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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission file number 000-28401

MAXYGEN, INC.

(Exact name of registrant as specified in its charter)

515 Galveston Drive

Redwood City, California 94063

(Address of principal executive offices)

(650) 298-5300

Registrant’s telephone number, including area code:

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

None

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

Common Stock, par value $0.0001 per share

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, there were 34,767,281 shares of the registrant’s common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued as of that date. The aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq National Stock Market as of that date, was approximately $237,183,051. Shares of common stock held by each executive officer and director and by each person who owns 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 29, 2004, there were 34,979,228 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits filed with the registrant’s prior annual reports, quarterly reports, registration statements and current reports are incorporated by reference into Item 15(c) of this report.

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

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:

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 27 to 38 should be considered carefully in evaluating us and our business.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. 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 other industries through our subsidiaries in agriculture (Verdia) and chemicals (Codexis). 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; Aventis Pasteur in novel vaccines; InterMune in next generation interferon gamma therapies; ALK-Abelló in allergy; the International AIDS Vaccine Initiative (IAVI) in HIV; Eli Lilly, Pfizer and DSM in pharmaceutical manufacturing; and Shearwater Corporation (a subsidiary of Nektar Therapeutics) in protein pharmaceutical PEGylation technologies. Additionally, we have a range of other strategic alliances in industrial applications, including with Novozymes, DuPont, Syngenta, Rio Tinto, Chevron, Sandoz, Cargill and Cargill-Dow. We also have received funding from U.S. government 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.

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We will 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. Verdia also has seven potential products in crop development and testing with its partners.

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, Maxygen Holdings Ltd. and Verdia, Inc., as well as our majority-owned subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.

Market Opportunity

We have a platform of proprietary technologies that helps allow us to integrate the powerful tools available in the biotechnology industry to develop novel and improved products for human therapeutics and industrial applications. We 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. Verdia also has seven potential products in crop development and testing with its partners. Our target markets include protein pharmaceuticals, vaccines, chemicals and agriculture. 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 the vaccine business areas.

Our primary focus, the therapeutic protein pharmaceutical market, represents a large and growing opportunity. In 2002, worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $29 billion. Protein pharmaceutical products, such as alpha interferon and granulocyte colony stimulating factor, 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 in 2001 exceeded $5.8 billion and are expected to approach $10 billion by 2006. This dramatic growth in the vaccine market is expected to be driven by the anticipated success of therapeutic vaccines and the development of novel vaccines that address significant unmet clinical needs.

Industrial Applications.    The industrial application markets of chemicals and agriculture offer attractive market opportunities for our subsidiaries, Codexis and Verdia.

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.

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An additional $200 billion in sales has been identified as potentially addressable by biological approaches within the next 10-20 years. In our chemicals business (Codexis), we are focused on developing novel biocatalytic processes that increase yields and decrease manufacturing costs for multiple currently marketed products. In particular we are focused on developing proprietary catalysts and processes for the production of several currently marketed pharmaceutical products.

The agricultural biotechnology seed market was estimated at approximately $3.7 billion in sales in 2002. In 2003, the global market value of biotechnology crops is estimated to be $4.2 billion. It is expected to grow to approximately $5.8 billion in sales by 2007 and to $10-15 billion in sales by 2010. Biotechnology crops, first introduced to the market in 1996, have been adopted rapidly by farmers and were planted on approximately 145 million acres worldwide in 2002 and 167 million acres in 2003. In our agriculture business (Verdia), we are primarily applying our technologies to potentially increase crop yield, including through insect and herbicide resistance.

Uses and Limitations of Genes as Products

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

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

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

The biotechnology industry has used two 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

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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 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, chemicals and agriculture. We have also developed expertise in other technologies that can be applied to optimize protein drugs, in particular directed conjugation technologies. These include rationale approaches to glycosylation and PEGylation of proteins. 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.

