10-K

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, 2006

Commission file number 000-28401

MAXYGEN, INC.

(Exact name of registrant as specified in its charter)

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

515 Galveston Drive

Redwood City, California 94063

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(650) 298-5300

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value	The NASDAQ Stock Market LLC

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

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 þ     No o

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.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o      No þ

As of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq Global Stock Market as of that date, was approximately $160,482,000. Shares of common stock held by each executive officer and director and by each person who owned 5% or more of the outstanding common stock have been excluded as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2007, there were 36,669,560 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s proxy statement for the 2007 Annual Meeting of Stockholders (hereinafter referred to as the “2007 Proxy Statement”) are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

Part I
	Item 1:	Business	1
	Item 1A:	Risk Factors	14
	Item 1B:	Unresolved Staff Comments	25
	Item 2:	Properties	25
	Item 3:	Legal Proceedings	26
	Item 4:	Submission of Matters to a Vote of Security Holders	26
Part II
	Item 5:	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
	Item 6:	Selected Financial Data	29
	Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Item 7A:	Quantitative and Qualitative Disclosures About Market Risk	44
	Item 8:	Financial Statements and Supplementary Data	45
	Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	79
	Item 9A:	Controls and Procedures	79
	Item 9B:	Other Information	82
Part III
	Item 10:	Directors, Executive Officers and Corporate Governance	82
	Item 11:	Executive Compensation	82
	Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	82
	Item 13:	Certain Relationships and Related Transactions, and Director Independence	82
	Item 14:	Principal Accounting Fees and Services	82
Part IV
	Item 15:	Exhibits, Financial Statement Schedules	83
SIGNATURES			86
EXHIBIT 10.25
EXHIBIT 10.27
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen ApS and Maxygen Holdings Ltd. For the year ended December 31, 2004 and for the two months ended February 28, 2005, the operations of Codexis, Inc. are also included. On February 28, 2005, our voting interests in Codexis fell below 50% and, from such date, the financial position and results of operations of Codexis are no longer consolidated with our financial position and results of operations. We instead reflect our investment in Codexis under the equity method of accounting. The operations of Verdia, Inc., prior to its sale on July 1, 2004, are reflected in our financial statements as discontinued operations. In this report, “Maxygen,” the “Company,” “we,” “us” and “our” refer to such consolidated entities, unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.

We own or have rights to various copyrights, trademarks and trade names used in our business, including Maxygen^®, MaxyScan^® and MolecularBreeding.^tm The following, which may appear in this document, are registered or other trademarks owned by the following companies: Neupogen (Amgen Inc.); Neulasta (Amgen Inc.); NovoSeven (Novo Nordisk A/S); Actimmune (Genentech, Inc.); Pegasys (Hoffmann-La Roche Ltd.); PEG-Intron (Schering Corporation) and Aranesp (Amgen 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 within the meaning of federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “can,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:

•  our ability to develop products suitable for commercialization;

•  our predicted development and commercial timelines for any of our potential products, including the timing of any commencement of clinical trials of any product candidate and the progress of such clinical trials;

•  our liquidity and future financial performance;

•  the establishment, development and maintenance of any manufacturing or collaborative relationships;

•  the effectiveness of our MolecularBreeding directed evolution platform and other technologies and processes;

•  our ability to protect our intellectual property portfolio and rights;

•  our ability to identify and develop new potential products;

•  the attributes of any products we may develop; and

•  our business strategies and plans.

These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in this report, including the factors described in the section entitled “Item 1A — Risk Factors.”

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.

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PART I

Item 1   BUSINESS

Overview

We are a biotechnology company committed to the discovery and development of improved next-generation protein pharmaceuticals for the treatment of disease and serious medical conditions. Four of our next-generation product candidates are currently in pre-clinical or clinical development:

•  MAXY-G34, a granulocyte colony stimulating factor, or G-CSF, for the treatment of neutropenia;

•  MAXY-alpha, an interferon alpha product for the treatment of hepatitis C virus, or HCV, infection;

•  MAXY-VII, a factor VII product for the treatment of uncontrolled bleeding in trauma, intracerebral hemorrhage and other indications; and

•  MAXY-gamma, an interferon gamma product for the treatment of idiopathic pulmonary fibrosis and other indications.

2006 Highlights

During 2006:

•  We initiated a Phase I clinical trial in the United States to evaluate Maxy-G34.

•  F. Hoffmann-La Roche Ltd., or Roche, initiated a Phase Ia clinical trial in New Zealand to evaluate MAXY-alpha and we received a $2 million milestone payment from Roche for the commencement of the trial.

•  We achieved a manufacturing process development milestone in our MAXY-VII program and received a $5 million milestone payment from Roche for the achievement of the milestone.

•  We received a $17.8 million cash payment for our equity interests in Avidia, Inc., which was acquired by Amgen Inc.

•  We expanded the scope of exclusive licenses previously granted to Codexis, Inc. to our MolecularBreeding directed evolution platform for certain applications relating to energy, including biofuels, in exchange for the right to receive a percentage of revenues received by Codexis for the sale of energy products and the use of processes in the energy field.

Business Strategy

Our goal is to develop and commercialize improved and proprietary versions of currently marketed or clinically validated therapeutic proteins. To achieve this objective, we are pursuing the following key strategies:

•  Advance the Development of Our Lead Product Candidates.  Our primary focus is the advancement of our lead product candidate, MAXY-G34, through clinical development. We initiated a Phase I clinical trial in the United States for our lead MAXY-G34 product candidate in the third quarter of 2006 and plan to commence Phase IIa clinical trials in the first half of 2007. Roche has an exclusive license to develop and commercialize our MAXY-alpha product candidates for the treatment of HCV infection. Roche initiated a Phase Ia clinical trial of MAXY-alpha in New Zealand at the end of 2006 and has informed us that a Phase Ib clinical trial of MAXY-alpha in HCV patients will begin in 2007. In December 2005, we entered into an agreement with Roche relating to the co-development and commercialization of our MAXY-VII product candidates for acute bleeding indications. In March 2007, we received notice from Roche that Roche has elected to terminate this agreement, effective April 12, 2007.

•  Create Value with Improved Next-Generation Protein Drugs.  Our research and development efforts focus on seeking to make improved and proprietary versions of currently marketed therapeutic proteins that address significant market opportunities. We identify currently marketed or clinically validated protein products that require or could benefit from improvements to address existing medical needs in the treatment

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of disease and serious medical conditions, and use our proprietary MolecularBreeding directed molecular evolution platform and other technologies to improve these products. We commit resources to only those product candidates that we believe are commercially viable.

•  Increase Value, Reduce Risk.  By using our technologies to improve the properties of currently marketed or clinically validated therapeutic proteins that have significant commercial value, we believe we can potentially create novel and proprietary best-in-class products that take advantage of known utility, development paths and markets. We believe that this approach may result in reduced risk and enhanced chances of commercial success as compared to the development of novel pharmaceutical products directed at unvalidated targets.

•  Establish a Portfolio of Next-Generation Therapeutic Proteins.  In addition to our existing product candidates, we have an ongoing discovery effort focused on next-generation protein or protein subunit pharmaceuticals. Our goal is to leverage discoveries in our research programs or in-licensed product candidates to extend and expand our product pipeline. By broadening our product portfolio, we hope to increase the probability of clinical and commercial success and reduce our exposure to the impact of any one product failure.

•  Establish Strategic Collaborations to Advance our Product Pipeline and Leverage Our Development Resources.  Part of our strategy has been to establish strategic collaborations that enable us to retain a large portion of the eventual value from our product candidates. We may enter into strategic collaborations at various stages in our research and development process that will allow us to further diversify our product development risks, reduce costs, access the complementary skills and infrastructure possessed by our partners and accelerate the development and commercialization of our product candidates.

•  Manage Our Financial Resources.  Fiscal discipline and pragmatic allocation of our resources are key components of our strategy. We focus our financial resources on those functions that should enhance our ability to generate improved next-generation product candidates and rapidly advance these new product candidates through pre-clinical and clinical development.

Product Pipeline

The following table summarizes the status of our product pipeline:

		Development	Commercialization
Product Candidate	Indication	Responsibilities	Rights	Status
MAXY-G34	Neutropenia	Maxygen	Maxygen	Phase I; plan to commence Phase IIa clinical trial in first half of 2007.
MAXY-alpha	Hepatitis C	Roche	Roche	Phase Ia; Roche expects to commence a Phase Ib clinical trial in 2007.
MAXY-VII	Uncontrolled bleeding	Maxygen*	Maxygen*	Pre-clinical**
MAXY-gamma	Idiopathic Pulmonary Fibrosis	InterMune	InterMune	Pre-clinical

*

Maxygen and Roche are currently parties to an agreement relating to the co-development and commercialization of our MAXY-VII product candidates for acute bleeding indications. On March 13, 2007, we received notice from Roche that Roche has elected to terminate this agreement, effective April 12, 2007. Upon termination of the agreement, all rights to our MAXY-VII product candidates will revert to Maxygen.

**

“Pre-clinical” means process development, product scale-up, formulation and further testing in animals, including toxicology, pharmacokinetics and pharmacodynamics.

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MAXY-G34

Our MAXY-G34 product candidate was designed to be an improved next-generation granulocyte colony stimulating factor, or G-CSF, for the treatment of neutropenia. G-CSF is a natural protein that works by stimulating the body’s bone marrow to produce more white blood cells.

Neutropenia is a severe decrease in neutrophil cell counts in the blood. Neutrophils are a specific type of blood cell that plays an important role in the defense against bacterial infections. Neutropenia is a common side effect of chemotherapeutic treatments for many forms of cancer, including breast cancer, lung cancer, lymphomas and leukemias. Neutropenia is also seen in a variety of other medical conditions and is sometimes caused by therapies administered to treat a disease, such as in patients treated for HCV infection. Neutropenic patients contract bacterial infections more easily and often, some of which can be life threatening. Further, and most importantly, chemotherapy treatment for neutropenic patients may be reduced or delayed, which can result in cancer progression.

MAXY-G34 may help the body make white blood cells more quickly than the products currently approved for the treatment of neutropenia, Neupogen and Neulasta, which could make it an attractive alternative for both doctors and patients. In multiple pre-clinical animal models, we have generated data that suggest that our MAXY-G34 product candidate reduces the duration of neutropenia by clinically relevant periods (approximately 25% shorter duration of neutropenia) when compared to the currently marketed products. This may help protect patients from chemotherapy and radiation therapy-related infections, shorten the duration of hospital stays and help keep patients on schedule for their cancer treatments.

Market Opportunity.  Neupogen, a first-generation G-CSF product, and Neulasta, a second-generation G-CSF product, currently dominate the market to treat chemotherapy and radiation-induced neutropenia. Worldwide sales of G-CSF products were approximately $3.9 billion in 2006.

Development Status.  In the third quarter of 2006, we initiated a Phase I clinical trial in the United States for our lead MAXY-G34 product candidate in healthy male and female volunteers. The preliminary results of the Phase I clinical trial indicate that MAXY-G34 was generally safe and well tolerated throughout the study, at all doses, which ranged from 10 to 150 µg/kg of MAXY G-34. All doses tested in this Phase I trial increased the neutrophil levels as compared to the placebo controls. In subject follow-up 30 days after the administration of MAXY-G34, no antibodies were detected in any clinical trial participants. As expected based on the results of pre-clinical animal studies, MAXY-G34 demonstrated a prolonged half-life compared to Neulasta. The median half-life observed for MAXY-G34 in healthy volunteers in the Phase I clinical trial was approximately 2.3 times the median terminal half-life for Neulasta in healthy volunteers as previously reported. At the 60, 100 and 150 µg/kg doses of MAXY-G34, low but detectable levels of MAXY-G34 were observed at the end of the 21-day collection period.

We have commenced additional Phase I studies to conduct further dosing studies and to obtain further data on certain biological markers. We expect that the data obtained from these additional studies may allow us to determine whether to evaluate MAXY-G34 for use in certain indications in addition to chemotherapy-induced neutropenia.

In the first half of 2007, we expect to commence a Phase IIa clinical trial of MAXY-G34 in cancer patients. We plan to conduct such clinical trials at multiple sites in Eastern Europe. In this Phase IIa clinical trial, cancer patients will be given a single dose of MAXY-G34 therapy per chemotherapy cycle, with each patient receiving multiple chemotherapy cycles.

We currently retain all rights to our MAXY-G34 product candidates.

MAXY-alpha

Our MAXY-alpha product candidates are designed to be superior next-generation interferon alpha products for the treatment of HCV and Hepatitis B virus, or HBV, infections. Alpha interferon is a natural protein that is produced by many cell types, including T-cells and B-cells, macrophages, fibroblasts, endothelial cells, osteoblasts and others, and is an important component of the anti-viral response, stimulating both macrophages and natural killer (NK) cells.

HCV infection causes chronic inflammation in the liver. In a majority of patients, HCV infection can persist for decades and eventually lead to cirrhosis, liver failure and liver cancer. HCV infection represents a significant

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medical problem worldwide. According to the World Health Organization, HCV is responsible for up to 76% of all liver cancer cases and two thirds of all liver transplants in the developed world. The U.S. Centers for Disease Control, or CDC, estimates that approximately 4.1 million people in the United States, or 1.6% of the U.S. population, have been infected with HCV, 3.2 million of whom are chronically infected with HCV and at risk of developing liver cirrhosis or liver cancer. The World Health Organization estimates that approximately 180 million people, or 3% of the world’s population, are infected with HCV worldwide, 130 million of whom are chronic HCV carriers. The World Health Organization also estimates that three to four million persons are newly infected each year, 70% of whom will develop chronic hepatitis.

Currently, there is no vaccine available to prevent HCV infection. The standard treatment for HCV infection is a combination of pegylated interferon and ribavirin, a small molecule. Approximately 50% of patients infected with HCV genotype I, the most common HCV genotype in the United States, fail to show a long-term sustained response to the standard treatment. As a result, we believe that new safe and effective treatment options for HCV infection are needed. We are working in collaboration with our partner, Roche, to develop a potentially superior next-generation interferon alpha product that is more effective at treating HCV infection. Using our proprietary MolecularBreeding directed molecular evolution platform and other technologies, we have created novel interferon alpha variants that we believe may have improved clinical properties as compared to current alpha interferon products. The lead novel interferon alpha molecules have been pegylated to obtain the desired biological half-life and dosing convenience of currently approved interferon alpha products.

Although various third parties are currently developing small molecules intended for the treatment of HCV infection, we believe that interferon alpha will remain an important product in the treatment of HCV in combination with small molecules. In addition, we believe that our pegylated MAXY-alpha product candidate may have the potential to treat a larger percentage of the 40% to 50% of HCV patients who are not effectively treated with existing drugs.

Market Opportunity.  Based on currently available market data, worldwide sales of drugs for the treatment of HCV, including pegylated interferon alpha and ribavirin, were approximately $3.0 billion in 2006. Sales of HCV drugs are expected to grow due to improved market penetration through improvements in therapies, increased awareness and improved diagnosis rates.

Development Status.  In 2003, we entered into a broad strategic alliance with Roche, a market leader in interferon alpha therapies, to develop novel improved interferon alpha and beta products for HCV and HBV infections and a wide range of other indications. See “Our Strategic Collaborations — Roche — MAXY-alpha.” Roche initiated a Phase Ia clinical trial in New Zealand for our lead MAXY-alpha product candidate at the end of 2006 and has informed us that they plan to commence a Phase Ib clinical trial for MAXY-alpha in 2007.

Outside the areas of the treatment of HCV and HBV infections, we retain the right to develop novel interferon alpha product candidates specifically tailored for other indications, including infectious diseases, oncology, inflammatory diseases and autoimmune diseases.

MAXY-VII

Our MAXY-VII product candidates are designed to be superior next-generation factor VII products to treat uncontrolled bleeding in emergency situations, such as trauma, intracerebral hemorrhage, or ICH, certain surgeries and other acute indications. Factor VII is a natural protein with a pivotal role in blood coagulation and clotting. Blood clotting factors, such as factors VII, VIII and IX, have been used for many years to control bleeding episodes.

The CDC estimates that 160,000 deaths occur in the United States each year as a direct result of trauma (injury), and cite unintentional trauma as the leading cause of death for people under age 45. Uncontrolled bleeding is believed to account for approximately half of all trauma-related deaths that occur within the first 48 hours after injury. There is currently no effective medical therapy for uncontrolled bleeding other than physical interventions, such as surgery and blood transfusions.

NovoSeven, a recombinant human factor VII product of Novo Nordisk A/S approved in the United States and Europe for the treatment of hemophilia, is the only factor VII product currently approved for any indication. Our MAXY-VII product candidates have been designed to deliver improved efficacy, a longer circulating half-life and

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an overall improved therapeutic index compared to NovoSeven. Studies in pre-clinical animal models have demonstrated that MAXY-VII may be more effective than NovoSeven at treating uncontrolled bleeding.

Novo Nordisk A/S has been conducting clinical trials of NovoSeven for acute indications, including ICH and trauma. In February 2007, Novo Nordisk A/S announced that NovoSeven missed the primary endpoint of improvement in mortality and severe disability at day 90 in a Phase III clinical trial to treat ICH and that it will not seek regulatory approval of NovoSeven for the treatment of this indication. Novo Nordisk A/S is currently conducting clinical trials of NovoSeven for trauma and other acute bleeding indications.

Market Opportunity.  NovoSeven is currently approved in the United States and Europe only for the treatment of hemophilia patients who have become resistant to factor VIII therapy due to the development of antibodies. Sales of NovoSeven in 2006 were approximately $980 million. The use of recombinant factor VII-based products for the treatment of new indications, such as severe bleeding in trauma, surgery and ICH, are forecasted to represent significant market opportunities for next-generation recombinant factor VII products. Analysts have estimated that the immediate market for an approved factor-VII based therapy for ICH alone could be as large as $500 million annually.

Development Status.  In December 2005, we entered into a co-development and commercialization agreement with Roche relating to the development and commercialization of our portfolio of next-generation recombinant factor VII products for multiple indications. See “Our Strategic Collaborations — Roche — MAXY-VII.” In 2006, we achieved a manufacturing process development milestone in our MAXY-VII program and received a $5 million milestone payment from Roche. On March 13, 2007, we received notice from Roche that Roche has elected to terminate this agreement, effective April 12, 2007, due to the inability of the parties to establish an animal model intended to provide pre-clinical de-risking of the program.

In light of Roche’s notice to us regarding the termination of the co-development and commercialization agreement for our MAXY-VII product candidates, and the recent announcement by Novo Nordisk A/S regarding the results of its clinical trials of NovoSeven for ICH, we are currently evaluating our plans for the continued development of our MAXY-VII product candidates for acute bleeding indications and hemophilia.

We have retained all rights for the development and commercialization of factor VII products for hemophilia and, as of April 12, 2007, the effective date of the termination of our co-development and commercialization agreement with Roche, all other rights to our MAXY-VII variants will revert to us.

MAXY-gamma

Our MAXY-gamma product candidates are next-generation versions of interferon gamma that may be useful for the treatment of a variety of diseases, including idiopathic pulmonary fibrosis, or IPF, HCV, tuberculosis and meningitis. We believe that interferon gamma may help in the prevention of excessive scarring, or fibrosis, of organs such as the liver and the lung. Interferon gamma is a naturally occurring protein in the human body that plays a role in the activation of the immune system to fight infectious pathogens. Interferon gamma has a wide spectrum of biologic effects, including anti-infective, anti-viral, anti-fibrotic, anti-proliferative, immunomodulatory and chemosensitization activities.

IPF is an inflammatory disease that results in severe fibrosis of the lungs. In time, this fibrosis can build up to the point where the lungs are unable to provide oxygen to the tissues of the body. The average survival rate of a patient with IPF is four to six years after diagnosis.

Our MAXY-gamma product candidates are designed to have improved efficacy and a less-frequent dosing regimen over Actimmune, the currently marketed interferon gamma product of InterMune, Inc., or InterMune. Actimmune is marketed for the treatment of severe, malignant osteopetrosis and chronic granulomatous disease (CGD) and, until recently, was being developed by InterMune for the treatment of IPF.

Market Opportunity.  We believe that the development of a next-generation version of interferon gamma to treat IPF may represent a significant market opportunity.

Development Status.  We have established a collaboration with InterMune in which InterMune has an exclusive license to develop and market our MAXY-gamma product candidates for all human therapeutic

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indications. See “Our Strategic Collaborations — InterMune — MAXY-gamma.” InterMune has not informed us whether it intends to continue to advance these product candidates into clinical development during 2007. In March 2007, InterMune announced that it was discontinuing development of Actimmune for IPF. If InterMune elects to cease development of our MAXY-gamma product candidates, all rights to our MAXY-gamma product candidates would revert back to us.

Other Assets and Areas of Research

In addition to our development stage product candidates, we have other earlier stage programs in pre-clinical research, and assets outside of our core business, including vaccine research and investments in other biotechnology companies.

Vaccines

We believe that 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 currently have an active program to advance the research for development of a preventative HIV vaccine. Our vaccine research program is being funded by research grants from the National Institutes of Health, or NIH, and the U.S. Department of Defense. In 2005, the NIH awarded us two competitive grants, including $11.7 million over approximately five years as part of the HIV Research and Development, or HIVRAD, program, and a Phase I grant from the NIH Small Business Innovation Research, or SBIR, program. We were also awarded a one-year contract of $2.4 million in 2005 from the Department of Defense for HIV vaccine discovery. In 2006, as part of the SBIR program, the NIH awarded us two additional grants totaling $500,000 as part of the HIV research program and one grant totaling $1.0 million over two years for work on vaccines for equine encephalitis.

The HIVRAD grant provides funds for the use of our MolecularBreeding directed evolution platform to generate novel HIV-1 antigens potentially capable of inducing broad antibody responses to multiple strains of the HIV-1 virus. Three of the SBIR awards fund investigations into the effect on immunogenicity of secondary modifications to a specific HIV-1 envelope protein and one of the SBIR awards granted in 2006, totaling $1.0 million over two years, will fund research on the development of vaccines for equine encephalitis. The grant from the Department of Defense will fund work to develop a high-throughput HIV vaccine screening platform. We are currently working in collaboration with Monogram Biosciences, Inc., Aldevron LLC and the Scripps Research Institute with respect to these government-funded projects.

Investment in Codexis, Inc.

We have a minority investment in Codexis, Inc., or Codexis, a biotechnology company focused on developing innovative biotechnology-based solutions for improving the manufacture of existing small molecule pharmaceutical products. We formed Codexis in January 2002 as a wholly-owned subsidiary to operate our former chemicals business. Our voting rights in Codexis were reduced below 50% in the first quarter of 2005 and, as a result, Codexis is no longer consolidated in our financial statements. In 2006, we expanded the scope of exclusive licenses previously granted to Codexis, Inc. to our MolecularBreeding directed evolution platform for certain applications relating to energy, including biofuels, in exchange for the right to receive a percentage of revenues received by Codexis for the sale of energy products and the use of processes in the energy field. As of December 31, 2006, our ownership in Codexis was approximately 32%, based upon the voting rights of the issued and outstanding shares of the common and preferred stock of Codexis. We are not obligated to fund the operations or other capital requirements of Codexis. For more information regarding our investment in Codexis, see Note 1 of the Notes to Consolidated Financial Statements.

Investment in Avidia Inc.

In July 2003, we established Avidia, Inc. (formerly Avidia Research Institute), or Avidia, a biotechnology company focused on developing a new class of therapeutic peptides for the treatment of serious medical conditions in the areas of autoimmunity, inflammation and oncology, together with a third-party investor. Avidia was formed as a spin-out of Maxygen to focus on the development of a new class of subunit proteins as therapeutic products. We

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also received equity interests in Avidia through our initial contribution of technology and funding and our participation in subsequent preferred stock financings of Avidia. On October 24, 2006, Amgen Inc. completed the acquisition of Avidia. As a result of the acquisition, we received approximately $17.8 million in cash in exchange for our equity interests in Avidia and may receive up to an additional $2.8 million in cash, contingent upon the development of certain Avidia products by Amgen Inc. Under an agreement that we entered into with Avidia at the time of Avidia’s formation, we have retained exclusive and non-exclusive rights to use certain Avidia technology to develop and commercialize products directed to certain specific targets. For more information regarding the sale of our investment in Avidia, see Note 13 of the Notes to Consolidated Financial Statements.

Our Technologies

MolecularBreeding

Our MolecularBreeding directed evolution 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 protein pharmaceutical is achieved, the group of lead candidates is considered for advancement as a product candidate for development.

The MolecularBreeding Directed Evolution Process

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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 of plants and animals, 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.

Step Two: MaxyScan Screening

The ability to screen or select for a desired improvement in function is essential to the effective development of an improved gene or protein. As a result, we have invested significant resources in developing automated, stringent, rapid screens and selection formats.

We have developed screening tests that can measure the production of proteins or small molecules in culture without significant purification steps or specific test reagents, thereby eliminating time-consuming steps required for traditional screening tests. We are also focusing on the development of reliable, cell-based screening tests that are predictive of specific functions relevant to our human therapeutics programs. Accordingly, we continue to develop new screening approaches and technologies. Our approach is to create multitiered screening systems where we use a less sensitive screening test as a first screen to quickly select proteins with the desired characteristics, followed by a more sensitive screening test to confirm value in these variants and to select for final lead product candidates. Unlike approaches that create random diversity, our MolecularBreeding directed evolution platform produces potentially valuable libraries of gene variants with a predominance of active genes with the desired function. As a result of capturing the natural process of sexual recombination with our proprietary DNAShuffling methods, we are also able to generate gene variants with the desired characteristic at a frequency 5 to 10-fold higher than combinatorial chemistry, rational design or other directed evolution methods. This allows us to use complex biological screens and formats as a final screening test, as relatively few proteins need to be screened to detect an improvement in the starting gene activity. Furthermore, this allows us to focus on developing screens that generate a broader range of information that is more responsive to commercial and clinical concerns. This separates us from many of our potential competitors who invest significant time and money to screen billions of compounds per day. While we have the capability to screen billions of compounds per day, we generally need to screen far fewer, on the order of 10,000 candidates per day or less. Some of our screening capabilities include mass spectrometry, in vivo animal assays, bioassays, immunochemical assays, chemical assays, and biochemical assays.

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

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 pharmaceuticals. Two examples of the tools that we use to post-translationally modify protein drugs are pegylation and glycosylation technologies. Over the last few years, glycosylation and pegylation have been validated technically and commercially through the successes of drugs, such as the pegylated interferons (Pegasys and PEG-Intron) and Aranesp, a hyper-glycosylated erythropoeitin. These post-translational modifications of proteins

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have been demonstrated to change the pharmacokinetics and pharmacodynamics of certain protein drugs. In addition these modifications can change the solubility, bioavailability and immunogencity profile of protein drugs.

Our Strategic Collaborations

Roche

MAXY-alpha.  In May 2003, we established a broad alliance with Roche to develop our MAXY-alpha product candidates for a wide range of indications. Roche exclusively licensed from us worldwide commercialization rights to specific novel interferon product candidates for the treatment of HCV and HBV infections. We received an initial payment and full research and development funding for the first two years of the collaboration. In addition, we are eligible to receive milestone payments based on the achievement of certain development milestones, royalties based on product sales, and option fees. This agreement also provides us and Roche with the option to expand the collaboration to develop other novel interferon alpha and beta products specifically tailored for indications outside of HCV and HBV infections, including oncology, autoimmune diseases, inflammatory diseases, and other infectious diseases, such as HIV. We retain the right to develop such products, while Roche may elect to acquire worldwide license and commercialization rights to these product candidates on pre-agreed terms. We have the option to co-fund development in the United States of any product to which Roche acquires a license in exchange for profit sharing or an increased royalty rate. The funded research term of this collaboration ended in December 2005. In November 2006, Roche initiated a Phase Ia clinical trial in New Zealand to evaluate our MAXY-alpha product candidates and we received a $2 million milestone payment from Roche. Roche has informed us that they plan to commence a Phase Ib clinical trial for MAXY-alpha in 2007.

MAXY-VII.  In December 2005, we established an alliance with Roche to co-develop our MAXY-VII product candidates for the treatment of uncontrolled bleeding in multiple indications, including trauma and intracerebral hemorrhage. We received an up-front fee of $8 million from Roche and, in 2006, we received a $5 million milestone payment from Roche for our achievement of a manufacturing process development milestone. On March 13, 2007, we received notice from Roche that Roche will terminate this agreement, effective April 12, 2007, due to the inability of the parties to establish an animal model intended to provide pre-clinical de-risking of the program. In light of Roche’s notice to us regarding the termination of the co-development and commercialization agreement for our MAXY-VII product candidates, and the recent announcement by Novo Nordisk A/S regarding the results of its clinical trials of NovoSeven for ICH, we are currently evaluating our plans for the continued development of our MAXY-VII product candidates for acute bleeding indications and hemophilia. We retained all rights for development and commercialization for next-generation novel recombinant factor VII products for the treatment of hemophilia and, as of April 12, 2007, the effective date of the termination of our co-development and commercialization agreement with Roche, all other rights to our MAXY-VII variants will revert to us.

InterMune

MAXY-gamma.  In October 2001, we entered into a license and collaboration agreement with InterMune to develop and commercialize our novel, next-generation interferon gamma products. Under the terms of this agreement, InterMune has exclusive rights to develop the next-generation interferon gamma products created by us, and retains exclusive worldwide commercialization rights for all human therapeutic indications. We received up-front license fees and full research funding during the research phase of the collaboration, which was completed in June 2004. We remain eligible to receive development and commercialization milestone payments that could exceed $60 million, in addition to royalties on product sales. InterMune has not informed us whether it intends to continue to advance these product candidates into clinical development during 2007. In March 2007, InterMune announced that it was discontinuing development of Actimmune for IPF. If InterMune elects to cease development of our MAXY-gamma product candidates, all rights to our MAXY-gamma product candidates would revert back to us.

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), we were assigned all the patents, applications and know-how related to our MolecularBreeding directed evolution platform,

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subject to certain internal research rights retained by GlaxoSmithKline plc. 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.

We have an extensive patent portfolio including over 80 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 20 pending U.S. patent applications and over 100 pending foreign and international counterpart applications relating to our MolecularBreeding directed evolution platform and specialized screening technologies, and the application of these technologies to the development of protein pharmaceuticals and other industries, including agriculture, vaccines, gene therapy and chemicals.

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

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

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

•  methods utilizing reiterative screening or only a single cycle of screening;

•  methods of combining any mutagenesis technique with DNA recombination methods to produce new chimeric genes;

•  methods using synthesized nucleic acid fragments;

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

•  methods of screening directed evolution libraries;

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

•  mutagenesis, including codon and gene site saturation mutagenesis, used in conjunction with recombination and reassembly;

•  cell-based recombination methods; and

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

Such patents reinforce our preeminent position as an 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 A/S, the California Institute of Technology, the University of Washington, GGMJ Technologies, L.L.C. and the University of Minnesota. These licenses give us rights to an additional 21 issued U.S. patents, 13 granted foreign patents and over 30 pending U.S. and foreign counterpart applications.

We have also received from Affymax (when it was a subsidiary of what is now GlaxoSmithKline plc) 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 or former employees could obtain and use information regarding our technologies without authorization, or develop similar technology independently. It is difficult for us to monitor unauthorized use of our proprietary methods and information. Effective protection of intellectual property rights is also unavailable or limited in some foreign

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countries. The efforts that we take to protect our proprietary information and rights may be inadequate to protect such information and rights. Our competitors could independently develop similar technology or design around any patents or other intellectual property rights we hold.

In July 2005, our European Patent 0752008, covering our first generation directed molecular evolution technologies, was the subject of an opposition proceeding before the European Patent Office. All claims of the patent were upheld as valid with minor amendments. In October 2005, the Australian Patent Office found, in an opposition proceeding regarding our Australian patent application No. 703264 that corresponds to European Patent 0752008, 89 of our claims to be patentable as presented. In February 2006, our European Patent 0876509, covering one embodiment of our second-generation directed molecular evolution technologies, was the subject of an opposition proceeding before the European Patent Office. The opposition board revoked the patent on the grounds of lack of inventive step. We have appealed this decision to the appeals board of the European Patent Office. The decision of the appeals board will likely be issued in 2008.

Product Patents

Our patent portfolio consists of the following issued patents and pending patent applications for each of our primary product candidates:

•  For our MAXY-G34 product candidates, we have three U.S. patents, 16 pending U.S. applications, six foreign patents and 30 pending foreign or international applications.

•  For our MAXY-alpha product candidates, we have 20 pending U.S. applications and 47 pending foreign or international applications. Certain of these applications are jointly held by us and our collaborative partner, Roche.

•  For our MAXY-VII product candidates, we have one U.S. patent, 21 pending U.S. applications, three foreign patents and 40 pending foreign or international applications. We also have exclusive licenses to two U.S. patents, ten pending U.S. applications and four pending foreign or international applications.

•  For our MAXY-gamma product candidates, we have two U.S. patents, six pending U.S. applications, six foreign patents and 37 pending foreign or international applications.

Manufacturing

We rely on third party manufacturers and collaborators to produce our compounds for clinical purposes and may do so for commercial production of any drug candidates that are approved for marketing. We have established agreements with Rentschler Biotechnologie GmbH, or Rentschler, in Germany for the manufacture of supplies of our MAXY-G34 product candidates for Phase I and II clinical trials and for the manufacture of supplies of our MAXY-VII product candidates for pre-clinical studies and Phase I and II clinical trials.

We believe that our current contract manufacturing agreement with Rentschler will be sufficient to accommodate clinical trials of our MAXY-G34 product candidates through Phase I and II clinical trials. However, we will need to secure additional manufacturing arrangements with contract manufacturers or develop our own manufacturing capability to meet our future needs, which would require significant capital investment.

Competition

Any products that we develop will compete in highly competitive markets. We face competition from large pharmaceutical and biopharmaceutical companies, such as Eli Lilly and Company, Pfizer, Inc., Genentech, Inc., Novo Nordisk A/S, Schering-Plough Corporation and Amgen Inc., and from smaller biotechnology companies, such as Human Genome Sciences, Inc., Neose Technologies, Inc., Zymogenetics, Inc. and InterMune, Inc. In the vaccines field, we face competition from biotechnology companies, such as Corixa Corporation (now a subsidiary of GlaxoSmithKline plc) and Vical Corporation, as well as large pharmaceutical companies, including GlaxoSmithKline plc, Sanofi-Aventis, Novartis AG, Pfizer Inc. and Merck & Co., Inc.

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 there can be no assurance that they will not

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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 our competitors have significantly greater experience than we do in:

•  developing products;

•  undertaking pre-clinical testing and clinical trials;

•  obtaining FDA and other regulatory approvals of products; and

•  manufacturing and marketing products.

We are a leader in the field of directed molecular evolution. We are aware that other companies, including Diversa Corporation, Xencor, Inc. and Nautilus Biotech, have alternative methods for obtaining and generating genetic diversity or use mutagenesis techniques to produce genetic diversity. Academic institutions such as the California Institute of Technology, Pennsylvania State University and the University of Washington are also working in this field. We have licensed certain patents from certain of these institutions. 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, organizations and persons have described technologies that appear to have some similarities to our patented proprietary technologies. We monitor publications and patents that relate to directed molecular evolution to be aware of developments in the field and evaluate appropriate courses of action in relation to these developments.

Research and Development Expenses

The majority of our operating expenses to date have been related to research and development. Our research and development expenses from continuing operations were $49.1 million in 2006, $41.9 million in 2005 and $53.6 million in 2004 (including research and development expenses attributable to Codexis in 2004 and 2005). Additional information required by this item is incorporated herein by reference to “Research and Development Expenses” in Note 1 of the Notes to Consolidated Financial Statements. We intend to maintain our strong commitment to research and development as an essential component of our product development effort. We may also license technology or products developed by third parties to obtain access to additional potential products.

Geographic Distribution

We have operations in two geographic locations, the United States and Denmark. In addition, certain of our collaborators are based outside the United States. Additional information required by this item is incorporated herein by reference to “Segment Information — Geographic Information” in Note 12 of the Notes to Consolidated Financial Statements.

Segment Reporting

We operate our business in one segment, human therapeutics. Prior to February 28, 2005, the date on which Codexis ceased to be our consolidated subsidiary, we operated our business in two segments, human therapeutics and chemicals. Additional information required by this item is incorporated herein by reference to “Segment Information” in Note 12 of the Notes to Consolidated Financial Statements.

Government Regulation

We are subject to regulation by the FDA and comparable regulatory agencies in foreign countries with respect to the development and commercialization of products resulting from our drug discovery activities. The FDA and comparable regulatory bodies in other countries currently regulate therapeutic proteins and related pharmaceutical products as biologics. Biologics are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the collection, testing, manufacture, safety, efficacy, potency, labeling, storage, record keeping, advertising, promotion, sale and distribution of the products.

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The time required for completing testing and obtaining approvals of our product candidates is uncertain but will take several years and approvals will only be obtained if our product candidates are shown to be safe and efficacious in clinical trials. Any delay in testing may hinder product development. In addition, we may encounter delays in product development or rejections of product applications due to changes in FDA or foreign regulatory policies during the period of product development and testing. Failure to comply with regulatory requirements may subject us to, among other things, civil penalties and criminal prosecution; restrictions on product development and production; suspension, delay or withdrawal of approvals; and the seizure or recall of products. The lengthy process of obtaining regulatory approvals and ensuring compliance with appropriate statutes and regulations requires the expenditure of substantial resources. Any delay or failure, by us or our corporate partners, to obtain regulatory approvals could adversely affect our ability to commercialize product candidates, receive milestone and royalty payments and generate sales revenue.

Under FDA regulations, the clinical testing program required for marketing approval of a new drug typically involves three sequential phases, which may overlap.

•  Phase I:  Studies are conducted on normal, healthy human volunteers to determine safety, dosage tolerance, absorption, metabolism, distribution and excretion. If possible, Phase I studies may also be designed to gain early evidence of effectiveness.

•  Phase II:  Studies are conducted on small groups of patients afflicted with a specific disease to determine dosage tolerance and optimal dosage, to gain preliminary evidence of efficacy, and to determine the common short-term side effects and risks associated with the substance being tested.

•  Phase III:  Involves large-scale studies conducted on disease-afflicted patients to provide statistical evidence of efficacy and safety and to provide an adequate basis for physician labeling.

In 2006, Phase I clinical trials were initiated for our lead MAXY-G34 and MAXY-alpha product candidates. To date, neither we nor our corporate collaborators have successfully completed clinical trials for any of our product candidates. If we or our corporate collaborators are unable to continue or successfully complete clinical trials of MAXY-G34, MAXY-alpha or any of our other product candidates, or decide not to continue clinical trials for a particular indication, we will not be able to seek or obtain regulatory approval for commercialization of the applicable product candidate for the relevant indication.

Phase I, Phase II or Phase III clinical testing may not be completed successfully within any specific period of time, if at all, with respect to any of our potential products. Furthermore, we, an institutional review board, the FDA or other regulatory bodies may suspend a clinical trial at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

FDA marketing approval is only applicable in the United States. Marketing approval in foreign countries is subject to the regulations of those countries. The approval procedures vary among countries and can involve additional testing. The requirements for approval and the time required to obtain approval may differ from that required for FDA approval.

Although there are some centralized procedures for filings in the European Union countries, in general each country has its own procedures and requirements, and compliance with these procedures and requirements may be expensive and time-consuming. Accordingly, there may be substantial delays in obtaining required approvals from foreign regulatory authorities after the relevant applications are filed, if approvals are ultimately received at all.

Environmental Regulation

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

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Employees

As of January 31, 2007, we had 151 employees, 50 of whom hold Ph.D., Ph.D. equivalent or M.D. degrees and 101 of whom were engaged in full-time research and development 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.

Corporate Background and History

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.

Our operations were originally focused on the application of our MolecularBreeding directed evolution platform and other technologies to the development of multiple products in a broad range of industries, including human therapeutics, chemicals and agriculture. In August 2000, to complement and expand our human therapeutics operations, we established our Danish subsidiary, Maxygen ApS, through the acquisition of ProFound Pharma A/S, a privately held Danish biotechnology company. In 2002, we formed two wholly owned subsidiaries, Codexis, Inc. and Verdia, Inc., to operate our chemicals and agriculture businesses.

Over the past several years, we have shifted our primary focus to the development of next-generation protein pharmaceuticals. Accordingly, in 2004, we sold Verdia to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for $64 million in cash. Codexis received financing from third party investors and operated as independent subsidiary beginning in September 2002 and, in February 2005, our voting rights in Codexis were reduced below 50%. As a result, we no longer consolidate Codexis in our financial statements and instead reflect our investment in Codexis under the equity method of accounting.

Available Information

Our web site is located at www.maxygen.com. We make available free of charge, on or through our web site, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing such reports with the Securities and Exchange Commission, or SEC. Information contained on our web site is not part of this report.

Item 1A   RISK FACTORS

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of factors both in and out of our control, including the risks faced by us described below and elsewhere in this report.

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 our company. 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 may not achieve or maintain profitability.

We have incurred losses since our inception, including losses from continuing operations of $16.5 million, $35.1 million and $49.1 million in 2006, 2005 and 2004, respectively. As of December 31, 2006, we had an accumulated deficit of $220.7 million. We expect to incur losses and negative cash flow from operating activities for at least the next several years. To date, we have derived substantially all our revenues from collaborations and grants and

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expect to derive a substantial majority of our revenue from such sources for at least the next several years. Revenues from collaborations and grants are uncertain because our existing agreements generally have fixed terms and may be terminated under certain conditions, 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 the development of our product candidates. As a result, we expect that our operating expenses will exceed revenues in the near term and we do not expect to achieve profitability during the next several years. If the time required for us to achieve profitability is longer than we anticipate, we may not be able to continue our business.

We 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. We may not be successful in the commercial development of products. Successful products will require significant investment and development, including clinical testing, to demonstrate their safety and effectiveness before their commercialization. To date, companies in the biotechnology industry have developed and commercialized only a limited number of products. We have not proven our ability to develop or commercialize any products. We, either alone or in conjunction with our corporate collaborators, must conduct a substantial amount of additional research and development before any regulatory authority will approve any of our potential products. This 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 could limit our ability to develop commercially successful products.

Drug development is a long, expensive and uncertain process and may not result in the development of any commercially successful products.

The development of human therapeutic products is long and uncertain. Most product candidates fail before entering clinical trials or in clinical trials. Most products that commence 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, initiation of clinical trials and the results of such development and clinical trials are uncertain and subject to change at any point. This uncertainty may result in research delays, clinical trial delays and failures, product candidate failures, even for products that appear promising in earlier clinical trials, and delays in regulatory action or approval. Such delays and failures could reduce or eliminate our revenue by delaying or terminating the potential development and commercialization of our product candidates and 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.

We design our product candidates to confer what we believe will be improved biological properties as compared to one or more currently marketed products. As a result, our product candidates differ from currently marketed drugs in ways that we expect will be beneficial. However, the impact of the modifications that we make in our product candidates may not be fully apparent in pre-clinical testing and may only be discovered in clinical testing. Such altered properties may render a product candidate unsuitable or less beneficial than expected for one or more diseases or medical conditions of possible interest or make the product candidate unsuitable for further development. This may lead to the redirection of the development strategy for a product candidate, which could lead to substantial delays, increased development costs, and reduction in market potential of a product to the extent that it ultimately obtains regulatory approval. This also could result in the termination of the development of the affected product candidate. In either case, such results could adversely affect our business.

For example, in regards to our MAXY-VII product candidates, we are seeking to develop such products for several acute indications. To date, no factor VII-based product has been approved by any regulatory agency for such indications and it is not certain that any such products can be shown to be safe or efficacious for the treatment or prevention of such indications. Moreover, the available animal bleeding models have so far proven to be unsuitable for assessing our potential products for such acute indications, increasing the risk that animal models may not provide accurate or meaningful data as to the suitability or advantages of our potential products as treatments for the diseases or medical conditions of interest. On March 13, 2007, we received notice from Roche that it has elected to

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terminate its collaboration agreement with us relating to the co-development and commercialization of our MAXY-VII product candidates for these indications due to the inability of the parties to establish an animal bleeding model intended to provide pre-clinical de-risking of the program. In a related development, Novo Nordisk A/S recently announced that NovoSeven missed the primary endpoint of improvement in mortality and severe disability at day 90 in a Phase III clinical trial to treat ICH and that it will not seek regulatory approval of NovoSeven for the treatment of this indication.

Accordingly, we, or our collaborators, may determine that certain pre-clinical or clinical product candidates or programs do not have sufficient potential to warrant further advancement for a particular indication or any indications and may elect to terminate our programs for such indications or product candidates at any time. If we terminate a pre-clinical program in which we have invested significant resources, our financial condition and results of operations may be adversely affected, as we will have expended resources on a program that will not provide a return on our investment and we will have missed the opportunity to have allocated those resources to potentially more productive uses. The failure of our MAXY-G34 or MAXY-alpha product candidates in clinical development could have a significant adverse material impact on us. Termination of such programs could also cause the price of our stock to drop significantly.

Our revenues, expenses and operating results are subject to fluctuations that may cause our stock price to decline.

Our revenues, expenses and 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 revenues, expenses and operating results to fluctuate include:

•  termination of research and development contracts with collaborators or government research grants, which may not be renewed or replaced;

•  the success rate of our development or discovery efforts leading to milestones and royalties;

•  timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements;

•  timing of expenses, particularly with respect to contract manufacturing, pre-clinical studies and clinical trials;

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

•  general and industry specific economic conditions, which may affect our collaborators’ research and development expenditures.

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

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

Our revenues are substantially dependent on a limited number of collaborative arrangements and government grants, and our inability to establish or maintain collaborations or grants would adversely impact our revenues, financial position and results of operation.

We expect that substantially all of our revenue for the foreseeable future will result from our government grants. We currently have a collaboration agreement with Roche for our MAXY-VII product candidates that will

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terminate on April 12, 2007, and five government grants that are expected to generate revenue in 2007. If the government grants are terminated and we are unable to enter into new collaboration agreements, our revenues, financial position and results of operations would be materially adversely affected.

Our potential 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 FDA must approve any therapeutic product or vaccine before it can be marketed in the United States. Other countries also require approvals from regulatory authorities comparable to the FDA before products can be marketed in the applicable country. Before we can file a new drug application (NDA) or biologic license application (BLA) with the FDA or other regulatory entity, 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.

Because our potential products involve the application of new technologies and may be based upon new therapeutic approaches, they may be subject to substantial review by government regulatory authorities and these authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. 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 United States or elsewhere. We may not be able to, or our collaborators may not be able to, conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for our products.

Even if we receive regulatory approval, the approved label for a product 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 continued review, and discovery of previously unknown problems or side effects associated with an approved product or the discovery of previously unknown problems with the manufacturer may result in restrictions on the product, the manufacturer or the manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices.

Our current and future product candidates could take a long time to gain regulatory approval, or may never gain approval, which could reduce or eliminate our revenue by delaying or terminating the potential commercialization of our product candidates.

The conduct of clinical trials for a single product candidate is a time-consuming, expensive and uncertain process and typically requires years to complete. In August 2006, we initiated a Phase I clinical trial in the United States for our MAXY-G34 product candidate for the treatment of chemotherapy-induced neutropenia. This clinical trial involves a double-blind placebo controlled dose escalation study in healthy volunteers. In November 2006, Roche initiated a Phase Ia clinical trial in New Zealand for our lead MAXY-alpha product candidate for the treatment of Hepatitis C virus infection. Thus, our most advanced product candidates are now only in the early stages of clinical trials.

Although both MAXY-G34 and MAXY-alpha have demonstrated properties in pre-clinical testing indicating that they may have advantages as compared to currently marketed drugs, the results from pre-clinical testing in vitro and animal models, as well as early, small scale clinical trials often are not predictive of results obtained in larger later stage clinical trials designed to prove safety and efficacy. There are no assurances that clinical trials of any of our current or future product candidates will produce sufficient safety and efficacy data necessary to obtain regulatory approval or result in a marketed product.

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In addition, the timing of the commencement, continuation and completion of clinical trials may be subject to significant delays, or a clinical trial may be suspended or delayed by us, our collaborators, the FDA or other foreign governmental agencies for various reasons, including:

•  deficiencies in the conduct of the clinical trials;

•  negative or inconclusive results from the clinical trials that necessitate additional clinical studies;

•  difficulties or delays in identifying and enrolling patients who meet trial eligibility criteria;

•  delays in obtaining or maintaining required approvals from institutions, review boards or other reviewing entities at clinical sites;

•  inadequate supply or deficient quality of product candidate materials necessary for the conduct of the clinical trials;

•  the occurrence of unacceptable toxicities or unforeseen adverse side effects, especially as compared to currently approved drugs intended to treat the same indications;

•  our lack of financial resources to continue the development of a product candidate;

•  future legislation or administrative action or changes in FDA policy or the policy of foreign regulatory agencies during the period of product development, clinical trials and FDA regulatory review; or

•  other reasons that are internal to the businesses of our collaborative partners, which they may not share with us.

In addition, we do not have the ability to independently conduct clinical trials for our product candidates and therefore rely on third parties, such as contract research organizations, to enroll qualified patients and conduct our clinical trials. If these third parties do not successfully carry out their contractual duties, conduct the clinical trials in accordance with the approved protocol and regulatory requirements or meet planned deadlines, we may be affected by increased costs, delays of our clinical trials or both, which may harm our business.

As a result of these risks and other factors, we and/or our collaborators may conduct lengthy and expensive clinical trials of MAXY-G34, MAXY-alpha or our other current or future product candidates, only to learn that a product candidate has failed to demonstrate sufficient safety or efficacy necessary to obtain regulatory approval, does not offer therapeutic or other improvements compared to other marketed drugs, has unforeseen adverse side effects or does not otherwise demonstrate sufficient potential to make the commercialization of the product worthwhile. Any failure or substantial delay in successfully completing clinical trials, obtaining regulatory approval and commercializing our product candidates could severely harm our business.

Our manufacturing strategy, which relies on third-party manufacturers, exposes us to additional risks.

We do not currently have the resources, facilities or experience to manufacture any product candidates or potential products ourselves. Completion of any clinical trials and any commercialization of our products will require access to, or development of, manufacturing facilities that meet FDA standards or other regulatory requirements to manufacture a sufficient supply of our potential products. We currently depend on third parties for the scale up and manufacture of our product candidates for pre-clinical and clinical purposes. If our third party manufacturers are unable to manufacture pre-clinical or clinical supplies in a timely manner, or are unable or unwilling to satisfy our needs or FDA or other regulatory requirements, it could delay clinical trials, regulatory submissions and commercialization of our potential products, entail higher costs and possibly result in our being unable to sell our products. In addition, technical problems or other manufacturing delays could delay the advancement of potential products into pre-clinical or clinical trials, delay or prevent us from achieving development milestones under our collaborative agreements or result in the termination of development of particular product candidates, adversely affecting our revenues and product development timetable, which in turn could adversely affect our stock price.

There are a limited number of contract manufacturers that are suitable for the manufacture of protein pharmaceuticals in compliance with current Good Manufacturing Practices (GMP) requirements and there is often limited access to such facilities. If we are unable to enter into agreements with qualified manufacturers that will

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provide us with our product candidates in a timely manner and at an acceptable cost, our business will be adversely affected.

In addition, failure of any third party manufacturers or us to comply with applicable regulations, including pre- or post-approval inspections and the current GMP requirements of the FDA or other comparable regulatory agencies, could result in sanctions being imposed on us. These sanctions could include fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.

The manufacturing of our product candidates presents technological, logistical and regulatory risks, each of which may adversely affect our potential revenues.

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

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

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

•  failure to comply with strictly enforced GMP regulations and similar foreign standards may result in delays in product approval or withdrawal of an approved product from the market.

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

If our collaborations are not successful, we may not be able to effectively develop and market some of our products.

Since we do not currently possess the resources necessary to develop and commercialize multiple products, or the resources to complete all approval processes that may be required for these potential products, we generally seek to enter into collaborative arrangements to develop and commercialize potential products. We have entered into collaborative agreements with other companies to fund the development of new product candidates for specific indications. These contracts generally expire after a fixed period of time. If they are not renewed or if we do not enter into new collaborative agreements, our revenues will be reduced and our potential products may not be commercialized.

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

For example, on March 13, 2007, we received written notice from Roche that it has elected to terminate its agreement with us relating to the co-development and commercialization of our MAXY-VII product candidates for acute bleeding indications. This termination by Roche was due to the inability of the parties to establish an animal model intended to provide pre-clinical de-risking of the program. We are currently evaluating our plans for the continued development of our MAXY-VII product candidates for acute bleeding indications and hemophilia. However, the termination of this agreement by Roche may make it more difficult or impossible for us to enter into

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an agreement with another third party for the development or commercialization of our MAXY-VII product candidates. If we are unable to enter into new collaboration agreements, we may elect to discontinue further development of these product candidates.

We are also party to an agreement with Roche for the development and commercialization of our MAXY-alpha product candidates. If Roche fails to perform its obligations under this agreement or seeks to materially amend or terminate this agreement, our prospects, including our ability to develop our MAXY-alpha product candidates, and our financial results could be materially adversely affected.

We conduct proprietary research programs, and any conflicts with our collaborators or any inability to commercialize products resulting from this research could harm our business.

An important part of our strategy involves conducting proprietary research programs. As a result, 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 currently market products intended to treat these medical conditions that our product candidates are planned to be used to treat, and could become our competitors in the future. For example, our collaborators could develop and commercialize competing products, fail to rapidly develop our product candidates, fail to obtain timely regulatory approvals for product commercialization, terminate their agreements with us prematurely, or fail to devote sufficient resources to allow the development and commercialization of our products. Any of these circumstances could harm our product development efforts.

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

We will either commercialize products resulting from our proprietary programs directly or through licensing to other companies. We have no experience in manufacturing or 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, each of which could require significant capital investment. 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.

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 United States 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 United States, 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 positions, are often uncertain and involve complex legal and factual questions. We apply for patents covering our technologies and potential products as we deem appropriate. However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Enforcement of our patents against

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infringers could require us to expend significant amounts with no assurance that we would be successful in any litigation. Others may independently develop similar or alternative technologies or design around our patented technologies or products. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages.

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

Litigation or other proceedings or third party claims of intellectual property infringement could require us to spend time and money and could require us to shut down some of our operations.

Our ability to develop products depends in part on not infringing patents or other proprietary rights of third parties, and not breaching any licenses that we have entered into with regard to our technologies and products. In particular, others have obtained patents and have filed, and in the future are likely to file, patent applications that may issue as patents that cover genes or gene fragments or corresponding proteins or peptides that we may wish to utilize to develop, manufacture and commercialize our product candidates. There are often multiple patents owned by third parties that cover particular proteins and related nucleic acids that are of interest to us in the development of our product candidates. To the extent these patents cover methods or compositions that we wish to use in developing, manufacturing or commercializing our product candidates, we would need to obtain a license from the proprietor of the relevant patent rights, which may not be available to us on acceptable terms, if at all.

Third parties may assert that we are employing their proprietary technology without authorization. In particular, our efforts to develop improved, next-generation protein pharmaceuticals could lead to allegations of patent infringement by the parties that hold patents covering other versions of such proteins or methods of making and using such proteins. In addition, third parties that do not have patents that currently cover our activities may obtain such patents in the future and then claim that our activities or product candidates infringe 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. In addition, 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.

Budget or cash constraints may force us to delay or terminate our efforts to develop certain products and could prevent us from executing our business plan, meeting our stated timetables and commercializing our potential products as quickly as possible.

Because we are an emerging company with limited resources, and because the research and development of pharmaceuticals is a long and expensive process, we must regularly assess the most efficient allocation of our research and development resources. Accordingly, we may choose to delay or terminate our research and development efforts for a promising product candidate to allocate those resources to another program, which could cause us to fall behind our timetables for development and prevent us from commercializing product

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candidates as quickly as possible. As a result, we may not be able to fully realize the value of some of our product candidates in a timely manner, since they will be delayed in reaching the market, or may not reach the market at all.

We are continuing our efforts to contain costs and continue to believe strict cost containment in the near term is essential if our current funds are to be sufficient to allow us to continue our currently planned operations. We assess market conditions on an ongoing basis and plan to take appropriate actions as required. However, we may not be able to effectively contain our costs and achieve an expense structure commensurate with our business activities and revenues. As a result, we could have inadequate levels of cash for future operations or for future capital requirements, which could significantly harm our ability to operate the business.

We may need additional capital in the future. If additional capital is not available, 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 and grants, will enable us to maintain our currently planned operations for at least the next twelve months. However, our current plans and assumptions may change, and our capital requirements may increase in future periods depending on many factors, including payments received under collaborative agreements and government grants, the progress and scope of our collaborative and independent research and development projects, the 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 have no committed sources of capital and do not know whether additional financing will be available when needed, or, if available, that the terms will be favorable to us or our stockholders. If additional funds are not available, we may be forced to delay or terminate research or pre-clinical development programs, clinical trials or the commercialization of products, if any, resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

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 or product development by others may result in our products and technologies becoming obsolete.

As a company that is focused on next-generation protein therapeutic products, we face, and will continue to face, intense competition from both 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 companies and organizations may develop technologies that are alternatives to our technologies. Further, our competitors in the protein optimization field, including companies that have developed and commercialized prior versions of protein therapeutic products, 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 may fail to achieve market acceptance, which would impair our ability to become profitable. Most of the companies and organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staff and facilities and capabilities, and greater experience in modifying DNA and proteins, obtaining regulatory approvals, manufacturing products and marketing. Our product candidates, even if approved by the FDA or a comparable foreign regulatory agency, may fail to achieve market acceptance, which would impair our ability to become profitable.

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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.

In addition, if any of our drug candidates are approved for commercial sale, they will need to compete with other products intended to treat the same disease, including the marketed versions of the protein therapeutic drug that we have sought to improve, and possibly including other variant versions of such drug, and generic bioequivalent or biosimilar versions of such drugs and small molecule drugs. Such competition may be intense and lead to price reductions for all forms of a particular therapeutic protein. If we are unable to market and commercialize our product successfully, our business would be adversely affected.

Legislative actions, recent and potential new accounting pronouncements and higher compliance costs are likely to adversely impact our future financial position and results of operations.

Recently adopted or future changes in financial accounting standards may cause adverse, unexpected earnings fluctuations and may adversely affect our reported results of operations. For example, our recent implementation of FASB Statement No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123(R), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based at their fair values had a material impact on our consolidated results of operations and net loss per share for the year ended December 31, 2006 and is expected to have a material impact on our results of operations in the future. The continued impact of expensing stock-based compensation will depend in part upon the timing and amount of future equity compensation awards. New accounting pronouncements and varying interpretations of such pronouncements have occurred with frequency in the recent past and may occur in the future. In addition, we may make changes in our accounting policies in the future.

Compliance with changing regulations regarding 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 and related SEC regulations and Nasdaq Global Market listing requirements, have created uncertainty for companies such as ours and compliance costs are increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment will result in increased general and administrative expenses and may cause a diversion of management time and attention from revenue-generating activities to compliance activities.

If we do not attract and retain key employees, our business could be impaired.

To be successful and achieve our objectives, we must attract and retain qualified scientific and management personnel. If we are unsuccessful in attracting and retaining qualified personnel, particularly at the management level, our business could be impaired. We have been successful in hiring and retaining key personnel in the past; however, we face significant competition for experienced, management level personnel. Although we believe have been successful in attracting and retaining qualified personnel, competition for experienced management personnel and scientists from numerous companies and academic and other research institutions may limit our ability to do so in the future on acceptable terms. Failure to attract and retain personnel could prevent us from pursuing collaborations or developing our products or core technologies.

The operation of international locations may increase operating expenses and divert management attention.

We conduct certain of our operations through Maxygen ApS, our Danish subsidiary. 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. The costs of operating internationally are expected to continue to exceed our international revenues, if any, for at least the next several years. As we continue to operate internationally, we are subject to risks of doing business internationally, including the following:

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

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

•  government limitations on research and/or research involving genetically engineered products or processes;

•  difficulties in staffing and managing foreign operations;

•  currency exchange risks; and

•  potentially adverse tax consequences.

Acquisitions could result in dilution, operating difficulties and other harmful consequences.

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

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

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

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

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

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

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

Our stock price has been, and may continue to be, extremely volatile, and an investment in our stock could decline in value.

The trading prices of life science company stocks in general, and ours in particular, have experienced significant price fluctuations in the last several years. During 2006, the price of our common stock on the Nasdaq Global Market ranged from $6.78 to $10.98. The valuations of many life science companies without product revenues and earnings, including ours, are based on valuation standards such as price to sales ratios and progress in product development 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. In addition, our stock price could be subject to wide fluctuations in response to factors including the following:

•  our failure to meet our publicly announced revenue and/or expense projections and/or product development timetables;

•  adverse or inconclusive results or delays in pre-clinical development or clinical trials;

•  any material amendment or termination of our collaborative agreements;

•  any decisions to discontinue or delay development programs or clinical trials;

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

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

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

•  developments in domestic and international governmental policy or regulations;

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

•  changes in general economic, political and market conditions, such as recessions, interest rate changes, terrorist acts and other factors;

•  developments in or challenges relating to patent or other proprietary rights; and

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

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

Substantial sales of shares may adversely impact the market price of our common stock.

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

Some of our existing stockholders can exert control over us, and may not make decisions that are in the best interests of all stockholders.

As of December 31, 2006, our executive officers and directors, together with GlaxoSmithKline plc, controlled approximately 26% of our outstanding common stock. As a result, these stockholders, if they act together, and GlaxoSmithKline plc, which owns approximately 18% of our outstanding common stock, 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 our company and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider. This concentration of ownership could also depress our stock price.

Item 1B   UNRESOLVED STAFF COMMENTS

Not applicable.

Item 2   PROPERTIES

As of March 1, 2007, we leased an aggregate of 56,980 square feet of office and laboratory facilities in Redwood City, California. Our leases expire on February 28, 2009 and include options to extend for an additional one-year term. We also lease an aggregate of 26,275 square feet of office and laboratory facilities in Horsholm, Denmark. This lease expires on October 31, 2010, but, as of October 31, 2005, may be terminated by us at any time upon six months notice.

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We believe that our existing facilities are adequate to meet our needs for the immediate future. We believe that we can accommodate future growth, if any, by leasing additional or alternative space. For additional information regarding our lease obligations, see Note 7 of the Notes to Consolidated Financial Statements.

Item 3   LEGAL PROCEEDINGS

In December 2001, a lawsuit was filed in the U.S. District Court for the Southern District of New York against us, our chief executive officer, Russell Howard, and our chief financial officer at the time of our initial public offering, 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 insurers of the 309 defendant issuers will pay to the plaintiffs $1 billion, less any recovery of damages the plaintiffs receive from the defendant underwriters. If the plaintiffs receive over $5 billion in damages from the defendant underwriters, we will be entitled to reimbursement of various expenses incurred by us as a result of the litigation. As part of the tentative settlement, we will assign to the plaintiffs “excess compensation claims” and certain other of our claims against the defendant underwriters based on the alleged actions of the defendant underwriters. The settlement is subject to acceptance by a substantial majority of defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. On February 15, 2005, the Court tentatively approved the proposed settlement, conditioned upon the parties altering the proposed settlement to comply with the Private Securities Litigation Reform Act’s settlement discharge provision. The settlement does not contemplate any settlement payments by us.

On December 5, 2006, the U.S. Second Circuit Court of Appeals reversed the District Court’s ruling certifying the consolidated cases as class actions. It cannot be determined at this time what effect this ruling will have on the settlement. If the decision by the Court of Appeals is not reversed, it is possible that individual lawsuits may be filed.

If the proposed settlement agreement is not finalized, and an action proceeds against us based on the facts alleged in the above referenced proceeding, we intend to defend the lawsuit vigorously. We believe the lawsuit against us and our officers is without merit. 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.

Item 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2006.

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Part II

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

Market Information

Our common stock has been traded on the Nasdaq Global Market under the symbol “MAXY” since December 16, 1999. During the last two fiscal years, through December 31, 2006, the high and low sale prices for our common stock, as reported on the Nasdaq Global Market, were as follows:

	High		Low
Year ended December 31, 2006
First Quarter	$	8.95	$	7.45
Second Quarter		8.44		7.01
Third Quarter		8.78		6.78
Fourth Quarter		10.98		7.97
Year ended December 31, 2005
First Quarter	$	12.64	$	8.15
Second Quarter		8.87		6.49
Third Quarter		9.25		6.85
Fourth Quarter		8.85		6.91

Holders

As of February 28, 2007, there were approximately 234 holders of record of our common stock, although we believe that there are a significantly larger number of beneficial owners of our common stock.

Dividends

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings, if any, for development of our business and, therefore, do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeable future.

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Company Stock Price Performance¹

The following graph shows the cumulative total stockholder return of an investment of $100 in cash on December 31, 2001 through December 31, 2006 for (i) the Company’s common stock, (ii) the Nasdaq Composite Index and (iii) the Nasdaq Biotechnology Index. All values assume reinvestment of the full amount of all dividends. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Maxygen, Inc., The NASDAQ Composite Index
And The NASDAQ Biotechnology Index

*  $100 invested on 12/31/01 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.

Total Return Analysis

	12/31/2001		12/31/2002		12/31/2003		12/31/2004		12/31/2005		12/31/2006
Maxygen, Inc.		100.00		43.37		60.50		72.79		42.74		61.30
Nasdaq Composite Index		100.00		71.97		107.18		117.07		120.50		137.02
Nasdaq Biotechnology Index		100.00		62.08		90.27		99.08		111.81		110.06

¹ The material in this section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of the Company’s filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

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Item 6   SELECTED FINANCIAL DATA

The following selected financial information is derived from our audited consolidated financial statements. When you read this selected financial data, it is important that you also read the historical financial statements and related notes included in this report, as well as the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results. Historical results include the consolidated operations of Codexis, Inc. for all periods through February 28, 2005. After that date, we account for Codexis, Inc. under the equity method of accounting.

	Year Ended December 31,
	2002			2003			2004			2005			2006
	(In thousands, except per share data)
Consolidated Statement of Operations Data:
Collaborative research and development revenue	$	24,818		$	20,573		$	14,333		$	11,594		$	20,544
Grant revenue		3,879			2,282			1,942			2,907			4,477
Total revenues		28,697			22,855			16,275			14,501			25,021
Operating expenses:
Research and development		54,328			45,949			53,586			41,904			49,130
General and administrative		12,381			11,831			14,435			13,221			17,559
Amortization of goodwill and other intangible assets		1,144			698			—			—			—
Total operating expenses		67,853			58,478			68,021			55,125			66,689
Loss from operations		(39,156	)		(35,623	)		(51,746	)		(40,624	)		(41,668	)
Interest income and other income (expense), net		7,981			5,253			4,055			5,572			8,524
Equity in net loss of minority investee		—			(500	)		(1,395	)		—			(1,000	)
Gain on sale of equity investment(1)		—			—			—			—			17,662
Loss from continuing operations		(31,175	)		(30,870	)		(49,086	)		(35,052	)		(16,482	)
Discontinued operations:
Loss from discontinued operations		(2,771	)		(1,586	)		(2,769	)		—			—
Gain on sale of discontinued operations (net of taxes and transaction costs)		—			—			61,197			—			—
Income (loss) from discontinued operations		(2,771	)		(1,586	)		58,428			—			—
Cumulative effect adjustment(2)		—			—			—			16,616			—
Net income (loss)		(33,946	)		(32,456	)		9,342			(18,436	)		(16,482	)
Subsidiary preferred stock accretion		—			(1,279	)		(1,000	)		(167	)		—
Income (loss) applicable to common stockholders	$	(33,946	)	$	(33,735	)	$	8,342		$	(18,603	)	$	(16,482	)
Basic and diluted income (loss) per share:
Continuing operations	$	(0.93	)	$	(0.89	)	$	(1.40	)	$	(0.98	)	$	(0.46	)
Discontinued operations	$	(0.08	)	$	(0.05	)	$	1.66		$	—		$	—
Cumulative effect adjustment	$	—		$	—		$	—		$	0.46		$	—
Applicable to common stockholders	$	(1.01	)	$	(0.98	)	$	0.24		$	(0.52	)	$	(0.46	)
Shares used in basic and diluted per share calculations		33,582			34,519			35,176			35,765			36,046

(1)	The gain on sale of equity investment in the year ended December 31, 2006 resulted from the net gain on the disposal of our investment in Avidia (see Note 1 of Notes to Consolidated Financial Statements).
(2)	The cumulative effect adjustment in the year ended December 31, 2005 resulted from the deconsolidation of Codexis, Inc. as of February 28, 2005 (see Note 1 of Notes to Consolidated Financial Statements).

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	December 31,
	2002			2003			2004			2005			2006
	(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments	$	219,138		$	191,868		$	232,893		$	188,323		$	182,876
Working capital		209,712			115,724			211,999			152,230			175,356
Total assets		269,764			234,069			263,105			214,523			205,647
Non-current portion of equipment financing		55			—			1,751			—			—
Minority interest		20,000			21,210			32,180			—			—
Accumulated deficit		(162,672	)		(195,128	)		(185,786	)		(204,222	)		(220,704	)
Total stockholders’ equity		229,199			198,224			211,341			197,344			189,799

QUARTERLY FINANCIAL DATA

	Quarter Ended
	March 31,			June 30,			Sept. 30,			Dec. 31,
	(In thousands, except per share data)
	(Unaudited)
2006
Collaborative research and development revenue	$	4,067		$	7,950		$	3,201		$	5,326
Grant revenue		898			1,355			1,040			1,184
Total revenues		4,965			9,305			4,241			6,510
Operating expenses:
Research and development		13,262			10,212			12,020			13,636
General and administrative		4,318			4,065			4,547			4,629
Total operating expenses		17,580			14,277			16,567			18,265
Loss from operations		(12,615	)		(4,972	)		(12,326	)		(11,755	)
Interest income and other income (expense), net		1,893			1,931			2,267			2,433
Equity in net loss of minority investee		—			(342	)		(658	)		—
Gain on sale of equity investment(1)		—			—			—			17,662
Income(loss) applicable to common stockholders	$	(10,722	)	$	(3,383	)	$	(10,717	)	$	8,340
Basic and diluted income (loss) per share:
Applicable to common stockholders	$	(0.30	)	$	(0.09	)	$	(0.30	)	$	0.23
Shares used in basic and diluted per share calculations		35,973			36,024			36,078			36,109

(1) The gain on sale of equity investment in the year ended December 31, 2006 resulted from the net gain on the disposal of our investment in Avidia (see Note 1 of Notes to Consolidated Financial Statements).

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	Quarter Ended
	March 31,			June 30,			Sept. 30,			Dec. 31,
	(In thousands, except per share data)
2005(1)
Collaborative research and development revenue	$	4,957		$	1,446		$	106		$	5,085
Grant revenue		592			500			629			1,186
Total revenues		5,549			1,946			735			6,271
Operating expenses:
Research and development		11,184			9,920			9,986			10,814
General and administrative		3,775			3,372			2,997			3,077
Total operating expenses		14,959			13,292			12,983			13,891
Loss from operations		(9,410	)		(11,346	)		(12,248	)		(7,620	)
Interest income and other income (expense), net		672			1,477			1,659			1,764
Loss from continuing operations		(8,738	)		(9,869	)		(10,589	)		(5,856	)
Cumulative effect adjustment(2)		16,616			—			—			—
Net income (loss)		7,878			(9,869	)		(10,589	)		(5,856	)
Subsidiary preferred stock accretion		(167	)		—			—			—
Income (loss) applicable to common stockholders	$	7,711		$	(9,869	)	$	(10,589	)	$	(5,856	)
Basic and diluted income (loss) per share:
Continuing operations	$	(0.25	)	$	(0.28	)	$	(0.30	)	$	(0.16	)
Cumulative effect adjustment	$	0.47		$	—		$	—		$	—
Applicable to common stockholders	$	0.22		$	(0.28	)	$	(0.30	)	$	(0.16	)
Shares used in basic and diluted per share calculations		35,658			35,702			35,812			35,888

(1)	Includes the consolidated operations of Codexis, Inc. through February 28, 2005. After that date, we account for Codexis, Inc. under the equity method of accounting.
(2)	The cumulative effect adjustment in the quarter ended March 31, 2005 resulted from the deconsolidation of Codexis, Inc. as of February 28, 2005 (see Note 1 of Notes to Consolidated Financial Statements).

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Item 7   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Forward-Looking Statements” and “Risk Factors.”

Executive Summary

We are a biotechnology company committed to the discovery and development of improved next-generation protein pharmaceuticals for the treatment of disease and serious medical conditions. We began operations in March 1997 with the mission to develop important commercial products through the use of biotechnology. Since then, we have established a focus in human therapeutics, particularly on the development and commercialization of optimized protein pharmaceuticals.

Our business strategy focuses on developing next-generation protein pharmaceuticals that address significant markets, on our own or with collaborative partners. Four of our next-generation product candidates are currently in clinical or pre-clinical development: MAXY-G34, a granulocyte colony stimulating factor, or G-CSF, product for the treatment of neutropenia; MAXY-alpha, an interferon alpha product for the treatment of hepatitis C virus infection and other indications; MAXY-VII, a factor VII product for the treatment of uncontrolled bleeding in trauma, intracerebral hemorrhage and other indications; and MAXY-gamma, an interferon gamma product for the treatment of idiopathic pulmonary fibrosis and other indications.

In August 2006, we initiated a Phase I clinical trial in the United States to evaluate Maxy-G34. In November 2006, F. Hoffman-La Roche Ltd., or Roche, initiated a Phase Ia clinical trial in New Zealand to evaluate MAXY-alpha. We received a $2.0 million milestone payment from Roche in the fourth quarter of 2006 as a result of the commencement of this clinical trial.

On March 13, 2007, we received notice from Roche that Roche will terminate its agreement with us relating to the co-development and commercialization of our MAXY-VII product candidates for acute bleeding indications, effective April 12, 2007, due to the inability of the parties to establish an animal model intended to provide pre-clinical de-risking of the program. In light of this development and other factors, we are currently evaluating our plans for the continued development of our MAXY-VII product candidates.

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

Prior to our focus on human therapeutics, we established two industrial subsidiaries, Codexis, Inc., or Codexis, and Verdia, Inc., or Verdia.

We established Codexis to focus on the development of biocatalysis and fermentation processes and advanced small-molecule pharmaceutical intermediaries for the pharmaceutical industry. Codexis received financing from third party investors and operated as an independent subsidiary beginning in September 2002. In February 2005, our voting rights in Codexis were reduced below 50%. As a result, we no longer consolidate the financial position and results of operations of Codexis with our financial results as of such date and instead account for Codexis under the equity method of accounting. To reflect what our basis in Codexis would have been under equity accounting, we recorded a cumulative effect adjustment of $16.6 million in the first quarter of 2005 to bring our investment basis in Codexis to zero as of February 28, 2005. At December 31, 2006, we had an equity interest in Codexis of approximately 32%. We are not obligated to fund the operations or other capital requirements of Codexis.

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We established Verdia to focus on the development of processes and products for the agricultural industry. On July 1, 2004, we completed the sale of Verdia to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for cash proceeds of $64.0 million.

In July 2003, we established Avidia Inc. (formerly Avidia Research Institute), or Avidia, together with a third-party investor. Avidia was formed as a spin-out of Maxygen to focus on the development of a new class of subunit proteins as therapeutic products. We also received equity interests in Avidia through our initial contribution of technology and funding and our participation in subsequent preferred stock financings of Avidia. On October 24, 2006, Amgen Inc. completed the acquisition of Avidia and Avidia became a wholly owned subsidiary of Amgen Inc. At the time of the acquisition of Avidia by Amgen Inc., our basis in Avidia was zero. As a result of the acquisition, we received approximately $17.8 million in cash in the fourth quarter of 2006 in exchange for our equity interests in Avidia and may receive up to an additional $2.8 million in cash, contingent upon the development of certain Avidia products by Amgen Inc. Under an agreement that we entered into with Avidia at the time of Avidia’s formation, we have retained exclusive and non-exclusive rights to use certain Avidia technology to develop and commercialize products directed to certain specific targets.

To date, we have generated revenues from research collaborations with pharmaceutical, chemical and agriculture companies and from government grants. However, over the past several years, we have strategically shifted our focus to pharmaceutical products and believe this is an important step in building long-term value in our company. Revenues from our research collaboration agreements were $20.5 million, $11.6 million and $14.3 million in 2006, 2005 and 2004, respectively. We expect our revenue to decrease in 2007 compared to 2006, primarily due to the loss of collaborative research and development revenue under our co-development agreement with Roche for our MAXY-VII product candidates, which Roche has elected to terminate, effective April 12, 2007. However, due to the nature of our research and our dependence on our collaborative partners to commercialize certain results of the research, our revenue may fluctuate substantially from year to year, based on the completion of new licensing or collaborative agreements and the achievement of development related milestones. As a result, due to the uncertain nature of the events generating the revenue, we cannot predict with any certainty whether we will receive future milestone payments or royalty payments under our collaborations or whether any particular collaboration or research effort will ultimately result in a commercial product.

For the purposes of this report, our continuing operations consist of the results of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen ApS (Denmark) and Maxygen Holdings Ltd. (Cayman Islands), as well as the results of Codexis through February 28, 2005.

We continue to maintain a strong cash position to fund our expanded product development efforts, with cash, cash equivalents and marketable securities totaling $182.9 million as of December 31, 2006.

We have incurred significant operating losses from continuing operations since our inception. As of December 31, 2006, our accumulated deficit was $220.7 million. We have invested heavily in establishing our proprietary technologies. Our research and development expenses for 2006 were $49.1 million, compared to $41.9 million in 2005 and $53.6 million in 2004 (including $2.5 million and $15.5 million of research and development expenses attributable to Codexis, our former chemicals segment, in 2005 and 2004, respectively). We expect to incur additional operating losses over at least the next several years.

Critical Accounting Policies and Estimates

General

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes (see Note 1 of Notes to Consolidated Financial Statements). Actual results could differ from those estimates. We believe the following are our critical accounting policies, including those that reflect the more significant judgments, estimates and assumptions we make in the preparation of our consolidated financial statements.

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Consolidation

The consolidated financial statements presented in this report include the amounts of us and our wholly-owned subsidiaries, Maxygen ApS (Denmark) and Maxygen Holdings Ltd. (Cayman Islands). For the year ended December 31, 2004 and for the two months ended February 28, 2005, 100% of the results of operations of Codexis are also included, as well as the financial position of Codexis at December 31, 2004.

As of February 28, 2005, primarily as a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH, our voting rights in Codexis were reduced below 50%. As a result, we no longer consolidate the financial position and results of operations of Codexis with our financial results as of such date. In accordance with EITF Consensus 96-16, “Investor Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Stockholder or Stockholders Have Certain Approval or Veto Rights” and paragraph 1 of ARB No. 51, “Consolidated Financial Statements,” we have included 100% of the net losses of Codexis in the determination of our net loss through February 28, 2005. In accordance with APB 18, “The Equity Method of Accounting for Investments in Common Stock,” we are accounting for our investment in Codexis under the equity method of accounting after February 28, 2005. We are not obligated to fund the operations or other capital requirements of Codexis. The operations of Verdia, Inc., prior to its sale on July 1, 2004, are reflected as discontinued operations. All significant intercompany balances and transactions have been eliminated in consolidation.

On July 15, 2003, we formed Avidia together with a third party investor. Until March 31, 2005, our investment in Avidia was accounted for under the equity method of accounting and our share of its results was recorded to the extent of our accounting basis in Avidia as a component of equity in net loss of minority investee in the Consolidated Statements of Operations. After March 31, 2005, our investment in Avidia was accounted for under the cost method of accounting. During the years ended December 31, 2004 and 2005, we had recorded losses equal to our investment basis in Avidia. On October 24, 2006, Amgen Inc. completed the acquisition of Avidia and Avidia became a wholly owned subsidiary of Amgen Inc. As a result of the acquisition, we received approximately $17.8 million in cash in the fourth quarter of 2006 in exchange for our equity interests in Avidia and may receive up to an additional $2.8 million in cash, contingent upon the development of certain Avidia products by Amgen Inc. For additional information regarding our investment in Avidia, see Notes 1 and 13 of Notes to Consolidated Financial Statements.

Goodwill and Intangible Impairment

In connection with our acquisition of Maxygen ApS in 2000, we allocated $26.2 million to goodwill and other intangible assets. Prior to the adoption of Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets,” or SFAS 142, in 2002, we amortized a portion of the goodwill each year. As of December 31, 2001, the net goodwill balance was $12.2 million. Beginning on January 1, 2002, goodwill is no longer amortized and goodwill and other intangible assets are generally evaluated on an individual acquisition or market basis at least annually whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. In accordance with SFAS 142, we review our long-lived assets (including goodwill) for impairment at least annually based on estimated future discounted cash flows attributable to the assets and other factors to determine the fair value of the respective assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets will be written down to their estimated fair values. No impairment charges were recorded in 2004, 2005 or 2006.

The valuation in connection with the initial purchase price allocation and the ongoing evaluation for impairment of goodwill and intangible assets requires significant management estimates and judgment. The purchase price allocation process requires management estimates and judgment as to expectations for various products and business strategies. If any of the significant assumptions differ from the estimates and judgments used in the purchase price allocation, this could result in different valuations for goodwill and intangible assets. Once it is established, we must test goodwill annually for impairment using a two-step process as required by SFAS 142. In addition, in certain circumstances, we must assess if goodwill should be tested for impairment between annual tests. Intangible assets with definite useful lives must be tested for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” When we conduct our impairment tests for goodwill and intangibles, factors that are considered important in determining whether impairment might exist

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include existing product portfolio, product development cycle, development expenses, potential royalties and product sales, costs of goods and selling expenses and overall product lifecycle. Any changes in key assumptions about the business and its prospects, or changes in market conditions or other external events, could result in an impairment charge and such a charge could have a material adverse effect on our consolidated results of operations.

Source of Revenue and Revenue Recognition Policy

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

Revenue related to performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements. Substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event when we have no future performance obligations related to the payment and we judge the event to be the culmination of a separate earnings process. Incentive milestone payments are triggered either by the results of our research efforts or by events external to us, such as regulatory approval to market a product. We receive royalties from licensees, which are based on sales to third parties of licensed products. Royalties are recorded as earned in accordance with the contract terms when third-party results can be reliably measured and collectibility is reasonably assured.

Non-refundable up-front payments received in connection with research and development collaboration agreements, including license fees, and technology advancement funding that is intended for the development of our core technologies, are deferred upon receipt and recognized as revenue over the relevant research and development periods specified in the agreement. Under arrangements where we expect our research and development obligations to be performed evenly over the specified period, the up-front payments are recognized on a straight-line basis over the period. Under arrangements where we expect our research and development obligations to vary significantly from period to period, we recognize the up-front payments based upon the actual amount of research and development efforts incurred relative to the amount of our total expected effort. In cases where the planned levels of research services fluctuate substantially over the research term, this requires us to make critical estimates in both the remaining time period and the total expected costs of our obligations and, therefore, a change in the estimate of total costs to be incurred or in the remaining time period could have a significant impact on the revenue recognized in future periods.

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

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

Our sources of potential revenues for the next several years are likely to be license fees, research funding and milestone payments under existing and possible future collaborative arrangements and government research grants. See Note 3 of Notes to Consolidated Financial Statements.

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Stock-Based Compensation Expense

Beginning on January 1, 2006, we began accounting for stock options and shares purchased under our Employee Stock Purchase Plan, or ESPP, under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” or SFAS 123(R), which requires the recognition of the fair value of equity-based compensation. We estimate the fair value of stock options and ESPP shares using the Black-Scholes-Merton option valuation model. This model requires the input of subjective assumptions in implementing SFAS 123(R), the most significant of which are our estimates of the expected volatility of the market price of our stock and the expected term of each award. We estimate expected volatility and future stock price trends based on a combination of historical and implied volatilities. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures), the expected volatility, and a comparison to relevant peer group data. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be significantly different from what we have recorded in the current period.

We have adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, compensation cost recognized during the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting For Stock-Based Compensation,” amortized on a graded vesting basis over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R) amortized on a straight-line basis over the options’ vesting period. Under this method of implementation, no restatement of prior periods has been made. Prior to our implementation of SFAS 123(R), we accounted for stock options and ESPP shares under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25, and related interpretations and made pro forma footnote disclosures as required by SFAS No. 148, “Accounting For Stock-Based Compensation — Transition and Disclosure,” which amended SFAS 123. Since the exercise price of all options granted was not below the fair market price of the underlying common stock on the grant date, prior to our implementation of SFAS 123(R) we generally recognized no equity-based compensation expense in our condensed consolidated statements of operations. Accordingly, there was no stock-based compensation expense related to employee stock options recognized during 2004 or 2005. See Note 1 of Notes to Consolidated Financial Statements under the caption “Stock-Based Compensation” for a further discussion.

Stock-based compensation expense recognized under SFAS 123(R) in the Consolidated Statements of Operations for the year ended December 31, 2006 was $5.7 million related to employee stock options, $914,000 related to consultant stock options and $87,000 related to the ESPP. As a result of its implementation of SFAS 123(R), our net loss for the year ended December 31, 2006 increased by $6.7 million. The implementation of SFAS 123(R) also increased basic and fully diluted loss per share from continuing operations by $0.19 for the year ended December 31, 2006. The implementation of SFAS 123(R) did not have an impact on cash flows from operations during the year ended December 31, 2006.

In connection with the grant of stock options to employees before our initial public offering, we recorded deferred stock compensation of approximately $2.4 million in 1998 and $19.5 million in 1999 under the provisions of APB 25. These amounts were initially recorded as a component of stockholders’ equity and were amortized as charges to operations over the vesting period of the options using a graded vesting method. We recognized stock compensation expense related to the deferred compensation amortization on these option grants, which relate to research and development expense and general and administrative expense, as shown in the following table (in thousands):

	2004		2005		2006
Research and development	$	178	$	—	$	—
General and administrative		59		—		—

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

In connection with the grant of stock options to consultants, we recorded stock compensation expense of $118,000 in 2004, $102,000 in 2005 and $914,000 in 2006. Stock compensation expense in connection with the grant of stock options to consultants included in research and development expense was $96,000 in 2004, $102,000 in 2005 and $12,000 in 2006. Stock compensation expense in connection with the grant of stock options to consultants included in general and administrative expense was $22,000 in 2004, none in 2005 and $902,000 in 2006.

Results of Operations

Revenues

Our total revenues were $25.0 million in 2006, compared to $14.5 million in 2005 and $16.3 million in 2004. Our revenues are derived primarily from research collaboration agreements and government research grants. Revenues from our research collaboration agreements were $20.5 million, $11.6 million and $14.3 million in 2006, 2005 and 2004, respectively, and revenues from government research grants were $4.5 million, $2.9 million and $1.9 million in 2006, 2005 and 2004, respectively.

The increase in collaborative research and development revenue of $9.0 million from 2005 to 2006 (including $1.5 million of revenues attributable to Codexis in 2005) was primarily due to collaborative research and development revenue from our collaboration with Roche for our MAXY-VII product candidates, including milestone payments totaling $7.0 million. The decrease in collaborative research and development revenue of $2.7 million from 2004 to 2005 was primarily due to the completion of the research and development funding terms of several collaborations during those periods and the deconsolidation of Codexis as of February 2005. This decrease was offset, in part, by the achievement of significant milestones from Roche in 2005 totaling $7.0 million with regard to our MAXY-alpha product candidates. The increase in grant revenue of $1.0 million from 2004 to 2005 and $1.6 million from 2005 to 2006 primarily reflects an increase in activity due to the beginning of three new government grant projects in the third quarter of 2005.

In 2006, Roche was the only collaborative partner that contributed to our collaborative research and development revenues. The initial funded research term of our collaboration with Roche for our MAXY-alpha product candidates ended in December 2005. In December 2005, we entered into a new collaboration with Roche for co-development and commercialization of our MAXY-VII product candidates. For the year ended December 31, 2006, revenues for the co-development of our MAXY-VII product candidates are net of the cost sharing amounts that we owed to Roche. Our revenues for 2006 relating to our MAXY-VII collaboration with Roche consisted primarily of a $5.0 million milestone payment, $11.1 million earned as net reimbursement of our research and development activities and $2.4 million related to the amortization of the non-refundable up-front payment we received from Roche in December 2005. Our revenues for 2006 also include a $2.0 million milestone payment we received from Roche as a result of the initiation by Roche of clinical trials of our MAXY-alpha product candidate. In March 2007, we received written notice from Roche that it has elected to terminate the collaboration agreement for co-development and commercialization of our MAXY-VII product candidates, effective April 12, 2007. As a result of the termination of the agreement, we have approximately $5.6 million of deferred revenue relating to the up-front fee of $8 million received from Roche in 2005 that we expect to recognize in the first half of 2007.

We expect our revenue for 2007 to decrease compared to 2006, due primarily to the loss of collaborative research and development revenue, including revenue earned as net reimbursement of our research and development activities, under our co-development agreement with Roche for our MAXY-VII product candidates, which Roche has elected to terminate, effective April 12, 2007. However, due to the nature of our research and our dependence on our collaborative partners to commercialize certain results of the research, our revenue may fluctuate substantially from year to year, based on the completion of new licensing or collaborative agreements and the achievement of development related milestones. As a result, due to the uncertain nature of the events generating the revenue, we cannot predict with any certainty whether we will receive future milestone payments or royalty payments under our collaborations or whether any particular collaboration or research effort will ultimately result in a commercial product.

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Prior to our deconsolidation of Codexis, as of February 28, 2005, we operated as two segments, human therapeutics and chemicals. Revenues for each operating segment were derived from our research collaboration agreements and government research grants and were categorized based on the industry of the product or technology under development. Results of Codexis through February 28, 2005 are shown as our chemicals segment. After February 28, 2005, we have operated as one segment, human therapeutics. The following table presents revenues for each operating segment (in thousands):

	Year Ended December 31,
	2004		2005		2006
Human therapeutics	$	11,555	$	12,991	$	25,021
Chemicals (through February 28, 2005)		4,720		1,510		—
Total revenue	$	16,275	$	14,501	$	25,021

The increased revenue for our human therapeutics segment from 2005 to 2006 was primarily due to collaborative research and development revenue from our collaboration with Roche for our MAXY-VII product candidates and an increase in activity on our existing grant projects. The increased revenue for our human therapeutics segment from 2004 to 2005 primarily reflects the achievement of significant milestones from Roche in the first and fourth quarters of 2005, totaling $7.0 million, for our MAXY-alpha program. This increase was partially offset by a decrease in revenue from various research collaborations that came to completion during 2004 and 2005. We expect revenue to decrease in 2007, primarily due to the loss of collaborative research and development revenue under our co-development agreement with Roche for our MAXY-VII product candidates, which Roche has elected to terminate, effective April 12, 2007.

During 2005 and 2006, Roche was the only collaborative partner that contributed collaborative research revenue to our human therapeutics segment. The funded research term of our collaboration with Roche for our MAXY-alpha product candidates ended in December 2005. In December 2005, we entered into a new collaboration with Roche, which became effective in December 2005, for co-development and commercialization of our MAXY-VII product candidates. In March 2007, we received written notice from Roche that it has elected to terminate this agreement, effective April 12, 2007.

Research and Development Expenses

Our research and development expenses consist primarily of salaries and other personnel-related expenses, research consultants and external collaborative research expenses (including contract manufacturing and research), facility costs, supplies and depreciation of facilities, and expensed laboratory equipment. Research and development expenses were $49.1 million in 2006, $41.9 million in 2005 and $53.6 million in 2004 (including $2.5 million and $15.5 million of research and development expenses attributable to Codexis in 2005 and 2004, respectively).

Excluding Codexis, the increases in our research and development expenses of $9.8 million from 2005 to 2006 and $1.3 million from 2004 to 2005 were primarily related to increased external collaborative research expenses associated with the development of our product candidates, including the manufacture of product candidates for clinical trials. For 2006, our implementation of FAS 123(R) also increased our research and development expenses compared to 2005. The increase in research and development expenses from 2004 to 2005 was also due to termination charges of $471,000 in 2005 related to a reduction in force of research and development personnel announced on June 16, 2005.

Stock compensation expenses included in research and development expenses increased from $115,000 in 2005 to $2.1 million in 2006, primarily as a result of our implementation of SFAS 123(R). See Note 1 of Notes to Consolidated Financial Statements under the caption “Stock-Based Compensation.” Stock compensation expenses included in research and development expenses decreased from $292,000 in 2004 to $115,000 in 2005, primarily as a result of the amortization of deferred compensation relating to the grant of stock options to employees before our initial public offering, which was fully amortized to expense by August 2004.

We do not track fully burdened research and development costs by project. However, we do estimate, based on full-time equivalent personnel effort, the percentage of research and development efforts (as measured in hours

38

incurred, which approximates costs) undertaken for projects funded by our collaborators and government grants, on the one hand, and projects funded by us, on the other hand. To approximate research and development expenses by funding category, the number of hours expended in each category has been multiplied by the approximate cost per hour of research and development effort and added to project-specific external costs. In the case where a collaborative partner is sharing the research and development costs, the expenses for that project are allocated proportionately between the collaborative projects funded by third parties and internal projects. We believe that presenting our research and development expenses in these categories will provide our investors with meaningful information on how our resources are being used.

