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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission file number 000-28401

MAXYGEN, INC.

(Exact name of registrant as specified in its charter)

515 Galveston Drive

Redwood City, California 94063

(Address of principal executive offices)

(650) 298-5300

Registrant’s telephone number, including area code:

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

None

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

Common Stock, par value $0.0001 per share

(Title of Class)

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

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

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

As of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, there were 34,767,281 shares of the registrant’s common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued as of that date. The aggregate market value of the voting stock held by non-affiliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq National Stock Market as of that date, was approximately $237,183,051. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 29, 2004, there were 34,979,228 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

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

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

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Forward Looking Statements

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

These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. The risk factors set forth below at pages 27 to 38 should be considered carefully in evaluating us and our business.

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

PART I

Item 1    BUSINESS

Overview

We are a biotechnology company focused on using our protein optimization and modification technologies to create and develop novel therapeutic and industrial products. We are a leader in the field of directed molecular evolution, a process by which genes are modified for specific commercial uses. Our technologies bring together advances in molecular biology and protein modification to help create novel biotechnology products. We have designed our technologies to rapidly improve existing biotechnology products as well as to create products that would be difficult or impossible to develop through other processes.

Our principal objective is to commercialize high-value protein pharmaceutical products. We also seek to capture value from our technologies in other industries through our subsidiaries in agriculture (Verdia) and chemicals (Codexis). Our products will be developed and marketed either through corporate collaborations or independently by Maxygen. To date, we have established strategic collaborations with leading companies including: Roche in interferon alpha and interferon beta therapies; Aventis Pasteur in novel vaccines; InterMune in next generation interferon gamma therapies; ALK-Abelló in allergy; the International AIDS Vaccine Initiative (IAVI) in HIV; Eli Lilly, Pfizer and DSM in pharmaceutical manufacturing; and Shearwater Corporation (a subsidiary of Nektar Therapeutics) in protein pharmaceutical PEGylation technologies. Additionally, we have a range of other strategic alliances in industrial applications, including with Novozymes, DuPont, Syngenta, Rio Tinto, Chevron, Sandoz, Cargill and Cargill-Dow. We also have received funding from U.S. government organizations including from the Defense Advanced Research Projects Agency (DARPA), the National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International Development and the U.S. Army Medical Research and Materiel Command.

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

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

This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen and our wholly-owned subsidiaries, Maxygen ApS, Maxygen Holdings Ltd. and Verdia, Inc., as well as our majority-owned subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.

Market Opportunity

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

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

Our primary focus, the therapeutic protein pharmaceutical market, represents a large and growing opportunity. In 2002, worldwide sales of therapeutic proteins made using recombinant DNA technology were approximately $29 billion. Protein pharmaceutical products, such as alpha interferon and granulocyte colony stimulating factor, represent some of the world’s most profitable pharmaceutical products and the protein therapeutics sector is one of the fastest growing of the pharmaceutical market, with an annual sales growth rate of 8 to 12%. We have a portfolio of improved protein therapeutics in development.

We also work on novel vaccines, primarily funded through government grants and partnerships. Worldwide sales of all vaccines in 2001 exceeded $5.8 billion and are expected to approach $10 billion by 2006. This dramatic growth in the vaccine market is expected to be driven by the anticipated success of therapeutic vaccines and the development of novel vaccines that address significant unmet clinical needs.

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

Sales in the chemical industry exceeded $1.7 trillion in 2000, with approximately $50 billion in sales readily addressable by biological processing, for example, either by fermentation or through the use of enzyme catalysts.