The Maxygen Strategy

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

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

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

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

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

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

Since 1997 we have entered into over 20 strategic collaborations and several proof of principle collaborations with commercial entities and have received ten grants from U.S. government agencies and philanthropic organizations. Since inception we have received $144.9 million in funding from our collaborators and from government grants, which includes $6.3 million of deferred revenue to be recognized over approximately the next two years. Approximately $115.1 million was received from our collaborators and $29.8 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, 2003 we had total committed funding of approximately $25.0 million remaining to be received over approximately the next two years. Potential milestone payments from our existing collaborations could exceed $500 million based on the accomplishment of specific performance criteria. We are entitled to receive royalties on any product sales generated from these collaborations.

In 2003, we were successful in achieving most of our corporate goals. In May 2003, we formed a broad alliance with Roche to develop novel type-1 interferon alphas for a wide range of diseases. 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 in collaboration with Roche; an optimized interferon gamma to treat idiopathic pulmonary fibrosis in collaboration with InterMune; and two internal product candidates, an optimized interferon beta to treat multiple sclerosis and an undisclosed optimized protein pharmaceutical to treat myelosuppression. In addition to these four human therapeutic product candidates, we have two potential products in development for which we are actively seeking outside funding for continued development; a therapeutic colon cancer vaccine and a preventative vaccine for Dengue hemorrhagic fever.

Codexis, our chemicals subsidiary, and Verdia, our agriculture subsidiary, continued to grow their businesses in 2003. Codexis is owned by a combination of Maxygen (57%) and independent investors, and is independently capitalized. Maxygen owns 100% of Verdia, which has been able to develop its business with modest cash investment by Maxygen. In 2003, Codexis established two new product development collaborations, with Sandoz and with Cargill, and extended its alliance with Rio Tinto. In addition, Codexis’ partner Novozymes launched two new products that had been developed using our MolecularBreeding directed evolution platform. Codexis now has over 19 potential products and processes in development with partners and in its own research and development pipeline. In addition, Codexis has five processes now operating at commercial scale, each process generating royalty payments. Verdia has seven partnered products in development.

In 2003, we had 26 additional U.S. patents issue and eight additional foreign patents granted bringing the total number of patents owned or licensed by us as of December 31, 2003 to 178. We also have over 600 patent applications pending worldwide.

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Current Fields of Application

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

Human Therapeutics

Our human therapeutics business, consisting of protein pharmaceuticals, prophylactic vaccines and therapeutic vaccines, presents us with opportunities in a wide variety of disease indications for which there is a significant unmet medical need for more efficacious (or effective) treatments.

Our primary focus is on protein therapeutics with limited vaccine activities 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 2002 of $29 billion, 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 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.

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

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 and safer protein

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pharmaceuticals that help address the limitations of current protein pharmaceuticals as well those 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, is now the market leader with sales of over $8 billion in 2002.

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 currently building internal pre-clinical and clinical capabilities and establishing relationships with contract research organizations to allow us to move multiple products through the approval processes in the United States, Europe, and other important markets. In parallel, we are working with pharmaceutical companies to develop, manufacture and commercialize biopharmaceutical candidates made using our technologies. By collaborating with leading pharmaceutical companies and creating better versions of proven protein therapeutics we believe that we can maximize our return and decrease our development risk.

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:

Consistent with this strategy we have recently intensified our internal research and development focus on the interferon proteins. Interferons are a group of naturally occurring proteins that help to regulate the human immune system through a variety of different activities. There are several known categories of human interferon; alpha and beta, which are called type 1 interferons; and interferon gamma, a type 2 interferon. Type 1 interferons are currently approved and marketed in a broad range of indications including hepatitis C, certain cancers and multiple sclerosis. Total worldwide sales for these indications were in excess of $5 billion in 2002 (includes ribavarin sales). The large and growing market opportunity, and efficacy limitations, delivery problems and significant side effects of current interferon therapy presents an attractive opportunity for us to use our proprietary technology to create improved interferon drugs. Interferons optimized in this way could expand the market considerably.

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

Products/Pipeline.    At present, we have eight active programs aimed at improving therapeutic proteins, many of which are next generation versions of successfully marketed products. Four of those potential products are in pre-clinical development.

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Lead Products in Our Protein Pharmaceutical Pipeline

Potential Products in Research and Development.

Maxy-Beta:  An engineered IFN-beta for the treatment of multiple sclerosis that has superior pharmacokinetics and pharmacodynamics compared to currently approved products and is targeted to be a more convenient and efficacious drug.

Maxy-Gamma:  An engineered IFN-gamma that has a superior pharmacokinetics and pharmacodynamics profile as compared to Actimmune (the approved IFN-gamma product marketed by InterMune) and is targeted to be a more convenient and efficacious drug for the treatment of fibrotic disease. See also the description of the InterMune alliance below under “Protein Pharmaceutical Alliances”.

Maxy-996:  An engineered version of an undisclosed protein factor for the treatment of myelosuppression associated with cancer chemotherapy that is more efficacious than currently approved drugs.

Maxy-Alpha:  A series of engineered IFN-alpha molecules with modified and more potent activities than currently approved products and that are targeted to be a more efficacious treatment for hepatitis. See also the description of the Roche alliance below under “Protein Pharmaceutical Alliances”.

Maxy-20:  An engineered undisclosed protein therapeutic for the treatment of hemophilia and trauma with an improved mechanism of action that is targeted to be more efficacious and convenient than existing drugs.

Maxy-30:  An engineered B7.1 receptor protein with a modified mechanism of action that is targeted to be improved and more potent than current biologic therapies for the treatment of autoimmune disease.

Maxy-60:  An engineered undisclosed protein with an improved mechanism of action for the treatment of severe sepsis.

Maxy-70:  An engineered undisclosed protein improved in activity and in pharmacologic half-life for the treatment of obesity and diabetes.

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

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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.

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 HBV and HCV, 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.

The Interferon Alpha Market

Total global interferon alpha sales (including ribavirin) for all indications including treatment of hepatitis B and C and several cancers were in excess of $2.9 billion in 2002.

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 is to develop a next-generation Actimmune with enhanced pharmacokinetics and a less-frequent dosing regime. Actimmune (Interferon gamma-1b), is currently being marketed by InterMune in the United States for the treatment of chronic granulomatous disease (CGD) and severe, malignant osteopetrosis. InterMune is continuing the development of Actimmune by conducting several advanced stage clinical trials, including a Phase III trial for the treatment of idiopathic pulmonary fibrosis (IPF) and a Phase III trial for ovarian cancer. Under the terms of the agreement, InterMune has taken forward into preclinical development product candidates created by us. 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.

Lundbeck.    In September 2000, we entered into a collaborative research and development agreement with H. Lundbeck A/S (“Lundbeck”), to develop an improved interferon beta pharmaceutical product that could be

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used for central nervous system diseases, including multiple sclerosis. Although the optimized interferon beta developed within the collaboration met all of the alliance’s pre-established goals for commercial attributes in pre-clinical testing, and the parties enjoyed a productive collaboration, as a result of the strategic prioritization of Lundbeck’s portfolio, and our growing focus and expertise in the development of type 1 interferons, on October 24, 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. Lundbeck continues to retain a financial interest in the improved interferon beta product candidate.

Vaccines

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

Market Opportunity.    Worldwide sales of all vaccines in 2001 exceeded $5.8 billion and are expected to approach $10 billion by 2006. 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 was estimated to have had 2002 sales of over $2 billion.

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

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

Our vaccine business activities have been built primarily through grant funding of more than $25 million from the U.S. government. This funding has 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.

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

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overcome the limitations of traditional vaccine development. This may enable us to address both the treatment and prevention of a wide variety of diseases including cancer, allergy, autoimmune disease and infectious diseases such as AIDS and hepatitis.

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

Examples of Potential Products in Our Vaccine Pipeline

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

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 inapparent infection to severe neurological consequences including death.

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

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

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ALK-Abelló.    In February 2001, we established a three-year collaboration with ALK-Abelló A/S, a wholly-owned subsidiary of Chr. Hansen Holding A/S, to research and develop novel recombinant therapeutics for the treatment of specific allergies. We are collaborating with ALK-Abelló to create therapies for treating specific allergies, including allergies to house dust mites and grasses, which are the cause of many common allergies. ALK-Abelló will receive exclusive worldwide rights to commercialize all recombinant human therapeutics developed in the collaboration. Under the terms of the collaboration, we have received license fees, technology access fees and research and development. We also may receive milestone payments based on clinical trials and commercial sales. We are also entitled to receive royalties on any product sales. The funded research term of this collaboration ended on February 8, 2004.

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 on February 16, 2004.

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

Karolinska Institute.    In July 2000, we initiated a program with the Karolinska Institute for the development of novel allergy immunotherapeutics. Under the agreement, we used our proprietary technologies to generate novel recombinant allergens for the treatment and prevention of certain common allergic conditions that the Karolinska Institute helped screen using sera and lymphocytes from allergic patients. We retain commercialization rights without any future financial obligation to the Karolinska Institute for any application of potential allergy products.

Industrial Applications

Chemicals—Codexis, Inc.

Our chemicals business is operated through our majority-owned subsidiary Codexis, Inc. Codexis was incorporated in January 2002, and 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.

Codexis is dedicated to becoming a leader in providing high-value chemical products and services to the worldwide life science and fine chemical industries. In particular Codexis is focused on developing proprietary catalysts and processes for the production of pharmaceutical products 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 where $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 were in part due to pricing pressure from generic competition and a changing regulatory environment. Increases in cost

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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. Some examples of existing biologically-based chemical processes in the non-pharmaceutical market are listed below:

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 MolecularBreeding directed evolution are potentially able to overcome such shortcomings.

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.

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

MolecularBreeding directed evolution 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:

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.

Technology Platform.    Codexis is focused on improving existing chemical processes and creating novel processes for the manufacturing of specialty and fine chemical products. In particular, Codexis is focused on developing proprietary catalysts and processes for the production of pharmaceutical products. Codexis’ set of proprietary technologies 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 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:

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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.

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.

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

Validated Applications in Chemicals

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.

Sandoz.    In October of 2003, Codexis and Sandoz entered into a research collaboration to develop an improved synthesis of one of Sandoz key fermented 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 April of 2003, Codexis 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 eligible for milestone and royalty payments from products commercialized by Cargill.

Rio Tinto.    In February of 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,

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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. The technology, if successful, may have broad applicability to multiple billion-dollar industries. Increased efficiency could play a significant role in the reduction of CO₂ emissions. In connection with the collaboration, we have received research and funding payments and technology advancement fees. Codexis is entitled to receive future research and funding payments and technology advancement fees. Codexis and Rio Tinto will 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.

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 has provided and will continue to provide research funding; Codexis is eligible to receive research and commercialization milestone payments.

Cargill Dow.    In March 2002, we established a collaboration with Cargill Dow LLC, to research and develop a novel process for the production of lactic acid. The goal of the collaboration is to further improve Cargill Dow’s novel low-cost process for the production of lactic acid from natural sugars derived from annually renewable resources, such as corn. Under the terms of the collaboration, we received technology access payments and research and development funding, and may receive research and commercialization milestones. Codexis is also eligible 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 collaboration was assigned to Codexis from Maxygen in connection with its capitalization in March 2002.

Chevron.    In October 2000, we entered into a three-year collaboration with Chevron Research and Technology Co. to develop novel bioprocesses for specific petrochemical products. The initial area of focus is to develop a biocatalytic process for the conversion of methane to methanol. Chevron will have commercialization rights in exchange for license fees, technology access fees, research funding, success-based milestones, annual fees and product royalties. This collaboration was assigned to Codexis from Maxygen in connection with its capitalization in March 2002. The funded research term of this collaboration ended in January 2004.

Pfizer.    In September 2000, we extended a May 1998 agreement with Pfizer Inc. in the area of biochemical manufacturing of a specific pharmaceutical product. Under the 1998 agreement, we improved the selectivity of the biosynthetic pathway that is critical to the manufacture of Pfizer’s product, and delivered an improved pathway that is currently in commercial operation at Pfizer. In the expanded collaboration, commercial terms were agreed upon for the improved process, with success earning 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 we announced that we had received our 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.

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

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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.

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

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

Agriculture—Verdia, Inc.

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

Verdia is dedicated to becoming a global leader in providing proprietary product solutions to important commercial problems in plant-based businesses through the application of advanced DNA breeding methods. Verdia is primarily applying its technologies to potentially increase crop yield, including through insect and herbicide resistance.

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Market Opportunity.    The agricultural biotechnology seed market was estimated at approximately $3.7 billion in sales in 2002. In 2003, the global market value of biotechnology crops is estimated to be $4.2 billion. It is expected to grow to approximately $5.8 billion in sales by 2007 and to $10-15 billion in sales by 2010. Biotechnology crops, first introduced to the market in 1996, have been adopted rapidly by farmers and were planted on approximately 145 million acres worldwide in 2002 and 167 million acres in 2003. Adoption rates for transgenic crops are the highest for any new technology in agriculture. Biotechnology crops create value by reducing farmer costs, simplifying farming systems and improving environmental sustainability through decreased use of conventional pesticides. Some examples of existing biotechnology-based products, the utilization of transgenic crops relative to crop protection chemicals and an overview of the market potential for transgenic crops are listed below:

Global Acreage of Transgenic Crops

Global Crop Protection Market: by Product Group

Global Transgenic Agriculture Market: by Crop

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

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for nutraceutical and pharmaceutical products. We believe our technology platform can be used to create numerous commercial opportunities in crop protection and plant quality traits.

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

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

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

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

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

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

Agriculture Alliances

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

Syngenta.    In June 1999, we entered into a five-year strategic collaboration with Zeneca Limited, a wholly-owned subsidiary of AstraZeneca plc, now known as Syngenta, to improve the yield and quality of several of Syngenta’s strategic crops. In November 2002 the collaboration was extended for a further two years, until March 2006. We have received and are entitled to receive research and development funding as well as license fees, milestone payments based on field trials, regulatory approval and commercial sales and royalties on any

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product sales. In 2001, two agriculture product candidates from the collaboration were advanced into development at Syngenta. This collaboration was assigned to Verdia in connection with its capitalization in March 2002.

DuPont.    In December 1998, we entered into a five-year strategic collaboration with Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. duPont de Nemours and Company, to utilize our technologies to generate new gene variants for use in the development of specific crop protection and quality grain traits in corn, soybeans and certain other crops. In January 2004, the collaboration was extended while a potential renewal of the collaboration is being negotiated. We have received research and development funding as well as license fees and success-based milestone payments and are entitled to receive milestones based on regulatory approval and commercial sales and royalties on product sales. We currently have one agricultural product candidate from the collaboration in development at DuPont. This collaboration was assigned to Verdia in connection with its capitalization in March 2002.

Maxygen’s Technologies

Evolution and DNA

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

The physical characteristics of an organism are determined by genetic information inherited from the previous generation. 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.

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Classical Breeding and Its Limitations

Without any knowledge of the genetic basis of evolution, humans have been breeding crops and animals for over 4,000 years in the search for better physical characteristics. All of the domestic breeds of farm animals and horses, cereal crops, fruits, vegetables, crops for fiber, household pets, most ornamental flowers and many other species represent the results of many generations of selective breeding by humans. In all these cases, humans have cross-bred crops or animals with the most desired physical characteristics to produce improvements in the next generation. For example, modern corn now has a dramatically higher yield than the wild strain of corn, which produced very small amounts of grain. This improvement probably began with ancient Inca farmers continually selecting, breeding and propagating the most robust seed corn. This is known as classical breeding.

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

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

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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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:

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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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 10.17), we were assigned all rights to the patents, applications and know-how related to our MolecularBreeding directed evolution platform. 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 including 77 issued 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 100 pending U.S. patent applications and over 200 pending foreign and international counterpart applications relating to our MolecularBreeding directed evolution platform and specialized screening technologies, and the application of these technologies to diverse industries including agriculture, protein pharmaceuticals, vaccines, gene therapy and chemicals.