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

	Year Ended December 31,
	2004		2005		2006
Collaborative projects funded by third parties(1)	$	9,444	$	4,146	$	9,906
Government grants		1,973		2,369		4,215
Internal projects		42,169		35,389		35,009
Total	$	53,586	$	41,904	$	49,130

(1) Research and development expenses related to collaborative projects funded by third parties may be less than the reported revenues due to the amortization of non-refundable up-front payments, as well as a portion of the collaborative research and development revenue that is charged for general and administrative expenses.

Our product development programs are at an early stage and may not result in any marketed products. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. Product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to pass through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals, may prove impracticable to manufacture in commercial quantities at reasonable costs and with acceptable quality and may be barred from commercialization if they are found to infringe or otherwise violate a third party’s intellectual property rights. In addition, competitors may develop superior competing products. Furthermore, it is uncertain which of our internally developed product candidates will be subject to future collaborative arrangements. The participation of a collaborative partner may accelerate the time to completion and reduce the cost to us of a product candidate or it may delay the time to completion and increase the cost to us due to the alteration of our existing strategy. The risks and uncertainties associated with our research and development projects are discussed more fully in the section of this report entitled “Item 1A — Risk Factors.” Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the development of any of our product candidates or the ultimate product development cost in any particular case.

We expect that our research and development costs will increase in 2007 over 2006, primarily due to an increase in research and development costs resulting from advancement of our MAXY-G34 product candidates through clinical development. In addition, due to the termination by Roche of our agreement for the co-development of our MAXY-VII product candidates, we are currently evaluating our plans for the continued development of these product candidates and the research and development expenses associated with such development. We expect to continue to devote substantial resources to research and development and we expect research and development expenses to increase over the next several years if we are successful in advancing our product candidates into and through clinical trials. To the extent we out-license our product candidates prior to commencement of clinical trials or collaborate with others with respect to clinical trials, increases in research and development expenses may be reduced or avoided. We intend to manage the level of our expenditures for research and development, including clinical trials, to balance advancing our product candidates against maintaining adequate cash resources for our operations. Our implementation of SFAS 123(R) had a material impact on our consolidated results of operations and net loss per share for the year ended December 31, 2006 and is expected to have a material impact on our consolidated results of operations and net loss per share in the future. The continued impact of our implementation of SFAS 123(R) will depend on, among other things, the levels of share-based payments granted in the future. See Note 1 of Notes to Consolidated Financial Statements under the caption “Stock-Based Compensation.”

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General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel costs for finance, legal, general management, business development and human resources, as well as insurance premiums and professional expenses, such as external expenditures for legal and accounting. General and administrative expenses were $17.6 million in 2006, compared to $13.2 million in 2005 and $14.4 million in 2004. General and administrative stock compensation expense was $4.6 million in 2006, $68,000 in 2005 and $63,000 in 2004.

The increase in general and administrative expenses of $4.3 million from 2005 to 2006 was primarily due to the increase in stock compensation expense included in general and administrative expenses resulting from our implementation of SFAS 123(R). This increase was offset in part by reduced personnel costs resulting from terminations and the deconsolidation of Codexis in 2005. The decrease in general and administrative expenses of $1.2 million from 2004 to 2005 was primarily due to the deconsolidation of Codexis, as of February 28, 2005, offset by an increase in professional fees related to an increase in market research and product profile development activity and regulatory compliance costs, as well as termination charges of $336,000 related to a reduction in force announced on June 16, 2005. Excluding Codexis, general and administrative expenses increased from $11.9 million in 2004 to $12.9 million in 2005, primarily due to increases in salaries and benefits, fees associated with compliance activities relating to the Sarbanes-Oxley Act of 2002 and the expiration of certain benefits under our services agreements with Codexis that required Codexis to reimburse us for certain administrative expenses.

Our general and administrative expenses may increase in 2007. We adopted SFAS 123(R) as of January 1, 2006 and expect that stock-based compensation expense will continue to have a material impact on our consolidated results of operations and net loss per share. The ongoing impact of our implementation of SFAS 123(R) on our general and administrative expenses will depend on, among other things, the levels of share-based payments granted in the future.

Interest Income and Other Income (Expense), Net

Interest income and other income (expense), net represents income earned on our cash, cash equivalents and marketable securities, net of currency transaction gains or losses related to the funding of our Danish subsidiary, Maxygen ApS. Interest income and other income (expense), net was $8.5 million in 2006, compared to $5.6 million in 2005 and $4.1 million in 2004. Included in these amounts are foreign exchange losses of $137,000 in 2006 and $537,000 in 2005 and foreign exchange gains of $552,000 in 2004. The increase in interest income and other income (expense), net from 2005 to 2006 reflects higher interest income reflecting higher interest rates in 2006 on lower average balances of cash, cash equivalents and marketable securities, plus a decrease in foreign exchange losses. The increase in interest income and other income (expense), net from 2004 to 2005 was primarily due to higher interest income from higher average balances of cash, cash equivalents and marketable securities, and higher interest rates, offset in part by an increase in foreign exchange losses.

Equity in Losses of Minority Investee

Equity in losses of minority investee reflects our share of the net loss of Codexis. In May 2006, we purchased $600,000 of secured subordinated convertible promissory notes and, in August 2006, the notes and accrued interest were converted into Codexis preferred stock and we purchased approximately $400,000 of additional preferred stock. Subsequent to our investments in May and August 2006, we recorded losses of $1.0 million under the equity method of accounting and as of December 31, 2006, we had recorded losses equal to our investment basis in Codexis. We are not obligated to fund the operations or other capital requirements of Codexis. As of December 31, 2006, the Company’s equity interest in Codexis was approximately 32%.

Gain on Sale of Equity Investment

On October 24, 2006, Amgen Inc. completed the acquisition of Avidia and Avidia became a wholly owned subsidiary of Amgen Inc. As a result of the acquisition, we received approximately $17.8 million in cash in the fourth quarter of 2006 in exchange for our equity interests in Avidia and may receive up to an additional $2.8 million in cash, contingent upon the development of certain Avidia products by Amgen Inc. We reported an income tax provision of $140,000 attributable to federal alternative minimum taxes as a result of the gain on sale of our equity

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interests in Avidia. Accordingly, we recorded a gain net of taxes on disposal of this investment of approximately $17.7 million in the fourth quarter of 2006. See Notes 1 and 13 of Notes to Consolidated Financial Statements.

Discontinued Operations

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

Cumulative Effect Adjustment

Codexis was formed in January 2002 and financed by us and several other investors in September and October of 2002. In August 2004, Codexis received additional equity funding from Pfizer Inc. Until February 28, 2005, we recognized 100% of the operating results of Codexis, even though we only owned a majority of the voting interests in Codexis. At such time, we had recorded cumulative losses of Codexis in the amount of $26.4 million, which was in excess of our investment basis of $9.8 million. On February 28, 2005, our voting rights in Codexis were reduced below 50%. As a result, we no longer consolidate the financial position and results of operations of Codexis with our financial results as of such date and instead account for Codexis under the equity method of accounting. To reflect what our basis in Codexis would have been under equity accounting, we recorded a non-recurring cumulative effect adjustment of $16.6 million in the first quarter of 2005 to bring our investment basis in Codexis to zero as of February 28, 2005. This cumulative effect adjustment does not have any tax consequences.

Subsidiary Preferred Stock Accretion

In 2002, Codexis sold $25 million of Codexis series B redeemable convertible preferred stock to investors, of which $5 million was purchased by us and $20 million was purchased by several other investors. In connection with the redemption rights of the Codexis series B stockholders, we recorded accretion of the redemption premium for the series B redeemable convertible preferred stock, excluding the shares owned by us, in the amount of $167,000 and $1.0 million for the years ended December 31, 2005 and 2004, respectively. The accretion was recorded as subsidiary preferred stock accretion on the condensed consolidated statement of operations and as a reduction of additional paid-in capital and an increase to minority interest on the condensed consolidated balance sheets. No accretion was recorded for the year ended December 31, 2006. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets of Codexis. Since we no longer consolidate the financial position of Codexis, as of February 28, 2005, we no longer recognized accretion for the Codexis redemption premium. We also no longer reflect amounts as minority interest on the condensed consolidated balance sheets. We have recorded a $2.3 million adjustment to additional paid-in capital in the three month period ended March 31, 2005 to eliminate the reduction of additional paid-in capital that had resulted from Codexis’ preferred stock accretion prior to February 28, 2005.

Provision for Income Taxes

Income tax expense from continuing operations for the year ended December 31, 2006 was $140,000. No income tax expense was recorded from continuing operations for the years ended December 31, 2005 and 2004. In 2006, we reported an income tax provision of $140,000 attributable to federal alternative minimum taxes as a result of the gain on the sale of our equity interests in Avidia. This amount has been netted against the gain on sale of our equity interests in Avidia and is reflected in gain on sale of equity investment in the Consolidated Statement of Operations. For 2005, there was no provision for U.S. federal, U.S. state, or foreign income taxes as we incurred operating losses for all jurisdictions. For 2004, we reported an income tax provision of $921,000 attributable to alternative minimum taxes as a result of the sale of Verdia. This amount has been netted against the gain on sale of Verdia and is reflected in gain on sale of discontinued operations in the Consolidated Statement of Operations.

Deferred tax assets and the associated valuation allowance increased by $5.6 million in 2006 due primarily to increases in state and foreign net operating loss carryforwards and deferred taxes related to deductible stock option compensation, offset in part by the use of federal net operating loss carryforwards and a reduction in capitalized research and development costs due to a reduction in state tax rate. The valuation allowance decreased by $2.1 million during 2005 due to the removal of Codexis’ deferred tax assets due to the deconsolidation of Codexis,

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offset by increases in net operating losses and tax credit carryforwards. Deferred tax assets and the associated valuation allowance decreased by $10.2 million during 2004 due to the use of net operating loss carryforwards to offset the income due to the sale of Verdia.

As of December 31, 2006, we had net operating loss carryforwards for federal income tax purposes of approximately $29.4 million, which expire in the years 2022 through 2026, and federal research and development tax credit carryforwards of approximately $2.6 million, which expire in the years 2012 through 2026. As of December 31, 2006, we had net operating loss carryforwards for state income tax purposes of approximately $23.5 million that expire in the years 2015 and 2016 and state research and development tax credits of approximately $2.7 million that have no expiration date.

Utilization of our net operating losses and credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses and credits before utilization. See Note 10 of the Notes to Consolidated Financial Statements.

New Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48, as an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” or SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 will not have a material effect on our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS 157. SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ request for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS 157 will have on our consolidated results of operations and financial condition.

In September 2006, the Securities and Exchange Commission issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” or SAB 108. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year effects of each of the company’s balance sheet and statement of operations and the related financial statement disclosures. Early application of the guidance in SAB 108 is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006. The application of the guidance did not have a material impact on our balance sheet and statement of operations and the related financial statement disclosures.

Liquidity and Capital Resources

Since inception, we have financed our continuing operations primarily through private placements and public offerings of equity securities, research and development funding from collaborators and government grants. In addition, as a result of the acquisition of Avidia by Amgen Inc., we received approximately $17.8 million in cash in the fourth quarter of 2006 in exchange for our equity interests in Avidia and, on July 1, 2004, we received cash proceeds of $64.0 million in cash from the sale of Verdia, our former agriculture subsidiary and the sole component of our agriculture segment. As of December 31, 2006, we had $182.9 million in cash, cash equivalents and marketable securities.

Net cash used in operating activities was $22.1 million in 2006, compared to $29.9 million in 2005 and $34.3 million in 2004. Uses of cash in operating activities were primarily to fund losses from continuing operations. The $7.8 million decrease in cash used in operating activities from 2005 to 2006 primarily relates to the timing of payments received from Roche. For 2005, net cash used in operating activities includes a one-time upfront payment of $8.0 million related to our MAXY-VII program, which we recorded as deferred revenue. For 2006, net cash used in operating activities includes the receipt of $12.0 million related to various milestone payments under our collaboration agreements with Roche,

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$5.0 million of which related to our MAXY-alpha program and was recorded as revenue and accounts receivable in 2005. Also, operating expenses in 2006 included incremental non-cash stock compensation expense of $5.7 million. The decrease in cash used in operating activities from 2004 to 2005 primarily relates to decreased expenditures in 2005 due to the deconsolidation of Codexis, offset in part by the payment of accrued expenses relating to annual bonuses for 2004 and program termination costs during 2005 that were not paid in 2004.

Net cash provided by investing activities was $40.7 million in 2006, compared to $16.3 million in 2005 and $34.6 million in 2004. The cash provided during 2005 and 2006 was primarily related to maturities of available-for-sale securities in excess of purchases, offset in 2005 by the $2.6 million used by Codexis to acquire Julich Fine Chemicals GmbH in February 2005. In addition, in 2006, we received cash from the sale of our equity interests in Avidia. The cash provided during 2004 was primarily related to net cash proceeds received from the sale of Verdia of $61.2 million, offset by purchases of available-for-sale securities and a $1.4 million loan provided to Avidia. The majority of additions of property and equipment in 2004 and 2005 related to Codexis’ investment in its bioprocessing facility. We expect to continue to make investments in the purchase of property and equipment to support our operations. We may use a portion of our cash to acquire or invest in businesses, products or technologies, or to obtain the right to use such technologies.

Net cash provided by financing activities was $1.0 million in 2006, compared to $2.2 million in 2005 and $16.6 million in 2004. The cash provided during 2005 and 2006 was primarily from proceeds from the sale of common stock in connection with our ESPP and the exercise of stock options by employees. The cash provided during 2005 also included proceeds of equipment loans entered into by Codexis, net of repayments of such loans. The cash provided in 2004 was primarily related to Codexis’ receipt of $10 million from the purchase of its equity securities by Pfizer Inc., the proceeds of $2.3 million from equipment loans entered into by Codexis, and $4.3 million from the exercise of stock options by employees and the proceeds of the sale of our common stock in connection with our ESPP.

There was no cash provided by or used for discontinued operations in 2005 or 2006. Cash provided by discontinued operations was $2.9 million in 2004 and was related to Verdia’s final payment for services provided by us and reimbursement to us for payments made on behalf of Verdia prior to the sale of Verdia to Pioneer Hi-Bred International, Inc.

In accordance with FASB Statement No. 52, “Foreign Currency Translation,” the functional currency for our Danish operations is its local currency. The effects of foreign exchange rate changes on the translation of the local currency financial statements into U.S. dollars are reported as a component of accumulated other comprehensives loss on the Consolidated Balance Sheets. The effect of exchange rate changes on cash and cash equivalents was a reduction of $55,000 in 2006, an increase of $276,000 in 2005 and a reduction of $582,000 in 2004.

The following are contractual commitments as of December 31, 2006 associated with lease obligations and purchase obligations (in thousands):

	Payments Due by Period
			Less						More
			Than 1		1-3		4-5		Than 5
Contractual Obligations	Total		Year		Years		Years		Years
Operating lease obligations	$	2,957	$	1,585	$	1,372	$	—	$	—
Purchase obligations		7,152		5,591		1,561		—		—
Total	$	10,109	$	7,176	$	2,933	$	—	$	—

As of December 31, 2006, we were eligible to receive up to $50.0 million in potential milestone payments from Roche under our existing collaboration agreement relating to the development of our MAXY-alpha product candidates. We may also earn royalties on future product sales, if any.

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

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and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results.

Item 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including corporate obligations and money market funds. All investments and substantially all cash and cash equivalents are held in U.S. currency, with approximately 5.9% of cash and cash equivalents held in Danish kroner at December 31, 2006. As of December 31, 2006, approximately 98% of our total portfolio was scheduled to mature in one year or less, with the remainder maturing in less than two years.

The following table represents the fair value balance of our cash, cash equivalents, short-term and long-term investments that are subject to interest rate risk by average interest rates as of December 31, 2006 (dollars in thousands):

	Expected Maturity
	2007			2008
Cash and cash equivalents	$	46,504		$	—
Average interest rates		4.79	%		—
Short-term investments	$	133,384		$	—
Average interest rates		4.60	%		—
Long-term investments	$	—		$	2,988
Average interest rates		—			5.25	%

We did not hold derivative instruments intended to mitigate interest rate risk as of December 31, 2006, and we have never held such instruments in the past. If market interest rates were to increase by 100 basis points, or 1%, from December 31, 2006 levels, the fair value of our portfolio would decline by approximately $1.9 million. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes ending fair values include principal plus accrued interest.

Foreign Currency Exchange Risk

A portion of our operations consist of research and development activities performed in Denmark by our wholly-owned subsidiary, Maxygen ApS. The functional currency of Maxygen ApS is the Danish kroner. In 2006, excluding stock compensation expenses, approximately 55% of our operating expenses related to Maxygen ApS. As a result, our financial results may be affected by changes in the foreign currency exchange rates of the Danish kroner and the euro. A decrease in the value of the U.S. dollar against the Danish kroner or the euro will result in an increase of our reported operating expenses. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign currency exchange rates, we from time to time enter into cash flow hedging arrangements. Currency forward contracts are utilized in these hedging arrangements. Our hedging arrangements are intended to reduce, but may not always eliminate, the impact of foreign currency exchange rate movements. Gains and losses on these foreign currency investments are generally offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to us on the amounts hedged.

At December 31, 2006, we have no foreign currency contracts outstanding in the form of forward exchange contracts. During 2006, we recognized $43,000 in foreign exchange gains from hedge contracts and, during 2005, we recognized $150,000 in foreign exchange losses from hedge contracts. These gains and losses were included with operating expenses. At December 31, 2005, we had foreign currency contracts outstanding in the form of forward exchange contracts totaling $5.3 million.

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Item 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Maxygen, Inc.

We have audited the accompanying consolidated balance sheets of Maxygen, Inc. as of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxygen, Inc. at December 31, 2005 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 2006, Maxygen, Inc. changed its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Maxygen, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2007 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Palo Alto, California

March 13, 2007

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MAXYGEN, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2006
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	26,940		$	46,504
Short-term investments		127,336			133,384
Accounts receivable and other receivables		6,076			4,099
Prepaid expenses and other current assets		3,530			3,133
Total current assets		163,882			187,120
Property and equipment, net		4,068			3,262
Goodwill		12,192			12,192
Long-term investments		34,047			2,988
Deposits and other long-term assets		334			85
Total assets	$	214,523		$	205,647
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,540		$	2,435
Accrued compensation		4,323			4,708
Other accrued liabilities		3,121			2,954
Deferred revenue		2,668			1,527
Taxes payable		—			140
Total current liabilities		11,652			11,764
Non-current deferred revenue		5,517			4,066
Other long-term liabilities		10			18
Commitments and contingencies (Notes 7 and 11)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2005 and 2006		—			—
Common stock, $0.0001 par value, 100,000,000 shares authorized, 35,922,178 and 36,157,910 shares issued and outstanding at December 31, 2005 and 2006, respectively		3			4
Additional paid-in capital		403,120			411,195
Accumulated other comprehensive loss		(1,557	)		(696	)
Accumulated deficit		(204,222	)		(220,704	)
Total stockholders’ equity		197,344			189,799
Total liabilities and stockholders’ equity	$	214,523		$	205,647

See accompanying notes.

46

MAXYGEN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2004			2005			2006
	(In thousands, except per share data)
Collaborative research and development revenue	$	14,333		$	11,594		$	20,544
Grant revenue		1,942			2,907			4,477
Total revenues		16,275			14,501			25,021
Operating expenses:
Research and development		53,586			41,904			49,130
General and administrative		14,435			13,221			17,559
Total operating expenses		68,021			55,125			66,689
Loss from operations		(51,746	)		(40,624	)		(41,668	)
Interest income and other income (expense), net		4,055			5,572			8,524
Equity in net loss of minority investee		(1,395	)		—			(1,000	)
Gain on sale of equity investment		—			—			17,662
Loss from continuing operations		(49,086	)		(35,052	)		(16,482	)
Discontinued operations:
Loss from discontinued operations		(2,769	)		—			—
Gain on sale of discontinued operations (net of taxes and transaction costs)		61,197			—			—
Income (loss) from discontinued operations		58,428			—			—
Cumulative effect adjustment		—			16,616			—
Net income (loss)		9,342			(18,436	)		(16,482	)
Subsidiary preferred stock accretion		(1,000	)		(167	)		—
Income (loss) applicable to common stockholders	$	8,342		$	(18,603	)	$	(16,482	)
Basic and diluted income (loss) per share:
Continuing operations	$	(1.40	)	$	(0.98	)	$	(0.46	)
Discontinued operations	$	1.66			—			—
Cumulative effect adjustment	$	—		$	0.46			—
Applicable to common stockholders	$	0.24		$	(0.52	)	$	(0.46	)
Shares used in basic and diluted per share calculations		35,176			35,765			36,046

See accompanying notes.

47

MAXYGEN, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

												Accumulated
						Additional						Other						Total
	Common Stock					Paid-In			Deferred Stock			Comprehensive			Accumulated			Stockholders’
	Shares			Amount		Capital			Compensation			Income (Loss)			Deficit			Equity
	(In thousands, except share and per share data)
Balance at January 1, 2004		34,909,799		$	3	$	394,966		$	(251	)	$	(1,366	)	$	(195,128	)	$	198,224
Issuance of common stock upon exercise of options for cash and for services rendered		631,372			—		4,382			—			—			—			4,382
Issuance of common stock under employee stock purchase plan		62,700			—		411			—			—			—			411
Issuance of common stock under 401(k) employer matching contribution		39,241			—		443			—			—			—			443
Stock compensation expense for consultant options, and fully vested stock options for services rendered		—			—		117			—			—			—			117
Repurchase of common stock		(6,779	)		—		(5	)		—			—			—			(5	)
Subsidiary preferred stock accretion		—			—		(1,000	)		—			—			—			(1,000	)
Amortization of deferred compensation		—			—		—			251			—			—			251
Components of comprehensive income:
Net income		—			—		—			—			—			9,342			9,342
Currency translation adjustment		—			—		—			—			(126	)		—			(126	)
Change in unrealized gain (loss) on available-for-sale securities		—			—		—			—			(698	)		—			(698	)
Comprehensive income																			8,518
Balance at December 31, 2004		35,636,333			3		399,314			—			(2,190	)		(185,786	)		211,341
Issuance of common stock upon exercise of options for cash and for services rendered		198,487			—		805			—			—			—			805
Issuance of common stock under employee stock purchase plan		37,966			—		299			—			—			—			299
Issuance of common stock under 401(k) employer matching contribution		49,392			—		350			—			—			—			350
Stock compensation expense for consultant options, and fully vested stock options for services rendered		—			—		102			—			—			—			102
Subsidiary preferred stock accretion		—			—		(167	)		—			—			—			(167	)
Modification of employee stock options		—			—		81			—			—			—			81
Deconsolidation of Codexis, Inc.		—			—		2,336			—			—			—			2,336
Components of comprehensive loss:
Net loss		—			—		—			—			—			(18,436	)		(18,436	)
Currency translation adjustment		—			—		—			—			645			—			645
Change in unrealized gain(loss) on available-for-sale securities		—			—		—			—			(12	)		—			(12	)
Comprehensive loss																			(17,803	)
Balance at December 31, 2005		35,922,178			3		403,120			—			(1,557	)		(204,222	)		197,344
Issuance of common stock upon exercise of options for cash and for services rendered		150,985			1		698			—			—			—			699
Issuance of common stock under employee stock purchase plan		46,815			—		309			—			—			—			309
Issuance of common stock under 401(k) employer matching contribution		37,932			—		325			—			—			—			325
Stock compensation expense for consultant options, and fully vested stock options for services rendered		—			—		914			—			—			—			914
Stock based compensation expense under SFAS 123(R)		—			—		5,829			—			—			—			5,829
Components of comprehensive loss:		—			—		—			—			—			—			—
Net loss		—			—		—			—			—			(16,482	)		(16,482	)
Currency translation adjustment		—			—		—			—			331			—			331
Change in unrealized gain (loss) on available-for-sale securities		—			—		—			—			530			—			530
Comprehensive loss																			(15,621	)
Balance at December 31, 2006		36,157,910		$	4	$	411,195		$	—		$	(696	)	$	(220,704	)	$	189,799

See accompanying notes.

48

MAXYGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2004			2005			2006
	(In thousands)
Operating activities
Net income (loss)	$	9,342		$	(18,436	)	$	(16,482	)
Loss from discontinued operations		2,769			—			—
Cumulative effect adjustment		—			(16,616	)		—
Gain on sale of discontinued operations		(61,197	)		—			—
Loss from continuing operations		(49,086	)		(35,052	)		(16,482	)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Depreciation and amortization		6,160			3,530			2,294
Equity in losses of minority investee		1,395			—			1,000
Gain on sale of equity investment		—			—			(17,662	)
Non-cash stock compensation		696			423			6,154
Common stock issued and stock options granted to consultants for services rendered and for certain technology rights		567			110			914
Changes in operating assets and liabilities:
Accounts receivable and other receivables		1,793			(5,003	)		1,977
Prepaid expenses and other current assets		(1,482	)		17			783
Deposits and other assets		(216	)		25			249
Accounts payable		113			902			895
Accrued compensation		2,885			(583	)		385
Accrued program termination costs		2,209			(2,209	)		—
Other accrued liabilities		234			1,342			(159	)
Taxes payable		921			(921	)		140
Deferred revenue		(538	)		7,542			(2,592	)
Net cash used in operating activities		(34,349	)		(29,877	)		(22,104	)
Investing activities
Purchases of available-for-sale securities		(166,482	)		(188,635	)		(146,046	)
Maturities of available-for-sale securities		143,813			209,767			171,587
Investment in minority investee		(1,395	)		—			(1,000	)
Acquisition of property and equipment		(2,559	)		(2,240	)		(1,488	)
Cash used in acquisition, net of cash acquired		—			(2,617	)		—
Proceeds from the sale of Verdia		61,197			—			—
Proceeds from the sale of Avidia		—			—			17,662
Net cash provided by investing activities		34,574			16,275			40,715
Financing activities
Repayments under equipment financing obligation		(445	)		(115	)		—
Borrowings under equipment financing obligation		2,696			1,229			—
Minority investment		9,970			—			—
Proceeds from issuance of common stock		4,335			1,102			1,008
Net cash provided by financing activities		16,556			2,216			1,008
Cash provided by discontinued operations		2,863			—			—
Codexis related net adjustment		—			(2,365	)		—
Effect of exchange rate changes on cash and cash equivalents		(582	)		276			(55	)
Net increase (decrease) in cash and cash equivalents		19,062			(13,475	)		19,564
Cash and cash equivalents at beginning of period		21,353			40,415			26,940
Cash and cash equivalents at end of period	$	40,415		$	26,940		$	46,504
Supplemental Cash Flow Information
Non-cash transactions:
Codexis common stock issued in acquisition	$	—		$	(188	)	$	—
Cash paid during the period for interest	$	135		$	41		$	15
Cash paid during the period for income taxes	$	2		$	912		$	—

See accompanying notes.

49

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Summary of Significant Accounting Policies

Organization and Principles of Consolidation

Maxygen, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on May 7, 1996. The Company is a biotechnology company committed to the discovery and development of improved next-generation protein pharmaceuticals for the treatment of disease and serious medical conditions. The Company began operations in March 1997 with the mission to develop important commercial products through the use of biotechnology. Since then, the Company has established a focus in human therapeutics, particularly on the development and commercialization of optimized protein pharmaceuticals.

The Company will require additional financial resources to complete the development and commercialization of its product candidates. The Company’s management may finance the Company’s operations through issuances of equity securities, collaborative research and development arrangements, government grants, or debt financing.

The consolidated financial statements include the amounts of the Company and its wholly-owned subsidiaries, Maxygen ApS (Denmark) (“Maxygen ApS”), which was acquired by the Company in August 2000, and Maxygen Holdings Ltd. (Cayman Islands) (“Maxygen Holdings”). For the year ended December 31, 2004 and for the two months ended February 28, 2005, the results of operations of Codexis, Inc. (“Codexis”) are also included in the Consolidated Financial Statements. Subsequent to February 28, 2005, the Company’s investment in Codexis is reflected using the equity method of accounting. The financial results of Verdia, Inc. (“Verdia”), prior to its sale on July 1, 2004, are reflected as discontinued operations.

The Company’s ownership in Codexis as of December 31, 2004 was approximately 51.4%, based upon the voting rights of the issued and outstanding shares of Codexis common and preferred stock. In accordance with Emerging Issues Task Force Consensus 96-16, “Investor Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Stockholder or Stockholders Have Certain Approval or Veto Rights” (“EITF 96-16”) and paragraph 1 of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”), the Company has included 100% of the net losses of Codexis in the determination of the Company’s consolidated net loss. The Company recorded minority interest in the Consolidated Financial Statements to account for the ownership interest of the minority owner. As a result of the issuance of Codexis common stock in connection with the acquisition by Codexis of Julich Fine Chemicals GmbH and certain other matters that occurred in the first quarter of 2005, the Company’s voting rights of the issued and outstanding shares of Codexis common and preferred stock were reduced below 50%. As a result, as of February 28, 2005, the date upon which such rights fell below 50%, the Company no longer consolidates the financial results of Codexis. In accordance with APB 18, “The Equity Method of Accounting for Investments in Common Stock,” the Company accounts for its investment in Codexis under the equity method of accounting after February 28, 2005.

In 2002, Codexis sold $25 million of Codexis series B redeemable convertible preferred stock to investors, of which, $5.0 million was purchased by the Company and $20.0 million was purchased by several unrelated investors. In connection with the redemption rights of the Codexis series B stockholders, the Company has recorded accretion of the redemption premium for the series B redeemable convertible preferred stock, excluding the shares owned by the Company, in the amount of $167,000 and $1.0 million for the years ended December 31, 2005 and 2004, respectively. The accretion is recorded as subsidiary preferred stock accretion on the Consolidated Statement of Operations and as a reduction of additional paid-in capital and an increase to minority interest on the Consolidated Balance Sheets. No accretion was recorded for the year ended December 31, 2006. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets of Codexis.

As of December 31, 2005, the Company had recorded losses equal to its investment basis in Codexis. In May 2006, the Company purchased $600,000 of secured subordinated convertible promissory notes and, in August 2006, the notes and accrued interest were converted into Codexis preferred stock and the Company purchased approximately $400,000 of additional preferred stock. Subsequent to its investments in May and August 2006, the

50

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company recorded losses of $1.0 million under the equity method of accounting and, at December 31, 2006, had recorded losses equal to its investment basis in Codexis. The Company is not obligated to fund the operations or other capital requirements of Codexis. As of December 31, 2006, the Company’s equity interest in Codexis was approximately 32%.

Until March 31, 2005, the Company’s investment in Avidia Inc. (“Avidia”) was accounted for under the equity method of accounting and the Company’s share of Avidia’s results was recorded to the extent of the Company’s accounting basis in Avidia as a component of equity in net loss of minority investee in the Consolidated Statements of Operations. After March 31, 2005, the Company’s investment in Avidia was accounted for under the cost method of accounting. As of December 31, 2004 and 2005, the Company had recorded losses equal to its investment basis in Avidia.

On October 24, 2006, Amgen Inc. (“Amgen”) completed the acquisition of Avidia. As a result of the acquisition, the Company received a cash payment of approximately $17.8 million in the fourth quarter of 2006 in exchange for its equity interests in Avidia and may receive up to an additional $2.8 million in cash, contingent upon the development of certain Avidia products by Amgen. Accordingly, the Company recorded a gain on disposal of this investment of approximately $17.7 million in the fourth quarter of 2006. Any additional gain as a result of the contingent amounts potentially payable to Avidia by Amgen will be recognized only if and when the contingency is satisfied. See Note 13.

Cumulative Effect Adjustment

Codexis was formed in January 2002 and financed by the Company and several other independent investors. In accordance with EITF 96-16 and ARB 51, through February 28, 2005, the Company consolidated 100% of the operating results of Codexis, even though it only owned a majority of the voting interests in Codexis. From March 2002 through February 28, 2005, the Company had recorded cumulative losses of Codexis of $26.4 million, which was in excess of the Company’s investment basis of $9.8 million. On February 28, 2005, the Company’s voting rights in Codexis were reduced below 50%. As a result, the Company no longer consolidates the financial position and results of operations of Codexis with the Company’s financial results as of such date and instead accounts for Codexis under the equity method of accounting. To reflect what the Company’s basis in Codexis would have been under equity accounting as required by EITF 96-16, the Company recorded a cumulative effect adjustment of $16.6 million in the first quarter of 2005 to bring its investment basis in Codexis to zero as of February 28, 2005. This cumulative effect adjustment does not have any tax consequences.

Foreign Currency Translation

The functional currency of Maxygen ApS is the Danish kroner. Assets and liabilities of Maxygen ApS are translated at current exchange rates. Revenues and expenses are translated at average exchange rates in effect during the period. Gains and losses from currency translation are included in accumulated other comprehensive loss. Currency transaction gains or losses are included in interest income and other income (expense), net.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Stock compensation expenses of $183,000 in the year ended December 31, 2005 and $355,000 in the year ended December 31, 2004 have been reclassified within operating expenses (into either research and development expenses or general and administrative expenses) in the Consolidated Statement of Operations as a result of the Company’s implementation of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”

51

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(“SFAS 123(R)”), effective January 1, 2006. Previously, stock compensation expense had been presented separately on the face of the consolidated statement of operations.

Cash, Cash Equivalents and Investments

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

The Company’s management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company’s debt securities are classified as available-for-sale and are carried at estimated fair value in cash equivalents and investments. Unrealized gains and losses are reported as a component of accumulated other comprehensive loss in stockholders’ equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization of premiums and accretion of discounts is included in interest income and other income (expense), net. Realized gains and losses and declines in value deemed to be other-than-temporary, if any, are included in interest income and other income (expense), net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities are included in interest income and other income (expense), net.

Derivatives and Financial Instruments

The Company addresses certain financial exposures through a program of risk management that includes the use of derivative financial instruments. The Company generally enters into foreign currency forward exchange contracts that expire within eighteen months to reduce the effects of fluctuating foreign currency exchange rates on forecasted cash requirements.

The Company accounts for derivative instruments under the provisions of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and evaluating effectiveness of hedging relationships.

All derivatives are recognized on the balance sheet at their fair value. The Company has designated its derivatives as foreign currency cash flow hedges. Changes in the fair value of derivatives that are highly effective as, and that are designated and qualify as, foreign currency cash flow hedges are recorded in other comprehensive income until the associated hedged transaction impacts earnings. Changes in the fair value of derivatives that are ineffective are recorded as interest income and other income (expense), net in the period of change.

The Company documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.

The purpose of the hedging activities is to minimize the effect of foreign currency exchange rate movements on the cash flows related to the Company’s funding of Maxygen ApS and payments to vendors in Europe. To date, foreign currency contracts are denominated in Danish kroner and euros. At December 31, 2005, the Company had foreign currency contracts outstanding in the form of forward exchange contracts totaling $7.2 million. The Company had no foreign currency contracts outstanding at December 31, 2006.

As a matter of policy, the Company only enters into contracts with counterparties that have at least an “A” (or equivalent) credit rating. The counterparties to these contracts are major financial institutions. Exposure to credit

52

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

loss in the event of nonperformance by any of the counterparties is limited to only the recognized, but not realized, gains attributable to the contracts. Management believes risk of loss is remote and in any event would not be material. Costs associated with entering into such contracts have not been material to the Company’s financial results. The Company does not utilize derivative financial instruments for trading or speculative purposes.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of investments and accounts receivable. The Company is exposed to credit risks in the event of default by the financial issuers or collaborators to the extent of the amount recorded on the balance sheet. A portion of the Company’s accounts receivable balance at December 31, 2005 and 2006 consisted of balances due from government agencies. Each grant agreement is subject to funding approvals by the U.S. government. Certain grant agreements provide an option for the government to audit the amount of research and development expenses, both direct and indirect, that have been submitted to the government agency for reimbursement. The Company does not require collateral or other security to support the financial instruments subject to credit risk.

Property and Equipment

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

Goodwill and Other Intangible Assets

In connection with the acquisition of Maxygen ApS in 2000, the Company allocated $26.2 million to goodwill and other intangible assets. Prior to adoption of Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) in 2002, the Company amortized a portion of the goodwill each year. As of December 31, 2001, the net goodwill balance was $12.2 million. Beginning on January 1, 2002, goodwill is no longer amortized and goodwill and other intangible assets are generally evaluated on an individual acquisition or market basis at least annually whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. In accordance with SFAS 142, the Company reviews its long-lived assets (including goodwill) for impairment at least annually based on estimated future discounted cash flows attributable to the assets and other factors to determine the fair value of the respective assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets will be written down to their estimated fair values. No impairment charges were recorded in 2004, 2005 or 2006.

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

53

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

changes in market conditions or other external events, could result in an impairment charge and such a charge could have a material adverse effect on the Company’s consolidated results of operations.

Long-Lived Assets

The Company reviews long-lived assets including intangible assets with finite lives for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable, such as a significant industry downturn, significant decline in the market value of the Company, or significant reductions in projected future cash flows. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The amount of the impairment loss, if any, is determined using discounted cash flows. In assessing the recoverability of long-lived assets, including intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets.

Revenue Recognition

The Company recognizes revenue from multiple element arrangements under collaborative research agreements, including license payments, research and development services, milestones, and royalties. Revenue arrangements with multiple deliverables are accounted for under the provisions of Staff Accounting Bulletin No. 104 and Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items in the arrangement. The consideration the Company receives is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units.

Non-refundable up-front payments received in connection with research and development collaboration agreements, including license fees, and technology advancement funding that is intended for the development of the Company’s core technologies, are deferred upon receipt and recognized as revenue over the relevant research and development periods specified in the agreement. Under arrangements where the Company expects its research and development obligations to be performed evenly over the specified period, the up-front payments are recognized on a straight-line basis over the period. Under arrangements where the Company expects its research and development obligations to vary significantly from period to period, the Company recognizes the up-front payments based upon the actual amount of research and development efforts incurred relative to the amount of the total expected effort to be incurred by the Company. In cases where the planned levels of research services fluctuate substantially over the research term, this requires the Company to make critical estimates in both the remaining time period and the total expected costs of its obligations and, therefore, a change in the estimate of total costs to be incurred or in the remaining time period could have a significant impact on the revenue recognized in future periods.

Revenue related to collaborative research payments from the Company’s corporate collaborators is recognized as research services are performed over the related funding periods for each contract. Under these agreements, the Company is typically required to perform research and development activities as specified in the respective agreement. Generally, the payments received are not refundable and are based on a contractual cost per full-time equivalent employee working on the project. Under certain collaborative research and development agreements, the Company and the collaborative partner agreed to share in the costs of research and development. In periods where the Company incurs more costs than the collaborative partner, payments from the collaborative partner are included in collaborative research and development revenues and, in periods where the collaborative partner incurs more expenses than the Company, the Company’s payments to the collaborative partner are included in research and development expenses. Research and development expenses (including general and administrative expenses) under the collaborative research agreements approximate or exceed the research funding revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not

54

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

incur the required level of effort during a specific period in comparison to funds received under the respective contracts.

Payments received relating to substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event because the Company has no future performance obligations related to the payment. Incentive milestone payments may be triggered either by the results of the Company’s research efforts or by events external to the Company, such as regulatory approval to market a product. Milestone revenues totaled $7.0 million for the year ended December 31, 2006 and are included in collaborative research and development revenues in the Consolidated Statements of Operations.

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

The Company has been awarded grants from the Defense Advanced Research Projects Agency, the National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International Development, the U.S. Army Medical Research and Materiel Command, the National Institutes of Health, and the U.S. Army Space & Missile Defense Command for various research and development projects. The terms of these grant agreements range from one to five years with various termination dates, the last of which is January 2010 for existing agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred.

Research and Development Expenses

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

The Company does not track fully burdened research and development costs by project. However, the Company does estimate, based on full-time equivalent personnel effort, the percentage of research and development efforts (as measured in hours incurred, which approximates costs) undertaken for projects funded by the Company’s collaborators and government grants, on the one hand, and projects funded by the Company, on the other hand. To approximate research and development expenses by funding category, the number of hours expended in each category has been multiplied by the approximate cost per hour of research and development effort and added to project-specific external costs. In the case where a collaborative partner is sharing the research and development costs, the expenses for that project are allocated proportionately between the collaborative projects funded by third parties and internal projects. The Company believes that presenting its research and development expenses in these categories will provide its investors with meaningful information on how the Company’s resources are being used.

55

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Year Ended December 31,
	2004		2005		2006
Collaborative projects funded by third parties(1)	$	9,444	$	4,146	$	9,906
Government grants		1,973		2,369		4,215
Internal projects		42,169		35,389		35,009
Total	$	53,586	$	41,904	$	49,130

(1) Research and development expenses related to collaborative projects funded by third parties are less than the reported revenues due to the amortization of non-refundable up-front payments, as well as a portion of the collaborative research and development revenue that is charged for general and administrative expenses.

Stock-Based Compensation

As of December 31, 2006, the Company had five stock option plans: the 2006 Equity Incentive Plan (the “2006 Plan”); the 1997 Stock Option Plan (the “1997 Plan”); the 1999 Nonemployee Directors Stock Option Plan; the 2000 International Stock Option Plan; and the 2000 Non-Officer Stock Option Plan. These stock plans generally provide for the grant of stock options to employees, directors and/or consultants. The 2006 Plan, which replaces the 1997 Plan, also provides for the grant of additional equity-based awards, including stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and dividend equivalents. In connection with stockholder approval of the 2006 Plan in 2006, the 1997 Plan was terminated as to future awards. The Company also has an Employee Stock Purchase Plan (“ESPP”) that enables eligible employees to purchase Company common stock.

Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), which requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards. The fair value of stock options and ESPP shares is estimated using the Black-Scholes-Merton option valuation model. This model requires the input of subjective assumptions in implementing SFAS 123(R), including expected stock price volatility, estimated life and estimated forfeitures of each award. The Company has adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, compensation cost recognized during the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) amortized on a graded vesting basis over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R) amortized on a straight-line basis over the options’ vesting period. Under this method of implementation, no restatement of prior periods has been made.

Stock-based compensation expense recognized under SFAS 123(R) in the Consolidated Statements of Operations for the year ended December 31, 2006 was $5.7 million related to employee stock options, $914,000 related to consultant stock options and $87,000 related to the ESPP. As a result of its implementation of SFAS 123(R), the Company’s net loss for the year ended December 31, 2006 increased by $6.7 million. The implementation of SFAS 123(R) also increased basic and fully diluted loss per share from continuing operations by $0.19 for the year ended December 31, 2006. The implementation of SFAS 123(R) did not have an impact on cash flows from operations during the year ended December 31, 2006.

Prior to January 1, 2006, the Company measured compensation expense for its employee equity-based compensation plans using the intrinsic value method under the provisions of Accounting Principles Board Opinion

56

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

No. 25, “Accounting for Stock Issued to Employees” and related interpretations. As the exercise price of all options granted under these plans was not below the fair market price of the underlying common stock on the grant date, no equity-based compensation cost was recognized in the condensed consolidated statements of operations under the intrinsic value method.

Stock Options

The exercise price of each stock option equals the closing market price of the Company’s stock on the date of grant. Most options are scheduled to vest over four years and all options expire no later than 10 years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of publicly traded options.

As part of its adoption of SFAS 123(R), the Company also examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, the Company identified no discernable activity patterns other than the employee populations for its U.S. and Danish operations. The Company used the Black-Scholes-Merton option pricing model to value the options for each of the employee populations. The weighted average assumptions used in the model for each employee population are outlined in the following table:

	Year Ended December 31, 2006
	U.S. Employees	Danish Employees
Expected dividend yield	0%	0%
Risk-free interest rate range — Options	4.30% to 5.11%	4.34% to 5.17%
Risk-free interest rate range — ESPP	3.20% to 5.05%	—
Expected life — Options	5.13 years	2.4 years
Expected life — ESPP	0.48 years to 0.92 years	—
Expected volatility — Options	52.43% to 56.42%	44.38% to 45.78%

The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, the Company reviews annual historical employee exercise behavior of option grants with similar vesting periods.

A summary of the changes in stock options outstanding under the Company’s equity-based compensation plans during the year ended December 31, 2006 is presented below:

						Weighted-
				Weighted-		Average
				Average		Remaining
				Exercise		Contractual		Aggregate
				Price Per		Term		Intrinsic
	Shares			Share		(In Years)		Value
								(In thousands)
Options outstanding at December 31, 2005		9,401,599		$	16.13
Granted		2,157,836			7.81
Exercised		(150,903	)		4.62
Canceled		(722,072	)		38.13
Options outstanding at December 31, 2006		10,686,460			13.13		6.19	$	19,858
Options exercisable at December 31, 2006		7,375,273		$	15.22		5.13	$	11,602

57

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The intrinsic value of options exercised during the years ended December 31, 2005 and 2006 was $855,000 and $594,000, respectively. The estimated fair value of shares vested during the years ended December 31, 2005 and 2006 was $11.4 million and $11.1 million, respectively. The weighted average grant date fair value of options granted during the year ended December 31, 2006 was $7.81. At December 31, 2006, the Company had $8.7 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over the weighted average remaining vesting period of 2.06 years. Cash received from stock option exercises and purchases under the ESPP was $1.0 million during the year ended December 31, 2006.

The following table summarizes outstanding and exercisable options at December 31, 2006:

	Options Outstanding
			Weighted-
			Average				Options Exercisable
	Number of		Remaining		Weighted-		Number of		Weighted-
	Shares		Contractual Life		Average		Shares		Average
Range of Exercise Prices	Outstanding		(In Years)		Exercise Price		Outstanding		Exercise Price
$ 0.20 - $ 7.00		1,352,723		6.27	$	5.53		907,673	$	4.82
$ 7.08 - $ 7.40		1,481,231		5.83	$	7.33		1,334,223	$	7.35
$ 7.47 - $ 7.89		1,800,732		8.52	$	7.73		144,610	$	7.54
$ 7.92 - $10.33		1,215,972		7.47	$	9.17		732,299	$	9.46
$10.41 - $10.76		1,274,608		5.75	$	10.58		1,154,639	$	10.59
$10.80 - $12.44		1,221,348		6.66	$	12.02		761,983	$	11.95
$12.99 - $17.20		1,116,255		4.02	$	13.80		1,116,255	$	13.80
$17.41 - $53.75		793,925		3.92	$	36.19		793,925	$	36.19
$56.88 - $59.81		429,666		3.50	$	57.17		429,666	$	57.17
		10,686,460		6.19	$	13.13		7,375,273	$	15.22

Employee Stock Purchase Plan

Under the ESPP, eligible employees may purchase common stock at a discount, through payroll deductions, during defined offering periods. The price at which stock is purchased under the ESPP is equal to 85% of the lower of (i) the fair market value of the common stock on the first day of the offering period or (ii) the fair market value of the common stock on the purchase date. During the year ended December 31, 2006, 46,815 shares of common stock were purchased pursuant to the ESPP. The weighted average fair value of purchase rights granted during the year ended December 31, 2006 was $1.92. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes-Merton model. For the year ended December 31, 2006, ESPP compensation expense was $87,000.

58

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pro Forma Information under SFAS 123 for Periods Prior to 2006

Prior to January 1, 2006, the Company followed the disclosure-only provisions of SFAS 123. The following table illustrates the effect on net loss and loss per common share for the year ended December 31, 2005 if the fair value recognition provisions of SFAS 123, as amended, had been applied to options granted under the Company’s equity-based employee compensation plans. For purposes of this pro forma disclosure, the estimated value of the options is recognized over the options’ vesting periods. If the Company had recognized the expense of equity programs in the consolidated statement of operations, additional paid-in capital would have increased by a corresponding amount, net of applicable taxes.

	Year Ended			Year Ended
	December 31,			December 31,
	2004			2005
	(In thousands)
Net income (loss), as reported	$	9,342		$	(18,436	)
Add: Stock based employee compensation cost included in the determination of net loss, as reported		236			—
Deduct: Total stock based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects		(10,240	)		(5,867	)
Pro forma net loss	$	(662	)	$	(24,303	)
Net income (loss) per common share:
Basic and diluted — as reported	$	0.27		$	(0.52	)
Basic and diluted — pro forma	$	(0.02	)	$	(0.68	)

For purposes of the weighted average estimated fair value calculations, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model and the following assumptions:

	Year Ended	Year Ended
	December 31, 2004	December 31, 2005
Expected dividend yield	0%	0%
Risk-free interest rate range — Options	2.75% to 3.51%	3.71% to 4.39%
Risk-free interest rate range — ESPP	2.75% to 4.45%	1.23% to 3.38%
Expected life — Options	4 years	4 years
Expected life — ESPP	0.9 years	0.7 years
Expected volatility	0.6	0.5

Based on the Black-Scholes-Merton option pricing model, the weighted average estimated fair value of employee stock option grants was $4.93 and $5.28 per share for the years ended December 31, 2004 and 2005, respectively, and the weighted average fair value of purchase rights granted under the ESPP was $1.02 and $2.01 per share for the years ended December 31, 2004 and 2005, respectively.

59

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation and Expense Information under SFAS 123(R)

For the year ended December 31, 2006, stock-based compensation expense related to employee stock options, consultant options and employee stock purchases under SFAS 123(R) was allocated as follows (in thousands):

	Year Ended
	December 31, 2006
Research and development	$	2,128
General and administrative		4,615
Stock-based compensation expense before income taxes		6,743
Income tax benefit		—
Total stock-based compensation expense after income taxes	$	6,743

There was no capitalized stock-based employee compensation cost as of December 31, 2006. There were no recognized tax benefits during the year ended December 31, 2006.

Income (Loss) Per Common Share

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

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

	Year Ended December 31,
	2004			2005			2006
Income (loss) applicable to common stockholders	$	8,342		$	(18,603	)	$	(16,482	)
Basic and diluted:
Weighted-average shares of common stock outstanding		35,177			35,765			36,046
Less: weighted-average shares subject to repurchase		(1	)		—			—
Weighted-average shares used in computing basic and diluted income (loss) per share		35,176			35,765			36,046
Basic and diluted income (loss) per common share	$	0.24		$	(0.52	)	$	(0.46	)

In accordance with paragraph 15 of Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” the Company has excluded all outstanding stock options and shares subject to repurchase from the calculation of diluted income (loss) per common share because all such securities are antidilutive to loss from continuing operations for all applicable periods presented. The total number of shares excluded from the calculations of diluted income (loss) per share, prior to application of the treasury stock method for options, was approximately 8,910,876 at December 31, 2004, 9,401,599 at December 31, 2005 and 10,686,460 at December 31, 2006.

60

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated Other Comprehensive Income (Loss)

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

	December 31,
	2004			2005			2006
Unrealized gain on available-for-sale securities	$	5		$	—		$	46
Unrealized losses on available-for-sale securities		(585	)		(592	)		(108	)
Foreign currency translation adjustments		(2,306	)		(579	)		(634	)
Changes in foreign currency contracts		696			(386	)		—
Accumulated other comprehensive loss	$	(2,190	)	$	(1,557	)	$	(696	)

Recent Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), as an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 will not have a material impact on the Company’s financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ request for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its consolidated results of operations and financial condition.

In September 2006, the Securities and Exchange Commission issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year effects of each of the company’s balance sheet and statement of operations and the related financial statement disclosures. Early application of the guidance in SAB 108 is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006. The application of the guidance in 2006 did not have a material impact on the Company’s balance sheet and statement of operations and the related financial statement disclosures.

61

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   Cash Equivalents and Investments

The Company’s cash equivalents and investments as of December 31, 2005 were as follows (in thousands):

				Gross		Gross
	Amortized			Unrealized		Unrealized			Estimated
	Cost			Gains		Losses			Fair Value
Money market funds	$	26,940		$	—	$	—		$	26,940
Corporate debt obligations		116,563			—		(286	)		116,277
U.S. government agency securities		45,412			—		(306	)		45,106
Total		188,915			—		(592	)		188,323
Less amounts classified as cash equivalents		(26,940	)		—		—			(26,940	)
Total investments	$	161,975		$	—	$	(592	)	$	161,383

The Company’s cash equivalents and investments as of December 31, 2006 were as follows (in thousands):

				Gross		Gross
	Amortized			Unrealized		Unrealized			Estimated
	Cost			Gains		Losses			Fair Value
Money market funds	$	45,258		$	—	$	—		$	45,258
Corporate debt obligations		20,082			2		(7	)		20,077
U.S. government agency securities		57,459			16		(101	)		57,374
Commercial paper		60,139			28		—			60,167
Total		182,938			46		(108	)		182,876
Less amounts classified as cash equivalents		(46,504	)		—		—			(46,504	)
Total investments	$	136,434		$	46	$	(108	)	$	136,372

Realized gains or losses on the maturity of available-for-sale securities for 2004, 2005 and 2006 were insignificant. The change in unrealized holding gains (losses) on available-for-sale securities included in accumulated other comprehensive income (loss) were unrealized losses of $698,000 in 2004 and $12,000 in 2005 and were unrealized gains of $530,000 in 2006. The Company intends to hold the securities until maturity and therefore does not believe the current unrealized losses of $108,000 are other than temporary.

At December 31, 2006, the contractual maturities of investments were as follows (in thousands):

	Amortized		Estimated
	Cost		Fair Value
Due within one year	$	133,434	$	133,384
Due after one year through two years		3,000		2,988
	$	136,434	$	136,372

62

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table provides the gross unrealized losses and the fair market value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2006 (in thousands):

	In Loss Position for Less Than 12 Months				In Loss Position for 12 Months or Greater				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Corporate debt obligations	$	5,462	$	2	$	3,588	$	5	$	9,050	$	7
U.S. government agency securities		10,545		15		30,725		86		41,270		101
Total	$	16,007	$	17	$	34,313	$	91	$	50,320	$	108

3.   Collaborative Agreements

During 2004, 2005 and 2006, the Company recognized revenue from thirteen collaborative agreements. These agreements typically include up-front licensing fees, technology advancement fees and research funding, as well as the potential to earn milestone payments and royalties on future product sales or cost savings. The agreements generally require, or required, the Company (or Codexis) to devote a specified number of full-time equivalent employees to the research efforts over defined research terms ranging from three to five years. Total revenue recognized under these collaboration agreements was $14.3 million in 2004, $11.6 million in 2005 and $20.5 million in 2006.

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

	December 31,
	2004			2005			2006
Partner A		35.0	%		69.4	%		82.0	%
Partner B		13.4	%		—			—

No other collaborator has comprised more than 10% of revenue in any period presented. In addition to providing the research funding summarized above, certain of the Company’s collaborators have also purchased equity securities in the Company or one of its subsidiaries. The collaboration agreements that generated revenue in 2004, 2005 and/or 2006 are summarized below, organized by segment.

Human Therapeutics

Roche (MAXY-VII)

In December 2005, the Company formed a strategic alliance with F. Hoffmann-La Roche Ltd. (“Roche”) to collaborate on the global development and commercialization of the Company’s portfolio of next-generation recombinant factor VII products for multiple acute bleeding indications. Factor VII is a natural protein with a pivotal role in blood coagulation and clotting. The collaboration focused on the development of lead candidates for the treatment of uncontrolled bleeding in trauma and intracerebral hemorrhage (ICH).

Under the terms of the collaboration, the Company and Roche agreed to share certain costs of worldwide research and development activities in connection with the development of the factor VII product candidates. The Company agreed to lead early stage clinical development of these product candidates and Roche agreed to lead late stage clinical development. Roche was granted exclusive worldwide rights to commercialize the factor VII products subject to the collaboration and the Company retained rights for the development of factor VII products for hemophilia.

63

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company received an upfront fee of $8.0 million in 2005 and received $5.0 million in 2006 for the achievement of a pre-clinical milestone. On March 13, 2007, the Company received written notice from Roche that Roche has elected to terminate this agreement, effective April 12, 2007.

Roche (MAXY-alpha)

In May 2003, the Company formed a broad strategic alliance with Roche to collaborate on the global development and commercialization of the Company’s portfolio of next-generation interferon alpha and beta variants for a wide range of indications. The collaboration is initially focused on the development of lead candidates for the treatment of hepatitis C virus (“HCV”) and hepatitis B virus (“HBV”) infections that have been designed by the Company to have novel and superior efficacy compared to currently marketed interferon alpha products.

Roche licensed from the Company worldwide commercialization rights to specific novel interferon product candidates for the treatment of HCV and HBV infection. The Company received an initial payment and research and development funding for the first two years of the collaboration. In addition, the Company is eligible to receive milestone payments and royalties based on product sales. The funded research term of this collaboration ended in December 2005. In 2006, Roche initiated a Phase Ia clinical trial in New Zealand to evaluate our MAXY-alpha product candidate and the Company received a $2.0 million milestone payment in connection with the commencement of such clinical trials.

Aventis Pasteur

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

Other

The Company also received revenue in 2004 from collaboration agreements with InterMune, Inc. (“InterMune”), ALK-Abelló A/S, a wholly-owned subsidiary of Chr. Hansen Holding A/S, Denmark, and International AIDS Vaccine Initiative and DBLV, LLC, an entity established and funded by the Rockefeller Foundation to develop novel HIV vaccines. The funded research term of the collaboration agreement with InterMune ended in June 2004. The funded research terms of the collaboration agreements with ALK-Abelló A/S and International AIDS Vaccine Initiative and DBLV, LLC ended in February 2004.

Chemicals (Codexis)

Our former chemicals segment was operated by Codexis. Effective February 28, 2005, the Company’s voting interests in Codexis fell below 50% and, from such time, Codexis ceased to be a consolidated subsidiary of the Company. The Company instead accounts for Codexis under the equity method of accounting from that date. During 2004 and 2005 (through February 28, 2005), Codexis received research and development funding and/or other fees under collaboration agreements with Teva Pharmaceutical Industries Ltd., Pfizer, Inc., Sandoz, Cargill, Incorporated, Rio Tinto Corporation plc, Eli Lilly and Company and Chevron Research and Technology Co. The Company assigned many of these agreements to Codexis in connection with the capitalization of Codexis in March 2002.

64

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.   Technology Licenses and Research Agreements

The Company has entered into several research agreements to fund research at universities and other research collaborators. These agreements are generally cancelable by either party upon written notice and may be extended by mutual consent of both parties. Research and development expenses are recognized as the related services are performed, generally ratably over the period of the service. Expenses under these agreements were approximately $1.3 million in 2004, $1.5 million in 2005 and $3.1 million in 2006.

5.   Properties and Equipment

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

	December 31,
	2005			2006
Leasehold improvements	$	3,688		$	3,982
Machinery and laboratory equipment		14,033			15,592
Computer equipment and software		2,527			2,806
Furniture and fixtures		1,211			1,218
		21,459			23,598
Less accumulated depreciation and amortization		(17,391	)		(20,336	)
Property and equipment, net	$	4,068		$	3,262

6.   Equipment Financing

In February 2004, Codexis entered into an equipment financing agreement with a financing company for up to $4.8 million of equipment purchases. Any obligations under this equipment financing agreement are solely obligations of Codexis and repayments are to be made solely from assets of Codexis. In 2004, Codexis borrowed $2.7 million and repaid $445,000. For the two months ended February 28, 2005, Codexis borrowed $1.2 million and repaid $115,000.

7.   Commitments

The Company has entered into various operating leases for its facilities and certain computer equipment and material contracts. The leases expire on various dates through 2009. The facilities leases also include scheduled rent increases. The scheduled rent increases are recognized on a straight-line basis over the term of the leases. The material contracts expire on various dates through 2008.

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

Year Ending December 31,
2007	$	7,176
2008		2,734
2009		199
Thereafter		—
	$	10,109

Total rent expense was $4.0 million in 2004, $2.3 million in 2005 and $2.0 million in 2006.

65

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   Stockholders’ Equity

Codexis Redeemable Convertible Preferred Stock

In connection with the redemption rights of the Codexis series B stockholders, the Company recorded accretion of the redemption premium for the series B redeemable convertible preferred stock, excluding the shares owned by the Company, in the amount of $1.0 million and $167,000 for the years ended December 31, 2004 and 2005, respectively. The accretion is recorded as subsidiary preferred stock accretion on the Consolidated Statement of Operations and as a reduction of additional paid-in capital and an increase to minority interest on the Consolidated Balance Sheets. The Company recorded a $2.3 million adjustment to additional paid-in capital in 2005 to eliminate the reduction of additional paid-in capital that had resulted from Codexis’ preferred stock accretion prior to February 28, 2005, the date Codexis ceased to be a consolidated subsidiary of the Company.

Codexis Convertible Preferred Stock

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

Maxygen Preferred Stock

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

401(k) Savings Plan

The Company has a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). Under the 401(k) Plan, participating employees may defer a percentage (not to exceed 100%) of their eligible pretax earnings up to the Internal Revenue Service’s annual contribution limit. All employees on the United States payroll of the Company age 18 years or older are eligible to participate in the 401(k) Plan. The Company has not been required to contribute to the 401(k) Plan, but beginning in 2001 elected to match contributions of its participating employees in an amount up to a maximum of the lesser of (i) 50% of the employee’s 401(k) yearly contribution or (ii) 6% of the employee’s yearly base salary. The matching contribution is made in the form of newly issued shares of Company common stock as of each June 30 and December 31. All matching contributions vest immediately. The Company may discontinue such matching contributions at any time. The fair value of the Company’s matching contribution to the 401(k) Plan was $443,000 in 2004, $350,000 in 2005 and $325,000 in 2006.

2006 Equity Incentive Plan

The Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”) on May 30, 2006. The 2006 Plan replaced the Company’s 1997 Stock Option Plan (the “1997 Plan”). The 2006 Plan provides for the grant of stock options (both nonstatutory and incentive stock options), stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and dividend equivalents to employees (including officers), directors and consultants of the Company and its subsidiaries and affiliates. No equity awards may be granted under the 2006 Plan after February 7, 2016. The maximum term of the options granted under the 2006 Plan is ten years. Options granted under the 2006 Plan vest and become exercisable pursuant to a vesting schedule determined by the administrator of the plan, generally over a four-year period at a rate of 25% at the end of the first

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MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

year and monthly for the three years thereafter. The 2006 Plan does not provide for annual increases in the number of shares available for issuance under the 2006 Plan. At December 31, 2006, 5,804,449 shares remained available for future awards under the 2006 Plan.

1997 Stock Option Plan

The Company’s stockholders originally approved the 1997 Plan on March 30, 1997. The 1997 Plan, which was scheduled to expire in March 2007, was replaced by the 2006 Plan. The maximum term of the options granted under the 1997 Plan is ten years. Options granted under the 1997 Plan vest and become exercisable pursuant to a vesting schedule determined by the administrator of the plan, generally over a four-year period 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, over a four-year period at a rate 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. In connection with the stockholder approval of the 2006 Plan, shares available for future awards under the 1997 Plan were transferred to the 2006 Plan and the 1997 Plan was terminated as to future awards. As a result, no shares remained available for future awards under the 1997 Plan at December 31, 2006.

1999 Nonemployee Directors Stock Option Plan

The Company’s stockholders approved the 1999 Nonemployee Directors Stock Option Plan (the “Directors’ Plan”) on December 14, 1999. The Directors’ Plan reserves a total of 300,000 shares of common stock for issuance thereunder. Each nonemployee director who becomes a Company director is automatically granted a nonstatutory stock option to purchase 20,000 shares of common stock on the date upon which such person first becomes a director. At the first board meeting immediately following each annual stockholders’ meeting, each non-employee director is automatically granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of options under the Directors’ Plan is equal to the fair market value of the common stock on the date of grant. Options have a term of ten years. Generally, each initial grant under the Directors’ Plan vests as to 25% of the shares subject to the option at the end of each year. Each subsequent grant generally vests in full one year after the date of grant. The Directors’ Plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the Directors’ Plan. At December 31, 2006, 95,000 shares remained available for future option grants under the Directors’ Plan.

2000 International Stock Option Plan

The board of directors adopted the 2000 International Stock Option Plan (the “International Plan”) on April 10, 2000 and amended it on March 1, 2001. The International Plan has not been approved by the Company’s stockholders as no such approval is required. Under the International Plan, the board of directors may issue nonqualified stock options to employees, directors and consultants of non-U.S. subsidiaries of the Company. No options may be granted under the International Plan after April 10, 2010. Under the International Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement options in the context of acquisitions), as determined by the board of directors. The maximum term of the options granted under the International Plan is ten years. Options granted under the International Plan vest and become exercisable pursuant to a vesting schedule determined by the administrator of the plan. 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, 2006, 1,829,859 shares remained available for future option grants under the International Plan.

67

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2000 Non-Officer Employee Stock Option Plan

The board of directors adopted the 2000 Non-Officer Stock Option Plan (the “Non-Officer Plan”) on December 6, 2000. The Non-Officer Plan has not been approved by the Company’s stockholders as no such approval is required. Under the Non-Officer’s Plan the board of directors may issue nonqualified stock options to employees (other than executive officers and stockholders owning 10% or more of the Company’s common stock) and consultants of the Company or any of its affiliates. No options may be granted under the Non-Officer Plan after December 6, 2010. Under the Non-Officer Plan, nonstatutory options may be granted at prices not lower than 85% of fair value at the date of grant (except in the case of replacement options in the context of acquisitions), as determined by the board of directors. The maximum term of the options granted under the Non-Officer Plan is ten years. Options granted under the Non-Officer Plan vest and become exercisable pursuant to a vesting schedule determined by the administrator of the plan, generally over a four-year period 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, over a four-year period at a rate 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, 2006, 673,529 shares remained available for future option grants under the Non-Officer Plan.

Activity under the 2006 Plan, the 1997 Plan, the Directors’ Plan, the International Plan and the Non-Officer Plan (collectively, the “Plans”) was as follows:

				Options Outstanding
							Weighted-
							Average
							Exercise
	Shares			Number of			Price Per
	Available			Shares			Share
Balance at December 31, 2003		4,928,759			9,563,265		$	17.79
Shares authorized		1,855,849			—			—
Options granted		(1,567,791	)		1,567,791		$	10.07
Options exercised		—			(700,831	)	$	7.12
Options canceled		1,519,344			(1,519,344	)	$	18.40
Balance at December 31, 2004		6,736,161			8,910,881		$	17.19
Shares authorized		1,889,270			—			—
Options granted		(2,132,290	)		2,132,290		$	9.34
Options exercised		—			(198,487	)	$	4.06
Options canceled		1,443,085			(1,443,085	)	$	14.31
Balance at December 31, 2005		7,936,226			9,401,599		$	16.13
Shares authorized		1,903,875			—			—
Options granted		(2,157,836	)		2,157,836		$	7.81
Options exercised		—			(150,903	)	$	4.62
Options canceled		708,422			(709,922	)	$	38.57
Options expired		12,150			(12,150	)	$	12.18
Balance at December 31, 2006		8,402,837			10,686,460		$	13.13

68

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1999 Employee Stock Purchase Plan

The Company’s stockholders approved the 1999 Employee Stock Purchase Plan (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. A total of 400,000 shares of the Company’s common stock were initially reserved for issuance under the ESPP. 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 lower of (i) the fair market value of the common stock on the first day of the offering period or (ii) the fair market value of the common stock on the purchase date. In addition, the ESPP provides for annual increases in the number of shares available for issuance under the purchase plan on the first day of each year, beginning January 1, 2001, equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual increase, or a lower amount determined by the board of directors. The ESPP will terminate in September 2019, unless terminated earlier in accordance with the provisions of the ESPP. The initial offering period commenced on December 16, 1999 and the first purchase under the ESPP occurred on September 29, 2000 when 67,540 shares of common stock were purchased. In 2004, 2005 and 2006, 62,700 shares, 37,966 shares and 46,815 shares of common stock were purchased pursuant to the ESPP, respectively. The weighted average fair value of purchase rights granted during the year was $1.02 in 2004, $2.01 in 2005 and $1.92 in 2006. At December 31, 2006, 1,048,187 shares remained available for purchase under the ESPP.

Fair value disclosures

Options granted to consultants are periodically re-valued as they vest in accordance with SFAS 123 and EITF 96-18 using a Black-Scholes-Merton model and the following weighted-average assumptions for 2004: estimated volatility of 0.60, risk-free interest rates of 4.0% to 5.2%, no dividend yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. The assumptions for 2005: estimated volatility of 0.60, risk-free interest rates of 3.78% to 3.99%, no dividend yield, and an expected life of the option equal to the full term, generally ten years from the date of grant. The assumptions for 2006: estimated volatility of 0.52 to 0.54, risk-free interest rates of 4.52% to 5.15%, no dividend yield, and an expected life of 5.13 years. The Company recorded total compensation expense of $48,000 in 2004, $102,000 in 2005 and $914,000 in 2006 related to the Black-Scholes-Merton revaluation of options grants to consultants. Stock compensation expense relating to the acceleration of stock options was immaterial for 2004 and 2005. There was no stock compensation expense relating to the acceleration of stock options for 2006.

During the year ended December 31, 2004, the Company recorded amortization of deferred stock compensation expense of approximately $237,000 related to the grant of certain stock options to employees prior to the Company’s initial public offering. The deferred compensation relating to such option grants was fully amortized by December 31, 2004.

Common Stock

At December 31, 2006, the Company had reserved shares of common stock for future issuance as follows:

2006 Equity Incentive Plan	6,041,949
2000 Non-Officer Employee Stock Option Plan	4,043,746
2000 International Stock Option Plan	2,991,829
1999 Employee Stock Purchase Plan	1,048,187
1999 Nonemployee Directors Stock Option Plan	300,000
1997 Stock Option Plan	5,711,773
	20,137,484

69

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.   Intangible Assets

In connection with the Maxygen ApS acquisition in 2000, the Company allocated $22.7 million to goodwill and $3.4 million to other intangible assets. Prior to adoption of SFAS 142, the Company amortized a portion of the goodwill each year. As of December 31, 2001, the net goodwill balance was $12.2 million. The Company must perform an impairment test of recorded goodwill at least annually. Any impairment loss from the annual test will be recognized as a part of operations. The Company completed its annual impairment test as of October 1, 2004, October 1, 2005 and October 1, 2006, which did not result in a determination of recorded goodwill being impaired. Intangible assets subject to amortization consisted of purchased core technology that had been fully amortized as of December 31, 2003.

10.   Income Taxes

Worldwide income (loss) from continuing operations before provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2004			2005			2006
United States	$	(27,303	)	$	(7,445	)	$	1,807
Foreign		(21,783	)		(27,607	)		(18,289	)
Loss from continuing operations	$	(49,086	)	$	(35,052	)	$	(16,482	)

Income tax expense from continuing operations for the year ended December 31, 2006 was $140,000. No income tax expense was recorded from continuing operations for the years ended December 31, 2004 and 2005. In 2006, the Company utilized prior year federal net operating loss carry forwards to reduce the federal taxable income to zero for regular tax purposes. However, for federal purposes, the Company is subject to alternative minimum tax and has reported an income tax provision of $140,000. This amount has been netted against the gain on sale of the Company’s equity interests in Avidia and is reflected in gain on sale of equity investment in the Consolidated Statement of Operations. In 2004, the Company reported taxable income due to the Company’s sale of Verdia. The Company utilized prior year federal and state net operating loss carryforwards to reduce the federal and state taxable income to zero for regular tax purposes. However, for federal purposes, the Company was subject to alternative minimum tax and has reported an income tax provision of $921,000. This amount has been netted against the gain on sale of Verdia and is reflected in gain on sale of discontinued operations in the Consolidated Statement of Operations. During 2004, the Company’s total deferred tax assets decreased due to the utilization of the prior year federal and state net operating losses used to offset the gain from the sale of Verdia and the loss of the unutilized tax assets of Verdia at the time of sale. During 2005, the Company’s total deferred tax assets decreased due to the removal of Codexis’ deferred tax assets in connection with the deconsolidation of Codexis offset in part by increases in net operating losses and tax credit carryforwards. During 2006, the Company’s total deferred tax assets increased due to increases in state and foreign net operating losses and deferred taxes related to deductible stock option compensation, offset in part by the use of federal net operating loss carryforwards and a reduction in capitalized research and development costs due to a reduction in state tax rate.

70

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	December 31,
	2005			2006
Net operating loss carryforwards	$	12,757		$	15,104
Research credits		5,000			5,575
Capitalized research		5,297			1,776
Investment in subsidiary		3,979			4,014
Stock based compensation		—			5,065
Other		4,181			5,316
Total deferred tax assets		31,214			36,850
Valuation allowance		(31,214	)		(36,850	)
Net deferred tax assets	$	—		$	—

The valuation allowance decreased by $2.1 million during 2005 and increased by $5.6 million in 2006. In assessing the realizability of deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considered future earnings, future taxable income, and the scheduled reversal of deferred taxes in making this assessment. Based on this assessment, the deferred tax assets have been fully offset by a valuation allowance at December 31, 2005 and 2006.

As of December 31, 2006, the Company had net operating loss carryforwards for federal income tax purposes of approximately $29.4 million, which expire in the years 2022 through 2026 and federal research and development tax credit carryforwards of approximately $2.6 million, which expire in the years 2012 through 2026. As of December 31, 2006, the Company had net operating loss carryforwards for state income tax purposes of approximately $23.5 million that expire in the years 2015 through 2016 and state research and development tax credits of approximately $2.7 million that have no expiration date.

Approximately $4.6 million of the valuation allowance for deferred tax assets relates to benefits of stock options deductions that, when recognized, will be allocated directly to additional paid-in capital.

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

71

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	December 31,
	2004			2005			2006
U.S. federal taxes (benefit)
At statutory rate	$	(17,180	)	$	(12,269	)	$	(5,720	)
State taxes (net of federal)		(2,893	)		(1,965	)		(533	)
Alternative minimum taxes		—			—			140
Stock related deductions		—			—			(208	)
Unbenefited foreign losses		7,624			10,120			5,610
Other		(1,149	)		(801	)		(232	)
Unbenefited losses		13,598			4,915			1,083
Total	$	—		$	—		$	140

11.   Litigation

In December 2001, a lawsuit was filed in the U.S. District Court for the Southern District of New York against the Company, its chief executive officer, Russell Howard, and its chief financial officer at the time of the initial public offering, Simba Gill, together with 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 over 300 companies that had public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styled In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against Drs. Howard and Gill; the remainder of the case remains pending.

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

On December 5, 2006, the U.S. Second Circuit Court of Appeals reversed the District Court’s ruling certifying the consolidated cases as class actions. It cannot be determined at this time what effect this ruling will have on the settlement. If the decision by the Court of Appeals is not reversed, it is possible that individual lawsuits may be filed.

If the proposed settlement agreement is not finalized, and an action proceeds against the Company based on the facts alleged in the above referenced proceeding, the Company intends to defend the lawsuit vigorously. The Company believes the lawsuit against it and its officers is without merit. If the outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, its business would be significantly harmed.

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

72

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

12.   Segment Information

On July 1, 2004, the Company sold Verdia, the sole component of its agriculture segment, to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company. The operations of Verdia prior to its sale are reflected in the Company’s financial statements as discontinued operations. Thus the agriculture segment data provided in earlier reports is now reflected as discontinued operations (see Note 14). On February 28, 2005, the Company’s voting interests in Codexis fell below 50% and from such time Codexis ceased to be a consolidated subsidiary of the Company. Accordingly, the financial position of Codexis is excluded from the December 31, 2005 Consolidated Balance Sheet, and the results of operations of Codexis are included in the consolidated results presented below only until February 28, 2005. Thereafter the Company’s investment in Codexis is reflected under the equity method of accounting. The Company has determined its reportable operating segments based upon how the business is managed and operated. The accounting policies of the segments described above are the same as those described in Note 1. Corporate administrative costs are generally allocated based on headcount.

Segment Earnings

	Human			Chemicals			Maxygen, Inc.
	Therapeutics			(Codexis)			Consolidated
	(In thousands)
2004
Segment loss	$	(38,113	)	$	(13,278	)	$	(51,391	)
Stock compensation		(325	)		(30	)		(355	)
Interest income and other income (expense), net		3,943			112			4,055
Equity in losses of minority investee		(1,395	)		—			(1,395	)
Loss from continuing operations		(35,890	)		(13,196	)		(49,086	)
Subsidiary preferred stock accretion		—			(1,000	)		(1,000	)
Loss applicable to common stockholders — continuing operations	$	(35,890	)	$	(14,196	)	$	(50,086	)
2005
Segment loss	$	(39,116	)	$	(1,325	)	$	(40,441	)
Stock compensation		(183	)		—			(183	)
Interest income and other income (expense), net		5,552			20			5,572
Loss from continuing operations		(33,747	)		(1,305	)		(35,052	)
Cumulative effect of change in accounting principle		16,616			—			16,616
Subsidiary preferred stock accretion		—			(167	)		(167	)
Loss applicable to common stockholders	$	(17,131	)	$	(1,472	)	$	(18,603	)
2006
Segment loss	$	(41,668	)	$	—		$	(41,668	)
Interest income and other income (expense), net		8,524			—			8,524
Equity in losses of minority investee		(1,000	)		—			(1,000	)
Gain on sale of equity investment		17,662			—			17,662
Loss applicable to common stockholders	$	(16,482	)	$	—		$	(16,482	)

73

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In 2004, depreciation expense for the two segments was $4,648,000 for human therapeutics and $1,512,000 for chemicals. In 2005, depreciation expense for the two segments was $3,268,000 for human therapeutics and $262,000 for chemicals. The operations of Codexis are not included in the consolidated operations of the Company after February 28, 2005. In 2006, depreciation expense was $2,294,000.

Segment Revenue

Revenues for each operating segment are derived from the Company’s research collaboration agreements and government grants and are categorized based on the industry of the product or technology under development. On February 28, 2005, the Company’s voting interests in Codexis fell below 50% and from such time Codexis ceased to be a consolidated subsidiary of the Company. Thus, the revenues of Codexis are included in the consolidated results presented below only until February 28, 2005 and thereafter the Company’s investment in Codexis is reflected under the equity method of accounting. The following table presents revenues for each reporting segment (in thousands):

	Year Ended December 31,
	2004		2005		2006
	(In thousands)
Human therapeutics	$	11,555	$	12,991	$	25,021
Chemicals (through February 28, 2005)		4,720		1,510		—
Total revenue	$	16,275	$	14,501	$	25,021

Identifiable Assets and Acquisition of Property and Equipment

The following table presents identifiable assets for each reporting segment:

	December 31,
	2005		2006
	(In thousands)
Human therapeutics	$	214,523	$	205,647
Chemicals		—		—
Total assets	$	214,523	$	205,647

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

	December 31,
	2005		2006
	(In thousands)
Human therapeutics	$	1,430	$	1,488
Chemicals (through February 28, 2005)		810		—
Total acquisitions	$	2,240	$	1,488

74

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Human Therapeutics

On February 28, 2005, the Company’s voting interests in Codexis fell below 50% and from such time Codexis ceased to be a consolidated subsidiary of the Company. Accordingly, the results of operations of Codexis are included in the consolidated results presented in the consolidated statements of operations only until February 28, 2005. Presented below are the results of operations for the Human Therapeutics business on a stand-alone basis:

	Year Ended December 31,
	2004			2005			2006
	(In thousands)
Revenues
Collaborative research and development revenue	$	9,613		$	10,084		$	20,544
Grant revenue		1,942			2,907			4,477
Total revenues		11,555			12,991			25,021
Operating Expenses:
Research and development		38,096			39,370			49,130
General and administrative		11,897			12,920			17,559
Total operating expenses		49,993			52,290			66,689
Loss from operations		(38,438	)		(39,299	)		(41,668	)
Interest income and other income (expense), net		3,943			5,552			8,524
Equity in losses of minority investee		(1,395	)		—			(1,000	)
Gain on sale of equity investment		—			—			17,662
Loss from continuing operations		(35,890	)		(33,747	)		(16,482	)
Income (loss) from discontinued operations		(2,769	)		—			—
Gain on sale of discontinued operations		61,197			—			—
Cumulative effect adjustment		—			16,616			—
Net income (loss)	$	22,538		$	(17,131	)	$	(16,482	)

Geographic Information

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

	Year Ended December 31,
	2004		2005		2006
	(In thousands)
Revenues
United States	$	12,220	$	13,768	$	25,021
Denmark		390		86		—
France		2,182		—		—
Austria		1,065		—		—
Australia		244		513		—
Other foreign countries		174		134		—
Total revenue	$	16,275	$	14,501	$	25,021

75

MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31,
	2005		2006
	(In thousands)
Long-Lived Assets
United States	$	39,726	$	40,055
Denmark		7,911		9,721
Total long-lived assets	$	47,637	$	49,776

Major Customers

Major customers (consisting of the Company’s non-grant collaborators) that represent more than 10% of total Company revenue are presented in the following table:

	2004			2005			2006
Human Therapeutics
Partner A		35.0	%		69.4	%		82.0	%
Partner B		13.4	%		—			—

13.   Avidia Inc. (formerly Avidia Research Institute)

On July 15, 2003, the Company and a third party investor formed Avidia Inc. In conjunction with its initial capitalization, the Company contributed certain technology to Avidia and invested $500,000. During 2004, the Company provided a series of loans to Avidia in the aggregate amount of $1.4 million. The loan had an interest rate of 3% per annum and converted into equity securities of Avidia in 2005. As of December 31, 2005, the Company had an equity interest of approximately 13% in Avidia, based upon the voting rights of the issued and outstanding shares of Avidia’s common and preferred stock. Until March 31, 2005, the Company’s investment in Avidia was accounted for under the equity method of accounting and the Company’s share of Avidia’s results was recorded to the extent of the Company’s accounting basis in Avidia as a component of equity in net loss of minority investee in the Consolidated Statements of Operations. In April 2005, Avidia issued additional equity securities, which lowered the Company’s ownership below 20%. Since the Company did not have the ability to exercise significant influence over Avidia’s operating and financial policies, after March 31, 2005, the Company’s investment in Avidia was accounted for under the cost method of accounting. As of December 31, 2004 and 2005, the Company had recorded losses equal to its investment basis.

On October 24, 2006, Amgen Inc. (“Amgen”) completed the acquisition of Avidia. As a result of the acquisition, the Company received a cash payment of approximately $17.8 million in the fourth quarter of 2006 in exchange for its equity interests in Avidia and may receive up to an additional $2.8 million in cash, contingent upon the development of certain Avidia products by Amgen. Accordingly, the Company recorded a gain on the exchange of its equity interest in Avidia of approximately $17.8 million in the fourth quarter of 2006. Any additional gain as a result of the contingent amounts potentially payable to the Company by Amgen will be recognized only if and when the contingency is satisfied.

14.   Sale of Verdia and Discontinued Operations

On July 1, 2004, the Company completed the sale of Verdia, its agriculture subsidiary and sole component of its agriculture segment, to Pioneer Hi-Bred International, Inc., a wholly-owned subsidiary of E.I. du Pont de Nemours and Company, for $64.0 million in cash, before income taxes and transaction costs of $1.4 million. Results of discontinued operations provided below reflect the results of Verdia until and including July 1, 2004.

Verdia’s investment in DeltaMax Cotton LLC, its joint venture with Delta and Pine Land Company in which Verdia had an equity interest of 50% as of July 1, 2004, was accounted for under the equity method of accounting.

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MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As a result of the Company’s sale of Verdia on July 1, 2004, Verdia’s portion of the DeltaMax loss as of July 1, 2004 is included in the income (loss) from discontinued operations in the Consolidated Statement of Operations.

The Company has recorded a gain from the sale of Verdia as follows (in thousands):

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

15.   Guarantees and Indemnifications

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

As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The indemnification agreements with the Company’s officers and directors terminate upon termination of their employment, but the termination does not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company’s director and officer insurance policy reduces the Company’s exposure and may enable the Company to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2006.

In addition, the Company customarily agrees in the ordinary course of its business to indemnification provisions in its collaboration agreements, in various agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases. With respect to lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations. The indemnification provisions appearing in the Company’s collaboration agreements are similar, but in addition provide some limited indemnification for its collaborator in the event of third party claims alleging infringement of certain intellectual property rights. In each of the cases above, the indemnification obligation generally survives the termination of the agreement for some extended period, although the obligation typically has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability that reduce its exposure for indemnification and would enable it in many cases to recover a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2006.

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MAXYGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.   Restructuring Charges

In June 2005, the Company implemented a plan to consolidate its organization to increase focus on development of its pharmaceutical product candidates. The restructuring plan included a reduction of approximately 16% of the Company’s personnel over the following four months. The Company recorded severance charges of $807,000 during 2005 in connection with the restructuring. The restructuring balances are comprised entirely of cash charges and are included in operating expenses on the condensed consolidated statements of operations as follows (in thousands):

	Charges
Severance costs
Research and development	$	471
General and administrative		336
Total	$	807

17.   Related Party Transactions

On April 1, 2006, the Company entered into a two-year consulting agreement with Waverley Associates, Inc. (“Waverley”), a private investment firm for which Mr. Isaac Stein is the president and sole stockholder. Mr. Stein also currently serves as chairman of the Company’s board of directors. Pursuant to the terms of the consulting agreement, the Company has agreed to pay consulting fees to Waverley of $24,166 per month during the term of the consulting agreement and has granted Mr. Stein an option to purchase 250,000 shares of the Company’s common stock. The option vests and is exercisable as to 1/12 of the underlying shares monthly beginning May 1, 2006 and has an exercise price of $8.28 per share. For the year ended December 31, 2006, the Company recognized $6.7 million of stock-based compensation expense under SFAS 123(R) in the Consolidated Statements of Operations related to stock options, of which approximately $902,000 is attributable to the option granted to Mr. Stein. Total expense under this arrangement was approximately $1.1 million for the year ended December 31, 2006.

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

Not applicable.

Item 9A   CONTROLS AND PROCEDURES

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

Controls Evaluations.  Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has (i) evaluated the effectiveness of our Disclosure Controls as of December 31, 2006, (ii) assessed the effectiveness of our Internal Control as of December 31, 2006 and (iii) evaluated whether any change in Internal Control that occurred in the most recently completed fiscal quarter has materially affected, or is reasonably likely to materially affect, our Internal Control.

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

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

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

Limitations on the Effectiveness of Controls.  Our management, including our CEO and CFO, does not expect that our Disclosure Controls and Internal Control will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation.  The CEO/CFO evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the controls’ implementation by us and the effect of the controls on the

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

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

Quarterly Reports

Quarterly Evaluation of Disclosure Controls.  Based upon the controls evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of December 31, 2006 to ensure that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

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

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

Annual Report on Internal Control Over Financial Reporting:  Company management is responsible for establishing and maintaining adequate Internal Control. Management assessed the effectiveness of our Internal Control as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control — Integrated Framework.” Based on the assessment using those criteria, management believes that, as of December 31, 2006, our Internal Control was effective.

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Maxygen, Inc.

We have audited management’s assessment, included in the accompanying Annual Report on Internal Control Over Financial Reporting, that Maxygen, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Maxygen, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Maxygen, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Maxygen, Inc maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Maxygen, Inc. as of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 and our report dated March 13, 2007 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

Palo Alto, California

March 13, 2007

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Item 9B   OTHER INFORMATION

There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2006 that was not reported.

PART III

Item 10   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We have adopted a written code of ethics that applies to our senior financial officers, including our principal executive officer, principal financial officer and principal accounting officer. We have posted the text of such code of ethics on our website (www.maxygen.com). We intend to satisfy the disclosure requirement of Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of our code of ethics that applies to our principal executive officer, principal financial officer, or principal accounting officer by posting such information on our website.

The remaining information required by this item is incorporated by reference from the sections captioned “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Board of Directors’ Meetings and Committees — Audit Committee” contained in the 2007 Proxy Statement.

Item 11   EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the sections captioned “Executive Compensation,” “Director Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” contained in the 2007 Proxy Statement.

Item 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the 2007 Proxy Statement.

Item 13   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference from the sections captioned “Related Party Transactions” and “Board of Directors’ Meetings and Committees” contained in the 2007 Proxy Statement.

Item 14   PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference from the section captioned “Ratification of Selection of Independent Registered Public Accounting Firm” contained in the 2007 Proxy Statement.

Pre-Approval of Non-Audit Services

During the quarter ended December 31, 2006, the Audit Committee did not approve any non-audit services to be provided by Ernst & Young LLP.

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PART IV

Item 15   EXHIBITS, FINANCIAL STATEMENT SCHEDULES

15(a)(1) Financial Statements.  The following documents are being filed as part of this report:

	Page
Report of Independent Registered Public Accounting Firm		45
Consolidated Balance Sheets		46
Consolidated Statements of Operations		47
Consolidated Statements of Stockholders’ Equity		48
Consolidated Statements of Cash Flows		49
Notes to Consolidated Financial Statements		50

15(a)(2) Financial Statement Schedules.  Financial statement schedules have been omitted because they are either presented elsewhere, are inapplicable or are immaterial as defined in the instructions.

15(a)(3) Exhibits.

Exhibit
Number			Description of Exhibit
	2	.1	Exchange Agreement, dated as of April 12, 2000, by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound Pharma A/S and the shareholders of ProFound Pharma A/S(1)
	2	.2	Amendment No. 1 to the Exchange Agreement, dated as of July 31, 2000, by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound Pharma A/S and the shareholders of ProFound Pharma A/S(1)
	2	.3	Agreement and Plan of Merger, dated June 2, 2004, by and among Pioneer Hi-Bred International, Inc., Tango Merger Sub, Inc., Maxygen, Inc. and Verdia, Inc.(2)
	3	.1	Amended and Restated Certificate of Incorporation(3)
	3	.2	Amended and Restated Bylaws(3)
	4	.1	Specimen Common Stock Certificate (Exhibit 4.1 to Amendment No. 1)(4)
	*10	.1	Form of Executive Officer and Director Indemnification Agreement (Exhibit 10.7)(4)
	*10	.2	Form of Executive Officer Change of Control Plan (Exhibit 10.1)(5)
	*10	.3	Form of Amendment No. 1 to Executive Officer Change of Control Plan (Exhibit 10.3)(6)
	*10	.4	Form of Amendment No. 2 to Executive Officer Change of Control Plan (Exhibit 10.3)(7)
	*10	.5	1997 Stock Option Plan, as amended, with applicable option agreement(8)
	*10	.6	Form of Amendment to Stock Option Agreements (Exhibit 10.2)(7)
	*10	.7	1999 Nonemployee Directors Stock Option Plan, as amended, with applicable option agreement (Exhibit 10.3)(5)
	*10	.8	1999 Employee Stock Purchase Plan, as amended (Exhibit 10.11)(9)
	*10	.9	2000 International Stock Option Plan, as amended, with applicable option agreement (10)
	*10	.10	2000 Non-Officer Stock Option Plan, as amended, with applicable option agreement (11)
	*10	.11	2006 Equity Incentive Plan (including related form of stock option agreement) (Exhibit 10.4)(7)
	*10	.12	Form of Restricted Stock Unit Award Agreement under 2006 Equity Incentive Plan (12)
	10	.13	Lease, dated as of October 21, 1998, between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.4)(4)
	10	.14	First Amendment to Lease, dated as of February 26, 1999, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.5)(4)
	10	.15	Second Amendment to Lease, dated as of October 24, 2000, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.6)(9)
	10	.16	Third Amendment to Lease, dated October 22, 2003, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.15) (13)

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Exhibit
Number			Description of Exhibit
	10	.17	Fourth Amendment to Lease dated December 15, 2004 by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.13) (14)
	10	.18	Fifth Amendment to Lease dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.2) (15)
	10	.19	Lease, dated December 15, 2004, between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.14) (14)
	10	.20	First Amendment to Lease, dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.1) (15)
	10	.21	Lease Agreement, dated May 5, 2000, between ProFound Pharma A/S and The Science Park in Horsholm (16)
	10	.22+	Technology Transfer Agreement, dated March 14, 1997 (effective March 1, 1998), among Maxygen, Inc., Affymax Technologies N.V. and Glaxo Group Limited, as amended (Exhibit 10.3 to Amendment No. 2)(4)
	*10	.23	Description of 2006 Executive Officer Cash Bonus Plan (Exhibit 10.1)(7)
	*10	.24	Description of Goldstein Reimbursement Arrangement (17)
	*10	.25	Letter Agreement (re tax equalization payments), dated November 20, 2006, between Elliot Goldstein and Maxygen, Inc.
	10	.26+	Co-Development and Commercialization Agreement, dated as of December 9, 2005, among Hoffman-La Roche, Inc., F. Hoffman-La Roche Ltd. and Maxygen Holdings Ltd. (Exhibit 10.23) (18)
	10	.27+	Cross License Agreement, dated as of July 16, 2003, between Maxygen, Inc. and Amgen Mountain View Inc. (as successor to Avidia, Inc.)
	10	.28+	Amended and Restated Exclusive License Agreement, dated July 10, 2006 (effective as of April 1, 2006), between Regents of the University of Minnesota and Maxygen, Inc. (19)
	*10	.29	Consulting Agreement, dated as of January 12, 2006 (effective January 1, 2006), between Balkrishan Gill and Maxygen, Inc. (Exhibit 10.24) (18)
	*10	.30	Consulting Agreement, between the Company and Waverley Associates, Inc., dated as of April 1, 2006 (20)
	21	.1	List of Subsidiaries
	23	.1	Consent of Independent Registered Public Accounting Firm
	24	.1	Power of Attorney (included on signature page)
	31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Management contract or compensatory plan or arrangement.
+	Confidential treatment has been granted, or requested, with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission.
(1)	Incorporated by reference to the corresponding exhibit to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 15, 2000.
(2)	Incorporated by reference to Exhibit 2.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on July 2, 2004.
(3)	Incorporated by reference to the corresponding exhibit to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2000, filed with the Securities and Exchange Commission on August 14, 2000.
(4)	Incorporated by reference to the indicated exhibit to Maxygen’s Registration Statement on Form S-1, as amended (No. 333-89413) initially filed with the Securities and Exchange Commission on October 20, 1999.

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(5)	Incorporated by reference to the indicated exhibit to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2001, filed with the Securities and Exchange Commission on August 14, 2001.
(6)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003.
(7)	Incorporated by reference to the indicated exhibit to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on June 30, 2006).
(8)	Incorporated by reference to exhibit 10.1 to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002.
(9)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2000, filed with the Securities and Exchange Commission on March 21, 2001.
(10)	Incorporated by reference to exhibit 10.6 to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 25, 2002.
(11)	Incorporated by reference to the exhibit 99.3 to Maxygen’s Registration Statement on Form S-8 (No. 333-57486) filed with the Securities and Exchange Commission on March 23, 2001.
(12)	Incorporated by reference to the exhibit 4.2 to Maxygen’s Registration Statement on Form S-8 (No. 333-138898) filed with the Securities and Exchange Commission on November 22, 2006.
(13)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 12, 2004.
(14)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March 14, 2005.
(15)	Incorporated by reference to the indicated exhibit to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 25, 2006.
(16)	Incorporated by reference to exhibit 10.1 to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended September 30, 2000, filed with the Securities and Exchange Commission on November 14, 2000.
(17)	Incorporated by reference to Exhibit 10.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on February 7, 2005.
(18)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 15, 2006.
(19)	Incorporated by reference to Exhibit 10.6 to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2006, filed with the Securities and Exchange Commission on August 7, 2006.
(20)	Incorporated by reference to Exhibit 10.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on April 4, 2006.

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SIGNATURES

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

MAXYGEN, INC.

By:  /s/  Russell J. Howard

Russell J. Howard

Chief Executive Officer

March 14, 2007

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael Rabson and Lawrence W. Briscoe or either of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

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

Signature	Title	Date
/s/  Russell J. Howard Russell J. Howard	Chief Executive Officer and Director (Principal Executive Officer)	March 14, 2007
/s/  Lawrence W. Briscoe Lawrence W. Briscoe	Chief Financial Officer (Principal Financial and Accounting Officer)	March 14, 2007
/s/  Isaac Stein Isaac Stein	Chairman of the Board	March 14, 2007
/s/  M.R.C. Greenwood M.R.C. Greenwood	Director	March 14, 2007
/s/  Louis G. Lange Louis G. Lange	Director	March 14, 2007
/s/  Ernest Mario Ernest Mario	Director	March 14, 2007
/s/  Gordon Ringold Gordon Ringold	Director	March 14, 2007
/s/  James R. Sulat James R. Sulat	Director	March 14, 2007

86

EXHIBIT INDEX

Exhibit
Number			Description of Exhibit
	2	.1	Exchange Agreement, dated as of April 12, 2000, by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound Pharma A/S and the shareholders of ProFound Pharma A/S(1)
	2	.2	Amendment No. 1 to the Exchange Agreement, dated as of July 31, 2000, by and among Maxygen, Inc., Maxygen Holdings Ltd., ProFound Pharma A/S and the shareholders of ProFound Pharma A/S (1)
	2	.3	Agreement and Plan of Merger, dated June 2, 2004, by and among Pioneer Hi-Bred International, Inc., Tango Merger Sub, Inc., Maxygen, Inc. and Verdia, Inc.(2)
	3	.1	Amended and Restated Certificate of Incorporation(3)
	3	.2	Amended and Restated Bylaws(3)
	4	.1	Specimen Common Stock Certificate (Exhibit 4.1 to Amendment No. 1) (4)
	*10	.1	Form of Executive Officer and Director Indemnification Agreement (Exhibit 10.7)(4)
	*10	.2	Form of Executive Officer Change of Control Plan (Exhibit 10.1)(5)
	*10	.3	Form of Amendment No. 1 to Executive Officer Change of Control Plan (Exhibit 10.3)(6)
	*10	.4	Form of Amendment No. 2 to Executive Officer Change of Control Plan (Exhibit 10.3)(7)
	*10	.5	1997 Stock Option Plan, as amended, with applicable option agreement(8)
	*10	.6	Form of Amendment to Stock Option Agreements (Exhibit 10.2)(7)
	*10	.7	1999 Nonemployee Directors Stock Option Plan, as amended, with applicable option agreement (Exhibit 10.3)(5)
	*10	.8	1999 Employee Stock Purchase Plan, as amended (Exhibit 10.11)(9)
	*10	.9	2000 International Stock Option Plan, as amended, with applicable option agreement(10)
	*10	.10	2000 Non-Officer Stock Option Plan, as amended, with applicable option agreement(11)
	*10	.11	2006 Equity Incentive Plan (including related form of stock option agreement) (Exhibit 10.4)(7)
	*10	.12	Form of Restricted Stock Unit Award Agreement under 2006 Equity Incentive Plan(12)
	10	.13	Lease, dated as of October 21, 1998, between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.4)(4)
	10	.14	First Amendment to Lease, dated as of February 26, 1999, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.5)(4)
	10	.15	Second Amendment to Lease, dated as of October 24, 2000, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.6)(9)
	10	.16	Third Amendment to Lease, dated October 22, 2003, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.15)(13)
	10	.17	Fourth Amendment to Lease dated December 15, 2004 by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.13)(14)
	10	.18	Fifth Amendment to Lease dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.2)(15)
	10	.19	Lease, dated December 15, 2004, between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.14)(14)
	10	.20	First Amendment to Lease, dated as of August 24, 2006, by and between Metropolitan Life Insurance Company and Maxygen, Inc. (Exhibit 10.1)(15)
	10	.21	Lease Agreement, dated May 5, 2000, between ProFound Pharma A/S and The Science Park in Horsholm (16)
	10	.22+	Technology Transfer Agreement, dated March 14, 1997 (effective March 1, 1998), among Maxygen, Inc., Affymax Technologies N.V. and Glaxo Group Limited, as amended (Exhibit 10.3 to Amendment No. 2) (4)
	*10	.23	Description of 2006 Executive Officer Cash Bonus Plan (Exhibit 10.1)(7)
	*10	.24	Description of Goldstein Reimbursement Arrangement(17)

87

Exhibit
Number			Description of Exhibit
	*10	.25	Letter Agreement (re tax equalization payments), dated November 20, 2006, between Elliot Goldstein and Maxygen, Inc.
	10	.26+	Co-Development and Commercialization Agreement, dated as of December 9, 2005, among Hoffman-La Roche, Inc., F. Hoffman-La Roche Ltd. and Maxygen Holdings Ltd. (Exhibit 10.23)(18)
	10	.27+	Cross License Agreement, dated as of July 16, 2003, between Maxygen, Inc. and Amgen Mountain View Inc. (as successor to Avidia, Inc.)
	10	.28+	Amended and Restated Exclusive License Agreement, dated July 10, 2006 (effective as of April 1, 2006), between Regents of the University of Minnesota and Maxygen, Inc.(19)
	*10	.29	Consulting Agreement, dated as of January 12, 2006 (effective January 1, 2006), between Balkrishan Gill and Maxygen, Inc. (Exhibit 10.24)(18)
	*10	.30	Consulting Agreement, between the Company and Waverley Associates, Inc., dated as of April 1, 2006 (20)
	21	.1	List of Subsidiaries
	23	.1	Consent of Independent Registered Public Accounting Firm
	24	.1	Power of Attorney (included on signature page)
	31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Management contract or compensatory plan or arrangement.
+	Confidential treatment has been granted, or requested, with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission.
(1)	Incorporated by reference to the corresponding exhibit to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 15, 2000.
(2)	Incorporated by reference to Exhibit 2.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on July 2, 2004.
(3)	Incorporated by reference to the corresponding exhibit to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2000, filed with the Securities and Exchange Commission on August 14, 2000.
(4)	Incorporated by reference to the indicated exhibit to Maxygen’s Registration Statement on Form S-1, as amended (No. 333-89413) initially filed with the Securities and Exchange Commission on October 20, 1999.
(5)	Incorporated by reference to the indicated exhibit to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2001, filed with the Securities and Exchange Commission on August 14, 2001.
(6)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003.
(7)	Incorporated by reference to the indicated exhibit to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on June 30, 2006).
(8)	Incorporated by reference to exhibit 10.1 to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002.
(9)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2000, filed with the Securities and Exchange Commission on March 21, 2001.
(10)	Incorporated by reference to exhibit 10.6 to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 25, 2002.

88

(11)	Incorporated by reference to the exhibit 99.3 to Maxygen’s Registration Statement on Form S-8 (No. 333-57486) filed with the Securities and Exchange Commission on March 23, 2001.
(12)	Incorporated by reference to the exhibit 4.2 to Maxygen’s Registration Statement on Form S-8 (No. 333-138898) filed with the Securities and Exchange Commission on November 22, 2006.
(13)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 12, 2004.
(14)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March 14, 2005.
(15)	Incorporated by reference to the indicated exhibit to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on August 25, 2006.
(16)	Incorporated by reference to exhibit 10.1 to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended September 30, 2000, filed with the Securities and Exchange Commission on November 14, 2000.
(17)	Incorporated by reference to Exhibit 10.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on February 7, 2005.
(18)	Incorporated by reference to the indicated exhibit to Maxygen’s Annual Report on Form 10-K (File No. 000-28401) for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 15, 2006.
(19)	Incorporated by reference to Exhibit 10.6 to Maxygen’s Quarterly Report on Form 10-Q (File No. 000-28401) for the quarter ended June 30, 2006, filed with the Securities and Exchange Commission on August 7, 2006.
(20)	Incorporated by reference to Exhibit 10.1 to Maxygen’s Current Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange Commission on April 4, 2006.

89

EX-10.25

Exhibit 10.25

To: Elliot Goldstein

From: Russell Howard

Re: Tax Equalization Agreement for 2007

Date: November 13, 2006

As an expatriate in Denmark you are subject to Danish income taxes. During the first three years of residency in Denmark, expatriates benefit from a tax holiday during which their income is taxed at a rate of 25%. Your residency in Denmark reached 3 years as of February 24, 2006. Maxygen entered an International Tax Assistance Agreement with you in 2005 to cover the period through February 2007. As we have discussed, Maxygen proposes to enter a Tax Equalization Agreement with you to cover the balance of calendar year 2007. This agreement does not provide for any tax equalization payments subsequent to December 31, 2007. Any such payments would be subject to approval of the Maxygen Board of Directors’ Compensation Committee and a separate tax equalization agreement covering the relevant period.

To provide you a net income level approximately equal to what you would receive if you were working at Maxygen, Inc. in Redwood City, CA and subject to US and California income and social taxes Maxygen will, in addition to your base salary, make the following tax equalization payments to you:

•	February 15, 2007	109,740 DKK
•	May 15, 2007	358,430 DKK
•	August 15, 2007	358,430 DKK
•	October 15, 2007	358,430 DKK

These payments constitute the entirety of your tax assistance payments from Maxygen through December 31, 2007, except with respect to any performance bonus you receive in 2007 for your performance in 2006.

Maxygen will make a separate tax equalization payment to you with respect to any performance bonus you receive for 2006 that is paid in 2007. The amount of this payment will be determined on a formula basis with the payment equal to the product of: 57.7% and the 2006 performance bonus you receive.

Receipt of tax equalization payments is dependent upon your being employed by Maxygen and being subject to Denmark income taxes on the scheduled payment date. Tax equalization payments to you will be made via the Denmark payroll and will be subject to Danish taxation.

Page 1 of 2

Thank you for your continued dedication and hard work in helping Maxygen’s success. Together, we look forward to continued progress and success of the company during 2007.

Very truly yours,

/s/ Russell Howard	11/13/2006
Russell Howard Chief Executive Officer Maxygen, Inc	Date

My signature indicates that I have read and understand the above Agreement.

/s/ Elliot Goldstein	11/13/2006
Elliot Goldstein	Date

Page 2 of 2

EX-10.27

Exhibit 10.27

Certain information in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

CROSS LICENSE AGREEMENT

     This Cross License Agreement (the “Agreement”) dated as of July 16, 2003 (the “Effective Date”) is entered into by and between Avidia Research Institute, a Delaware corporation, having a place of business at 515 Galveston Drive, Redwood City, California 94063 (“Avidia”) and Maxygen, Inc., a Delaware corporation, having a place of business at 515 Galveston Drive, Redwood City, California 94063 (“Maxygen”).

BACKGROUND

     A. In connection with the establishment of Avidia, Maxygen has assigned to Avidia certain patent applications relating to methods for preparing novel monomeric or multimeric proteins pursuant to an Assignment Agreement of even date herewith;

     B. Maxygen desires to obtain from Avidia an exclusive worldwide license under the Assigned Patent Rights (as defined below) for the Maxygen Field (as defined below); and Avidia is willing to grant such a license to Maxygen, on the terms and conditions herein;

     C. Maxygen owns or Controls certain intellectual property that is necessary for the practice of the Assigned Patent Rights, as well as intellectual property that may be useful for such practice, in each case, outside the Maxygen Field, and Avidia desires to obtain from Maxygen non-exclusive licenses to use such intellectual property outside the Maxygen Field; and Maxygen is willing to grant to Avidia such licenses, on the terms and conditions herein;

     D. Maxygen owns certain software and tangible property useful for the practice of the Assigned Patent Rights outside the Maxygen Field, and Avidia desires to obtain from Maxygen non-exclusive licenses to use such software and tangible property outside the Maxygen Field; and Maxygen is willing to grant to Avidia such licenses, on the terms and conditions herein; and

     E. Maxygen wishes to obtain options to acquire exclusive licenses to Products for certain Avidia Targets (as defined below); and Avidia is willing to grant such a license to Maxygen, on the terms and conditions herein

     NOW THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows:

     1. DEFINITIONS. The following capitalized terms defined in this Article 1 shall have the meanings set forth below for purposes of this Agreement:

          1.1 “Affiliate” means any corporation, firm, limited liability company, trust, partnership or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this Agreement. As used in this definition, “controls”, “controlled by” and “under common control with” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities or partnership interest, by contract or otherwise. In

the case of a corporation, the direct or indirect ownership of fifty percent (50%) or more of its outstanding voting shares, or in the case of a partnership, status as a general partner, or in the case of any other type of legal entity, fifty percent (50%) or more of the ownership interests, shall in any event be deemed to confer control, it being understood that the direct or indirect ownership of a lesser percentage of such shares or ownership interest shall not necessarily preclude the existence of control.

          1.2 “Agriculture Subfield” shall have the meaning set forth in Exhibit A hereto.

          1.3 “Approved DBP Therapeutic Conjugate” means a particular DBP Therapeutic Conjugate that Maxygen has agreed that Avidia may develop and commercialize pursuant to Section 2.5. The Approved DBP Therapeutic Conjugates as of the Effective Date are listed on Exhibit B hereto.

          1.4 “Assigned Patent Rights” means, collectively: (a) the patent applications listed on Exhibit C hereto; (b) all patent applications filed on an invention described in an Invention Disclosure; (c) all divisions, continuations (other than continuations-in-part), substitutions and patents of addition of any of the preceding; (d) all foreign counterparts of any of the foregoing; and (e) all patents and/or registrations that issue from any of the foregoing patent applications (including, without limitation, all reissues, renewals, extensions, substitutions, confirmations, re-registrations, re-examinations, re-validations, supplementary protection certificates and/or other governmental actions that extend the term of any such letters patent).

          1.5 “Authorized Method” means the practice of the Assigned Patent Rights and/or the Subject Improvements to generate one or more libraries of nucleic acids encoding Domain-Based Proteins by the process of: (a) [****]; and (b) [****].

          1.6 “Avidia Know-How” means all Know-How that is owned or Controlled by Avidia prior to the Trigger Date that is necessary or useful for the practice of the Assigned Patent Rights and/or the Subject Improvements and/or Avidia Necessary Claims in the Maxygen Field.

          1.7 “Avidia Necessary Claim” means a claim of any issued patent (other than those within the Assigned Patent Rights) owned or Controlled by Avidia that is necessary for the practice of the Authorized Method in the Maxygen Field. As used in this definition, “necessary” means that the [****]. The Avidia Necessary Claims shall be listed on Exhibit D hereto, which shall be updated in accordance with Section 3.3.

          1.8 “Avidia Target” means any Ligand (other than an Excluded Target) for which research is conducted by Avidia (or its subcontractor) to develop a Product for [****] or [****] therapeutic and/or prophylactic use that [****].

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

2

          1.9 “Avidia Team” means the following individuals: [****] and [****].

          1.10 “Avidia Useful Claim” means a claim of any Patent Right owned or Controlled by Avidia (other than the Avidia Necessary Claims or any claims within the Assigned Patent Rights) that: (a) is useful, but not necessary, for the practice of the Assigned Patent Rights and/or the Subject Improvements in the Maxygen Field, or (b) becomes a “Avidia Useful Claim” pursuant to Section 3.6 below.

          1.11 “Cap” shall have the meaning set forth in Section 5.1.2 below.

          1.12 “Change of Control” means: (a) a dissolution or liquidation of Avidia; (b) a sale of all or substantially all the assets of Avidia; or (c) any consolidation or merger of Avidia with or into any other corporation or other entity or person, or any other corporate reorganization, in which those persons or entities that are Avidia stockholders immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the surviving entity’s voting power immediately after such consolidation, merger or reorganization; in each case, in which those persons or entities that are Avidia stockholders immediately prior to the relevant event described in clauses (a), (b) or (c) above receive cash or publicly-traded securities or some combination thereof having an aggregate value of at least [****] U.S. dollars (U.S.$ [****]).

          1.13 “Chemicals Subfield” shall have the meaning set forth in Exhibit E hereto.

          1.14 “Confidential Information” means any and all information, whatever its form or medium (whether written, oral, electronic, graphic or otherwise), including technical information, results, data and/or design of experiments, that is disclosed by any Party to the other Party that (a) if disclosed in written or other tangible form, is marked or labeled as “confidential” or “proprietary” or with a similar marking or legend sufficient to notify the receiving Party that such information is subject to the terms of this Agreement, or (b) if disclosed orally or in other intangible form, is identified as confidential or proprietary by the disclosing Party at the time of disclosure.

          1.15 “Control” or “Controlled” means possession of the ability to grant licenses or sublicenses, as the case may be, to intellectual property or Know-How or to transfer Materials, in each case, without violating the terms of any agreement or other arrangement with any Third Party. Control shall include the right to grant sublicenses or transfer Materials where the grant or practice of such sublicense or transfer may incur a contractual payment obligation to a Third Party, but only to the extent the Party receiving the sublicense or transfer hereunder agrees to fully reimburse the granting Party for any such payments due to such Third Party, unless otherwise expressly agreed in writing by the Parties.

          1.16 “CPI” means the Consumer Price Index, All Urban Customers, as published in the U.S. Bureau of Labor Statistics.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

3

          1.17 “DBP Research Conjugate” means a non-naturally occurring fusion protein(s) that contains a protein described in Section 1.20(a) and (b) (and (c) and/or (e), as applicable) that has fused at [****] of such protein [****] other specific protein(s) [****], wherein (i) such other specific protein(s) [****] is/are [****], or (ii) such fusion protein is [****].

          1.18 “DBP Therapeutic Conjugate” means a non-naturally occurring fusion protein (i) that contains a protein described in Section 1.20(a) and (b) (and (c) and/or (e), as applicable) that has fused at [****] of such protein [****] other specific protein(s) [****] that is [****], and (ii) is [****].

          1.19 “Domain” means a protein subsequence of between [****] and [****] contiguous amino acids, that is (a) a [****], or (b) a [****] that (i) is [****], and (ii) has a [****].

          1.20 “Domain-Based Protein” means a non-naturally occurring protein expressed from a [****] that:

               (a) is capable of binding specifically to one or more Ligands; and

               (b) consists solely of between one (1) and [****] Domain(s) (from up to three (3) different Families), that are covalently bound (either directly to each other or, optionally, via linkers each of which is less than [****] amino acids), and consists of no other amino acid residues, except as expressly permitted in (c), (d) or (e) below; and

               (c) optionally, has fused at [****] of the protein described in (a) and (b) above an amino acid sequence of less than [****] amino acids; and

               (d) optionally, has fused at [****] of the protein described in (a) and (b) above (and (c) and/or (e), as applicable) one or more other [****] proteins [****], if, and only if:

                    (i) [****], or

                    (ii) [****], or

                    (iii) such fusion protein is an Approved DBP Therapeutic Conjugate approved by Maxygen pursuant to Section 2.5 below; and

               (e) optionally, at [****] of a protein described above (i.e., a protein described in any permitted combination of (a), (b), (c) and (d) above), a linker of less than [****] amino acids that allows more rapid purification of such protein or detection of such protein in an assay (e.g., ELISA).

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

4

It is understood and agreed by the Parties that, as used herein, “Domain-Based Protein” shall not include, except as expressly permitted in (c), (d) or (e) above, any composition of matter containing (however attached or bound): (x) any [****], or (y) any [****].

As used herein, “Domain-Based Protein” shall include any composition of matter that consists solely of (1) non-covalently bound multimers of similar or different Domain-Based Proteins or (2) Domain-Based Proteins that are bound, covalently or non-covalently, to molecules that [****].

          1.21 “Excluded Target” means a Ligand (a) that is proprietary to any Third Party (i.e., [****]); or (b) that was an Avidia Target but ceased to be an Avidia Target pursuant to Section 5.3.2 or 5.3.4; or (c) for which Avidia did not commence any research for its own benefit to develop any Product [****], but with regard to which a Third Party has entered into a written agreement with Avidia pursuant to which such Third Party will collaborate with and sponsor research at Avidia to develop Products [****].

          1.22 “Family” means a group of [****] sequences, in which the members of such group (a) are [****], and (b) have a [****] and remain the same whether such a member is isolated or covalently joined to other peptides in a larger protein.

          1.23 “Invention Disclosure” means an invention disclosure listed on Exhibit F hereto.

          1.24 “Know-How” means proprietary data, instructions, processes, formulae, materials, expert opinions and information, including, without limitation, biological, chemical, pharmacological, toxicological, pharmaceutical, physical, analytical, pre-clinical, clinical, safety, manufacturing and quality control data and information, in each case, that is not generally known. Know-How does not include any inventions included in the Patent Rights.

          1.25 “Known” means (i) known or believed by Avidia or by Avidia’s Affiliates or Licensees who are working on the relevant Domain-Based Protein or DBP Therapeutic Conjugate, or (ii) disclosed by information in the public domain, in the form of a peer-reviewed scientific publication or abstract or other credible scientific publication.

          1.26 “Licensed Product” means a Product for the treatment or prophylaxis of [****] or [****] disease that [****], for which Maxygen has exercised a Target Option with respect to such Avidia Target and entered into a Product License Agreement.

          1.27 “Licensee” means any Third Party that Avidia or Maxygen has granted a license or sublicense, as the case may be, to any of the Assigned Patent Rights.

          1.28 “Ligand” means a naturally occurring biomolecule.

          1.29 “Major Market Country” means [****].

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

5

          1.30 “Materials” means the biological materials listed on Exhibit G hereto.

          1.31 “Maxygen Field” means the development, manufacture, use and/or commercialization of Maxygen Products.

          1.32 “Maxygen Information” means any non-public information that was (i) disclosed, prior to the Effective Date, by or on behalf of Maxygen or its Affiliates to a member of the Avidia Team, or (ii) developed by any member of the Avidia Team during their employment by or consulting with Maxygen, or (iii) learned by any member of the Avidia Team during their employment by or consulting with Maxygen from Maxygen or a Third Party under confidentiality with Maxygen.

          1.33 “Maxygen Necessary Claim” means a claim of any issued patent owned or Controlled by Maxygen that is necessary for the practice of the Authorized Method outside the Maxygen Field. As used in this definition, “necessary” means that the [****]. The Maxygen Necessary Claims licensed to Avidia as of the Effective Date are listed on Exhibit H hereto, which shall be updated in accordance with Section 2.3.

          1.34 “Maxygen Necessary Know-How” means all Know-How owned or Controlled by Maxygen prior to the Trigger Date that is necessary to practice of the Authorized Method outside the Maxygen Field.

          1.35 “Maxygen Other Know-How” means all Know-How owned or Controlled by Maxygen prior to the Trigger Date that was developed (a) by any member of the Avidia Team in the period from June 1, 2001 until the Effective Date or (b) prior to the Effective Date pursuant to (i) the Consulting Agreement, entered by [****] and Maxygen, Inc., effective January 21, 2003, or (ii) the Laboratory Services Agreement, entered by [****] and Maxygen, Inc., effective February 14, 2003; provided, Maxygen Other Know-How shall not include any Maxygen Necessary Know-How or any Shuffling Technology.

          1.36 “Maxygen Product” means (a) any Product in the Chemicals Subfield; (b) any Product in the Agriculture Subfield; and/or (c) any Reserved Therapeutic Product.

          1.37 “Maxygen Useful Claim” means a claim of a Patent Right owned or Controlled by Maxygen (other than the Maxygen Necessary Claims) that: (a) is useful, but not necessary, for the practice of the Assigned Patent Rights and/or the Subject Improvements outside the Maxygen Field, or (b) becomes a “Maxygen Useful Claim” pursuant to Section 2.4 below. The Maxygen Useful Claims existing as of the Effective Date are listed on Exhibit I hereto.

          1.38 “Maxygen Useful Know-How” means all Know-How owned or Controlled by Maxygen prior to the Trigger Date that is necessary or useful for the practice of the Assigned Patent Rights and/or the Subject Improvements outside the Maxygen Field;

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

6

provided, Maxygen Useful Know-How shall not include any Maxygen Necessary Know-How, Maxygen Other Know-How or Shuffling Technology.

          1.39 “Party” means Maxygen or Avidia, and the “Parties” means Maxygen and Avidia.

          1.40 “Patent Rights” means any and all United States or foreign provisional and/or utility patent applications (including, without limitation, all divisions, continuations in whole or in part, substitutions and patents of addition), and any and all United States or foreign letters patent and/or registrations (including, without limitation, all reissues, renewals, extensions, confirmations, re-registrations, re-examinations, re-validations, supplementary protection certificates and/or other governmental actions that extend the term of any such letters patent).

          1.41 “Product” means any product that contains a Domain-Based Protein that is (a) claimed in one or more of the Assigned Patent Rights or (b) made, or developed with [****].

          1.42 “Product License Agreement” means that certain form of Product License Agreement attached hereto as Exhibit J.

          1.43 “Qualified IPO” means a firmly underwritten public offering of shares of common stock of Avidia for a total offering of not less than twenty million U.S. dollars ($20,000,000), before deduction of underwriter’s commissions and expenses.

          1.44 “Reserved Therapeutic Product” means any Product for [****] therapeutic or prophylactic use, that is:

               (a) a TPO [****];

               (b) a TPO/IL3 [****];

               (c) a TNF/IL-1 [****];

               (d) [****] any interferon receptor;

               (e) [****] any interferon or any interferon receptor;

               (f) a p40 (subunit of IL-12 and IL-23) [****];

               (g) [****] CD40;

               (h) [****] CD40 ligand;

               (i) [****] B.7.1 (CD80);

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               (j) [****] B.7.2 (CD86);

               (k) [****] CD28; or

               (l) [****] CTLA4.

For purposes of this definition, “agonist” means a [****] agonist of the applicable Ligand and/or cognate receptor, and “antagonist” means a [****] antagonist of the applicable Ligand and/or cognate receptor. The criteria for agonists and antagonists for the above targets are set forth on Exhibit K hereto. It is understood and agreed that an agonist and/or an antagonist functions by binding to the applicable Ligand and/or the cognate receptor.

          1.45 “Restriction Enzyme Processes” means processes involving the use of restriction enzymes to cut nucleic acids at predetermined positions and then recombining such nucleic acids by ligation.

          1.46 “Shuffle”, “Shuffled” and “Shuffling” means the recombination and/or rearrangement and/or mutation of genetic material for the creation of genetic diversity.

          1.47 “Shuffling Technology” means (a) all Patent Rights owned or Controlled by Maxygen that are necessary or useful for Shuffling and (b) all Know-How owned or Controlled by Maxygen that is necessary or useful for Shuffling and (i) exists as of the Effective Date or (ii) is disclosed to Avidia by Maxygen during the term of this Agreement.

          1.48 “Software” means each, and collectively all, of the software programs owned by Maxygen that are listed on Exhibit L hereto, in source and object code format, and associated documentation necessary for the operation of such software, but only to the extent and in the form such documentation exists as of the Effective Date, unless otherwise agreed in writing by the Parties.

          1.49 “Software Improvement” means any modification, derivative work of or improvement made by Avidia to any aspect of the Software.

          1.50 “Splicing By Overlap Extension” means a PCR-based extension process for joining two or more nucleic acid molecules at defined sites at the ends of the molecules by the use of specially designed Bipartite Primers. By way of illustration, an example of such a process is described in Horten et al., Gene, 77:61-68 (1989). As used in this definition, “Bipartite Primer” means an oligonucleotide primer containing solely subsequences from the ends of two different nucleic acids such that the two nucleic acids can be joined together by PCR extension.

          1.51 “Subject Improvement” means any improvement of or to any invention claimed in the Assigned Patent Rights, (a) that is conceived and reduced to practice or otherwise developed, in the period from the Effective Date until and including the Trigger Date, by (i)

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Maxygen, (ii) Avidia, or (iii) any Licensee of either Party, provided that neither Party shall be obliged to incur additional contractual payment obligations or to engage in undue additional negotiation with such Licensee to obtain such rights necessary to perform its obligations under Sections 2.1(a) or 3.1(a), and (b) the practice of which falls within the scope of a claim of a patent application or patent within the Assigned Patent Rights in any country or multinational jurisdiction, which claim is entitled to filing priority based on a patent application or patent within the Assigned Patent Rights that was filed on or before the Trigger Date; provided, a Subject Improvement shall (x) include any claims of Patent Rights claiming the applicable improvement and any related Know-How for practicing such Subject Improvement and (y) exclude the Assigned Patent Rights.

          1.52 “Suspension Date” shall have the meaning set forth in Section 5.2.1(c).

          1.53 “Target Option” shall have the meaning set forth in Section 5.1.1(a) below.

          1.54 “Territory” means worldwide.

          1.55 “Third Party” means any person or entity other than Maxygen or Avidia or an Affiliate of Maxygen or Avidia.

          1.56 “Trigger Date” means the earliest of (a) the fourth anniversary of the Effective Date, (b) the closing date of a Qualified IPO, or (c) a Change of Control; provided, if Maxygen exercises its Target Option with respect to [****] or more Avidia Targets and the Parties enter into the corresponding Product License Agreements, prior to the earliest to occur of (a), (b) or (c) above, then the Trigger Date shall automatically be extended until the earliest to occur of (x) the sixth anniversary of the Effective Date, (y) the closing date of a Qualified IPO, or (z) a Change of Control.

          1.57 “Veterinary Product” means any Product for veterinary therapeutic or prophylactic use, that is:

               (a) [****];

               (b) [****];

               (c) [****];

               (d) [****];

               (e) [****];

               (f) [****];

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               (g) [****];

               (h) [****];

               (i) [****]; or

               (j) [****].

For purposes of this definition, “agonist” means a [****] agonist of the applicable Ligand and/or cognate receptor, and “antagonist” means a [****] antagonist of the applicable Ligand and/or cognate receptor. The criteria for agonists and antagonists for the above targets are set forth on Exhibit K hereto. It is understood and agreed that an agonist and/or an antagonist functions by binding to the applicable Ligand and/or the cognate receptor.

     2. LICENSE TO AVIDIA

          2.1 License Grant. In partial consideration for the Avidia stock granted to Maxygen pursuant to [****] and subject to the terms and conditions of this Agreement, Maxygen hereby grants to Avidia the following licenses:

               (a) a non-exclusive, [****], perpetual, irrevocable, [****] license, under the Maxygen Necessary Claims and the Maxygen Necessary Know-How to practice the Authorized Method, solely to develop, make, have made, use, import, have imported, offer to sell and sell Products outside the Maxygen Field in the Territory;

               (b) a non-exclusive, [****], perpetual, irrevocable, [****] license, under the Maxygen Useful Claims and the Maxygen Useful Know-How, solely to develop, make, have made, use, import, have imported, offer to sell and sell Products outside the Maxygen Field in the Territory;

               (c) a non-exclusive, [****], perpetual, irrevocable, [****] license to practice the Maxygen Other Know-How in the Territory to (i) develop, make, have made, use, import, have imported, offer to sell and sell Products outside the Maxygen Field, and (ii) for any other purpose, except to develop, make, have made, use, import, have imported, offer to sell and sell any protein-based product for [****] other than [****];

               (d) a non-exclusive, [****], perpetual, irrevocable, [****] license, under Maxygen’s interest in the Subject Improvements (including any corresponding Patent Rights and/or Know-How), solely to develop, make, have made, use, import, have imported, offer to sell and sell Products outside the Maxygen Field in the Territory;

               (e) a non-exclusive, [****], perpetual, irrevocable license, to make, have made and use the Materials and/or their derivatives, to develop, make, have made, use,

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import, have imported, offer to sell and sell Products outside the Maxygen Field in the Territory; and

               (f) a non-exclusive, [****], perpetual, irrevocable, non-transferable (except pursuant to Section 14.2.1) license to the Software to (i) use such Software internally within Avidia, (ii) display such Software internally within Avidia, (iii) reproduce such Software, to the extent necessary to prepare backup copies for Avidia’s internal use, and (iv) make derivative works of such Software for internal use within Avidia, in each case, solely in conjunction with Avidia’s efforts to develop, make, have made, use, import, have imported, offer to sell and sell Products outside the Maxygen Field in the Territory.

          2.2 Sublicenses. Avidia may grant and authorize sublicenses to any of the rights granted it in Section 2.1(a)-(e); provided, however, Avidia may only grant sublicenses under Sections 2.1(a), (b), (d) and (e) in conjunction with a grant of a license of the Assigned Patent Rights and solely for the purpose of allowing the practice of the Assigned Patent Rights to develop, make, have made, use, import, have imported, offer to sell and sale of Products outside the Maxygen Field in the Territory. Promptly after the grant of any such sublicense, Avidia shall notify Maxygen in writing of the identity of each such Licensee and the specific rights (by field and geographic region) granted to each such Licensee, provided that Avidia shall have no obligation to reveal any information that is confidential information of such Licensee.

          2.3 Other Necessary Claims.

               2.3.1 Notice; Decision. If during the term of this Agreement Avidia becomes aware of any claims of any patents owned or Controlled by Maxygen that Avidia believes are necessary for the practice of the Authorized Method, then Avidia may contact Maxygen identifying the relevant claims of the relevant patents and requesting a license from Maxygen. In any such event, Maxygen agrees to discuss in good faith with Avidia whether Avidia requires a license to any such claims of any such patent for such purpose. Maxygen further agrees that, if the Parties agree that Avidia requires a license to such claims of any patents to practice the Authorized Method, such request will be considered favorably by Maxygen, unless the grant of such license by Maxygen would have a material adverse impact on Maxygen or its Affiliates, as determined in Maxygen’s sole discretion. If Maxygen’s decision is favorable, such claims of any patents shall be added to Exhibit H (which addition shall be reflected in a writing signed by both Parties), and such claims shall be Maxygen Necessary Claims unless any payments would be owed to any Third Party for the granting or practice of any such license, in which case the procedures set forth in Section 2.3.3 below shall apply.

               2.3.2 Neutral Determination.

                    (a) If the Parties are unable to agree on whether a license to any claims of any patents owned or Controlled by Maxygen is necessary for Avidia to practice the Authorized Method, either Party shall submit the matter to a mutually agreed independent

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patent attorney (the “Neutral”) who shall have the authority to determine whether a license to claims of any such patent is necessary for Avidia to practice the Authorized Method. As used in this Section 2.3.2, “necessary” means that the methods claimed in the Assigned Patent Rights and/or Subject Improvements cannot practically be practiced to perform the Authorized Method without infringing the applicable claims of any patent owned or Controlled by Maxygen.

                    (b) The Parties shall equally share the costs associated with any such evaluation. If the Neutral determines that such a license is necessary for the practice of the Authorized Method, then subject to Section 2.3.4, so long as the grant of such license by Maxygen would not have a material adverse impact on Maxygen, the applicable claims of such patent shall be added to Exhibit H and be “Maxygen Necessary Claims” unless any payments would be owed to Third Parties for the granting or practice of any such license, in which case the procedures set forth in Section 2.3.3 below shall apply.

                    (c) The Parties shall direct the Neutral that any evaluation subject to this Section 2.3.2 be completed within ninety (90) days and each shall reasonably cooperate to allow such evaluation to be completed within such time period.

               2.3.3 License Terms. If (a) the Parties agree or the Neutral decides that any claims of a particular patent owned or Controlled by Maxygen are necessary for the practice of the Authorized Method, and (b) payments would be owed to Third Parties for the granting or practice of any such license, then Maxygen shall disclose all such payments to Avidia in writing. If Avidia is still interested in obtaining a license to such patent, then it shall notify Maxygen in writing and the Parties shall negotiate in good faith the scope and terms of such a license to Avidia. Any license granted by Maxygen to Avidia pursuant to this Section 2.3.3 must be embodied in a written document signed by both Parties. In any such agreement, Avidia will agree (x) to be responsible for paying any amounts due to Third Parties for the practice of any such license by Avidia and its Licensees, and (y) indemnify and hold harmless Maxygen and its Affiliates and their respective directors, officers, employees and agents from and against any and all losses, injuries, damages and/or liabilities resulting from or arising out of or in connection with the practice of such license by Avidia or its Licensees.

               2.3.4 Acknowledgement. It is understood and agreed by the Parties that Shuffling Technology is one of Maxygen’s most valuable proprietary assets and that protection of Shuffling Technology is of paramount importance to Maxygen, and notwithstanding Section 2.3.2 above, that the Parties do not intend that Avidia will receive from Maxygen the grant of any license to any Shuffling Technology without Maxygen’s express written consent under this Section 2.3, which Maxygen may provide at its sole discretion on a case-by-case basis.

          2.4 Maxygen Useful Claims. If after the Effective Date Avidia becomes aware of any claims in Patent Rights owned or Controlled by Maxygen that Avidia believes would be useful for the practice of the Assigned Patent Rights and/or the Subject Improvements outside the Maxygen Field, then Avidia may request a license from Maxygen thereto identifying the relevant claims and Patent Rights. In any such event, Maxygen agrees to discuss in good faith with Avidia the terms of such a proposed license to Avidia; provided, Maxygen shall have no obligation to grant to Avidia any license to such claims. If the Parties agree on the terms for such a license that are the same as those set forth in this Agreement, then such claims in such

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Patent Rights shall be “Maxygen Useful Claims.” If the Parties agree on the terms for such a license that are different than those set forth in this Agreement, then the Parties will enter into a written agreement reflecting such terms. In any such agreement, Avidia will agree (a) to be responsible for paying any amounts due to Third Parties for the practice of any such license by Avidia and its Licensees, and (b) indemnify and hold harmless Maxygen and its Affiliates and their respective directors, officers, employees and agents from and against any and all losses, injuries, damages and/or liabilities resulting from or arising out of or in connection with the practice of such license by Avidia or its Licensees.

          2.5 DBP Therapeutic Conjugates.

               2.5.1 Acknowledgement. Avidia acknowledges that it shall not have any right, without Maxygen’s express written consent, to directly or indirectly (a) intentionally develop any DBP Therapeutic Conjugate for [****], or (b) make, use, import, sell or otherwise commercialize any DBP Therapeutic Conjugate for [****].

               2.5.2 Notice; Discussion. If during the term of this Agreement Avidia wishes to develop or commercialize any DBP Therapeutic Conjugate, then Avidia shall notify Maxygen and request approval from Maxygen to develop or commercialize such DBP Therapeutic Conjugate, identifying in writing (a) [****], and (b) [****]. In any such event, Maxygen agrees to discuss with Avidia in good faith Avidia’s interest in developing or commercializing such DBP Therapeutic Conjugate. Maxygen further agrees that such requests by Avidia for Maxygen’s approval will be considered favorably by Maxygen, unless Maxygen determines, in its sole discretion, that such an approval may have a material adverse impact on Maxygen or its Affiliates or Licensees.

               2.5.3 [****]; Approval. If Maxygen is willing to provide Avidia its approval that Avidia may develop and/or commercialize a particular DBP Therapeutic Conjugate, then the Parties shall [****] and any such DBP Therapeutic Conjugate thereafter shall be an Approved DBP Therapeutic Conjugate for purposes of this Agreement.

               2.5.4 Expectation. It is understood and agreed that it is the expectation of the Parties that no payments shall be required to be paid by Avidia to Maxygen for any such approval by Maxygen of any DBP Therapeutic Conjugate.

          2.6 Effect of Trigger Date. Upon the occurrence of the Trigger Date:

               (a) all licenses granted to Avidia (and sublicenses granted by Avidia to its Licensees) under this Agreement in effect as of the Trigger Date shall remain in effect, subject to the terms and conditions of this Agreement; and

               (b) Avidia shall not receive additional license rights to Subject Improvements conceived and reduced to practice or otherwise developed by Maxygen, except with respect to (i) patents or patent applications filed after the Trigger Date that claim such

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Subject Improvements or (ii) such Subject Improvements that fall within the scope of claims of patent applications or patents within the Assigned Patent Rights which were filed after the Trigger Date but are entitled to claim filing priority based on another patent application or patent within the Assigned Patent Rights filed on or before the Trigger Date. By way of illustration and without limitation, [****].

          2.7 No License Rights. Notwithstanding Section 2.1, it is understood and agreed that no license or right is granted to Avidia by Maxygen and no covenant is made by Maxygen to Avidia with regard to any Patent Rights or Know-How or Software owned or Controlled by Maxygen:

               (a) that pertain to the practice of the Shuffling Technology, except as expressly set forth in Section 2.1(a) with regard to Maxygen Necessary Claims and Maxygen Necessary Know-How, or as may be expressly agreed by Maxygen in a further written agreement; and/or

               (b) to develop, make, have made, use, import, have imported, offer for sale, sell or have sold (i) any instrument intended to perform DNA synthesis or produce DNA variants, or (ii) any kit, or set of materials or reagents, that is intended to enable a Third Party to conduct DNA synthesis or produce DNA variants; and/or

               (c) to develop, make, have made, use, import, have imported, offer for sale, sell or have sold any DBP Therapeutic Conjugate for [****] except an Approved DBP Therapeutic Conjugate.

          2.8 Third Party Obligations. Avidia shall be solely responsible for the payment of any amounts due to Third Parties to obtain any rights necessary for Avidia to develop or commercialize the inventions claimed in the Assigned Patent Rights and/or in connection with the development, manufacture, use, importation or sale of Products outside the Maxygen Field.

          2.9 No Implied Rights. No licenses or other rights, other than those expressly set forth in this Agreement, are granted by Maxygen to Avidia hereunder, and no additional license or other rights shall be deemed granted by Maxygen to Avidia by implication, estoppel or otherwise.

     3. LICENSE TO MAXYGEN

          3.1 License Grant. Subject to the terms and conditions of this Agreement (including without limitation Section 3.8), Avidia hereby grants to Maxygen, and Maxygen hereby accepts, the following licenses:

               (a) an exclusive, irrevocable, perpetual, [****] license under the Assigned Patent Rights and the Avidia Necessary Claims to practice the Authorized Method,

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solely to develop, make, have made, use, import, have imported, offer to sell and sell Maxygen Products for the Maxygen Field in the Territory;

               (b) an exclusive, irrevocable, perpetual, [****] license under the Avidia Useful Claims and Avidia Know-How, solely to develop, make, have made, use, import, have imported, offer to sell and sell Maxygen Products for the Maxygen Field in the Territory;

               (c) a non-exclusive, irrevocable, perpetual, [****] license under Avidia’s interest in the Subject Improvements (including any corresponding Patent Rights and/or Know-How), solely to develop, make, have made, use, import, have imported, offer to sell and sell Maxygen Products for the Maxygen Field in the Territory;

               (d) an exclusive, irrevocable, perpetual, [****] license under Avidia’s interest in any Patent Rights or Know-How owned or Controlled by Avidia necessary or used to develop, make, have made, use therapeutically or prophylactically, import, have imported, offer to sell and sell, Veterinary Products, solely to develop, make, have made, use, import, have imported, offer to sell and sell Reserved Therapeutic Products in the Territory;

               (e) an exclusive, irrevocable, perpetual, [****] license, under Avidia’s interest in any Patent Rights or Know-How owned or Controlled by Avidia necessary or used to develop, make, have made, use therapeutically or prophylactically, import, have imported, offer to sell and sell any Product which is a DBP Research Conjugate, solely to develop, make, have made, use therapeutically or prophylactically, import, have imported, offer to sell and sell Maxygen Products in the Maxygen Field in the Territory; and

               (f) a non-exclusive, irrevocable, perpetual, [****] license under Avidia’s interest in any Patent Rights owned or Controlled by Avidia (i) that claim inventions conceived or reduced to practice in the period from the Effective Date until and including the Trigger Date and (ii) that would be infringed, but for such license, by the practice by Maxygen and/or its Affiliates of the Shuffling Technology as it exists up to and including the Trigger Date, solely to make, use, import, offer to sell and sell Maxygen Products in the Maxygen Field and products other than Products in the Territory.

          3.2 Right to Sublicense.

               (a) Maxygen may grant and authorize sublicenses to any of the rights granted it in Section 3.1(a)-(c); provided, however, Maxygen may only grant such sublicenses in conjunction with a grant of a sublicense of the Assigned Patent Rights and solely for the purpose of allowing the practice of the Assigned Patent Rights to develop, make, have made, use, import, have imported, offer to sell, and sell Maxygen Products in the Maxygen Field. Promptly after the grant of any such sublicense, Maxygen shall notify Avidia in writing of the identity of any such Licensees and the specific rights (by field and geographic region) granted to any such Licensee, provided that Maxygen shall have no obligation to reveal any information that is confidential information of such Licensee.

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               (b) Maxygen may grant and authorize sublicenses to any of the rights granted it in Section 3.1(d)-(f). Promptly after the grant of any such sublicense, Maxygen shall notify Avidia in writing of the identity of any such Licensees and the specific rights (by field and geographic region) granted to any such Licensee, provided that Maxygen shall have no obligation to reveal any information that is confidential information of such Licensee.

          3.3 Other Necessary Claims.

               3.3.1 Notice; Decision. If during the term of this Agreement, Maxygen becomes aware of any claims of any patents owned or Controlled by Avidia that Maxygen believes are necessary for the practice of the Authorized Method, then Maxygen may contact Avidia identifying the relevant claims of the relevant patents and requesting a license from Avidia with respect thereto. In any such event, Avidia agrees to discuss in good faith with Maxygen whether Maxygen requires a license to any such claims of any such patent for such purpose. Avidia further agrees that, if the Parties agree that Maxygen requires a license to such claims of any patents to practice the Authorized Method, such request will be considered favorably by Avidia, unless the grant of such license by Avidia would have a material adverse impact on Avidia or its Affiliates, as determined in Avidia’s sole discretion. If Avidia’s decision is favorable, such claims of any patents shall be added to Exhibit D (which addition shall be reflected in a writing signed by both Parties), and such patent shall be an Avidia Necessary Claim, unless any payments would be owed to any Third Party for the granting or practice of any such license, in which case the procedures set forth in Section 3.3.3 below shall apply.

               3.3.2 Neutral Determination.

                    (a) If the Parties are unable to agree on whether a license to any claims of any patents owned or Controlled by Avidia is necessary for Maxygen to practice the Authorized Method, either Party shall submit the matter to a mutually agreed independent patent attorney (the “Neutral”) who shall have the authority to determine whether a license to claims of any such patent is necessary for Maxygen to practice the Authorized Method. As used in this Section 3.3.2, “necessary” means that the methods claimed in the Assigned Patent Rights and/or Subject Improvements cannot practically be practiced to perform the Authorized Method without infringing the applicable claims of any patent owned or Controlled by Avidia.

                    (b) The Parties shall equally share the costs associated with any such evaluation. If the Neutral determines that such a license is necessary for the practice of the Authorized Method, then subject to Section 3.3.3, so long as the grant of such license by Avidia would not have a material adverse impact on Avidia, the applicable claims of such patent shall be added to Exhibit D and be an “Avidia Necessary Claim” unless any payments would be owed to Third Parties for the granting or practice of any such license, in which case the procedures set forth in Section 3.3.3 below shall apply.

                    (c) The Parties shall direct the Neutral that any evaluation subject to this Section 3.3.2 be completed within ninety (90) days and each shall reasonably cooperate to allow such evaluation to be completed within such time period.

               3.3.3 License Terms. If (a) the Parties agree or the Neutral decides that any claims of a particular patent owned or Controlled by Avidia are necessary for the practice of

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the Authorized Method, and (b) payments would be owed to Third Parties for the granting or practice of any such license, then Avidia shall disclose all such payments to Maxygen in writing. If Maxygen is still interested in obtaining a license to such patent, then it shall notify Avidia in writing and the Parties shall negotiate in good faith the scope and terms of such a license to Maxygen. Any license granted by Avidia to Maxygen pursuant to this Section 3.3.3 must be embodied in a written document signed by both Parties. In any such agreement, Maxygen will agree (x) to be responsible for paying any amounts due to Third Parties for the practice of any such license by Maxygen and its Licensees, and (y) indemnify and hold harmless Avidia and its Affiliates and their respective directors, officers, employees and agents from and against any and all losses, injuries, damages and/or liabilities resulting from or arising out of or in connection with the practice of such license by Maxygen or its Licensees.

          3.4 Effect of Trigger Date. Upon the occurrence of the Trigger Date:

               (a) all licenses granted to Maxygen (and sublicenses granted by Maxygen to its Licensees) under this Agreement in effect as of the Trigger Date shall remain in effect, subject to the terms and conditions of this Agreement; and

               (b) Maxygen shall not receive additional license rights to Subject Improvements conceived and reduced to practice or otherwise developed by Avidia, except with respect to (i) patents or patent applications filed after the Trigger Date that claim such Subject Improvements or (ii) such Subject Improvements that fall within the scope of claims of patent applications or patents within the Assigned Patent Rights for which Avidia is entitled to claim filing priority based on another patent application or patent within the Assigned Patent Rights filed on or before the Trigger Date. By way of illustration and without limitation, [****].

          3.5 Reserved Rights. Notwithstanding the exclusive licenses granted to Maxygen in the Maxygen Field:

               (a) Avidia shall retain the right under the Assigned Patent Rights and all other intellectual property licensed by Avidia to Maxygen (i) to develop evidence demonstrating proof of principle for the inventions claimed in the Assigned Patent Rights (subject to the limitations in Section 10.1.3 and the further limitation that Avidia will not conduct any research or development with regard to any Reserved Therapeutic Product subject to Section 1.44(d) or (e)), and (ii) to develop, make, have made, use, import, have imported, offer to sell and sell Veterinary Products.

               (b) Avidia shall have the right to (i) disclose to potential investors (or their agents) or corporate partners, pursuant to nondisclosure agreements containing terms at least as restrictive as those in Article 6, the results of work done by the Avidia Team in the period from June 1, 2001 until the Effective Date relating to the practice of the Assigned Patent Rights, and (ii) subject to Section 6.4, Avidia shall have the right to publish in scientific journals

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or present at scientific meetings the results of work done by the Avidia Team from June 1, 2001 relating to the practice of the Assigned Patent Rights until the Effective Date.

               (c) Avidia shall have the right to file, prosecute and maintain any patent applications or patents arising from the results of the activities performed pursuant to Section 3.5(a) above. If Avidia determines that it will not seek patent protection for particular inventions conceived or reduced to practice in the course of such activities, then Avidia shall notify Maxygen of such decision in writing, and Maxygen shall have the right, for a period not to exceed sixty (60) days), to request that Avidia file, prosecute and maintain patent applications and patents on such invention(s), provided such invention pertains to the Maxygen Field. In the event Maxygen does not so request in such sixty (60) day period, it shall be deemed to have decided not to file a patent application for such particular invention. Where so requested under this Section 3.5(c), and pursuant to Section 7.1, Avidia (i) shall file, prosecute and maintain any such patent applications and patents as may reasonably be requested by Maxygen to protect Maxygen’s rights thereto in the Maxygen Field or (ii) shall provide Maxygen the opportunity to take responsibility for such filing, prosecution or maintenance.

               (d) Upon the earlier of (i) Avidia’s or Maxygen’s filing of the applicable patent application(s) described in Section 3.5(c) above, or (ii) a decision of Maxygen not to have Avidia file patent application(s) with regard to a particular invention, Avidia shall have the right to (x) disclose to potential partners or investors, and/or (y) pursuant to the procedure set forth in Section 6.4 (which shall in no event be construed as delaying publication beyond the time limits set forth in this Section 3.5(d)), publish in scientific journals or present at scientific meetings, the applicable results of work done pursuant to Section 3.5(a) above.

               (e) At least semiannually, Avidia shall provide to Maxygen a written report [****] regarding any activities performed pursuant to Section 3.5(a) above and [****].

          3.6 Avidia Useful Claims. If after the Effective Date Maxygen becomes aware of any claims in Patent Rights owned or Controlled by Avidia that Maxygen believes would be useful for the practice of the Assigned Patent Rights and/or the Subject Improvements in the Maxygen Field, then Maxygen may request a license from Avidia thereto identifying the relevant claims and Patent Rights. In any such event, Avidia agrees to discuss in good faith with Maxygen the terms of such a proposed license to Maxygen; provided, Avidia shall have no obligation to grant to Maxygen any license to such claims. If the Parties agree on the terms for such a license that are the same as those set forth in this Agreement, then such claims in such Patent Rights shall be “Avidia Useful Claims.” If the Parties agree on the terms for such a license that are different than those set forth in this Agreement, then the Parties will enter into a written agreement reflecting such terms. In any such agreement, Maxygen will agree to (a) be responsible for paying any amounts due to Third Parties for the practice of any such license by Maxygen and its Licensees, and (b) indemnify and hold harmless Avidia and its Affiliates and their respective directors, officers, employees and agents from and against any and all losses,

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injuries, damages and/or liabilities resulting from or arising out of or in connection with the practice of such license by Maxygen or its Licensees.

          3.7 Third Party Obligations. Maxygen shall be solely responsible for the payment of any amounts due to Third Parties to obtain any rights necessary for Maxygen to develop, manufacture, use, import, offer for sale or sell Maxygen Products in the Maxygen Field.

          3.8 Reserved Therapeutic Products.

               3.8.1 Waiver of License Rights. Maxygen may, at its sole discretion, waive its exclusive license rights to any of the Reserved Therapeutic Products, with express written notice to Avidia identifying the specific Reserved Therapeutic Products to which the waiver applies. Such waived exclusive license rights shall revert to Avidia upon receipt of such notice.

               3.8.2 Other Assays for Reserved Therapeutic Products. The principles and agreed criteria for determining whether a particular Domain-Based Protein is a Therapeutic Reserved Product are set forth on Exhibit K hereto. If either Party believes that an assay not listed on Exhibit K is suitable for evaluating the [****] of a particular Domain-Based Protein to determine whether it is a Therapeutic Reserved Product, it may notify the other Party and provide a written description of the assay and an explanation of why such assay is appropriate to evaluate the [****] of a particular Domain-Based Protein. In any such event, the Parties shall discuss in good faith whether such assay is appropriate for the proposed purpose with regard to the applicable Domain-Based Protein. If the Parties agree that such an assay is appropriate to evaluate [****] of a Domain-Based Protein to determine if it is a Therapeutic Reserved Product, then such assay shall be added to Exhibit K via written amendment. If the Parties fail to agree that such assay is appropriate for such purpose, the proposed assay shall not be added to Exhibit K. If the Parties are unable to reach agreement on at least one assay for assessing the [****] of a Domain-Based Protein with regard to the applicable Ligand or its cognate receptor, such an assay and the results in such assay that evidence [****] will be selected by an agreed Neutral Third Party; provided, such assay [****] must be consistent with the general principles and specific criteria set forth in Exhibit K.

               3.8.3 Waiver of Assay Criteria. If Avidia generates assay results showing that a particular Domain-Based Protein meets the criteria for a Reserved Therapeutic Product set forth in Exhibit K, but Avidia believes that such Domain-Based Protein should not be considered a Reserved Therapeutic Protein, then, at Avidia’s written request, Maxygen may, at its sole discretion, determine whether such assay results are sufficient (or insufficient) to demonstrate that such Domain-Based Protein is not a Reserved Therapeutic Product. If Maxygen makes a determination that such results are sufficient to demonstrate that such Domain-Based Protein is not a Reserved Therapeutic Product, it shall provide Avidia with express written notice of its decision, identifying the specific (a) assay(s), (b) Domain-Based Protein(s), and (c) Reserved Therapeutic Product criteria to which such determination applies. If

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Maxygen decides that the assay results are insufficient to demonstrate that such Domain-Based Protein is not a Reserved Therapeutic Product, but Avidia believes that it has conclusive scientific evidence that demonstrates that such Domain-Based Protein is not a Reserved Therapeutic Product, then Avidia may submit the matter to a mutually agreed independent molecular biologist (the “Neutral”) who shall have the authority to determine whether such assay results are sufficient to demonstrate that such Domain-Based Protein is not a Reserved Therapeutic Product. The Party against whom the Neutral rules shall bear the costs associated with such determination.

               3.8.4 Assays. At Avidia’s request, Maxygen shall cooperate with and provide reasonable assistance to Avidia to facilitate the performance by Avidia of assays listed on Exhibit K. At Maxygen’s discretion, such assistance may include: (i) performing one or more of such assays on behalf of Avidia, if such assays are then being performed at Maxygen; or (ii) providing to Avidia one or more of such assays and/or reagents for conducting such assays. Notwithstanding the foregoing, Maxygen shall have no obligation to (a) incur any additional expense in providing any such assistance or materials (unless Maxygen agrees in its sole discretion to provide such assistance or materials in exchange for reimbursement from Avidia of all associated additional expenses thereby incurred by Maxygen), (b) acquire, make or develop any materials or assays not then in Maxygen’s possession, or (c) violate any agreement entered by Maxygen with any Third Party.

               3.8.5 Reports. At least semiannually until and including the Trigger Date, Maxygen shall provide to Avidia a written report [****] performing research or development upon Reserved Therapeutic Products and [****].

          3.9 No Implied Rights. No licenses or other rights, other than those expressly set forth in this Agreement, are granted by Avidia to Maxygen hereunder, and no additional license or other rights shall be deemed granted by Avidia to Maxygen by implication, estoppel or otherwise.

     4. TECHNOLOGY TRANSFER; OTHER COLLABORATIVE ACTIVITIES

          4.1 Delivery. Promptly following the Effective Date, at Avidia’s written request, Maxygen shall, to the extent that they are in Maxygen’s possession and Control, deliver to Avidia (a) documents embodying Maxygen Necessary Know-How, Maxygen Team Know-How or Maxygen Useful Know-How, as agreed by the Parties, (b) the Software (in electronic format), and (c) samples of the Materials sufficient to allow Avidia to establish initial stocks of the same; provided, in each case, Maxygen shall have no further obligation to deliver further Software, Know-How or Materials, unless otherwise agreed in writing by the Parties. All Know-How and Software provided to Avidia pursuant to this Article 4, shall be treated as Confidential Information of Maxygen that is subject to Article 6. All Know-How provided to Maxygen pursuant to this Article 4 shall be treated as Confidential Information of Avidia that is subject to Article 6.

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          4.2 Assistance. Each Party shall, at the request of the other Party [****], provide technical assistance to the requesting Party to instruct and assist the requesting Party in the practice of the Know-How and Patent Rights licensed it herein; provided, however, neither Party shall be obligated to provide more than [****] per year of such assistance to the other Party, unless otherwise agreed in writing by the Parties.

          4.3 Subject Improvements. Until the Trigger Date, Avidia and Maxygen shall each annually notify the other of any patent applications or patents filed in the previous year by or on behalf of such Party claiming any Subject Improvement(s) that such Party or its Licensee(s) owns or Controls, and provide to the other Party copies of any of the foregoing that have not been previously provided to such other Party.

          4.4 Materials.

               4.4.1 Use. Avidia acknowledges that the Materials are experimental in nature and may have unknown characteristics and properties. Avidia agrees to use prudence and all reasonable care in the use, handling, storage, transportation, disposition and containment of any and all the Materials, and to maintain and use the Materials under suitable containment conditions in compliance with all applicable national, state and local laws, regulations, rules, ordinances, codes of practice and current good laboratory practices.

               4.4.2 Bailment. All right, title and interest in and to the tangible materials comprising the Materials is/are and shall continue to be solely owned by Maxygen. Maxygen hereby grants to Avidia, and Avidia hereby accepts, a bailment to non-exclusively use the Materials provided by Maxygen to Avidia to practice the license granted in Section 2.1(e).

               4.4.3 Assumption of Risk. AVIDIA EXPRESSLY ACKNOWLEDGES THAT IT HEREBY ASSUMES ANY AND ALL RISKS ASSOCIATED WITH THE USE OF THE MATERIALS, AND THAT MAXYGEN SHALL HAVE NO LIABILITY TO AVIDIA OR ANY THIRD PARTY FOR ANY LIABILITY, PROBLEM, LOSS OR DAMAGE RESULTING FROM AVIDIA’S OR AVIDIA’S LICENSEES USE OF THE MATERIALS.

          4.5 Software.

               4.5.1 No Obligation to Correct or Update. The Parties agree that the Software licensed to Avidia in Section 2.1(f) was developed by Maxygen for its internal use and not for use by Avidia or any Third Party and may have bugs, errors or other defects that may result in unreliable or incorrect results or may render it inoperative. Avidia agrees that, unless the Parties otherwise agree in writing, Maxygen has (a) no obligation or duty to provide Avidia any support with regard to the installation, maintenance or use of the Software, unless otherwise agreed in writing by the Parties, and (b) no obligation or duty to correct, or attempt to correct, any bugs, errors or other defects in the Software or any Software Improvement. If Maxygen in its sole discretion provides Avidia with (i) corrections for any bugs, errors or other defects in the

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Software or (ii) any updates for the Software not in existence on the Effective Date, then such corrections and updates shall be deemed “Software” and Avidia shall have the license set forth in Section 2.1(f) with respect thereto.

               4.5.2 No Patent Filings. Avidia agrees that the Software, including all intellectual property rights therein, is owned solely by Maxygen, and agrees not to file any patent application on any aspect of the Software, any Software Improvement and/or any derivative work based on the Software, without Maxygen’s prior written consent, which Maxygen may provide or withhold in its sole discretion.

               4.5.3 No Transfer. Avidia covenants that Avidia will not, without Maxygen’s written consent, which Maxygen may grant or withhold in its sole discretion, transfer to any Third Party any of the Software or any Software Improvements, or any object code or source code for any Software or Software Improvement.

               4.5.4 Assumption of Risk. AVIDIA EXPRESSLY ACKNOWLEDGES THAT IT HEREBY ASSUMES ANY AND ALL RISKS ASSOCIATED WITH THE USE OF THE SOFTWARE, AND THAT MAXYGEN SHALL HAVE NO LIABILITY TO AVIDIA OR ANY THIRD PARTY FOR ANY LIABILITY, PROBLEM, LOSS OR DAMAGE RESULTING FROM AVIDIA’S USE OF THE SOFTWARE.

          4.6 Collaborative Research. At any time, Maxygen and Avidia may agree to conduct collaborative research pursuant to a written agreement with regard to any Reserved Therapeutic Product and/or Licensed Product licensed by Maxygen. Unless otherwise agreed by the Parties, Maxygen shall pay for any research conducted by Avidia pursuant to such research collaboration at an FTE rate of $[****]/FTE/year, such FTE rate to be revised annually to account for any change in the CPI, using 2003 as the comparison year. If Maxygen and Avidia enter into such a research collaboration with respect to a Reserved Therapeutic Product: (a) such shall be deemed an exercise of one of Maxygen’s [****] Target Options, and shall count toward the Cap, as defined in Section 5.1.2; and (b) any Reserved Therapeutic Product developed or commercialized by Maxygen which is derived from the work done by Avidia pursuant to such collaboration shall be subject to such financial terms, if any, set forth in such written agreement. For clarification, Maxygen shall be free to develop or commercialize any Reserved Therapeutic Product without collaborating with Avidia, and in such event Maxygen shall not have any financial obligation to Avidia with respect to such Reserved Therapeutic Product.

          4.7 Subject Improvements. Each Party shall own any Subject Improvements made by it, and any related Patent Rights and/or Know-How.

     5. MAXYGEN OPTIONS

          5.1 Target Options.

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               5.1.1 Option Grant. Avidia hereby grants to Maxygen, and Maxygen hereby accepts, [****] options (each a “Target Option”), exercisable until the Trigger Date, to obtain, with respect to a given Avidia Target, an exclusive worldwide, royalty-bearing license, with the right to sublicense, to develop, make, have made, use, import, have imported, offer for sale and sell Licensed Products directed against the applicable Avidia Target, as set forth in the form of Product License Agreement attached hereto as Exhibit I.

               5.1.2 Maximum. Maxygen may obtain such licenses with respect to the first [****] Avidia Targets as to which Maxygen exercises its Target Options. In no event shall the total number of Target Options exercised by Maxygen exceed [****] (the “Cap”). The obligations of Avidia pursuant to this Article 5 shall expire upon the Parties’ entry into the corresponding Product License Agreement pursuant to Maxygen’s exercise of its [****] Target Option.

          5.2 Avidia Target Reports.

               5.2.1 Reports.

                    (a) Semiannual Reports. Until the earlier of the Trigger Date or when the Cap is reached, at least semiannually, Avidia shall notify Maxygen of all Avidia Targets outside the Maxygen Field upon which Avidia is working (directly or through a subcontractor), identifying each such Avidia Target, and shall provide to Maxygen a written report [****] regarding such Avidia Target(s) and potential Licensed Products relating thereto. Avidia may, at its discretion, include in such semiannual reports other human therapeutic targets (e.g., receptors) outside the Maxygen Field that Avidia has identified as suitable for the development of agonist or antagonist Products but upon which it has not commenced any work; provided, such targets shall not be considered Avidia Targets.

                    (b) Other Reports. If during the period between the semiannual reports described above, Avidia wishes to notify Maxygen of any Avidia Targets, it may so notify Maxygen, providing a written report [****]. In addition, at such time as Avidia has expended [****] dollars ($[****]) on research relating to a particular Avidia Target not previously included in a semiannual report pursuant to Section 5.2.1(a) above or any other reports pursuant to this Section 5.2.1(b), (provided that such time is before the earlier of the Trigger Date or when the Cap is reached), it shall notify Maxygen and provide to Maxygen a written report relating to such Avidia Target [****], so that Maxygen will have an opportunity to determine whether it wishes to exercise its Target Option thereto before such Avidia Target becomes an Excluded Target.

                    (c) Further Information. With respect to any Avidia Target subject to a semiannual report set forth in Section 5.2.1(a) or other report under Section 5.2.1(b) (the “Target Reports”), during the [****] day period referred to in Section 5.3.1 during which Maxygen is determining whether to exercise its Target Option with respect to such Avidia

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Target, Avidia shall (i) update any information or data provided in such Target Reports [****], up and until the earlier of Maxygen’s exercise of the Target Option, or [****] days from Maxygen’s receipt of the applicable Avidia report; and (ii) use reasonable efforts to promptly respond to any reasonable questions raised by Maxygen with regard to the data relating to any Avidia Target and potential Licensed Products relating thereto to allow Maxygen to determine whether it wishes to exercise its Target Option thereto; provided however that Avidia shall not be obliged to perform any research to answer any questions raised by Maxygen.

                    (d) Excluded Targets. If Avidia concludes that a Ligand should be deemed as an Excluded Target under Section 1.21(a) (except any that also qualifies as an Excluded Target pursuant to Section 1.21(b) or (c)), prior to conducting any research on such Ligand, Avidia shall notify Maxygen of the identity of any such Ligand and of any basis for its conclusion that such a Ligand should be deemed an Excluded Target. If Maxygen disagrees, then the Parties shall submit such issue to a mutually agreed independent patent attorney (the “Neutral”) who shall have the authority to determine whether [****] and whether such Ligand is in fact an Excluded Target. Maxygen shall bear the costs associated with any such evaluation, unless the Neutral determines that such Ligand is not an Excluded Target, in which case Avidia shall bear such costs. If the Neutral determines that such a Ligand is not an Excluded Target, then it shall be an Avidia Target for all purposes of this Agreement. Notwithstanding the foregoing, a Ligand shall be presumed to be an Excluded Target for the purpose of this Agreement if [****], and Maxygen shall not have the right to submit the issue of whether such Ligand is an Excluded Target to a Neutral for evaluation in such instances; provided Maxygen shall be entitled to have the Neutral verify that Avidia has [****]. Avidia shall not have any obligation hereunder to disclose to Maxygen or the Neutral any [****].

               5.2.2 Other Disclosures. In addition to the reports described in Section 5.2.1 above, concurrently with each such report Avidia shall also disclose to Maxygen in writing, subject to Section 7.3, all issued patents and published patent applications owned by Third Parties of which Avidia is aware that [****], in each case, that Avidia has not previously disclosed to Maxygen. The Parties acknowledge and agree that the foregoing shall not be interpreted as obligating Avidia to search for or inquire as to the existence of, such Third Party patents and patent applications.

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          5.3 Target Option Exercise.

               5.3.1 Notice. Within [****] days of its receipt from Avidia of any report described in Section 5.2, provided that the Cap has not been reached, Maxygen shall have the right to exercise its Target Option to obtain an exclusive license with respect to Products directed toward such Avidia Target(s). If Maxygen wishes to exercise its Target Option for a particular Avidia Target, it shall send to Avidia a completed and signed Product License Agreement for such Avidia Target and its corresponding Licensed Product. Maxygen shall be deemed to have exercised a Target Option when Avidia countersigns such Product License Agreement and returns it to Maxygen.

               5.3.2 Maxygen Rejection. After Avidia provides Maxygen with any report pursuant to Section 5.2, in the event that Maxygen notifies Avidia that it will not exercise its Target Option with respect to a particular Avidia Target, or fails to timely provide Avidia within the applicable [****] day period the completed and signed Product License Agreement for a particular Avidia Target and the corresponding Licensed Products, then subject to the further notice and disclosure obligations described in Sections 5.4.1, Avidia shall be free to seek a Third Party sponsor of a project for such Avidia Target, or any other license or collaborative arrangement with a Third Party with respect to such Avidia Target and/or a Product directed thereto. If Avidia enters into such a Third Party collaboration for a particular Avidia Target and/or Product(s) directed thereto within [****] months of Maxygen’s declining or failing to exercise its Target Option for such Avidia Target, then such target shall become an Excluded Target. However, if Avidia has not entered into such a Third Party collaboration for a particular Avidia Target and/or Product(s) directed thereto within [****] months of Maxygen’s declining or failing to exercise its Target Option for such Avidia Target, then Avidia shall be obligated to present any such Avidia Target to Maxygen again in the next semiannual report or earlier, at Avidia’s option, prior to entering into a Third Party collaboration for such Avidia Target. In any such case, Maxygen shall again have the opportunity to exercise its Target Option with respect thereto, in accordance with Section 5.3.1 and on the terms set forth in the Product License Agreement.

               5.3.3 Maxygen Waiver. If Avidia notifies Maxygen of any potential target upon which Avidia has not commenced research and development using the Assigned Patent Rights, then Maxygen may, at its sole discretion, notify Avidia in writing that Maxygen is not interested in such target and thereby waive its right to evaluate data that may be created by Avidia relating to such target. In such case, such specific target shall never become an Avidia Target for purposes of this Agreement.

               5.3.4 Excluded Target. In the event that, with respect to a given Avidia Target, Avidia has expended greater than [****] U.S. Dollars (U.S.$ [****]) in a period of [****] or fewer continuous months (the “Trigger Amount”) directly on the research and development of one or more Products directed against such Avidia Target, then such Avidia Target shall cease being an Avidia Target for purposes of this Article 5, and shall be deemed to

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be an Excluded Target. In such event Avidia shall notify Maxygen of the identity of such Excluded Target, and at Maxygen’s request, provide a written accounting of the expenditures meeting such Trigger Amount. For clarification, the Trigger Amount shall include [****], in each case, as determined and allocated in accordance with U.S. generally accepted accounting principles, consistently applied.

          5.4 Suspension Date.

               5.4.1 Notification to Maxygen.

                    (a) Notification. If Avidia has received [****] a Change of Control, and the Cap has not been reached by such date, then within [****] days after Avidia’s notification to Maxygen that it has received [****], Avidia shall notify Maxygen of (i) all new Avidia Targets (i.e., Avidia Targets not disclosed in the previous notifications) and [****] relating thereto, and (ii) [****] any Avidia Target previously disclosed which has not become an Excluded Target pursuant to Section 5.3.2 or 5.3.4, if any, [****] the last notification of such Avidia Target to Maxygen.

                    (b) Further Information. With respect to [****] a report provided by Avidia pursuant to Section 5.4.1(a), Avidia shall use reasonable efforts to promptly respond to any reasonable questions raised by Maxygen [****] relating to any Avidia Target and potential Licensed Products relating thereto to allow Maxygen to determine whether it wishes to exercise its Target Option thereto; provided however that Avidia shall not be obliged to perform any research to answer any questions raised by Maxygen.

                    (c) Other Disclosures. In addition to the notification described in Section 5.4.1(a) above, concurrently with each such report Avidia shall also disclose to Maxygen in writing, subject to Section 7.3, all issued patents and published patent applications [****], in each case, that Avidia has not previously disclosed to Maxygen. The Parties acknowledge and agree that the foregoing shall not be interpreted as obligating Avidia [****].

               5.4.2 Notification to Avidia. Within [****] days of its receipt from Avidia of any report described in Section 5.4.1(a) above, Maxygen shall have the right to exercise its remaining Target Option(s) with respect to Products directed toward such Avidia Target(s), provided that the Cap is not exceeded. If Maxygen wishes to exercise a Target Option for a particular Avidia Target, it shall send to Avidia [****]. Maxygen shall be deemed to have exercised a Target Option when [****]. Avidia may not [****] with respect to any Avidia Target or Licensed Product that is the subject to a Product License Agreement, [****].

               5.4.3 Suspension Date. The [****] day after Maxygen’s receipt from Avidia of any report described in Section 5.4.1(a) above shall be deemed a “Suspension Date.” After such Suspension Date, Maxygen may not exercise any further Target Options; provided, if (i) such [****] Change of Control does not occur within [****] days of Avidia’s notice to Maxygen [****], or within [****] thereof [****], if any regulatory ruling or government consent

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is required for such Change of Control, or (ii) Avidia has abandoned its discussions pertaining to such [****] Change of Control, then upon the earlier to occur of such events, Avidia shall promptly notify Maxygen and such Suspension Date shall no longer be in effect, and Maxygen’s rights shall be reinstated as they were prior to such Suspension Date.

          5.5 Product License Agreement.

               5.5.1 Avidia acknowledges that it may not [****] with respect to any Licensed Product that is the subject of a Product License Agreement, [****].

               5.5.2 Within [****] days, or such longer period as the Parties may agree in writing (the “Interim Period”), after [****] a Product License Agreement, Avidia shall cease all work directly related to the Licensed Product to which such Product License Agreement pertains. During such Interim Period, Avidia may [****].

               5.5.3 Avidia shall have the right to (a) disclose to potential investors (or their agents), under terms of confidentiality at least as restrictive as those in Article 6, the results of work done by it with respect to the applicable Avidia Target or Licensed Product to which such Product License Agreement pertains, [****], and/or (b) subject to the procedures set forth in Section 6.4, publish in scientific journals or present at scientific meetings, the applicable results of work done by it with respect to the applicable Avidia Target or Licensed Product, [****]; provided in each case that Avidia has filed, pursuant to Section 7.1, patent application(s) with respect to any patentable inventions related thereto prior to any such disclosure or publication.

               5.5.4 Avidia shall have the right to disclose to potential corporate partners under terms of confidentiality at least as restrictive as those in Article 6, general results of work done by it with respect to the applicable Avidia Target or Licensed Product (e.g., [****]) to which such Product License Agreement pertains, but shall not disclose (a) [****] of any Licensed Product subject to the applicable Product License Agreement or (b) that Maxygen has entered into a Product License Agreement with Avidia with respect to such Avidia Target.

               5.5.5 In event of that one or more terms of this Agreement relating to licenses and related intellectual property rights set forth in this Agreement conflict with or are not entirely consistent with one or more terms of a particular Product License Agreement, the terms set forth in such Product License Agreement shall prevail with regard to the Products subject to such Product License Agreement. By way of example, but without limitation, [****].By way of further example, [****].

     6. CONFIDENTIALITY

          6.1 Confidential Information. Except as expressly provided herein, the Parties agree that, for the term of this Agreement, the receiving Party shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except for the

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purposes contemplated by this Agreement any Confidential Information furnished to it by the disclosing Party hereto pursuant to this Agreement, except to the extent that it can be established by the receiving Party by competent proof that such Confidential Information:

               6.1.1 was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure;

               6.1.2 was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party;

               6.1.3 became generally available to the public or otherwise part of the public domain after its disclosure to the receiving Party, other than through any act or omission of the receiving Party in breach of this Agreement or any other agreement between the Parties or in contravention of the disclosing Party’s rights under applicable law;

               6.1.4 was independently developed by the receiving Party without reference to or use of any Confidential Information disclosed by the disclosing Party; or

               6.1.5 was subsequently disclosed to the receiving Party free of obligations of confidentiality by a Third Party without legal obligation to the disclosing Party or its Affiliates with regard thereto.

          6.2 Permitted Use and Disclosures. Each Party may use and disclose Confidential Information disclosed to it by the other Party as necessary, for the purposes of: prosecuting or defending litigation, complying with applicable governmental laws, rules or regulations or court order issued by a court of competent jurisdiction or otherwise submitting required information to tax or other governmental authorities, or negotiating and/or entering into a permitted sublicense or otherwise exercising license rights expressly granted to it by the other Party pursuant to the terms of this Agreement, provided that if a Party is required to make any such disclosure, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other Party of such disclosure and will use its reasonable efforts to secure confidential treatment of such information in consultation with the other Party prior to its disclosure (whether through protective orders or otherwise) and disclose only the minimum necessary to comply with such requirements.

          6.3 Publicity. Except as expressly permitted in this Article 6, or as required by law or regulation, each Party agrees not to disclose the terms of this Agreement to any Third Party without the prior written consent of the other Party, which consent shall not be unreasonably withheld; provided, however, each Party may disclose this Agreement or its terms without such consent (a) to its attorneys, advisors, investors and others on a need-to-know basis, under circumstances that reasonably ensure the confidentiality thereof, (b) in any prospectus, offering memorandum, or other document, filing or public announcement required by applicable securities laws or other applicable law or regulation, and/or (c) in confidence, to actual or prospective financing sources in connection with a financing, sublicenses, actual or prospective corporate partners, or Third Parties with whom such Party may enter a strategic combination, on a need-to-know basis.

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          6.4 Public Disclosures

               6.4.1 Limits on Public Disclosures. Any public disclosure (electronic or paper) by Avidia describing any method for making, using or manufacturing any Maxygen Product in the Maxygen Field and/or any Maxygen Product composition in the Maxygen Field shall require Maxygen’s written consent, which consent shall not be unreasonably withheld. Any public disclosure (electronic or paper) by Maxygen describing any method for making, using or manufacturing any Product outside the Maxygen Field and/or any Product composition outside the Maxygen Field shall require Avidia’s written consent, which consent shall not be unreasonably withheld.

               6.4.2 Pre-Publication Review. To avoid loss of patent rights as a result of premature public disclosure of patentable information, each Party shall submit to the other Party all manuscripts describing scientific results obtained from the practice of the Assigned Patent Rights that have applicability to the receiving Party’s field, and the receiving Party shall notify the disclosing Party in writing within thirty (30) days after receipt of any disclosure whether the receiving Party desires to file or have filed a patent application on any invention disclosed in such scientific results with respect to its permitted field of use. In the event that the receiving Party desires to file such a patent application, the disclosing Party shall withhold publication or disclosure of such scientific results until the earlier of the date upon which (i) a patent application is filed thereon, or (ii) the Parties determine after consultation that no patentable invention exists or, alternatively, that patent protection should not be sought for such invention, or (iii) sixty (60) days after receipt by the disclosing Party of the receiving Party’s written notice of the receiving Party’s desire to file such patent application. Further, if such scientific results contain the information of the receiving Party that is subject to use and/or nondisclosure restrictions under this Article 6, the disclosing Party agrees to remove such information from the proposed publication or disclosure, upon request by the receiving Party. Any publication subject to this Section 6.4 shall include an acknowledgment of the contributions of each Party, in accordance with customary scientific norms.

          6.5 Injunctive Relief. Each Party hereto acknowledges that the remedy at law for breach by any Party of its obligations under this Article 6 is inadequate and that each Party shall be entitled to equitable remedies, including injunctive relief, in the event of a breach by the other Party.

          6.6 Acknowledgement. The Parties acknowledge that the members of the Avidia Team were previously employed by and/or were consultants to Maxygen and that in such capacity each member of the Avidia Team (a) had access to, and was exposed to, proprietary and valuable Confidential Information of Maxygen and Third Parties, and (b) was involved in the generation of proprietary and valuable Confidential Information at Maxygen that has been assigned to Maxygen. All Maxygen Information shall remain at all times Confidential Information of Maxygen, subject to the terms of this Article 6, unless assigned by Maxygen to Avidia.

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     7. PATENT PROSECUTION

          7.1 Avidia Rights and Responsibilities.

               7.1.1 Prosecution. Avidia shall have the right, but not the obligation, to (a) file, prosecute and maintain the Assigned Patent Rights and any Patent Rights claiming the composition, or method of use or manufacture, of any Veterinary Product (“Vet Product Patents”) and (b) conduct any interference, reexamination, reissue or opposition proceeding the subject of which is any Assigned Patent Rights and/or any Vet Product Patent ((a) and (b), collectively, to “Prosecute” or the “Prosecution” of the Assigned Patent Rights and any Vet Product Patents), in each case using counsel reasonably acceptable to Maxygen. Avidia shall control the Prosecution and bear the costs of any such activities undertaken by Avidia or any agent of Avidia. Avidia shall keep Maxygen fully informed of the status of each patent application and patent within the Assigned Patent Rights and/or the Vet Product Patents that Avidia Prosecutes, and to that end, Avidia shall, at a minimum, furnish Maxygen with a copy of each draft submission to a patent authority of any jurisdiction at least thirty (30) days before the date Avidia proposes to make such submission in the condition that such draft exists at such time. Avidia shall reasonably and in good faith consider Maxygen’s comments on each such draft submission, and shall make all reasonable proposed revisions suggested by Maxygen that may effect the rights of Maxygen or its Licensees in the Maxygen Field without adversely affecting Avidia’s rights with respect to the Assigned Patent Rights and/or Vet Product Patents. Maxygen shall reimburse Avidia for any reasonable out-of-pocket expenses incurred by Avidia as a result of such revisions requested by Maxygen, if such revisions relate solely to the Maxygen Field. Avidia shall make reasonable efforts to provide Maxygen with an update to such draft prior to filing to enable Maxygen to monitor progress and further comment on the draft. Avidia shall provide Maxygen with a copy of each submission to a patent authority of a jurisdiction within the Territory reasonably promptly after making such filing and copies of any documents received from any patent office with regard to any of the Assigned Patent Rights and/or Vet Product Patents reasonably promptly following receipt thereof.

               7.1.2 Election Not to Prosecute. In each country of the Territory, if Avidia elects not to Prosecute the applicable Assigned Patent Rights and/or Vet Product Patent(s) in such country, Avidia shall give Maxygen notice of such election promptly, but in any event at least forty-five (45) days before the next required filing deadline, in order to maintain the availability of patent protection for the subject matter of such Assigned Patent Rights and/or Vet Product Patent(s), or payment of fees relating to the Prosecution of such Assigned Patent Rights or Vet Product Patent(s), if required in such country. If, after receiving any such notice from Avidia, Maxygen responds with written notice to Avidia that it (or any of its Licensees) wishes to take responsibility for such Assigned Patent Rights and/or Vet Product Patent(s) in such country then Avidia shall (i) promptly provide Maxygen with all pertinent files, correspondence, records, information and other documents relating thereto in Avidia’s possession or control, and (ii) take all other actions reasonably necessary to transfer to Maxygen (or its designee) the right, power and authority to Prosecute such Assigned Patent Rights and/or Vet Product Patent(s) in such country. If Maxygen (or its designee) assumes Prosecution of any patent application or patent within the Assigned Patent Rights and/or Vet Product Patent(s) in any country pursuant to this Section 7.1.2 it shall be responsible for all expenses incurred in connection with such activities.

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               7.1.3 Cooperation. Each Party shall reasonably cooperate with the other Party in the Prosecution of the Assigned Patent Rights and/or Vet Product Patent, and shall execute and deliver to the Party that is conducting such Prosecution activities (the “Filing Party”) such documents as may be reasonably necessary in the furtherance of such Prosecution. Patent counsel for each Party shall cooperate with patent counsel for the other Party in connection with the filing, prosecution and maintenance of such patent applications and patents. The Party that is not the Filing Party with respect to a particular patent application or patent subject to this Article 7 will be granted an associate power of attorney (or its equivalent) on such applications solely to inspect the filings made by the Filing Party and not for any other purpose.

               7.1.4 No Abandonment. During the term of this Agreement, neither Party shall take actions to abandon any patent application that is within the Assigned Patent Rights and/or Vet Product Patent without at least thirty (30) days advance written notice of the other Party, but either Party may discontinue its Prosecution activities with respect to any Assigned Patent Rights and/or Vet Product Patent without the written consent of the other Party, subject to Section 7.1.2.

               7.1.5 Limits on Patent Filings. In order to facilitate Avidia’s compliance with the covenant in Section 10.1.6, if after a reasonable inquiry by Avidia, Avidia wishes to obtain advice from Maxygen whether a particular patent application that would be within the Assigned Patent Rights and/or Subject Improvements (a) discloses any Maxygen Information, or (b) has claims that fall within the scope of claims of Patent Rights within the Shuffling Technology, then Avidia may request such advice from Maxygen. In such case, Maxygen shall review any such patent application provided hereunder by Avidia and shall, within a reasonable time thereafter, inform Avidia whether it believes that such patent application discloses any Maxygen Information (and if so, shall identify such Maxygen Information) and/or falls within the scope of any claims of Patent Rights within the Shuffling Technology (and, if so, shall identify the relevant Shuffling Technology claims).

               7.1.6 Notice. Each Party shall inform the other Party of any Patent Rights, information or proceeding of which it becomes aware that relate to the Assigned Patent Rights and that may adversely impact the validity, title or enforceability of the Assigned Patent Rights in the Territory in the other Party’s field.

               7.1.7 Notice of Patent Issue. During the term of this Agreement, promptly following the issue or grant of any patent owned or Controlled by Maxygen or Avidia, as the case may be, that may be necessary for the practice of the Authorized Method, Maxygen or Avidia, as the case may be, shall provide the other Party with a copy of such patent, and at the request of either Party, the Parties shall discuss the relevance of such patent to the Authorized Method.

          7.2 Necessary Claims.

               7.2.1 Maxygen Necessary Claims. Maxygen shall have the right, but not the obligation, at its sole discretion, to (a) seek and maintain the Maxygen Necessary Claims and (b) conduct any interference, reexamination, reissue or opposition proceeding the subject of which is any Maxygen Necessary Claims ((a) and (b), collectively, to “Prosecute” the Maxygen

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Necessary Claims), in each case using counsel of its choice. Maxygen shall bear the costs of any such activities undertaken by Maxygen or any agent of Maxygen.

               7.2.2 Avidia Necessary Claims. Avidia shall have the right, but not the obligation, at its sole discretion, to (a) seek and maintain the Avidia Necessary Claims and (b) conduct any interference, reexamination, reissue or opposition proceeding the subject of which is any Avidia Necessary Claims ((a) and (b), collectively, to “Prosecute” the Avidia Necessary Claims), in each case using counsel of its choice. Avidia shall bear the costs of any such activities undertaken by Avidia or any agent of Avidia.

          7.3 Common Interest Disclosures. With regard to any information or opinions or advice of counsel disclosed by one Party to the other Party regarding intellectual property and/or technology owned by Third Parties, Maxygen and Avidia acknowledge that they have a common legal interest in determining whether, and to what extent, Third Party intellectual property rights may affect the Assigned Patent Rights, or the Maxygen Necessary Claims or the Avidia Necessary Claims and have a further common legal interest in defending against any actual or prospective Third Party claims based on allegations of misuse or infringement of intellectual property rights relating to the Assigned Patent Rights, or the Maxygen Necessary Claims or the Avidia Necessary Claims or their use. Accordingly, [****].

     8. PATENT ENFORCEMENT AND OTHER ACTIONS AGAINST THIRD PARTIES

          8.1 Notice. In the event that Avidia or Maxygen becomes aware of any actual or threatened infringement of any patents within the Assigned Patent Rights (an “Infringement”), that Party shall promptly notify the other Party in writing.

          8.2 Enforcement of the Assigned Patent Rights.

               8.2.1 Outside the Maxygen Field. Avidia shall have the first right, but not the obligation, at its sole expense, to bring or defend, prosecute and control any action, suit or proceeding with respect to any Infringement outside the Maxygen Field, including any declaratory judgment action related thereto (each an “Action”) against any Third Party involving the Assigned Patent Rights outside the Maxygen Field.

               8.2.2 In the Maxygen Field. Maxygen shall have the first right, but not the obligation, at its sole expense, to bring or defend, prosecute and control any action, suit or proceeding with respect to such Infringement, including any declaratory judgment action (each an “Action”) against any Third Party involving any claims in the Assigned Patent Rights covering any (a) composition of any Maxygen Product, or (b) method of using any such Maxygen Product. Avidia agrees to join any such Action as a party at Maxygen’s request, if Avidia is an indispensable or required party under applicable law, and Avidia agrees not to oppose such joinder.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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               8.2.3 Control; Settlement. The Party conducting an Action under this Section 8.2 shall have full control over its conduct, including settlement thereof; provided, such settlement shall not be made without the prior written consent of the other Party if it would adversely affect the rights of such other Party, including without limitation, the licenses granted hereunder.

               8.2.4 Recoveries. The Party bringing an Action pursuant to this Section 8.2 shall have the right first to reimburse itself out of any sums recovered in such Action or in its settlement for all reasonable out-of-pocket costs and expenses, including reasonable attorney’s and expert fees and other direct costs incurred in connection with such Action or settlement. The remainder is next to be used to reimburse the other Party for its costs and expenses incurred in providing cooperation requested by the Party controlling such Action pursuant to Section 8.5 below. Any remaining amounts may be kept by the Party bringing such Action.

          8.3 Enforcement of Maxygen Necessary Claims and Avidia Necessary Claims.

               8.3.1 Maxygen. Maxygen (or its designee) shall have the exclusive right, but not the obligation, at its sole discretion, to bring or defend, prosecute and control any action, suit or proceeding with respect to any actual or threatened infringement of any Maxygen Necessary Claims, including any declaratory judgment action against any Third Party related thereto, at its own expense and may keep any recovery obtained in any such action, suit or proceeding.

               8.3.2 Avidia. Avidia (or its designee) shall have the exclusive right, but not the obligation, at its sole discretion, to bring or defend, prosecute and control any action, suit or proceeding with respect to any actual or threatened infringement of any Avidia Necessary Claims, including any declaratory judgment action against any Third Party related thereto, at its own expense and may keep any recovery obtained in any such action, suit or proceeding.

          8.4 Other Actions. With respect to any Patent Rights, Know-How or Software licensed hereunder not expressly described above in Sections 8.2 or 8.3, as between Maxygen and Avidia, each Party shall have the exclusive right, at its sole expense, to commence and/or defend any action or proceeding to enforce or defend any rights it may have to any Patent Rights or Know-How owned solely by such Party, and to resolve such matters as it deems appropriate, subject to the licenses granted herein.

          8.5 Cooperation. In any action or proceeding subject to this Article 8, each Party shall fully cooperate with and assist the other Party as reasonably requested, at the expense of the requesting Party.

     9. REPRESENTATIONS AND WARRANTIES; DISCLAIMER

          9.1 Mutual Representations and Warranties. Each of Avidia and Maxygen hereby represents and warrants to the other, as of the Effective Date, as follows:

               9.1.1 it is a corporation duly organized and validity existing under the laws of the state of its incorporation;

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               9.1.2 the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action;

               9.1.3 it has the right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder, including, without limitation, in the case of Maxygen, the right, power and authority to grant the licenses under Article 2 and, in the case of Avidia, the right, power and authority to grant the licenses under Article 3; and

               9.1.4 the execution, delivery and performance by such Party of this Agreement and its compliance with the terms and provisions hereof to such Party’s best knowledge does not conflict with or result in a breach of any of the terms and provisions of or constitute a default under (a) a loan agreement, guaranty, financing agreement, agreement affecting any Party or other agreement or instrument binding or affecting such Party or its property; (b) the provisions of its charter documents or bylaws; or (c) any order, writ, injunction or decree of any court or governmental authority entered against it or by which any of its property is bound.

          9.2 Maxygen. Maxygen hereby represents and warrants to Avidia that:

               9.2.1 As of the Effective Date, it owns or Controls the patents listed in Exhibit H and Exhibit I.

               9.2.2 As of the Effective Date, it owns or Controls the Software and Materials; and

               9.2.3 As of the Effective Date, it is unaware of any claims in any issued patent owned or licensed by Maxygen (except the Maxygen Necessary Claims listed in Exhibit H) that are necessary for Avidia to practice the Authorized Method outside the Maxygen Field.

               9.2.4 it is unaware of any claims that are pending as of the Effective Date in any pending U.S. patent application owned or licensed by Maxygen that, when issued, Maxygen expects will cover the practice of the Authorized Method such that Avidia would require a license to such claims to practice the Authorized Method.

               9.2.5 To the best of Maxygen’s knowledge, the practice of the Materials and Software within the scope of the licenses granted to Avidia in Sections 2.1(e) and (f) respectively, does not require the practice of the Shuffling Technology.

               9.2.6 As of the Effective Date, the Excluded Technology (as defined in the License Agreement between Maxygen and Verdia entered into on March 30, 2002) does not include any Maxygen Necessary Claims.

               9.2.7 As of the Effective Date, the Maxygen Necessary Claims are free and clear of all liens and any encumbrances that would be inconsistent with the licenses granted to Avidia in Section 2.1(a).

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               9.2.8 As of the Effective Date, neither Maxygen nor its Affiliates has received any written notice of any claim or allegation that the practice of the Authorized Method infringes any patents or other intellectual property rights of any Third Party.

          9.3 Disclaimers. Nothing in this Agreement is or shall be construed as:

               9.3.1 Mutual.

                    (a) A warranty or representation that anything developed, made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of any patent rights or other intellectual property right of any Third Party; or

                    (b) An obligation to bring or prosecute actions or suits against any Third Parties for infringement of any of the Patent Rights licensed by Avidia under this Agreement.

               9.3.2 Avidia.

                    (a) A warranty or representation by Avidia as to the validity or scope of any claim or patent within the Assigned Patent Rights or the Avidia Necessary Claims or the Avidia Useful Claim;

                    (b) An obligation to bring or prosecute actions or suits against Third Parties for infringement of any of the Patent Rights licensed to Maxygen under this Agreement; or

                    (c) Except as expressly set forth in Sections 3.3 and 3.6, granting by implication, estoppel, or otherwise indirectly any licenses or rights under patents or other rights owned or Controlled by Avidia, regardless of whether such patents or other rights are dominant or subordinate to any patent licensed to Maxygen hereunder.

               9.3.3 Maxygen.

                    (a) A warranty or representation by Maxygen as to the validity or scope of any claim or patent within the Maxygen Necessary Claims or the Maxygen Useful Claims;

                    (b) An obligation to bring or prosecute actions or suits against Third Parties for infringement of any of the Patent Rights licensed to Avidia under this Agreement; or

                    (c) Except as expressly set forth in Sections 2.3 and 2.4, granting by implication, estoppel, or otherwise indirectly any licenses or rights under patents or other rights owned or Controlled by Maxygen, regardless of whether such patents or other rights are dominant or subordinate to any patent licensed to Avidia hereunder.

          9.4 Disclaimer of Warranties. ALL PATENT RIGHTS, SUBJECT IMPROVEMENTS, KNOW-HOW, SOFTWARE AND MATERIALS LICENSED

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HEREUNDER ARE LICENSED “AS IS” AND, EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS ARTICLE 9, MAXYGEN AND AVIDIA MAKE NO REPRESENTATIONS OR EXTEND ANY WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR OF NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY.

     10. COVENANTS

          10.1 Avidia.

               10.1.1 Avidia hereby covenants to Maxygen that Avidia will not grant during the term of this Agreement any right, license or interest in or to the Assigned Patent Rights and/or its Subject Improvements and/or the Avidia Necessary Claims that is in conflict with the rights and licenses granted to Maxygen under this Agreement.

               10.1.2 Avidia hereby covenants that it shall not enforce, or permit or encourage the enforcement of, against Maxygen, or its Affiliates, Licensees, successors or assigns (each, a “Maxygen Protected Entity”), any issued patent owned or Controlled by Avidia that claims any (i) method of practicing the Assigned Patent Rights and/or Subject Improvements in the Maxygen Field, or (ii) a composition of matter (including, without limitation, any genus claim) of a Maxygen Product, or (iii) method of making such Maxygen Product, or using such a Maxygen Product in the Maxygen Field, if the Maxygen Protected Entity infringes such patent in the course of practicing the Assigned Patent Rights and/or Subject Improvements for the development, manufacture, use, importation, offer for sale or sale of such Maxygen Product within the Maxygen Field. Such covenant shall also apply, solely with respect to such patent, to any person or entity to whom Avidia assigns such patent or grants a right to enforce such patent.

               10.1.3 Avidia hereby covenants that it and its Affiliates and Licensees shall not, without Maxygen’s express prior written consent [****], directly or indirectly (a) intentionally develop for [****], any DBP Therapeutic Conjugate, other than an Approved DBP Therapeutic Conjugate, or (b) make, have made, use, import, have imported, offer to sell, sell or otherwise commercialize for [****] any DBP Therapeutic Conjugate, other than an Approved DBP Therapeutic Conjugate.

               10.1.4 Avidia hereby covenants that it and its Affiliates shall not knowingly practice any Shuffling Technology, without Maxygen’s express prior written consent. Maxygen acknowledges and agrees that the foregoing covenant shall not be construed as limiting Avidia’s and its Affiliates’ exercise of the licenses granted in Section 2.1(a) and (b).

               10.1.5 Avidia hereby covenants that it shall not enforce, or permit or encourage the enforcement of, against Maxygen, or its Affiliates, Licensees, successors or assigns (each, a “Maxygen Protected Entity”) any patent claim owned or Controlled by Avidia that Maxygen identifies pursuant to Section 3.3.1 as being a potential Avidia Necessary Claim for activities conducted by such Maxygen Protected Entity with regard to such a claim in connection with the development or commercialization of Maxygen Products in the Maxygen Field prior to the earliest to occur of (a) the completion of the process described in Section 3.3

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with regard to the relevant patent claims; (b) the execution of a license between the Parties for the relevant claims of such patent; or (c) twelve (12) months after the issue of the relevant patent.

               10.1.6 Avidia covenants that it and its Affiliates and Licensees (excluding Maxygen) and their respective agents shall not, without Maxygen’s written consent, which Maxygen may withhold in its sole discretion, file or Prosecute any patent application that would be within the Assigned Patent Rights and/or Subject Improvements that (a) discloses any Maxygen Information, or (b) has claims that fall within the scope of claims of Patent Rights within the Shuffling Technology, to the extent that such claims are known by Avidia, or would have been known to Avidia after a reasonable inquiry, to fall within the scope of claims of Patent Rights within the Shuffling Technology.

          10.2 Maxygen.

               10.2.1 Maxygen hereby covenants to Avidia that Maxygen will not grant during the term of this Agreement any right, license or interest in or to the Maxygen Necessary Claims and/or its Subject Improvements and/or the Software and/or the Materials that is in conflict with the rights and licenses granted to Avidia under this Agreement.

               10.2.2 Maxygen hereby covenants that it shall not enforce, or permit or encourage the enforcement of, against Avidia, or its Affiliates, Licensees, successors or assigns (each, an “Avidia Protected Entity”) any issued patent owned or Controlled by Maxygen that claims any (a) method of practicing the Assigned Patent Rights and/or Subject Improvements, or (b) a composition of matter (including, without limitation, any genus claim) of a Product outside the Maxygen Field, excluding any DBP Therapeutic Proteins other than Approved DBP Therapeutic Proteins (an “Avidia Product”), or (c) method of making such an Avidia Product outside the Maxygen Field, or using such an Avidia Product outside the Maxygen Field, if the Avidia Protected Entity infringes such patent in conjunction with the practice of the Assigned Patent Rights and/or Subject Improvements for the development, manufacture, use, importation, offer for sale or sale of Products outside the Maxygen Field. Such covenant shall also apply, solely with respect to such patent, to any person or entity to whom Maxygen assigns such patent or grants a right to enforce such patent. Notwithstanding the foregoing, this covenant shall not extend to any patent within the Shuffling Technology; provided, Avidia shall have the licenses granted in Section 2.1.

               10.2.3 Maxygen hereby covenants that it shall not enforce, or permit or encourage the enforcement of, against Avidia, or its Affiliates, Licensees, successors or assigns (each, a “Avidia Protected Entity”) any patent claim owned or Controlled by Maxygen that Avidia identifies pursuant to Section 2.3.1 as being a potential Maxygen Necessary Claim for activities conducted by such Avidia Protected Entity with regard to such a claim in connection with the development or commercialization of Products outside the Maxygen Field prior to the earliest to occur of (a) the completion of the process described in Section 2.3 with regard to the relevant patent claims, (b) the execution of a license between the Parties for the relevant claims of such patent; or (c) twelve (12) months after the issue of the relevant patent.

          10.3 Injunctive Relief. Each Party agrees that in the event of any breach of any of the foregoing covenants that the non-breaching Party shall be entitled to injunctive relief,

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including specific performance, to allow it to obtain the benefit of such covenant, in addition to any other remedies available to it at law or in equity.

     11. INDEMNIFICATION

          11.1 Avidia. Avidia agrees to indemnify, defend and hold harmless Maxygen and its Affiliates and their respective directors, officers, employees and agents (each, an “Indemnitee”) from and against any and all liabilities, claims, actions, suits, proceedings, costs, demands, expenses (including, without limitation, attorneys and professional fees and other costs of litigation), losses, or causes of action (each, a “Liability”) arising out of or relating in any way to: (a) any breach by Avidia of the representations and warranties in Sections 9.1; (b) the possession, manufacture, use, importation, sale or other disposition of Products outside the Maxygen Field by or on behalf of Avidia or its Licensees, whether based on breach of warranty, negligence, product liability or otherwise; (c) the exercise by Avidia of any right granted it pursuant to this Agreement, and/or (d) any possession or use of the Materials or the Software or Software Improvements; except, in each case, to the extent that such Liability is caused by the negligence or willful misconduct of Maxygen or a Maxygen Indemnitee.

          11.2 Maxygen. Maxygen agrees to indemnify, defend and hold Avidia and its Affiliates and their respective directors, officers, employees and agents (each, also an “Indemnitee”) harmless from and against any and all liabilities, claims, actions, suits, proceedings, costs, demands, expenses (including, without limitation, attorneys and professional fees and other costs of litigation), losses, or causes of action (each, also a “Liability”) arising out of or relating in any way to: (a) any breach by Maxygen of any of the representations and warranties in Sections 9.1 or 9.2, (b) the possession, manufacture, use, importation, sale or other disposition of Maxygen Products in the Maxygen Field by or on behalf of Maxygen or its Licensees, whether based on breach of warranty, negligence, product liability or otherwise, and/or (c) the exercise by Maxygen of any right granted it pursuant to this Agreement; except, in each case; to the extent that such Liability is caused by the negligence or willful misconduct of Avidia or an Avidia Indemnitee.

          11.3 Procedure. Any Indemnitee that intends to claim indemnification from a Party under this Article 11 (the “Indemnitor”) shall provide notice in writing of any Liability in respect of which the Indemnitee or its counsel intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume full control of the defense and settlement thereof with counsel mutually satisfactory to the Parties. The indemnity obligations in this Article 11 shall not apply to amounts paid in any settlement hereunder if such settlement is made without the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. At the Indemnitor’s request, the Indemnitee under this Article 11, and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification and provide full information with respect thereto. The Indemnitor shall not enter into any settlement or consent to an adverse judgment in any such claim, demand, action or other proceeding that (a) admits wrongdoing on the part of the other Party or its Affiliates or their respective officers, directors, employees and agents, or (b) which imposes additional material obligations on the other Party, without the prior express written consent of the other Party, which consent shall not be unreasonably withheld or delayed.

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          11.4 Conflict. In the event of any conflict between the indemnification provisions set forth in this Agreement and the indemnification provisions set forth in a Product License Agreement, the provisions of this Agreement shall govern.

     12. TERM AND TERMINATION

          12.1 Term. This Agreement shall commence on the Effective Date, and unless earlier terminated as provided in this Article 12, shall remain in full force and effect in on a country-by-country basis until the expiration of the earlier to occur of (i) the last to expire of the Patent Rights licensed hereunder in the applicable country, or (ii) twenty-five (25) years from the Effective Date of this Agreement (“Expiration”). Following the Expiration of this Agreement, the licenses granted in Sections 2.1 and 3.1 shall become perpetual on a country-by-country basis.

          12.2 Termination for Cause. A Party shall have the right to terminate this Agreement in its entirety upon the material breach by the other Party of such other Party’s material obligations, if such breach is not cured within sixty (60) days after receipt of written notice from such Party thereof.

          12.3 Termination for Insolvency. If voluntary or involuntary proceedings by or against a Party are instituted in bankruptcy under any insolvency law, or a receiver or custodian is appointed for such Party, or proceedings are instituted by or against such Party for corporate reorganization or the dissolution of such Party, which proceedings, if involuntary, shall not have been dismissed without prejudice within sixty (60) days after the date of filing, or if such Party makes an assignment for the benefit of creditors, or substantially all of the assets of such Party are seized or attached and not released within sixty (60) days thereafter, the other Party may immediately terminate this Agreement effective upon notice of such termination.

          12.4 Permissive Termination. Either Party may, at any time, terminate any of the licenses granted to it by the other Party hereunder with written notice of such license termination to the other Party. Such license shall cease to be perpetual upon such notice.

          12.5 Effect of Termination.

               12.5.1 Accrued Rights and Obligations. Termination of this Agreement for any reason shall not release any Party hereto from any liability that, at the time of such termination, has already accrued to the other Party or that is attributable to a period prior to such termination, nor preclude either Party from pursuing any rights and remedies it may have hereunder or at law or in equity that accrued or are based upon any event occurring prior to such termination.

               12.5.2 Licenses. The licenses granted to Maxygen in Sections 3.1 and 3.3 and any sublicenses that Maxygen has granted pursuant to Section 3.2, and the licenses granted to Avidia in Sections 2.1 and 2.3 and any sublicenses that Avidia has granted pursuant to Section 2.2 shall remain in full force and effect regardless of the Expiration or any termination of this Agreement. Notwithstanding the foregoing, either Party may terminate such licenses granted by the other Party to itself voluntarily pursuant to Section 12.4.

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          12.6 Survival. Sections 4.4, 4.5, 4.7, 7.2, 7.3, 9.3, 9.4, 12.5 and Articles 1, 6, 8, 11 (but only to the extent such claim arises from acts or omissions that occurred prior to termination), 13 and 14 of this Agreement shall survive termination of this Agreement for any reason.

     13. DISPUTE RESOLUTION

          13.1 Mediation. If a dispute arises out of or relates to this Agreement, or the performance or any alleged breach hereof, the Parties agree first to try in good faith to settle the dispute by negotiation and escalation to senior representatives within their respective organizations.

          13.2 Proceeding. Except as set forth in Section 13.1, any dispute arising out of or relating to this Agreement, or its performance or any alleged breach (except any dispute relating to the validity, enforceability or infringement of any patent) that is not settled by agreement of the Parties shall be finally settled by binding arbitration. Such arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (except as specifically provided in this Article 13) and shall be held in Palo Alto, California. Unless otherwise agreed in writing by the Parties, the arbitration shall be conducted by one neutral independent arbitrator who shall be a former U.S. district court or California state court judge.

          13.3 Discovery. The arbitrator shall determine what discovery will be permitted, consistent with the goal of limiting the cost and time that the Parties must expend for discovery; provided, however, the arbitrator shall permit such discovery as he or she deems necessary to permit an equitable resolution of the dispute. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy thereof.

          13.4 Costs. The costs of the arbitration, including administrative fees and fees of the arbitrator, shall be shared equally by the Parties, and each Party shall bear its own costs and attorneys’ and witness’ fees incurred in connection with the arbitration.

          13.5 Decision. The arbitration proceedings and the decision of the arbitrator shall not be made public without the joint consent of the Parties and each Party shall maintain the confidentiality of such proceedings and decision unless otherwise permitted by the other Party; provided, either Party may make such disclosures as are required to comply with applicable law or regulation. The Parties agree that the decision of the arbitrator shall be binding as to any and all disputes, controversies, claims and counterclaims presented to the arbitrator. Any award of the arbitrator may be entered in a court of competent jurisdiction for a judicial recognition of the decision and an order of enforcement.

          13.6 Injunctive Relief. Pending the establishment of the arbitral tribunal or pending the arbitral tribunal’s determination of the merits of the controversy, either Party may seek from a court of competent jurisdiction any interim or provisional relief that may be necessary to protect the rights or property of that Party. The Parties further agree that in the event of any breach of this Agreement for activities conducted outside the scope of the licenses granted in Sections 2.1 and 3.1 or the violation of any covenant herein, in addition to any other

40

remedies available to such Party at law or in equity, the non-breaching Party shall be entitled to injunctive relief to (a) prevent any continuing breach, and (b) abate any continuing injury to the non-breaching Party resulting from any such breach.

     14. MISCELLANEOUS

          14.1 Governing Law; Jurisdiction. This Agreement and any dispute arising from the performance or any breach hereof (except any dispute relating to the validity, enforceability or infringement of any patent), including any arbitration proceeding subject to Article 13, shall be governed by and construed in accordance with the laws of the State of California, without reference to conflicts of laws principles.

          14.2 Assignment.

               14.2.1 Agreement. This Agreement shall not be assignable in whole or in part by either Party to any Third Party without the written consent of the other Party; except either Party may assign this Agreement, without such consent, to (a) an Affiliate of such Party; or (b) an entity that acquires all or substantially all of the business or assets of such Party to which this Agreement pertains, whether by merger, reorganization, acquisition, sale or otherwise. The terms and conditions of this Agreement shall be binding on and inure to the benefit of the permitted successors and assigns of each of the Parties.

               14.2.2 Assignment of Sublicenses. Any sublicenses granted under this Agreement may be assigned by such sublicensee [****].

          14.3 Notices. Any notice required or permitted under this Agreement shall be hand-delivered or sent by express delivery service or certified or registered mail, postage prepaid, or by fax with written confirmation by mail, to the following addresses of the Parties or such other address as a Party may provide for itself with notice to the other Party. Notice shall be deemed served when delivered or, if delivery is not accomplished by reason or some fault of the addressee, when tendered.

If to Maxygen	Maxygen, Inc.
	515 Galveston Drive
	Redwood City, California 94063
	Attn: General Counsel
If to Avidia	Avidia Research Institute
	515 Galveston Drive
	Redwood City, California 94063
	Attn: President

          14.4 Further Assurances. At any time or from time to time on and after the Effective Date of this Agreement, either Party shall, at the request of the other Party, (a) deliver

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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to the requesting Party such records, data or other documents consistent with the provisions of this Agreement, (b) execute, and deliver or cause to be delivered, all such consents, documents or further instruments of assignment, transfer or license, and (c) take or cause to be taken all such actions, as the requesting Party may reasonably deem necessary or desirable in order for the requesting Party to obtain the full benefits of this Agreement and the transactions contemplated hereby.

          14.5 Force Majeure. Neither Party shall be held liable or responsible to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement, other than an obligation to make payments hereunder, when such failure or delay is caused by or results from fire; flood; earthquake; tornado; embargo; government regulation; prohibition or intervention; war; act of war (whether war be declared or not); insurrection; act of terrorism; riot; civil commotion; strike; act of God or any other cause where failure to perform is beyond the reasonable control and not caused by the negligence or misconduct of the affected Party (a “Force Majeure Event”) so long as the affected Party has used reasonable efforts to avoid, mitigate and/or overcome the effects of the Force Majeure Event.

          14.6 Independent Contractors. The Parties agree that the relationship of Maxygen and Avidia established by this Agreement is that of independent contractors. Furthermore, the Parties agree that this Agreement does not, is not intended to, and shall not be construed to, establish a partnership or joint venture, nor shall this Agreement create or establish an employment, agency or any other relationship. Neither Party shall have any right, power or authority, nor shall they represent themselves as having any authority to assume, create or incur any expense, liability or obligation, express or implied, on behalf of the other Party, or otherwise act as an agent for the other Party for any purpose.

          14.7 Advice of Counsel. Avidia and Maxygen have each consulted counsel of their choice regarding this Agreement, and each acknowledges and agrees that this Agreement shall not be deemed to have been drafted by one Party or the other and will be construed accordingly.

          14.8 Other Obligations. Except as expressly provided in this Agreement or as separately agreed upon in writing between Avidia and Maxygen, each Party shall bear its own costs incurred in connection with the implementation of the obligations under this Agreement.

          14.9 Waiver. Neither Party may waive or release any of its rights, remedies or interests in or arising under this Agreement except in writing signed by the Party to be bound. The failure or delay of either Party to assert a right or remedy hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition.

          14.10 Severability. In the event that any provision(s) of this Agreement are determined to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, the remainder of the Agreement shall remain in full force and effect without said provision(s). The Parties shall in good faith negotiate a substitute clause for any provision(s)

42

declared invalid or unenforceable, which shall most nearly approximate the intent of the Parties in entering this Agreement.

          14.11 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE FOR ANY LOST REVENUES OR PROFITS OF ANY PERSON OR ENTITY OR ANY OTHER INCIDENTAL, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

          14.12 Entire Agreement; Modification. This Agreement, together with the attached Exhibits, which are hereby incorporated by reference, and the Assignment Agreement of even date hereof, constitutes the entire agreement between the Parties, with respect to the subject matter hereof, and supersedes and cancels all prior or contemporaneous understandings or agreements, whether written or oral, between Maxygen and Avidia with respect to such subject matter. This Agreement can only be amended or modified with a written document signed by both Parties.

          14.13 Headings. The captions to the several Sections and Articles hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation.

          14.14 Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original and which together shall constitute one instrument.

     IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their authorized representatives as of the Effective Date.

MAXYGEN, INC.		AVIDIA RESEARCH INSTITUTE
By:	/s/ Balkrishan S. Gill	By:	/s/ Victor Perlroth
	Name: Balkrishan S. Gill		Name: Victor Perlroth
	Title:   President		Title:   President

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Exhibit A:	Agriculture Subfield
B:	Approved DBP Therapeutic Conjugates
C:	Assigned Patent Rights
D:	Avidia Necessary Claims
E:	Chemicals Subfield
F:	Invention Disclosures
G:	Materials
H:	Maxygen Necessary Claims
I:	Maxygen Useful Claims
J:	Form of Product License Agreement
K:	Reserved Therapeutic Product Criteria
L:	Software

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EXHIBIT A

Agriculture Subfield

“Agriculture Subfield” shall mean the discovery, development and commercialization of:

     (a) [****];

     (b) [****];

     (c) [****];

     (d) [****];

     (e) [****]; and

     (f) [****].

     Definitions

     1.1 “Bulk Production” shall mean production of commercial Products, including, without limitation, [****].

     1.2 “Enabling Technology” shall mean patent applications and patents owned or controlled by Maxygen relating to (i) [****], or the use thereof, and/or (ii) generally applicable [****].

     1.3 “Gene” shall mean a structural gene, including optionally regulatory sequences therefor, including, without limitation, promoters, enhancers and downstream regulatory elements.

     1.4 “Gene Expression Manipulation” shall mean alteration of one or more Gene(s) (e.g., alteration of a sequence of a structural gene or a sequence of a Gene regulatory element, such as a promoter) to enable and/or facilitate Product development or Bulk Production.

     1.5 “Metabolic Pathway Manipulation” shall mean alteration of one or more single Genes, multiple Genes, genetic pathways and/or genomes by modification of pathway control mechanisms to enable and/or facilitate:

          (a) Product development via (i) [****], and/or (ii) [****], and/or (iii) [****], and/or

          (b) Bulk Production.

     1.6 “Microbe” shall mean whole (live or dead) procaryotic organisms (other than Category I Plants), or extracts thereof.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

     1.7 “Plant(s)” shall mean whole Plants, Plant seeds, Plant parts, Plant cells and/or Plant cell cultures derived from Category I Plants and/or Category II Plants.

          1.7.1 “Category I Plants” shall mean:

          (a) land plants, including nonseed plants (Bryophytes, Tracheophytes) such as liverworts, mosses, ferns, and seed plants, such as gymnosperms and angiosperms (monocot and dicots); and/or

          (b) non-land plants, including the Prasinophytes, Chlorophyceae, Trebouxiouphyceae, Ulvophyceae, Chlorokybales, Streptophyta, Klebsormidiales, Zygnematales, Charales, Coleochaetales and Embryophytes.

          1.7.2 “Category II Plants” shall mean:

          (a) mushrooms (Basidiomycetes); and/or

          (b) photosynthetic bacteria, including, but not limited to blue green algae (Cyanobacteria); and/or

          (c) eukaryotic photosynthetic algae and microalgae including, but not limited to green algae (Chlorophytes and Euglenophytes), yellow algae (Cyanophytes), brown algae (Phaeophytes, Xanthophytes, Eustigmatophytes and Raphidophytes) and red algae (Rhodophytes); and/or

          (d) microalgae, including but not limited to diatoms (Chrysophytes and Pyrrophytes).

     1.8 “Product” shall mean [****].

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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EXHIBIT B

Approved DBP Therapeutic Conjugates

As of the Effective Date: [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EXHIBIT C

Assigned Patent Rights

a. [****]

b. [****]

c. [****]

d. [****]

e. [****]

f. [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EXHIBIT D

Avidia Necessary Patents

As of the Effective Date: [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EXHIBIT E

Chemicals Subfield

“Chemicals Subfield” shall mean:

     (a) [****], except for the [****];

     (b) [****]; and

     (c) [****], except for the [****].

Definitions

     1.1 “Agrochemical” shall mean any chemical intended for plant protection or plant growth applications (e.g., any insecticide, nematicide, insect growth regulator, plant growth regulator, fertilizer or herbicide).

     1.2 “Biocatalyst” shall mean a whole cell (live or dead) of a Microbe or Category II Plant that has been [****] that can perform enzymatic catalysis of a particular chemical reaction.

     1.3 “Basic Chemical” shall mean a chemical having a molecular weight of [****]. By way of illustration and without limitation, a chemical monomer or oligomer suitable for [****], or a carbohydrate intended for use as a carbon source in fermentation, would each be a Basic Chemical, if the applicable molecule had a molecular weight of less than [****] Daltons.

     1.4 “Biocatalyst Commercialization” shall mean (i) the preparation, screening and commercial use of Biocatalysts for the purpose of allowing the selection and commercialization of Biocatalysts [****], and (ii) the manufacture and commercial sale of Biocatalysts [****].

     1.5 “Building Block” shall mean any [****], that (a) is not a [****] or a [****], and (b) is intended for addition to one or more [****] to make a [****].

     1.6 “Building Block Development” shall mean the development of one or more Building Blocks for use in [****].

     1.7 “Bulk Production” shall mean production via enzymatic catalysis (using an Enzyme Product or a Biocatalyst) or fermentation of:

          (a) any Enzyme Product or Biocatalyst, or

          (b) any Catalysis Product or Fermentation Product, or

          (c) any Scheduled Product.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

     1.8 “Catalysis Product” shall mean a [****].

     1.9 “Codexis” shall mean Codexis, Inc.

     1.10 “Codexis Restricted Field” shall mean:

          (a) [****];

          (b) [****];

          (c) [****]; and

          (d) [****].

     1.11 “Discovery” shall mean the [****].

     1.12 “Enabling Technology” shall mean all patent applications and patents owned or controlled by Maxygen relating to (i) [****], or the use thereof, and/or (ii) generally applicable [****].

     1.13 “Enzyme Commercialization” shall mean (i) the preparation, screening and commercial use of Enzyme Libraries for the purpose of allowing the selection and commercialization of one or more Enzyme Products solely for use for [****], and (ii) the manufacture and commercial sale of Enzyme Products solely for use for [****].

     1.14 “Enzyme Library” shall mean a set of two or more variant but related enzymes (or genes encoding such enzymes), in each case, that are made using Enabling Technology.

     1.15 “Enzyme Product” shall mean an enzyme selected from an Enzyme Library.

     1.16 “Fermentation Product” shall mean any [****] that is produced via fermentation of a Microbe and/or Category II Plant that has been [****].

     1.17 “Functional Compound” shall mean any non-polypeptide, organic chemical produced in substantially pure form, having a molecular weight of [****] Daltons, that is not a Basic Chemical and is used (i) as an [****], or (ii) to [****] products, or (iii) to [****] products, or (iv) for external application to one or more Plants as an [****].

     1.18 “Gene” shall mean a structural gene, including optionally regulatory sequences therefor, including, without limitation, promoters, enhancers and downstream regulatory elements.

     1.19 “Gene Expression Manipulation” shall mean alteration of one or more Gene(s) (e.g., alteration of a sequence of a structural gene or a sequence of a Gene regulatory element, such as a promoter) to enable and/or facilitate Product development or Bulk Production.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

2

     1.20 “Intermediate” shall mean with regard to a particular [****], a [****], chemical produced in [****]. It is understood and agreed that Intermediate(s) shall not include chemicals having commercial utility for any purpose other than synthesis of the applicable [****] (e.g., Basic Chemicals shall not be Intermediates).

     1.21 “Metabolic Pathway Manipulation” shall mean alteration of one or more single Genes, multiple Genes, genetic pathways and/or genomes by modification of pathway control mechanisms to enable and/or facilitate:

          (a) Product development via (i) [****], and/or (ii) [****]; and/or

          (b) Bulk Production.

     1.22 “Microbe” shall mean whole (live or dead) procaryotic organisms and/or yeasts and/or fungi (excluding those which are Category II Plants), or extracts thereof.

     1.23 “Plant(s)” shall mean whole Plants, Plant seeds, Plant parts, Plant cells and/or Plant cell cultures derived from Category I Plants and/or Category II Plants.

          1.23.1 “Category I Plants” shall mean:

               (a) land plants, including nonseed plants (Bryophytes, Tracheophytes) such as liverworts, mosses, ferns, and seed plants, such as gymnosperms and angiosperms (monocot and dicots); and/or

               (b) non-land plants, including the Prasinophytes, Chlorophyceae, Trebouxiouphyceae, Ulvophyceae, Chlorokybales, Streptophyta, Klebsormidiales, Zygnematales, Charales, Coleochaetales and Embryophytes.

          1.23.2 “Category II Plants” shall mean:

               (a) mushrooms (Basidiomycetes); and/or

               (b) photosynthetic bacteria, including, but not limited to blue green algae (Cyanobacteria); and/or

               (c) eukaryotic photosynthetic algae and microalgae including, but not limited to green algae (Chlorophytes and Euglenophytes), yellow algae (Cyanophytes), brown algae (Phaeophytes, Xanthophytes, Eustigmatophytes and Raphidophytes) and red algae (Rhodophytes); and/or

               (d) microalgae, including but not limited to diatoms (Chrysophytes and Pyrrophytes).

     1.24 “Product” shall mean any [****].

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

3

     1.25 “Scheduled Product” shall mean:

          (a) Products for the following [****] applications:

               (1) [****] Applications:

                    (i) [****];

                    (ii) [****]; and/or

                    (iii) [****]

               (2) [****] Applications (for [****]):

                    (i) [****];

                    (ii) [****];

                    (iii) [****];

                    (iv) [****]; and/or

                    (v) [****].

          (b) Products for the following [****] applications:

                    (i) [****];

                    (ii) [****];

                    (iii) [****]; and/or

                    (iv) [****].

          (c) Products for the following [****] applications:

                    (i) [****];

                    (ii) [****];

                    (iii) [****];

                    (iv) [****];

                    (v) [****]; and/or

                    (vi) [****].

          (d) Products that are [****] of a type specified below, for use to make [****]:

               1. [****];

               2. [****];

               3. [****];

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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               4. [****]; and/or

               5. [****].

          (e) Products that are of a type specified below for use as [****]:

               1. [****];

               2. [****];

               3. [****]; and/or

               4. [****].

          (f) Products of a type specified below for use as [****]:

               1. [****];

               2. [****]; and/or

               3. [****].

          (g) Products of a type specified below, for use in [****]:

               1. [****];

               2. [****]; and/or

               3. [****].

          (h) Products that is/are any of the following [****], to the extent not covered by Section 1.21(d) above:

               1. [****];

               2. [****];

               3. [****];

               4. [****]; and/or

               5. [****].

          (i) Products that are [****] specified below, for use as [****]:

               1. [****];

               2. [****];

               3. [****];

               4. [****];

               5. [****]; and/or

               6. [****].

          (j) Products that is/are any of the [****] specified below, for [****]:

               1. [****];

               2. [****];

               3. [****];

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

5

               4. [****]; and/or

               5. [****].

     1.26 “Strain Improvement” shall mean modification of a Microbe or Category II Plant to enhance its suitability for use in Bulk Production of one or more Fermentation Products.

     1.27 “Template” shall mean the minimally active, non-polypeptide chemical structure (e.g., a pharmacophore) having a molecular weight of [****] Daltons, that is common to a family of chemical structures, and (a) is known to possess measurable specific bioactivity (e.g., biostimulatory, bioinhibitory, receptor binding, enzyme substrate, channel blocking or similar activities) in a particular in vitro or in vivo disease model system, and (b) is useful as an Intermediate.

     1.28 “Template Decoration” shall mean modification of a Template by a Third Party (other than an Affiliate of Codexis) by attaching, via one or more chemical and/or enzymatic steps, one or more Building Blocks to generate an organic chemical product (including, without limitation, a Product or a Functional Compound) having a molecular weight of [****] Daltons.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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EXHIBIT F

Invention Disclosures

1.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
2.	Title: [****]
	Date: [****]
	Maxygen control no.: [****]
3.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
4.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
5.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
6.	Title: [****]
	Date: [****]
	Maxygen control no: [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

7.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
8.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
9.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
10.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
11.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
12.	Title: [****]
	Date: [****]
	Maxygen control no: [****]
13.	Title: [****]
	Date: [****]
	Maxygen control no: [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

2

14.	Title: [****]
	Date: [****]
	Maxygen control no. [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

3

EXHIBIT G

Materials

Avidia Maxybody Sequences

[****]

All remaining quantities of the [****] received by Maxygen pursuant to the [****] entered by [****] and Maxygen, Inc. effective [****].

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EXHIBIT H

Maxygen Necessary Claims

1. [****]

2. [****]

3. [****]

4. [****]

Maxygen Necessary Claims shall also include the claims of non-U.S. counterpart patents that claim the same subject invention as the foregoing claims.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EXHIBIT I

Maxygen Useful Claims

As of the Effective Date: [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EXHIBIT J

Form of

PRODUCT LICENSE AGREEMENT

     This PRODUCT LICENSE AGREEMENT (the “Agreement”), effective as of _______, 200__ (the “Effective Date”), is made by and between Maxygen, Inc., a Delaware corporation with a principal place of business at 515 Galveston Drive, Redwood City, California 94063 (“Maxygen”), and Avidia Research Institute, a ___________ corporation with a principal place of business at ___________ (“Avidia”).

BACKGROUND

A. Avidia and Maxygen entered into a Cross License Agreement effective July 16, 2003, pursuant to which Maxygen received certain options from Avidia to acquire exclusive licenses to Licensed Products (as defined below) to develop and commercialize human pharmaceutical products.

B. Maxygen has provided Avidia notice that it wishes to exercise one of its options to acquire an exclusive license under Patent Rights and Know-How owned or Controlled by Avidia to develop and commercialize Licensed Products directed to __________, and Avidia is willing to grant such license, on the terms and conditions herein.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the Parties hereby agree as follows:

ARTICLE 1 — DEFINITIONS

     In this Agreement, the following capitalized terms shall have the meaning ascribed to them respectively in this Article. In this Agreement, capitalized terms not otherwise expressly defined herein, if defined in the Cross License Agreement, shall have the meaning ascribed to them respectively therein.

     1.1 “Affiliate” means any corporation, firm, limited liability company, trust, partnership or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this Agreement. As used in this definition, “controls”, “controlled by” and “under common control with” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities or partnership interest, by contract or otherwise. In the case of a corporation, the direct or indirect ownership of fifty percent (50%) or more of its outstanding voting shares, or in the case of a partnership, status as a general partner, or in the case of any other type of legal entity, fifty percent (50%) or more of the ownership interests, shall in any event be deemed to confer control, it being understood that the direct or indirect ownership of a lesser percentage of such shares or ownership interest shall not necessarily preclude the existence of control.

     1.2 “Avidia Know-How” means any Know-How owned or Controlled by Avidia necessary or useful for the development, manufacture, importation, use or sale of the Licensed Products.

     1.3 “Avidia Materials” means any Materials owned or Controlled by Avidia necessary or useful for the development, manufacture, importation, use or sale of the Licensed Products.

     1.4 “Avidia Patent Rights” means any Patent Rights owned or Controlled by Avidia necessary or useful for the development, manufacture, importation, use or sale of the Licensed Products.

     1.5 “Avidia Technology” means Avidia’s interest in (a) the Avidia Patent Rights, (b) the Avidia Know-How, and (c) the Avidia Materials.

     1.6 “Biological License Application” or “BLA” means the Biological License Application, as defined in the U.S. Public Health Service Act, as amended, and the regulations promulgated thereunder, and any corresponding foreign application, registration or certification in the Territory.

     1.7 “Combination Licensed Product” shall have the meaning set forth in Section 3.2.3(a).

     1.8 “Commercially Reasonable Efforts” means the level of efforts and resources reasonably appropriate to diligently develop and/or commercialize (as applicable) Licensed Products in a sustained manner, consistent with the efforts and resources a similarly situated biopharmaceutical company would typically devote to a product of similar market potential, profit potential, and/or proprietary protection.

     1.9 “Confidential Information” means any and all information, whatever its form or medium (whether written, oral, electronic, graphic or otherwise), including technical information, results, data and/or designs of experiments, that is disclosed by any Party to the other Party pursuant to this Agreement that (a) if disclosed in written or other tangible form, is marked or labeled as “confidential” or “proprietary” or with a similar marking or legend sufficient to notify the receiving Party that such information is subject to the terms of this Agreement, or (b) if disclosed orally or in other intangible form, is identified as confidential or proprietary by the disclosing Party at the time of disclosure, and is confirmed in writing as confidential or proprietary delivered to the receiving Party within thirty (30) days thereafter.

     1.10 “Control” or “Controlled” means possession of the ability to grant the licenses or sublicenses as provided for herein without violating the terms of any agreement or other arrangement with any Third Party.

     1.11 “Cross License Agreement” means that certain Cross License Agreement entered by Avidia and Maxygen effective July 16, 2003.

     1.12 “Domain-Based Protein” shall have the meaning set forth in the Cross License Agreement.

     1.13 “FDA” means the U.S. Food and Drug Administration, and any successor entity.

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     1.14 “Field” means treatment and/or prophylaxis of [****] OR [****] [****] disease.

     1.15 “First Commercial Sale” means the first sale of a Licensed Product to a Third Party in a particular country, following the receipt of all Regulatory Approvals required for the sale of such Licensed Product in such country.

     1.16 “Investigational New Drug Application” or “IND” means an Investigational New Drug Application, as defined in the U.S. Public Health Service Act, as amended, and the regulations promulgated thereunder, and any corresponding foreign application, registration or certification in the Territory.

     1.17 “Know-How” means any proprietary data, instructions, processes, formulae, materials, expert opinions and information, including, without limitation, biological, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, clinical, safety, manufacturing and quality control data and information. Know-How does not include any inventions included in the Patent Rights.

     1.18 “Licensed Product” means a Product for use in the Field, in any formulation or dosage form.

     1.19 “Major Market Country” means [****].

     1.20 “Materials” means any chemical or biological substances including any: (i) organic or inorganic chemical or compound; (ii) gene; (iii) vector or construct, whether plasmid, phage, virus or any other type; (iv) host organism, including bacteria and eukaryotic cells; (v) eukaryotic or prokaryotic cell line or expression system; (vi) protein, including any peptide or amino acid sequence, enzyme, antibody or protein conferring targeting properties and any fragment of a protein or peptide or enzyme; (vii) genetic material, including any genetic control element (e.g., promoters); (viii) virus; or (ix) assay or reagent.

     1.21 “Net Sales” means the gross revenue received by Maxygen or its Sublicensees for sales of Licensed Products or Licensed Combination Products by Maxygen and/or its Sublicensees to bona fide independent Third Parties in arm’s length sales, less: (a) [****]; (b) [****]; (c) [****], (d) [****], (e) [****], and (f) [****].

     1.22 “Party” means Maxygen or Avidia, and the “Parties” means Maxygen and Avidia.

     1.23 “Patent Rights” means any and all United States or foreign provisional and/or utility patent applications (including, without limitation, all divisions, continuations in whole or in part, substitutions, and patents of addition), and any and all United States or foreign letters patent and/or registrations (including, without limitation, all reissues, renewals, extensions, confirmations, re-registrations, re-examinations, re-validations, supplementary protection certificates and/or other governmental actions that extend the term of any such letters patent).

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     1.24 “Phase I”, “Phase II”, and “Phase III” means Phase I (or Phase I/II), Phase II (or Phase II/III), and Phase III clinical trials, respectively, in each case as prescribed by the applicable United States IND regulations, or the corresponding foreign statutes, rules or regulations in the Territory. For the purposes of this Agreement, a clinical trial shall be deemed to be initiated upon the first dosing of the first human subject in such trial.

     1.25 “Product” means any product that (a) binds to and is an [agonist] OR [antagonist] [prior to signing, Maxygen shall select one which corresponds to work performed by Avidia upon the relevant Avidia Target] of __________ [prior to signing, Maxygen shall insert the name of the relevant Avidia Target] and (b) contains a [****]. For purposes of this definition, the term [****] shall have the meaning set forth in the Cross License Agreement.

     1.26 “Product Patent” means a patent application or patent within the Avidia Patent Rights that claims a composition of matter that is a Licensed Product, or a method of manufacturing or using a Licensed Product.

     1.27 “Regulatory Agency” means the FDA, the European Medicines Evaluation Agency, or any other governmental agency having similar jurisdiction over the development, manufacturing, and marketing of biopharmaceutical products and any successor agencies thereof.

     1.28 “Regulatory Approval” means, with respect to a country or, where applicable, a multinational jurisdiction, all such approvals, licenses, registrations or authorizations that are required to be obtained from any one or more Regulatory Agencies prior to the manufacture, marketing and/or sale of a Licensed Product in such country or multinational jurisdiction (including, where applicable, pricing approvals necessary to obtain reimbursement).

     1.29 “Regulatory Filing” means any filing with a Regulatory Agency relating to the Regulatory Approval of a Licensed Product, including all supporting data. Regulatory Filings include, without limitation, INDs and BLAs.

     1.30 “Sublicensee” means an Affiliate of Maxygen or a Third Party, in each case, that Maxygen has granted a license or sublicense to make, use and/or sell one or more Licensed Products.

     1.31 “Territory” means all countries of the world.

     1.32 “Third Party” means any individual, corporation, partnership or other entity or party other than Maxygen or Avidia or an Affiliate of either of them.

     1.33 “Valid Claim” means a claim contained in (a) an issued and unexpired patent included within the Avidia Patent Rights that has not been held unenforceable, unpatentable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through abandonment, reissue, disclaimer or otherwise, or (b) a

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pending patent application that is included within the Avidia Patent Rights, which application claims in a first priority date of no more than [****] years prior to the date upon which pendency is determined. If a claim of a patent application that ceased to be a Valid Claim under subsection 1.33(b) later issues or grants as a patent subject to subsection 1.33(a) then such claim shall again be considered to be a Valid Claim, effective as of the earlier of the grant, allowance, or issuance of such patent.

ARTICLE 2 — LICENSE GRANT

     2.1 License to Maxygen. Subject to the terms and conditions of this Agreement, Avidia hereby grants to Maxygen, and Maxygen hereby accepts, an exclusive, worldwide, royalty-bearing license under the Avidia Technology, to make, have made, use, import, have imported, offer for sale and/or sell Licensed Products in the Territory for use in the Field.

     2.2 Sublicenses. Maxygen may grant and authorize sublicenses of the rights granted it in Section 2.1 to its Affiliates, and Third Parties; provided that, Maxygen shall only have the right to grant and authorize sublicenses to Third Parties of the rights granted it in Section 2.1, (a) after such time as it spends at least [****] dollars ($[****]) in the development of a Licensed Product, or (b) earlier, if the purpose of such sublicense is solely for such Sublicensee to develop or manufacture the Licensed Product on behalf of Maxygen. Within thirty (30) days of the grant of any sublicense Maxygen shall provide Avidia with a copy of such sublicense agreement, which copy may be redacted by Maxygen to avoid disclosure to Avidia of any confidential information belonging to such Third Party. Maxygen hereto shall remain responsible to Avidia hereto for the performance of the financial and other obligations of its Sublicensees.

     2.3 No Implied Licenses. Other than those rights and licenses expressly granted herein, no rights or licenses are granted or shall be deemed granted under this Agreement with respect to the Avidia Technology and/or other intellectual property owned or Controlled by Avidia.

     2.4 Negative Covenant.

               (a) Maxygen covenants that it shall not, nor shall it cause or authorize any Affiliate or Sublicensee to, (i) use or practice, directly or indirectly, any Avidia Technology for any other purpose other than those expressly permitted by this Agreement or except as permitted under the Cross License Agreement, or (ii) make, have made, use, import, have imported, offer for sale and/or sell Licensed Products in any manner outside the scope of the license set forth in Section 2.1, except as may be permitted in another written agreement entered by the Parties.

               (b) If the Field of this Agreement is the treatment and/or prophylaxis of [****], Maxygen covenants that it shall not, nor shall it cause or authorize any Affiliate or Sublicensee to, (i) use or practice, directly or indirectly, any Avidia Technology licensed under this Agreement for the treatment and/or prophylaxis of [****], except as permitted under the Cross License Agreement or any other written agreement entered by the Parties, or (ii) make,

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have made, use, import, have imported, offer for sale and/or sell Licensed Products for [****], except as may be permitted in another written agreement entered by the Parties.

     2.5 License to Avidia.

          2.5.1 License Grant. Subject to the terms and conditions of this Agreement, Maxygen hereby grants to Avidia, and Avidia hereby accepts, a non-exclusive, worldwide, royalty-free, fully-paid license under Maxygen’s interest in any Patent Rights owned or Controlled by Maxygen that claim generically Products made in the course of practicing the license set forth in Section 2.1, solely to make, have made, use, import, have imported, offer for sale and/or sell (a) [****] and (b) products that are not Licensed Products but are [****].

          2.5.2 Sublicenses. Subject to Section 2.5.3, Avidia may grant and authorize sublicenses to any of the rights granted it in Section 2.5.1. Each such sublicense shall be in writing and consistent with the terms and conditions of this Agreement. Promptly after the grant of any such sublicense, Avidia shall notify Maxygen in writing of the identity of each such sublicensee and the specific rights (by field and geographic region) granted to each such Licensee, provided that Avidia shall have no obligation to reveal any information that is confidential information of such sublicensee. Avidia hereto shall remain responsible to Maxygen hereto for the performance of the financial and other obligations of its sublicensees, including any reporting or other obligations due to the Third Party licensor(s) of such Patent Rights.

          2.5.3 Third Party Payments. With respect to any Patent Rights subject to Section 2.5.1, Avidia hereby agrees it will be responsible for paying any and all amounts due to Third Parties for the grant to Avidia and/or the practice of any such license by Avidia and its sublicensees in accordance with a schedule to be agreed in writing by the Parties that will permit Maxygen to timely meet its obligations to such Third Parties.

          2.5.4 No Implied Licenses. Other than those rights and licenses expressly granted herein, no rights or licenses are granted or shall be deemed granted under this Agreement with respect to the Maxygen Technology and/or other intellectual property owned or Controlled by Maxygen.

ARTICLE 3 — MILESTONE PAYMENTS AND ROYALTIES

     3.1 Milestone Payments.

          3.1.1 Payments to Avidia. Within thirty (30) days following the first occurrence of each of the events specified below with respect to each different Licensed Product by Maxygen or its Sublicensees, Maxygen shall pay to Avidia the following nonrefundable, non-creditable (except as provided for in Section 3.1.2 below) milestone payments:

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Milestones	Amount
A. [****]	$[****]
B. [****]	$[****]
C. [****]	$[****]
D. [****]	$[****]
E. [****]	$[****]
F. [****]	$[****]

               For purposes of this Section 3.1, Licensed Products that contain different Domain-Based Proteins shall be deemed to be different Licensed Products.

          3.1.2 Backup Licensed Products. The payments due under Section 3.1.1 above shall be made with respect to the Licensed Products as described above. However, the Parties understand that Maxygen may cease all development of a particular Licensed Product (a “Discontinued Licensed Product”), and focus its efforts on another Licensed Product that Maxygen had been developing, or with respect to which Maxygen commences development, as an alternative to the Discontinued Licensed Product in the event of its unsuccessful development (the “Backup Licensed Product”). If Maxygen has made any payment with respect to such Discontinued Licensed Product under Section 3.1.1 in respect of the achievement of any milestone event described therein, then following the accomplishment of that same milestone event with respect to its Backup Licensed Product, no milestone payment shall be due hereunder in respect of such achievement. When milestone events described in Section 3.1.1 are achieved with respect to such Backup Licensed Product where the corresponding milestone payment amount was not previously paid with respect to the Discontinued Licensed Product, then Maxygen shall pay such corresponding milestone payment amount pursuant to Section 3.1.1.

          3.1.3 No Milestone Skipping. Subject to Section 3.1.2, if an event that triggers a milestone payment pursuant to Section 3.1.1 occurs, with respect to a particular Licensed Product, at any time prior to payment of any of the preceding milestone payment amounts set forth in Section 3.1.1, with respect to such Licensed Product, then Maxygen shall pay Avidia within thirty (30) days of such event both the milestone payment amount triggered by such event and all such unpaid preceding milestone payment amounts for such Licensed Product.

     3.2 Royalties.

          3.2.1 Royalties on Net Sales. In partial consideration for the rights granted hereunder, Maxygen shall pay a nonrefundable, non-creditable royalty to Avidia of [****] percent ([****]%) of aggregate Net Sales of Licensed Products by Maxygen and its Sublicensees.

          3.2.2 Non-Royalty Sales; One Royalty. No royalty shall be payable under Section 3.2.1 above with respect to sales of Licensed Products among Maxygen, its Affiliates and Sublicensees for resale to bona fide independent Third Parties, nor shall such royalty be due on Licensed Products sold or otherwise distributed for use in clinical trials, or distributed at cost or less for promotional use or for compassionate use. The royalty rate set forth in Section 3.2.1

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shall apply as set forth therein regardless of the number of Valid Claims that cover the relevant Licensed Product.

          3.2.3 Combination Licensed Products.

               (a) If Maxygen sells any Licensed Product in the form of a combination product containing a Licensed Product and one or more pharmaceutically active ingredients or a delivery device (whether combined in a single formulation and/or package, as applicable, or formulated and/or packaged separately but sold together for a single price) (a “Combination Licensed Product”), Net Sales of such Combination Licensed Product for the purpose of determining the royalty due to Avidia pursuant to Section 3.2.1 will be calculated by multiplying actual Net Sales of such Combination Licensed Product by the fraction A/(A+B) where A is the invoice price of such Licensed Product if sold separately, and B is the total invoice price of the other active ingredient(s) and/or the delivery device in the combination if sold separately.

               (b) If, on a country-by-country basis, such other pharmaceutically active ingredient or ingredients or delivery device in the Combination Licensed Product are not sold separately in such country, but the Licensed Product component of the Combination Licensed Product is sold separately in such country, Net Sales for the purpose of determining royalties due to Avidia pursuant to Section 3.2.1 for the Combination Licensed Product shall be calculated by multiplying actual Net Sales of such Combination Licensed Product by the fraction A/C where A is the invoice price of such Licensed Product component if sold separately, and C is the invoice price of the Combination Licensed Product. If, on a country-by-country basis, such Licensed Product component is not sold separately in such country, Net Sales for the purposes of determining royalties due to Avidia pursuant to Section 3.2.1 for the Combination Licensed Product shall be D/(D+E) where D is the fair market value of the portion of the Combination Licensed Products that contains the Licensed Product and E is the fair market value of the portion of the Combination Licensed Products containing the other active ingredient(s) or delivery device included in such Combination Licensed Product, as such fair market values are determined in good faith by the Parties. If the Parties, after good faith negotiation, cannot reach agreement on such fair market values under this Section 3.2.3(b), then either Party may refer the matter for resolution by binding short-form arbitration in accordance with Section 3.2.3(d).

               (c) If, on a country-by-country basis, such Licensed Product component is not sold separately in such country, Net Sales for the purposes of determining royalties due to Avidia pursuant to Section 3.2.1 for the Combination Licensed Product shall be calculated by multiplying actual Net Sales of such Combination Licensed Product by the fraction D/(D+E) where D is the fair market value of the portion of the Combination Licensed Product that contains the Licensed Product and E is the fair market value of the portion of the Combination Licensed Product containing the other active ingredient(s) or delivery device included in such Combination Licensed Product, as such fair market values are determined in faith by the Parties; provided, however, that in no event under this Section 3.2.3(c) shall such fraction be less than 2/3.

               (d) Notwithstanding the foregoing, the Parties agree that adjuvants, excipients, toxins, PEGylation moieties (or other added generic carbohydrates or polymers),

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and/or half-life extenders, unless any of the foregoing [****], shall not be deemed to be “pharmaceutically active ingredient(s)”, the presence of which in a Licensed Product would be deemed to create a Combination Licensed Product; the Parties also agree that peptide domains that specifically bind a particular molecule shall not constitute a “drug delivery device”, the presence of which in a Licensed Product would be deemed to create a Combination Licensed Product. If the Parties, after good faith negotiation, cannot reach agreement under this Section 3.2.3(d), then either Party may refer the matter for resolution by binding short-form arbitration in accordance with Section 3.2.3(e).

               (e) If the Parties do not agree upon the fair market value(s) of the Licensed Product and/or the non-Licensed Product component(s) of any Combination Product at issue pursuant to Section 3.2.3(b), and/or if a dispute arises between the Parties with respect to Section 3.2.3(c), then such matters shall be finally determined by binding arbitration pursuant to this Section 3.2.3(e) in accordance with the Commercial Arbitration Rules of the American Arbitration Association by [****]. For arbitration of disputes subject to this Section 3.2.3, each Party to the arbitration shall prepare and submit [****]. The arbitrator shall be directed that any arbitration subject to this Section 3.2.3(e) shall be completed within [****] from the filing of notice of a request for such arbitration. The arbitration proceedings and the decision shall not be made public without the joint written consent of the Parties, and each Party shall maintain the confidentiality of such proceedings and decision, unless each Party otherwise agrees in writing; provided either Party may make disclosures as are required to comply with applicable law or regulation. The Parties agree that [****] decision shall be the sole, exclusive and binding remedy between them regarding determination of the matters subject to arbitration subject to this Section 3.2.3(e).

          3.2.4 Certain Countries. With respect to Net Sales of a particular Licensed Product in each country of the Territory made during time periods in which there exists no Valid Claim covering the development, manufacture, importation, offer for sale, sale and/or use of such Licensed Product in such country by Maxygen or its Sublicensees, then Maxygen’s obligation to pay to Avidia royalties pursuant to Section 3.2.1 shall be reduced to a royalty rate of [****] percent ([****]%) of aggregate Net Sales of Licensed Products by Maxygen and its Sublicensees with respect to such country.

          3.2.5 Where Compulsory License have been Granted. If a compulsory license is granted to a Third Party under the applicable laws of any country in the Territory with regard to any Licensed Product, then the royalty rate payable by Maxygen pursuant to Section 3.2.1 for sales of such Licensed Product in such country shall be adjusted to match the royalty rate granted to such Third Party for such country, if such rate is lower than the rate otherwise payable hereunder, but only for so long as such compulsory lower royalty rate remains in effect.

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          3.2.6 Third Party Payments.

               (a) In addition the other payments due to Avidia under Sections 3.1, 3.2 and 5.3, Maxygen shall be responsible for paying [****] amounts due to Third Parties for activities conducted by Maxygen and its Sublicensees pursuant to any sublicenses granted by Avidia to Maxygen pursuant to Section 2.1 in connection with its development or commercialization of the Licensed Products, in accordance with a schedule to be agreed in writing by the Parties that will permit Avidia to timely meet its obligations to such Third Parties.

               (b) Maxygen shall be solely responsible for acquiring any other licenses as it deems appropriate from Third Parties for the development and for paying any amounts due to such Third Parties for licenses or other rights Maxygen has acquired to develop, make, have made, use, sell, offer for sale or import or have imported Licensed Products in the Territory.

          3.2.7 Royalty Term. The obligation of Maxygen to pay royalties under this Section 3.2 (except for payments due pursuant to Section 3.2.6) shall commence upon the First Commercial Sale for each Licensed Product, on a Licensed Product-by-Licensed Product and country-by-country basis, and continue until the later of (i) such time as there are no Valid Claims covering the manufacture, sale or use of such Licensed Product in such country, or (ii) [****] years from the First Commercial Sale of such Licensed Product by Maxygen and/or its Sublicensees in such country. Notwithstanding the foregoing, if at any time the royalty term with respect to a particular Licensed Product expires at a time at which there is at least one claim in a pending patent application that covers the manufacture, sale or use of such Licensed Product but is no longer deemed to be a Valid Claim due to the priority date of such patent application, then the royalty term shall restart at such time as such claim becomes a Valid Claim again pursuant to Section 1.33. Such renewed royalty term shall continue until such time as there are no Valid Claims covering the manufacture, sale or use of such Licensed Product in such country, and is subject to further renewal pursuant to this Section 3.2.7.

     3.3 Taxes.

          3.3.1 Payment of Tax. Avidia shall pay any and all taxes levied on payments received pursuant to Sections 3.1 and/or 3.2. If applicable laws or regulations require that taxes be deducted and withheld from a payment made pursuant to Sections 3.1 and/or 3.2, Maxygen shall (i) deduct those taxes from the payment; (ii) pay the taxes to the proper taxing authority; and (iii) within sixty (60) days following such payment, send to Avidia evidence of the applicable obligation together with proof of that payment.

          3.3.2 Other Taxes. Any sales taxes (e.g., consumption or value added taxes), use taxes, transfer taxes, value added, duties and other taxes or governmental charges assessed and required to be paid in connection with (i) the sale of any Licensed Product by Maxygen or its Sublicensee to a Third Party, or (ii) the transfer to Maxygen or its Affiliate or Sublicensee of any Licensed Product manufactured by Avidia or a Third Party, shall be the sole responsibility of Maxygen or its Sublicensee, as the case may be.

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          3.3.3 Assessment. Either Party may, at its own expense, protest any assessment, proposed assessment, or other claim by any governmental authority for any amount of taxes, interest or penalties or seek a tax credit, refund or other recovery of such amounts paid if permitted to do so by law. The Parties shall reasonably cooperate with each other in conducting any such protest or in efforts to receive any such tax credit, refund or other recovery, including without limitation by providing records and such additional information as may reasonably be necessary for a Party to pursue such protest, tax credit, refund or other recovery.

ARTICLE 4 — REPORTS; BOOKS AND RECORDS

     4.1 Royalty Reports and Payments. Commencing with the First Commercial Sale of a Licensed Product by Maxygen or its Sublicensees, Maxygen shall make quarterly written reports to Avidia within sixty (60) days after the end of each calendar quarter, stating in each such report, by Licensed Products and by country, the number, description and aggregate Net Sales in U.S. dollars of Licensed Products sold during the calendar quarter by each of Maxygen and each of its Sublicensees. The report shall also show (i) the calculation of Net Sales and the royalty payments due to Avidia on such Net Sales, (ii) the amount of taxes, if any, withheld to comply with applicable law, and (iii) the exchange rates used in calculating the payments due Avidia, which exchange rates shall comply with Section 4.3. Simultaneously with the delivery of each such report, Maxygen shall pay to Avidia the total royalties, if any, due to Avidia for the period of such report. If no royalties are due, Maxygen shall so report.

     4.2 Payment Method; Late Payments. All amounts due Avidia hereunder shall be paid in U.S. dollars. Any payments or portions thereof due hereunder which are not paid on the date such payments are due under this Agreement shall bear interest per annum at a rate equal to the lesser of: (a) the prime rate as reported by the Chase Manhattan Bank, New York (or its successor) for the due date of such payment, plus an additional [****] percent ([****]%) per year, or (b) the maximum rate permitted by law.

     4.3 Currency Conversion. If any currency conversion shall be required in connection with the calculation of royalties hereunder, such conversion shall be made using the exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions for buying U.S. dollars, as reported in The Wall Street Journal for the last business day of the calendar quarter to which such payment pertains.

     4.4 Blocked Currency. In each country where the local currency is blocked and cannot be removed from the country, at the election of Avidia, royalties accrued in that country may be paid to Avidia in such country in local currency by deposit in a local bank designated by Avidia.

     4.5 Records; Inspection. Maxygen shall keep (and cause its Sublicensees to keep) complete, true and accurate books of account and records for the purpose of determining the royalty amounts payable under Section 3.2. Such books and records shall be kept reasonably accessible for at least [****] years following the end of the calendar quarter to which they pertain. Such records will be open for inspection during such [****] year period by an

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independent accountant reasonably acceptable to Maxygen for the purpose of verifying the royalty statements. Such inspections may be made no more than once each calendar year, at reasonable times mutually agreed by Maxygen and Avidia. Avidia’s representative or agent will be obliged to execute a reasonable confidentiality agreement prior to commencing any such inspection. Avidia shall bear the costs and expenses of inspections conducted under this Section 4.5 unless a variation or error producing an underpayment in royalties payable exceeding [****] percent ([****]%) of the amount payable for the period covered by such audit is established in the course of any such inspection, whereupon all costs relating to the inspection shall be born by Maxygen. Maxygen shall promptly pay to Avidia any and all unpaid amounts that are discovered in such audits, together with interest on such unpaid amounts at the rate specified in Section 4.2 above.

ARTICLE 5 — DILIGENCE

     5.1 Reasonable Efforts. Maxygen shall use Commercially Reasonable Efforts to: (i) [****]. Maxygen may conduct such activities itself or through Third Parties, at its sole discretion.

     5.2 Voluntary Cessation of Development. If Maxygen makes a decision that it will not (itself or with a Third Party) conduct further development or commercialization activities with respect to any Licensed Product, Maxygen shall promptly, and in no event later than thirty (30) days after such decision, so notify Avidia in writing. If Maxygen decides that it will not maintain any development or commercialization activities with respect to at least one Licensed Product for use in the Field, then upon such written notification, this Agreement shall terminate. At the request of Avidia, the Parties shall then engage in good faith negotiation for an agreement under which Maxygen would grant to Avidia an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under all necessary or useful intellectual property rights owned or Controlled by Maxygen to make, have made, use, import, sell and offer for sale Licensed Products.

     5.3 Sponsored Research. Promptly following the execution of this Agreement, the Parties agree to use reasonable efforts to negotiate and to endeavor to agree upon the terms of and enter into a Research Agreement pursuant to which Maxygen would sponsor a minimum of [****] Avidia FTE (full time equivalent) for [****] year for agreed research on the Licensed Products, at an annual FTE rate of [****]. The terms of any such agreement, including an agreed research plan, detailing specific activities to be conducted by Avidia, shall be reflected in a written agreement executed between the Parties. If within sixty (60) days of the Effective Date such a written agreement has not been entered by Maxygen and Avidia, then in lieu of such an agreement, Maxygen shall promptly pay to Avidia $[****] and prior to the first anniversary of the Effective Date, Maxygen shall spend at least another $[****] on research and/or development with regard to Licensed Products that may be performed, at Maxygen’s sole election, either internally by Maxygen and/or on behalf of Maxygen by one or more Third Parties. Commencing on the [****] of the Effective Date and ending on the earlier of (a) the date that the first IND for a Licensed Product is filed in the Territory, or (b) Maxygen notifies Avidia

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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that it is terminating its license hereunder, Maxygen shall make annual expenditures of at least [****] dollars ($[****]) per year on research and/or development relating to the relevant Avidia Target and Licensed Products and shall provide Avidia with written evidence that such expenditures were made. At Maxygen’s sole discretion, such additional expenses may be incurred for activities (y) conducted by Avidia on behalf of Maxygen, or (z) conducted by Maxygen or by one or more Third Parties on behalf of Maxygen.

     5.4 Progress Reports. Maxygen shall provide to Avidia, within [****] days after the end of each of the second calendar quarter and the fourth calendar quarter of each year during the term of this Agreement, written reports summarizing the activities performed by or on behalf of Maxygen or its Sublicensees, and the anticipated timelines therefor, for the purpose of updating Avidia on the anticipated timing and achievement of any of the milestones set forth in Section 3.1.1 relevant to each Licensed Product; except that in no event shall Maxygen be required to disclose any confidential information of any Third Party. It is understood and agreed that such stated goals and anticipated timelines may be subject to change by Maxygen or its Sublicensee, as the case may be, at its sole discretion, subject only to the diligence requirements set forth in Section 5.1 above. Maxygen shall use reasonable efforts to provide to Avidia all material additional information that Avidia may reasonably request from time to time regarding the status of the anticipated timing and achievement of any of the milestones set forth in Section 3.1.1 relevant to a Licensed Product.

ARTICLE 6 — INTELLECTUAL PROPERTY

     6.1 Patent Prosecution.

          6.1.1 Maxygen Sole Inventions. Maxygen shall be responsible for preparing, filing, prosecuting and maintaining of any patent applications and patents owned solely by it, worldwide in such countries as it deems appropriate, and conducting any interferences, reexaminations, reissues, oppositions or requests for patent term extensions relating thereto, using counsel of its choice, at its expense.

          6.1.2 Avidia Sole Inventions.

               (a) Avidia shall be responsible for preparing, filing, prosecuting and maintaining of the patent applications and patents owned solely by it, worldwide in such countries as it deems appropriate, and conducting any interferences, reexaminations, reissues, oppositions or requests for patent term extensions relating thereto, using counsel of its choice, at its expense.

               (b) Avidia shall use reasonable efforts to obtain patent coverage with regard to Product Patents, in at least the [****], and such other countries as Maxygen and Avidia may agree. Avidia shall notify Maxygen of its intention to file any such patent application, and shall provide Maxygen with copies of all patent prosecution and maintenance documentation and correspondence so that Maxygen shall be currently and promptly informed of the continuing

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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prosecution and maintenance of patent applications and patents within the Product Patents. Maxygen shall have the right to review and comment upon such documentation and correspondence, as well as all specifications, claims and responses to office actions prior to their submission to the relevant government patent office. Avidia shall reasonably consider Maxygen’s reasonable, timely comments on each such draft submission; provided that Maxygen shall be given a reasonable time, in view of the relevant filing deadline or goal, within which to provide Avidia with its comments for Avidia’s consideration. Avidia shall keep Maxygen fully informed of the status of such patent applications and patents. The Parties acknowledge that in order to obtain an early priority date for a particular application, in some circumstances Avidia may need to file patent applications prior to review by Maxygen. Maxygen shall reimburse Avidia for the expenses incurred by Avidia with respect to the filing, prosecution and maintenance of patents and patent applications within the Product Patents.

               (c) If at any time Avidia does not wish to file or wishes to discontinue the prosecution or maintenance of any patent application or patent within the Product Patents filed in any country, on a country-by-country basis, it shall promptly give notice of such intention to Maxygen. Maxygen shall have the right, but not the obligation, to assume responsibility for the prosecution of any such patent applications or maintenance of any such patents in the applicable country, at its own expense, by giving notice to Avidia of such intention within thirty (30) days.

          6.1.3 Patent Term Extensions. If Maxygen requests that an application be made to extend the term of a Product Patent covering a Licensed Product, then unless such a filing would have a material adverse impact on another human pharmaceutical product then being developed or commercialized by Avidia, the Parties will apply to extend the patent term with respect to such Product Patent, as provided for in the Patent Term Restoration Act or other similar laws and regulations affording an extension or restoration of patent term in the United States and similar laws and regulations in the other countries of the Territory. Avidia will cooperate fully with and assist Maxygen in making all filings for patent term extensions requested by Maxygen as described in this Section 6.1.3, at Maxygen’s sole expense.

     6.2 Enforcement.

          6.2.1 Product Patents. If during the Term, either Party believes any Product Patents are infringed by the activities of any Third Party, then such Party shall notify the other Party in writing. If such alleged infringement is in the Field, then Avidia shall have the initial right, but not the obligation, to notify the alleged infringer of the alleged infringement, and to initiate, prosecute and control any action with respect to such alleged infringement, by counsel of its own choice, to secure the cessation of the infringement or to bring suit against the alleged or threatened infringer. If Avidia fails to bring suit as it is permitted to within [****] days after receiving written notice from Maxygen of the alleged or threatened infringement, then Maxygen shall have the right, but not the obligation, to bring at Maxygen’s sole expense and in Maxygen’s sole control, suit against the alleged or threatened infringer; provided that such action is limited only to [****]. The non-enforcing Party shall participate and/or cooperate, at the request and expense of the enforcing Party, in any suit brought by the enforcing Party pursuant to this

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Section 6.2.1. The non-enforcing Party may participate, in its discretion and at its expense, in any suit brought by the enforcing Party pursuant to this Section 6.2.1.

          6.2.2 Recoveries. Any damages or other monetary awards recovered in a suit prosecuted by either Party pursuant to Section 6.2.1 regarding infringement shall be applied first to reimburse the costs and expenses of the Parties in conducting (or assisting in the conduct of) such suit (including without limitation the internal costs and expenses specifically attributable to such suit). Any remaining recovery shall be shared by the Parties as follows: (a) with regard to any recovery in an action brought by Avidia, [****] percent ([****]%) to Avidia, and [****] percent ([****]%) to Maxygen; and (b) with regard to any recovery in an action brought by Maxygen, or jointly by Avidia and Maxygen, [****] percent ([****]%) to Avidia, and [****] percent ([****]%) to Maxygen.

          6.2.3 No Admissions. Neither Party shall admit the unenforceability or invalidity of any Product Patent in the course of any proceeding that it has the right to conduct pursuant to this Section 6.2, without the advance written consent of the other Party.

          6.2.4 Cooperation. The Party participating in any such claim, suit or proceeding, shall keep the other Party hereto reasonably informed of the progress of any such claim, suit or proceeding. If either Party brings any action or proceeding as permitted under this Section 6.2, then, if required by applicable law in order to permit the action or proceeding to go forward, the other Party agrees to be joined as a party to such action and to give the first Party reasonable assistance and authority to control, file and prosecute the suit as necessary, at the expense of the first Party.

     6.3 Infringement Claims. If a Third Party asserts that Patent Rights owned by or licensed to it are infringed by the development, manufacture, use or sale of a Licensed Product by Maxygen or its Sublicensees during the Term, Maxygen shall have the exclusive right and responsibility to resolve the problem raised by the asserted infringement, whether by obtaining a license from such Third Party, by defending against such Third Party’s claims or otherwise and shall be solely responsible for any liabilities incurred in connection therewith pursuant to Section 9.2 below. Avidia shall reasonably cooperate with Maxygen at Maxygen’s expense in conducting the defense of the claim, and Maxygen shall keep Avidia reasonably informed of all material developments in connection with any such claim, suit or proceeding. Notwithstanding the above, Maxygen shall not enter into any agreement that makes any admission regarding (i) wrongdoing on the part of Avidia, or (ii) the invalidity, unenforceability or absence of infringement of any patent claiming Avidia Technology or, without the prior written consent of Avidia, which consent shall not be unreasonably withheld.

ARTICLE 7 — CONFIDENTIALITY

     7.1 Confidential Information. Except as expressly provided herein, the parties agree that, for the term of this Agreement and for five (5) years thereafter, the receiving Party shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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purpose except for the purposes contemplated by this Agreement any Confidential Information furnished to it by the disclosing party hereto pursuant to this Agreement, except that to the extent that it can be established by the receiving Party by competent proof that such Confidential Information:

          7.1.1 was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure;

          7.1.2 was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party;

          7.1.3 became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement;

          7.1.4 was independently developed by the receiving Party without reference to any information or materials disclosed by the disclosing Party; or

          7.1.5 was subsequently disclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party without breach of any legal obligation of such Third Party to the disclosing Party.

     7.2 Permitted Disclosures. Each Party hereto may disclose another’s Confidential Information to the extent such disclosure is reasonably necessary, in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable laws or regulations or otherwise submitting information to tax or other governmental authorities, conducting development of Licensed Products, or making a permitted sublicense or otherwise exercising its rights hereunder, provided that if a Party is required to make any such disclosure of another Party’s confidential information, other than pursuant to a confidentiality agreement, it will as far as is practicable give reasonable advance notice to the latter Party of such disclosure and, save to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such information prior to its disclosure (whether through protective orders or otherwise).

     7.3 Securities and Exchange Commission. If a Party concludes in good faith that it is required to file or register this Agreement or a notification thereof with any governmental authority or regulatory agency, including without limitation the U.S. Securities and Exchange Commission and the Competition Directorate of the Commission of the European Communities, in accordance with applicable laws and regulations, such Party may do so; provided that, it will as far as is practicable give reasonable advance notice to the latter Party of such disclosure and will use its reasonable efforts to secure confidential treatment of such information prior to its disclosure (whether through protective orders or otherwise). The other Party shall cooperate and assist such filing/registering Party upon request of such filing/registering Party, in such filing or notification and shall execute all documents reasonably required in connection therewith, at the expense of the requesting Party.

     7.4 Non-Disclosure. Except to the extent required by law, each of the Parties hereto agrees not to disclose to any Third Party the financial terms of this Agreement without the prior

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written consent of each other Party hereto, except (i) [****], in each case under circumstances that reasonably ensure the confidentiality thereof, or (ii) as may be required by applicable law, regulation or court order; provided that, it will as far as is practicable give reasonable advance notice to the latter Party of such required disclosure and, save to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such information prior to its disclosure (whether through protective orders or otherwise).

ARTICLE 8 — REPRESENTATIONS AND WARRANTIES

     8.1 Representations and Warranties.

          8.1.1 Avidia. Avidia represents and warrants to Maxygen as of the Effective Date, except as set forth in the Schedule of Exceptions attached hereto as Exhibit A, that (i) it has the full right and authority to enter into this Agreement and, to its knowledge, grant the rights and licenses granted herein; (ii) [****]; and (iii) it has not previously granted, and will not grant during the term of this Agreement, any right, license or interest in or to Avidia Technology or the Licensed Products which is in conflict with the licenses granted under this Agreement.

          8.1.2 Maxygen. Maxygen represents and warrants to Avidia that it has the full right and authority to enter into this Agreement and to perform its obligations under this Agreement.

     8.2 Disclaimer of Warranties. AVIDIA AND MAXYGEN EACH EXPRESSLY DISCLAIMS ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, WRITTEN, ORAL, STATUTORY OR OTHERWISE, WITH RESPECT TO THE CONFIDENTIAL INFORMATION, LICENSED PRODUCTS AND/OR AVIDIA TECHNOLOGY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY, ENFORCEABILITY, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES (EXCEPT [****]).

ARTICLE 9 — INDEMNIFICATION

     9.1 Avidia. Avidia shall indemnify, defend and hold harmless Maxygen and its Affiliates and Sublicensees and their respective employees, agents, officers and directors (each a “Maxygen Indemnitee”) from and against any claims, actions or suits by a Third Party (including, without limitation, product liability and environmental claims) resulting in any liabilities, damages, settlements, claims, penalties, fines, and reasonable costs or reasonable expenses (including, without limitation, reasonable attorneys’ fees and other expenses of litigation) arising out of or resulting from (i) a breach of any of the representations or warranties of Avidia in Section 8.1.1, or (ii) the research, manufacture, development, clinical testing, importation, distribution, marketing, offer for sale, sale or use of any Licensed Products and/or Products pursuant to Section 2.5 by or on behalf of Avidia or its Affiliates or sublicensees

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(including without limitation, product liability claims), except to the extent caused by the gross negligence or willful misconduct of Maxygen.

     9.2 Maxygen. Maxygen shall indemnify, defend and hold harmless Avidia and its Affiliates and Sublicensees and their respective employees, agents, officers and directors (each a “Avidia Indemnitee”) from and against any claims, actions or suits by a Third Party (including, without limitation, product liability and environmental claims) resulting in any liabilities, damages, settlements, claims, penalties, fines, and reasonable costs or reasonable expenses (including, without limitation, reasonable attorneys’ fees and other expenses of litigation) arising out of or resulting from (i) a breach of Maxygen’s representations and warranties in Section 8.1.2, or (ii) the research, manufacture, development, clinical testing, importation, distribution, marketing, offer for sale, sale or use of any Licensed Products by or on behalf of Maxygen or its Affiliates or Sublicensees (including without limitation, product liability claims), except to the extent caused by the gross negligence or willful misconduct of Avidia.

     9.3 Procedure. An Indemnitee that intends to claim indemnification from a Party under this Article 9 shall [****].

ARTICLE 10 — TERM AND TERMINATION

     10.1 Term. This Agreement shall be effective as of the Effective Date and, unless otherwise terminated earlier pursuant to the other provisions of this Article 10, shall continue in full force and effect on a Licensed Product-by-Licensed Product and country-by-country basis until the date Maxygen and its Affiliates and Sublicensees has no remaining royalty obligations hereunder for such Licensed Products in such country and no possibility of renewed royalty obligations on account of claims in pending patent applications no longer qualifying as Valid Claims. Thereafter, the licenses granted by Avidia under Section 2.1 shall be fully paid, non-exclusive and perpetual, subject to Maxygen’s continued compliance with all provisions that survive expiration of this Agreement.

     10.2 Termination for Cause. Either Party may terminate this Agreement in the event the other Party has materially breached or defaulted in the performance of any of its obligations hereunder, and such default has continued, after written notice thereof (which notice reasonably describes the events or circumstances related to the alleged breach or default) was received by the breaching Party from the nonbreaching Party, for [****] days thereof for non-payment by Maxygen or ninety (90) days thereof for any other breach. The non-breaching Party shall have the right to terminate this Agreement at the end of such period unless the breaching Party has cured any such breach or default prior to the expiration of such period.

     10.3 Termination for Insolvency. If voluntary or involuntary proceedings by or against a Party are instituted, or if a Party otherwise seeks relief, under bankruptcy, insolvency or similar law, or a receiver or custodian is appointed for such party, or proceedings are instituted by or against such Party for corporate reorganization or the dissolution of such party, which proceedings, if involuntary, shall not have been dismissed within [****] days after the date of

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filing, or if such Party makes an assignment for the benefit of creditors, or substantially all of the assets of such Party are seized or attached and not released within [****] days thereafter, the other Party may immediately terminate this Agreement effective upon notice of such termination.

     10.4 Permissive Termination. Maxygen may terminate this Agreement in whole, or in part on a Licensed-Product-by-Licensed-Product basis, upon at least thirty (30) days written notice of such termination to Avidia. Termination of this Agreement in whole pursuant to this Section 10.4 shall be subject to the terms of Section 5.2.

     10.5 Effect of Breach or Termination.

          10.5.1 Accrued Rights and Obligations. Termination of this Agreement for any reason shall not release any Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination, nor preclude either Party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination.

          10.5.2 Return of Confidential Information. Upon the expiration or termination of this Agreement, Maxygen and Avidia shall promptly return to the other Party all Confidential Information received from the other Party except one copy of written and graphic materials (in hard copy or electronic form) which may be retained for archival purposes.

          10.5.3 Licenses. The licenses granted to Maxygen herein shall terminate in the event of any termination of this Agreement if either Party properly terminates this Agreement pursuant to Section 10.2 or 10.3 or if Maxygen terminates this Agreement in its entirety pursuant to 10.4.

          10.5.4 Sublicenses. In the event of any termination of this Agreement, any sublicense granted by Maxygen shall remain in force and effect and be assigned by Maxygen to Avidia, if and only if such Sublicensee is not in breach of the its obligations under the sublicense agreement; provided the financial obligations of any such Sublicensee shall be limited to the amounts Maxygen is obligated to pay to Avidia for the activities of such Sublicensee under this Agreement.

          10.5.5 Stock on Hand. In the event this Agreement is terminated for any reason other than Maxygen’s termination pursuant to Section 10.4, until [****] months after the effective date of such a termination, Maxygen and its Sublicensees shall have the right to sell or otherwise dispose of the stock of any Licensed Products in the possession of Maxygen or its Sublicensees at the time of notice of such termination, subject to Articles 3 and 4.

     10.6 Covenant. The covenant in Section 2.4 shall survive in the event of an expiration of this Agreement following the payment of all royalties due under the Agreement but not in the

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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event of any termination of the Agreement pursuant to Sections 10.2, 10.3 or 10.4, solely with respect to the termination of this Agreement in whole.

     10.7 Survival. Sections 2.5 (subject to any and all ongoing payment obligations to Third Parties, and if the agreement has not been terminated pursuant to Section 10.2 or 10.3), 3.1 (as to pre-termination events), 3.2 (as to pre-termination sales and sales subject to Section 10.5.5), 3.3, the last sentence of 5.2, 6.1, 6.2 (as to pre-termination enforcement actions only), 6.3, 8.2, 10.4 and 10.5, 10.6 and Articles 1, 4 (as to pre-termination sales and sales subject to Section 10.5.5), 7, 9, 11 and 12 shall survive the expiration or termination of this Agreement for any reason.

ARTICLE 11 — DISPUTE RESOLUTION

     11.1 Mediation. If a dispute arises out of or relates to this Agreement, or the breach thereof, the Parties agree first to try in good faith to settle the dispute by negotiation and escalation to senior representatives within their respective organizations.

     11.2 Jurisdiction; Venue. Each Party hereby irrevocably consents to the personal jurisdiction of and exclusive venue before the U.S. district court for the Northern District of the State of California (and the California Superior Courts for San Mateo and Santa Clara counties), and hereby waives all defenses such Party may have to the personal jurisdiction of and/or venue before such courts.

ARTICLE 12 — MISCELLANEOUS

     12.1 Governing Law. This Agreement and any dispute arising from the performance or any breach hereof, including without limitation any arbitration under Section 3.2.3(d), shall be governed by and construed in accordance with the laws of the State of California, without reference to conflicts of laws principles of that State or of any other jurisdiction. Notwithstanding the foregoing, the interpretation and enforcement of Section 3.2.3(d) shall be governed by the United States Arbitration Act.

     12.2 Waiver. Neither Party may waive or release any of its rights or interests in this Agreement except in writing. The failure of either Party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition.

     12.3 Assignment. This Agreement shall not be assignable by either Party to any third party hereto without the written consent of the other Party, which consent shall not be unreasonably withheld; provided either Party may assign this Agreement, without such consent, to (i) an Affiliate of such Party; or (ii) an entity that acquires all or substantially all of the business or assets of such Party to which this Agreement pertains, whether by merger, reorganization, acquisition, sale or otherwise. The terms and conditions of this Agreement shall be binding on and inure to the benefit of the permitted successors and assigns of the Parties. Any assignment not satisfying the foregoing shall be null and void.

     12.4 Notices. Any notices, requests and other communications hereunder shall be in writing and shall be personally delivered or sent by international express delivery service,

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registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address specified below, or such other address as may be specified in writing to the other Party hereto:

Maxygen:	Maxygen, Inc.
	515 Galveston Drive
	Redwood City, CA 94063
	Attn: General Counsel
Avidia:	Avidia Research Institute
	Attn:

     12.5 Force Majeure. Neither Party shall be liable to the other for failure or delay in the performance of any of its obligations under this Agreement for the time and to the extent such failure or delay is caused by earthquake, riot, civil commotion, war, hostilities between nations, governmental law, order or regulation, embargo, action by the government or any agency thereof, act of God, storm, fire, accident, labor dispute or strike, sabotage, explosion or other similar or different contingencies, in each case, beyond the reasonable control of the respective Party. The party affected by Force Majeure shall provide the other Party with full particulars thereof as soon as it becomes aware of the same (including its best estimate of the likely extent and duration of the interference with its activities), and will use reasonable efforts to overcome the difficulties created thereby and to resume performance of its obligations as soon as practicable. Notwithstanding the foregoing, the milestone payments and royalty payments hereunder shall not be delayed by the payer because of a Force Majeure affecting the payer, unless such Force Majeure specifically precludes the payment process.

     12.6 Independent Contractors. The Parties agree that the relationship of Maxygen and Avidia established by this Agreement is that of independent contractors. Furthermore, the Parties agree that this Agreement does not, is not intended to, and shall not be construed to, establish a partnership or joint venture, and nor shall this Agreement create or establish an employment, agency or any other relationship. Neither Party shall have any right, power or authority, nor shall they represent themselves as having any authority to assume, create or incur any expense, liability or obligation, express or implied, on behalf of the other Party, or otherwise act as an agent for the other Party for any purpose.

     12.7 Advice of Counsel. Avidia and Maxygen each acknowledges and agrees that this Agreement shall not be deemed to have been drafted by one Party or another and will be construed accordingly.

     12.8 Patent Marking. Maxygen agrees to mark and have its Affiliates and Sublicensees mark all Licensed Products they sell or distribute pursuant to this Agreement in accordance with the applicable statute or regulations in the country or countries of manufacture and/or sale thereof.

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     12.9 Other Obligations. Except as expressly provided in this Agreement or as separately agreed upon in writing between Avidia and Maxygen, each Party shall bear its own costs incurred in connection with the implementation of the obligations under this Agreement.

     12.10 Severability. In the event that any provisions of this Agreement are determined to be invalid or unenforceable by a court of competent jurisdiction, the remainder of the Agreement shall remain in full force and effect without said provision. The Parties shall in good faith negotiate a substitute clause for any provision declared invalid or unenforceable, which shall most nearly approximate the intent of the Parties in entering this Agreement; provided, if the Parties are unable to agree on such a substitute clause and the deletion of the provision held invalid or unenforceable would produce material adverse financial consequences for one Party, such Party shall have the right to terminate the Agreement with one hundred eighty (180) days notice.

     12.11 Further Assurances. At any time or from time to time on and after the date of this Agreement, either Party shall at the request of the other party (i) deliver to the requesting party such records, data or other documents consistent with the provisions of this Agreement, (ii) execute, and deliver or cause to be delivered, all such consents, documents or further instruments of assignment, transfer or license, and (iii) take or cause to be taken all such actions, as the requesting Party may reasonably deem necessary or desirable in order for the requesting Party to obtain the full benefits of this Agreement and the transactions contemplated hereby.

     12.12 Export Laws. Notwithstanding anything to the contrary contained herein, all obligations of Avidia and Maxygen are subject to prior compliance with United States export regulations and such other United States laws and regulations as may be applicable, and to obtaining all necessary approvals required by the applicable agencies of the government of the United States. Avidia and Maxygen, respectively, shall each use its best efforts to obtain such approvals for its own activities. Each party shall cooperate with the other Party and shall provide assistance to the other party as reasonably necessary to obtain any required approvals.

     12.13 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER OR ANY THIRD PARTY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES (INCLUDING, WITHOUT LIMITATION, LOST PROFITS) ARISING OUT OF ANY PERFORMANCE OF THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY, UNLESS SUCH DAMAGES ARISE FROM [****].

     12.14 Entire Agreement; Amendment. This Agreement, together with the attached Exhibits which are incorporated herein by reference, constitutes the entire agreement between the Parties with respect to the subject matter hereof, and supersedes and cancels all prior or contemporaneous understandings or agreements, whether written or oral, between Maxygen and Avidia with respect to such subject matter, except that certain Cross License Agreement entered by the Parties dated June 30, 2003, which shall survive according to its terms. This Agreement can only be amended or modified with a written document signed by both Parties.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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     12.15 Headings. The captions to the several Sections and Articles hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation.

     12.16 Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original and which together shall constitute one instrument.

     IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their authorized representatives as of the Effective Date.

MAXYGEN, INC.	AVIDIA RESEARCH INSTITUTE
By:	By:
Name:	Name:
Title:	Title:

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Exhibit A

Schedule of Exceptions

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EXHIBIT K

Reserved Therapeutic Product Criteria

A.

General Principles. Whether a particular Domain-Based Protein is a Reserved Therapeutic Product will be determined with reference to the criteria in this Exhibit K. It is the intent of the Parties that such determination will be based on (1) the [****], as assessed in an assay agreed by the Parties, and (2) the [****], as assessed in an assay agreed by the Parties. Reserved Therapeutic Products are those that both (1) [****]; and (2) [****]. A single assay may be adequate to demonstrate [****].

The assays expressly listed in this Exhibit for a particular Reserved Therapeutic Product (i.e., in Section B.4 and C below) have been agreed to by the Parties.

B. [****] Assays. Assays for [****] will measure [****]. Several types of [****] assays are described below.

1.	[****]
2.	[****].
3.	[****]
4.	Assays demonstrating [****] are illustrated below with regard to assays for assessing the [****].

a.	[****]
b.	[****]
c.	[****]

C. [****] Assays. Assays for [****] will measure [****]. [****] of an agonist in the applicable assay that is [****]. [****] of an antagonist in the applicable assay that results in [****].

1. [****]

a. [****]: [****]¹

2. [****]

a. [****]: [****]

1	By way of example and without illustration, if a [****].
*	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

3. [****]

a. [****]: [****]

4. Agonists of any [****]

a. [****]:

A.	[****]; or
B.	[****]; or
C.	[****].

5. Antagonists of any [****]

a.	[****]: [****]
b.	Assay:

A.	[****]
B.	[****]
C.	[****]

6. Antagonists of [****]

a. [****]: [****]

7. Agonists or antagonists of [****]

a.	Agonist [****]: [****]
b.	Antagonist [****]: [****]

8. Agonists or antagonist of a [****]

a.	Agonist [****]: [****]
b.	Antagonist [****]: [****]

9. Agonists or Antagonists of [****]

a. Agonist [****]: [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

2

b. Antagonist [****]: [****]

10. Agonists or Antagonists of [****]

a.	Agonist [****]: [****]
b.	Antagonist [****]: [****]

11. Agonists or antagonists of [****]

a.	Agonist [****]: [****]
b.	Antagonist [****]: [****]

12. Agonists or antagonists of [****]

a.	Agonist [****]: [****]
b.	Antagonist [****]: [****]

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

3

EXHIBIT L

Software

1.	[****]
2.	[****]
3.	[****]
4.	[****]
5.	[****]

All the foregoing are copyrighted by Maxygen.

^* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EX-21.1

Exhibit 21.1

List of Subsidiaries

Maxygen ApS (Denmark)
Maxygen Holdings Ltd. (Cayman Islands)

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Forms S-8 (File Nos. 333-93423, 333-38078, 333-44794, 333-57486, 333-84904, 333-104108, 333-113651, 333-123323, 333-132478 and 333-138898) pertaining to the 2006 Equity Incentive Plan, the 2000 International Stock Option Plan, the 2000 Non-Officer Stock Option Plan, the 1997 Stock Option Plan, the 1999 Employee Stock Purchase Plan and the 1999 Nonemployee Directors Stock Option Plan of Maxygen, Inc., of our reports dated March 13, 2007 with respect to the consolidated financial statements of Maxygen, Inc., Maxygen, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Maxygen, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/ ERNST & YOUNG LLP  

Palo Alto, California
March 13, 2007

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Russell J. Howard, certify that:

1.	I have reviewed this annual report on Form 10-K of Maxygen, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosures and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 14, 2007	/s/ Russell J. Howard
	Russell J. Howard
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Lawrence W. Briscoe, certify that:

1.	I have reviewed this annual report on Form 10-K of Maxygen, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosures and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 14, 2007	/s/ Lawrence W. Briscoe
	Lawrence W. Briscoe
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002

     I, Russell J. Howard, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge the Annual Report of Maxygen, Inc. on Form 10-K for the annual period ended December 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Maxygen, Inc.

By:	/s/ Russell J. Howard
Name:	Russell J. Howard
Title:   Date:	Chief Executive Officer March 14, 2007

     I, Lawrence W. Briscoe, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge the Annual Report of Maxygen, Inc. on Form 10-K for the annual period ended December 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Maxygen, Inc.

By:	/s/ Lawrence W. Briscoe
Name:	Lawrence W. Briscoe
Title:   Date:	Chief Financial Officer   March 14, 2007