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

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

Uses and Limitations of Genes as Products

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

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

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

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

A second approach, directed molecular evolution, seeks to improve genes for commercial purposes by mimicking the natural events of evolution. There are two general approaches to directed molecular evolution, those utilizing targeted mutagenesis and those utilizing recombination-based techniques. Targeted mutagenesis involves the mutation of genes at preselected sites, most of which are harmful to gene function. The mutated genes are then screened to determine which mutations have resulted in improved attributes. Since targeted

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mutation has a low probability of improving a gene or sequence of complex biological reactions, screening for positive changes is expensive and time consuming. The second approach to directed molecular evolution involves recombination-based techniques, which mimic naturally occurring sexual recombination, a process in which regions of DNA are exchanged between strands of DNA. As recombination-based techniques do not require an understanding of the underlying biological process, and do not generate as many harmful changes as random mutagenesis, use of this approach is generally less costly and less time intensive than genomics, rational design or targeted mutagenesis approaches.

The Maxygen Solution

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

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

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

The Maxygen Strategy

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

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

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

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

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

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

Since 1997 we have entered into over 20 strategic collaborations and several proof of principle collaborations with commercial entities and have received ten grants from U.S. government agencies and philanthropic organizations. Since inception we have received $144.9 million in funding from our collaborators and from government grants, which includes $6.3 million of deferred revenue to be recognized over approximately the next two years. Approximately $115.1 million was received from our collaborators and $29.8 million was received from government funding. Assuming our research efforts for existing collaborations and grants continue for their full research terms, as of December 31, 2003 we had total committed funding of approximately $25.0 million remaining to be received over approximately the next two years. Potential milestone payments from our existing collaborations could exceed $500 million based on the accomplishment of specific performance criteria. We are entitled to receive royalties on any product sales generated from these collaborations.

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

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

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

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Current Fields of Application

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

Human Therapeutics

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

Our primary focus is on protein therapeutics with limited vaccine activities that are principally funded by third parties.

Protein Therapeutics

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

Market Opportunity.    With a worldwide market (sales) in 2002 of $29 billion, recombinant DNA produced protein therapeutics is one of the fastest growing sectors of the pharmaceuticals market. Despite this commercial success, many presently marketed protein pharmaceuticals have deficiencies as therapeutics. For example, some protein drugs have limited pharmacologic half-life and as a result, require frequent, high doses. Other protein pharmaceuticals have adverse side effects that limit dosing and patient compliance. Proteins can also be immunogenic, potentially leading to adverse events or reduced therapeutic efficacy. Our opportunity is to develop products with improved attributes.

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

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

By applying our technologies, which include our MolecularBreeding directed evolution platform and also post-translational modification tools, we believe we will be able to develop more potent and safer protein

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pharmaceuticals that help address the limitations of current protein pharmaceuticals as well those in development where clear deficiencies have already been identified. Our goal is to make “best in class” protein drugs. This strategy has driven some of the most successful commercial franchises in the pharmaceutical industry. For example Lipitor, a lipid lowering agent that was the fifth product in its class, is now the market leader with sales of over $8 billion in 2002.

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

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

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

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

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

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Lead Products in Our Protein Pharmaceutical Pipeline

Potential Products in Research and Development.

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

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

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

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

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

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

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

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

Protein Pharmaceutical Alliances.

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

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lead candidates for the treatment of hepatitis B virus (“HBV”) and hepatitis C virus (“HCV”) infection that have been designed by us to have novel and superior efficacy compared to currently marketed interferon alpha products. This builds on Roche’s commitment to hepatitis, following Pegasys, a new generation interferon that provides significant benefit over conventional interferon therapy in patients infected with HCV.

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

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

The Interferon Alpha Market

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

About Hepatitis B

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

About Hepatitis C

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

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

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

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used for central nervous system diseases, including multiple sclerosis. Although the optimized interferon beta developed within the collaboration met all of the alliance’s pre-established goals for commercial attributes in pre-clinical testing, and the parties enjoyed a productive collaboration, as a result of the strategic prioritization of Lundbeck’s portfolio, and our growing focus and expertise in the development of type 1 interferons, on October 24, 2003 the companies agreed to terminate the research program and transfer to Maxygen all rights held by Lundbeck with regard to the improved interferon beta. Lundbeck continues to retain a financial interest in the improved interferon beta product candidate.