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

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

In addition to the patents that we own directly, we have also exclusively licensed patent rights and technology for specific uses from Novozymes, the California Institute of Technology (Caltech), the University of Washington, 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, 34 U.S. pending patent applications and over 100 additional international or foreign counterpart applications.

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

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

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

Competition

Any products that we develop through our technologies will compete in highly competitive markets. In the protein pharmaceuticals field we face competition from large pharmaceutical and biopharmaceutical companies such as Eli Lilly and Company, 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. In the agriculture field, Verdia faces competition from large agribusinesses, such as Monsanto Company and DowAgroScience and from smaller biotechnology companies such as Paradigm Genetics.

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

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.

Employees

As of January 31, 2004 we had 271 employees, 97 of whom hold Ph.D., Ph.D. equivalent or M.D. degrees and 209 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.

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RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

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

We have incurred net losses since our inception, including a loss applicable to common stockholders of approximately $45.0 million in 2001, $33.9 million in 2002 and $33.7 million in 2003. As of December 31, 2003, we had an accumulated deficit of approximately $195.1 million. We expect to have 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 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.

We Need to Contain Costs in Order to Achieve Profitability.

We are continuing our efforts to contain costs and reduce our expense structure. We believe strict cost containment and expense reductions in the near term are essential if our current funds are to be sufficient to allow us to achieve future profitability. We assess market conditions on an ongoing basis and plan to take appropriate actions as required. 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.

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:

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

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or further deteriorate, there could be a material adverse impact on our financial position, revenues, results of operations and cash flow.

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. 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 products may not be commercialized.

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

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

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

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

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.

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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. The current difficult economic climate means that the current ability of biotechnology companies to raise capital is severely limited, particularly companies such as Maxygen without human therapeutic product 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.

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

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

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

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

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

Codexis operates as an independent subsidiary of Maxygen. While we currently own 57% of Codexis, our representatives do not constitute a majority of the board of directors and thus we do not have control of the operating and other decisions of Codexis. The interests of Codexis and its stockholders may not always coincide with our interests or the interests of our stockholders. Since Maxygen is currently required to consolidate the financial statements of Codexis with its own financial statements, Codexis may enter into agreements or conduct its operations in a manner that could have a direct material adverse impact on our financial statements and results of operations. Since Maxygen and Codexis presently operate from shared facilities, Codexis could conduct its operations in a manner that adversely affects our business or reputation in the community and/or in the

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biotechnology industry, making it more difficult to operate in the community, secure additional alliances and maintain existing collaborations. This could have an adverse impact on our ability to conduct business.

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. These requirements have been increased as a result of the increasing operational independence of our subsidiaries Verdia and Codexis. At present we provide a number of operational, financial and reporting services to Codexis and Verdia under services agreements. If we are unable to implement improvements to our management information and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then management may have access to inadequate information to manage our day-to-day operations. Failure to attract and retain sufficient numbers of talented employees will further strain our human resources and our ability to satisfy our obligations under collaboration agreements. This would reduce our revenue, increase our losses and harm our reputation in the marketplace.

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

Since August 2000, when we acquired Maxygen ApS, a Danish biotechnology company, we have been operating with international business locations. 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:

Legislative Actions, 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 possibility that we will be required to expense all stock option grants, may cause adverse, unexpected earnings fluctuations and affect our financial position and results of operations. New pronouncements and varying interpretations of 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

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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.

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 purchase/sale volume is low and thus the market price of our common stock is particularly sensitive to purchases/sales of high volumes of shares. Our low purchase/sale 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.

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

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

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.

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

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

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

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

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

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

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

We face, and will continue to face, intense competition from organizations such as large and small biotechnology companies, as well as academic and research institutions and government agencies that are pursuing competing technologies for modifying DNA and proteins. These organizations may develop technologies that are alternatives to our technologies. Further, our competitors in the directed molecular evolution field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce commercial products.

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

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

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

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

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of biopharmaceutical and biotechnology companies, including our patent

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positions, are often uncertain and involve complex legal and factual questions. We apply for patents covering our technologies and products as we deem appropriate. However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Others may independently develop similar or alternative technologies or design around our patented technologies or products. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages.

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

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

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

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

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

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

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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.

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

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

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

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

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

Because our products involve the application of new technologies and may be based upon new therapeutic approaches, they may be subject to substantial review by government regulatory authorities and government regulatory authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. We have not submitted an application to the FDA or any other regulatory authority for any product candidate, and neither the FDA nor any other regulatory authority has approved any therapeutic product candidate developed with our MolecularBreeding directed 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.

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

Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain Development Process. 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 trial are uncertain and subject to change at any point. This uncertainty may result in research delays and 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.

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

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

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

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

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

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

Our future products are expected to include pharmaceutical products. Our ability and that of our collaborators to commercialize pharmaceutical products developed with our technologies may depend in part on the extent to which reimbursement for the cost of these products will be available from government health

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

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

Activists and terrorists have shown a willingness to injure people and damage physical facilities, equipment and biological materials to publicize and/or further their ideological causes. Recent 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.

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

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

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

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

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

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

We May Be Sued for Product Liability.

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

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

The trading prices of life science company stocks in general, and ours in particular, have experienced significant price fluctuations in the last three years. 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 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:

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.

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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 Item 3—Legal Proceedings.

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:

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

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

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

Our executive officers, directors and principal stockholders together control approximately 30% of our outstanding common stock, including GlaxoSmithKline plc, which owns approximately 19% of our outstanding common stock. As a result, these stockholders, if they act together, and GlaxoSmithKline plc by itself, 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.

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Maxygen leases an aggregate of 49,675 square feet of office and laboratory facilities in Redwood City, California. Our leases expire on February 24, 2005 with respect to 41,763 square feet and on April 21, 2005 with respect to 7,912 square feet. Codexis, Inc. (our chemicals subsidiary) leases approximately 28,785 square feet of office and laboratory facilities in Redwood City, California. Codexis’ lease expires on January 31, 2011. Approximately 13,000 square feet of Maxygen’s space is being used by Verdia, Inc. (our agriculture subsidiary). The remaining Maxygen space in Redwood City, California is being used by our human therapeutics segment.

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

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 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 309 defendant issuers and their insurers 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. We believe that our portion of the tentative settlement of the litigation, if any, will be covered by existing insurance.

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.

No matter was submitted to a vote of security holders during the fourth quarter ended December 31, 2003.

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PART II

Price Range of Common Stock

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, 2003, the high and low sale prices for our common stock, as reported on the Nasdaq National Market, were as follows:

On March 10, 2004, there were approximately 343 holders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.

Dividend Policy

We have never declared or paid any 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 below.

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The following table gives information about equity awards under our 1997 Plan, Directors’ Plan, Non-Officer Plan, International Plan and ESPP as of December 31, 2003.

Codexis, a majority-owned Maxygen consolidated subsidiary, maintains the Codexis 2002 Stock Plan (“Codexis Stock Plan”). As of December 31, 2003, the Codexis Stock Plan had 2,348,450 shares of Codexis common stock available to be issued upon exercise of outstanding options at an exercise price of $0.40 per share. It also had 648,123 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.

Verdia, a wholly-owned Maxygen consolidated subsidiary, maintains the Verdia 2003 Stock Plan (“Verdia Stock Plan”). As of December 31, 2003, the Verdia Stock Plan had 1,329,500 shares of Verdia common stock available to be issued upon exercise of outstanding options at an average exercise price of $0.40 per share. It also had 110,500 shares of Verdia common stock remaining available for future issuance. The Verdia Stock Plan was approved by Verdia stockholders but has not been approved by Maxygen stockholders.

