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                                                                     EXHIBIT 4.2

                       AMENDMENT NO. 1 TO RIGHTS AGREEMENT

        THIS AMENDMENT NO. 1 (this "Amendment"), dated as of November 4, 2002,
to the Rights Agreement, dated as of May 10, 2001 (the "Rights Agreement"),
between Applied Molecular Evolution, Inc., a Delaware corporation (the
"Company"), and EquiServe Trust Company, N.A., as Rights Agent (the "Rights
Agent"), is made with reference to the following facts:

        A. The Company and the Rights Agent have heretofore entered into the
Rights Agreement. Pursuant to Section 27 of the Rights Agreement, the Company
and the Rights Agent may, from time to time, supplement or amend the Rights
Agreement in accordance with the provisions of such Section.

        B. The Board of Directors of the Company has determined that it is in
the best interests of the Company to amend the Rights Agreement in certain
respects.

        NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements set forth herein, the parties hereto agree as follows:

        1. Subsection 1(a)(ii) of the Rights Agreement is hereby amended by
adding, after clause D, the following clauses:

        or (E) William D. Huse, M.D., Ph.D. ("Huse"), or any Affiliate or
        Associate thereof, as a result of the acquisition by Huse of up to 17.5%
        of the shares of Common Stock of the Company due to the issuance of
        compensatory stock options, or the issuance of Common Stock on the
        exercise thereof, previously or subsequently granted under agreements
        approved by the Company's Board of Directors pursuant to stock option
        plans approved by the stockholders of the Company, or (F) BVF Partners
        L.P. ("BVF"), or any Affiliate or Associate thereof, as a result of the
        acquisition by BVF and its Affiliates and Associates of up to an
        aggregate of 15.8% of the shares of Common Stock of the Company;

        2. The first sentence of Section 3(a) of the Rights Agreement is hereby
amended by adding the following to the end of such sentence:

                ; provided, however, that in no event shall a Distribution Date
                be deemed to occur as a result of (i) the acquisition by Huse of
                up to 17.5% of the shares of Common Stock of the Company due to
                the issuance of compensatory stock options, or the issuance of
                Common Stock on the exercise thereof, previously or subsequently
                granted under agreements approved by the Company's Board of
                Directors pursuant to stock option plans approved by the
                stockholders of the Company or (ii) the acquisition by BVF and
                its Affiliates and Associates of up to an aggregate of 15.8% of
                the shares of Common Stock of the Company.

        3. No "Stock Acquisition Date" shall be deemed to occur under the Rights
Agreement as a result of (i) the acquisition by Huse of up to 17.5% of the
shares of Common Stock of the Company or (ii) the acquisition by BVF and its
Affiliates and Associates of up to an aggregate of 15.8% of the shares of Common
Stock of the Company.

        4. Section 22 of the Rights Agreement is hereby amended by adding the
following sentence after the first sentence:

        In the event the transfer agency relationship in effect between the
        Company and the Rights Agent terminates, the Rights Agent will be deemed
        to resign automatically on the effective date of such termination; and
        any required notice will be sent by the Company.

        5. The Rights Agreement is hereby amended by adding Section 35 which
shall read in its entirety as follows:

        Force Majeure. Notwithstanding anything to the contrary contained
        herein, Rights Agent shall not be liable for any delays or failures in
        performance resulting from acts beyond its reasonable control including,
        without limitation, acts of God, terrorist acts, shortage of supply,
        breakdowns or malfunctions, interruptions or malfunction of computer
        facilities, or loss of data due to power failures or mechanical
        difficulties with information storage or retrieval systems, labor
        difficulties, war, or civil unrest.

                                      -1-
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        6. All amendments made to the Rights Agreement in this Amendment shall
be deemed to apply retroactively as well as prospectively.

        7. This Amendment shall be governed by and construed in accordance with
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with all laws of such State applicable to contracts to
be made and performed entirely within such State.

        8. This Amendment may be executed in counterparts, each of which shall
be an original, but such counterparts shall together constitute one and the same
instrument.

              [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                      -2-
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        IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested, all as of the date and year first above written.

Attest:                                 APPLIED MOLECULAR EVOLUTION, INC.

By:  /s/ Lawrence E. Bloch              By: /s/ William D. Huse
   -------------------------------         -------------------------------------

Title:  Chief Financial Officer         Title:  Chief Executive Officer
      ----------------------------            ----------------------------------

Attest:                                 EQUISERVE TRUST COMPANY, N.A.

By:  /s/ Gregory Veliotis               By:  /s/ Joshua P. McGinn
   -------------------------------         -------------------------------------

Title:  Account Manager                 Title: Senior Account Manager
      ----------------------------            ----------------------------------

                                      -3-<PAGE>

                                                                   Exhibit 10.28

June 7, 2002

William L. Respess, Ph.D., J.D.
[HOME ADDRESS]

Dear Larry,

I am pleased to present to you this letter agreement which confirms the terms of
your employment with Applied Molecular Evolution, Inc. ("AME").

1. POSITION AND START DATE. Your position with AME will be Vice President and
General Counsel reporting directly to the Chief Executive Officer of AME. Your
employment start date will be July 1, 2002.

2. COMPENSATION.

      (a) SALARY. The offer includes a starting monthly salary of $22,916.67,
which is equivalent to $275,000 annually, subject to regular deductions and tax
withholdings. You will be eligible for consideration for annual
performance-based salary increases in the discretion of the Board of Directors
of AME.

      (b) STOCK OPTION. You will also receive a nonqualified stock option under
the AME 2001 Stock Incentive Plan to purchase up to 180,000 shares of the common
stock of AME which provides for vesting over a four year period with a six-month
cliff ("Stock Option"). The grant price will be equal to one hundred percent
(100%) of the Fair Market Value of a share of AME common stock on the close of
business on the date of grant, which will be the first full day of employment at
AME. You will be allowed to exercise the vested portion of the Stock Option for
10 years from the date of the grant, and receive accelerated vesting upon a
change in control as provided in your Stock Option agreement. The terms of the
Stock Option shall be as set forth in the attached stock option agreement form
and the AME 2001 Stock Incentive Plan except as otherwise provided in this
letter agreement.

      (c) ADDITIONAL INCENTIVE COMPENSATION. You will also be eligible for
annual performance-based stock option grants and cash bonuses as determined in
the discretion of the Board of Directors of AME.

      (d) BENEFITS AND VACATION. As an employee of AME, you will receive
employer-paid medical, dental, life/AD&D, short and long-term disability
insurance benefits under the terms of the AME employee benefit plans. You will
also be eligible to enroll in AME's 401(k), Flexible Benefits and Employee Stock
Purchase plans during any enrollment period following employment. Additionally
you will accrue four weeks of vacation each year of employment.

3. SEVERANCE RIGHTS. In the event of the termination of your employment by AME
for any reason except for "Cause," you will immediately receive accelerated
vesting of 50% of your unvested option shares of your initial grant, and you
will receive pay equivalent to six months of your base salary and six months of
AME's contribution towards your medical benefits. In addition, this same
severance package will be available if you terminate your employment for "Good
Reason."

      Solely for purposes of this employment agreement and your initial Stock
Option agreement, the term "Cause" shall mean any act which violates this
agreement or the employment policies of AME or any willful misconduct by you
which may result in harm to AME or its employees, directors or customers, and
the term "Good Reason" shall mean a material reduction (which is not corrected
by AME after 30 days notice by you to AME) in your duties, reduction in
compensation except as part of, and at the same percentage as, an across the
board

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reduction in compensation of the senior management team and relocation of your
office more than 30 miles from your original place of employment with AME.

4. TERMS OF EMPLOYMENT. Your employment with AME will be subject to AME's
general employment policies (including its insider trading policy) and is
at-will. In other words, either you or AME can terminate your employment at any
time for any reason, with or without cause and with or without notice. This term
of employment is not subject to change or modification of any kind except if in
writing and signed by you and the Chief Executive Officer of AME.

5. CONDITIONS FOR EMPLOYMENT. As a pre-condition of your employment, you will be
required to sign a copy of our Proprietary Information and Inventions Agreement.
Two copies of this agreement are attached for your review and signature. Please
return both copies and subsequently, one copy will be returned to you after they
have been signed by AME's Chief Executive Officer. Also, it should be noted that
it is AME's policy to respect fully proprietary and/or confidential information
of your previous employers. No employee is expected to disclose, or is allowed
to use for AME's purposes, any confidential or proprietary information he or she
may have acquired as a result of previous employment. In addition, to conform
with the Immigration Reform and Control Act of 1986, please bring with you on
your start date the original of either one of the documents noted in List A, or
one document from List B and one document from List C from the Employment
Eligibility Verification (I-9), attached.

I am pleased to present this employment agreement to you. Please sign and return
the attached copy of this letter as soon as possible. Once signed by you, this
letter and your Stock Option agreement will constitute the complete agreement
between you and AME regarding employment matters and will supersede any and all
prior written or oral agreements or understanding on these matters.

I am confident that you will make significant contributions to AME's efforts and
that you will enjoy the rewards of working with our senior management team to
help AME reach its full potential. Finally, please feel free to contact Sarah
Novicki or myself if you have any questions or concerns regarding any of the
above information and/or if you would like additional information on AME's
compensation and benefits package.

Sincerely,

/s/ WILLIAM D. HUSE
---------------------------------------
William D. Huse, M.D., Ph.D.
President and Chief Executive Officer

Attachments:   Two copies of Proprietary Information and Inventions Agreement
               INS Form I-9

Accepted and agreed:

Signature: /s/ WILLIAM L. RESPESS
          -------------------------------------------------
               William L. Respess

Date:  July 1, 2002
     ------------------------------------------------------

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