Vaccines

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

Market Opportunity.    Worldwide sales of all vaccines in 2001 exceeded $5.8 billion and are expected to approach $10 billion by 2006. Recombinant DNA technology has enabled the development of prophylactic vaccine products that are safer, cheaper and easier to manufacture. This may create new market potential for these types of products, such as the Hepatitis B vaccine market, which was estimated to have had 2002 sales of over $2 billion.

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

Business Strategy.    Our strategy for vaccines is to develop selected vaccine opportunities with Maxygen and grant funding to a point third party funding can be arranged to develop new and improved preventative and therapeutic vaccines. We intend to outlicense and partner potential products that we choose not to develop independently and enter into additional collaborations to further our technologies and product development capabilities. By collaborating with leading pharmaceutical companies we seek to balance our return and our development risk. Additionally, the flexibility of our technologies allows many targets to be pursued simultaneously, thus decreasing portfolio risk.

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

Technology Platform.    We believe our proprietary technologies have the potential to transform the design and development of vaccines through the optimization of properties that allow for the generation of broad and strong immune responses. We have shown that we can generate new modified vaccines that have the potential to

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

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

Examples of Potential Products in Our Vaccine Pipeline

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

Vaccine Alliances

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

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

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

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

International AIDS Vaccine Initiative.    In February 2001, we established a three-year collaboration to develop novel HIV vaccines with the International AIDS Vaccine Initiative (IAVI) and DBLV LLC, an entity established and funded by the Rockefeller Foundation. Under the agreement, DBLV has provided research and development funding to us for the three year initial research term. We retain all rights to commercialize HIV vaccine candidates made in the research program in all developed countries of the world, as well as in certain markets in the developing world. In recognition of the great need for a vaccine against AIDS in the poorest countries of the world, we have granted IAVI a royalty-free license to develop and distribute HIV vaccines to those who cannot afford them in developing countries. The funded research term of this collaboration ended on February 16, 2004.

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

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

Industrial Applications

Chemicals—Codexis, Inc.

Our chemicals business is operated through our majority-owned subsidiary Codexis, Inc. Codexis was incorporated in January 2002, and we contributed our chemicals business to Codexis in March 2002 in exchange for all the capital stock of Codexis. On September 13, 2002, Codexis sold $15 million of Codexis redeemable, convertible preferred stock to investors, of which $5 million was purchased by Maxygen and $10 million was purchased by several other investors. On October 1, 2002, Codexis sold an additional $10 million of redeemable, convertible preferred stock to several third party investors.

Codexis is dedicated to becoming a leader in providing high-value chemical products and services to the worldwide life science and fine chemical industries. In particular Codexis is focused on developing proprietary catalysts and processes for the production of pharmaceutical products and assisting pharmaceutical customers in managing the life cycle of their pharmaceutical products. Products in this area include chiral pharmaceuticals, complex natural products and novel pharmaceutical building blocks.

Market Opportunity.    Codexis’ primary area of focus is the pharmaceutical market. Sales of pharmaceuticals where $401 billion in 2002, an 8% increase over 2001. However, earnings growth in the pharmaceutical industry slowed to an increase of 1.8% in 2002. The decrease in industry gross margins were in part due to pricing pressure from generic competition and a changing regulatory environment. Increases in cost

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of goods was also due in part to the growing complexity in manufacturing pharmaceutical products. In addition, the number of new drugs approved each year has steadily declined while research and development costs per approved product continue to rise.

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

Together with the pharmaceutical industry, the commodity, specialty and fine chemical segments comprise the broader chemical industry, which had sales of $1.7 trillion in 2000. Within the latter three segments, approximately $50 billion in sales is readily addressable by biological processing, for example, either by fermentation or through the use of enzyme catalysts. Some examples of existing biologically-based chemical processes in the non-pharmaceutical market are listed below: