, state securities laws and regulations, and the regulations of any
stock exchange on which the Company's securities may then be listed, and the
Company has obtained the approval or favorable ruling from any governmental
agency that the Company determines is necessary or advisable.

        (b) FINANCIAL REPORTS. To the extent required to comply with the
California Corporations Code or the regulations thereunder, not less often than
annually the Company shall furnish to Optionees and Offerees Company summary
financial information including a balance sheet regarding the Company's
financial condition and results of operations, unless such Optionees or Offerees
have duties with the Company that assure them access to equivalent information.
Such financial statements need not be audited.

SECTION 13. ASSIGNMENT OR TRANSFER OF AWARDS.

        (a) GENERAL. An Award granted under the Plan shall not be anticipated,
assigned, attached, garnished, optioned, transferred or made subject to any
creditor's process, whether voluntarily, involuntarily or by operation of law,
except as approved by the Committee.

        (b) TRUSTS. Neither this Section 13 nor any other provision of the Plan
shall preclude a Participant from transferring or assigning Restricted Shares to
(a) the trustee of a trust that is revocable by such Participant alone, both at
the time of the transfer or assignment and at all times thereafter prior to such
Participant's death, or (b) the trustee of any other trust to the extent
approved by the Committee in writing. A transfer or assignment of Restricted
Shares from such trustee to any other person than such Participant shall be
permitted only to the extent approved in advance by the Committee in writing,
and Restricted Shares held by such trustee shall be subject to all the
conditions and restrictions set forth in the Plan and in the applicable Stock
Award Agreement, as if such trustee were a party to such Agreement.

SECTION 14. NO EMPLOYMENT RIGHTS.

        No provision of the Plan, nor any Option granted or other right to
acquire Common Stock granted under the Plan, shall be construed to give any
person any right to become, to be treated as, or to remain an Employee. The
Company and its Subsidiaries reserve the right to terminate any person's Service
at any time and for any reason.

SECTION 15. DURATION AND AMENDMENTS.

        (a) TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on the date of its adoption by the Board. The Plan shall terminate
automatically ten (10) years after its adoption by the Board and may be
terminated on any earlier date pursuant to Subsection (b) below.


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<PAGE>   16

        (b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board may amend or
terminate the Plan at any time. Rights under any Option granted or other right
to acquire Common Stock granted before amendment of the Plan shall not be
materially impaired by any amendment or termination, except with consent of the
Optionee or Offeree.

        (c) EFFECT OF AMENDMENT OR TERMINATION. No Common Stock shall be issued
or sold under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Common Stock previously issued or Option
previously granted under the Plan.

SECTION 16. EXECUTION.

        To record the adoption of the Plan, the Company has caused its
authorized officer to execute the same.

                                            APPLIED MOLECULAR EVOLUTION, INC.



                                            By
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                                            Title
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