Summary Description of Maxygen’s Equity Compensation Plans

1997 Stock Option Plan

Maxygen’s stockholders approved the 1997 Plan on March 30, 1997 and approved amendments to the 1997 Plan on May 25, 2000 and May 31, 2002. Pursuant to the 1997 Plan, the board of directors may issue incentive stock options to employees, including officers and members of the board of directors who are also employees, and nonqualified stock options to employees, officers, directors, consultants, and advisors of Maxygen. No

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options may be granted under the 1997 Plan after March 1, 2007. Under the 1997 Plan, incentive options to purchase Maxygen common stock may be granted to employees at prices not lower than fair value on the date of grant, as determined by the board of directors. Nonstatutory options (options that do not qualify as incentive options) may be granted to key employees, including directors and consultants, at prices not lower than 85% of fair value on the date of grant (110% in certain cases), as determined by the board of directors. The maximum term of the options granted under the 1997 Plan is ten years. 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, 2003, 3,024,960 shares remain available for future option grants under the 1997 Plan.

1999 Nonemployee Directors Stock Option Plan

Maxygen’s stockholders approved the Directors’ Plan on December 14, 1999. The Directors’ Plan reserves a total of 300,000 shares of common stock for issuance thereunder. Each nonemployee director who becomes a Maxygen director will be automatically granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date upon which such person first becomes a director. At the first board meeting immediately following each annual stockholders’ meeting, each non-employee director will automatically be granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the Directors’ Plan will be equal to the fair market value of the common stock on the date of grant. Options have a term of ten years. Generally, each initial grant under the Directors’ Plan will vest as to 25% of the shares subject to the option at the end of each year. Each subsequent grant will generally vest in full one year after the date of grant. The Directors’ Plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the Directors’ Plan. At December 31, 2003, 155,000 shares remain available for future option grants under the Directors’ Plan.

2000 Non-Officer Employee Stock Option Plan

The board of directors adopted the Non-Officer Plan on December 6, 2000. The Non-Officer Plan has not been approved by Maxygen’s stockholders as no such approval is required. Under the Non-Officer’s Plan the board of directors may issue nonqualified stock options to employees (other than executive officers and stockholders owning 10% or more of Maxygen’s common stock) and consultants of Maxygen or any of its affiliates. 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, 2003, 607,356 shares remain available for future option grants under the Non-Officer Plan.

2000 International Stock Option Plan

The board of directors adopted the International Plan on April 10, 2000 and amended it on March 1, 2001. The International Plan has not been approved by Maxygen’s stockholders as no such approval is required. Under

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the International Plan the board of directors may issue nonqualified stock options to employees, directors and consultants of non-U.S. subsidiaries of Maxygen. 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, 2003, 1,141,443 shares remain available for future option grants under the International Plan.

1999 Employee Stock Purchase Plan

Maxygen’s stockholders approved the ESPP on December 14, 1999. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. The ESPP permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first day of the offering period or on the purchase date, whichever is lower. The initial offering period commenced on December 16, 1999. In addition, the ESPP provides for annual increases in the number of shares available for issuance under the purchase plan on the first business day of each year equal to the lesser of (i) 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. The ESPP will terminate in September 2019, unless terminated earlier in accordance with the provisions of the ESPP. At December 31, 2003, 695,668 shares remain available for future purchases under the ESPP.

Recent Sales of Unregistered Securities

We made no unregistered sales of our securities during the year ended December 31, 2003 that have not already been reported in an earlier quarterly report.

Application of Initial Public Offering Proceeds

The effective date of our first registration statement, filed on Form S-1 under the Securities Act (No. 333-89413) relating to our initial public offering of common stock, was December 15, 1999. Net proceeds to us were approximately $101.0 million. From the effective date through December 31, 2003, the proceeds were applied toward:

The use of the proceeds from the offering does not represent a material change in the use of the proceeds described in the registration statement. As of December 31, 2003, the initial public offering proceeds were fully applied.

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Purchases of Equity Securities by Maxygen

The following table gives information about repurchases of Maxygen common stock by Maxygen during the fourth quarter ended December 31, 2003.

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

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QUARTERLY FINANCIAL DATA

(unaudited)