**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**Form 10-K**

**x**               Annual Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934

**Forthe fiscal year ended December 31, 2005**

**OR**

**o**                  Transition Report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934

**Forthe transition period from  ***               *to

**CommissionFile Number 000-24537**

----

**DYAX CORP.**

(Exact name of registrantas specified in its charter)

| **Delaware**(State of  Incorporation)                                                                            |   | **04-3053198**(IRS Employer  Identification No.) |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| **300 Technology Square, Cambridge, Massachusetts  02139**(Address of  principal executive offices and zip code) |
| Registrant’s telephone number, including area code: **(617) 225-2500**                                      |

 

| Securities registered pursuant to  Section 12(b) of the Act: | **None**                                              |
|------------------------------------------------------------------------|-------------------------------------------------------|
| Securities registered pursuant to  Section 12(g) of the Act: | **Common  Stock, $.01 Par Value*****(Title of Class)* |

 

----

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o No x

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Company was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes xNo o

Indicate by checkmark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiles and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

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

The aggregate market valueof the registrant’s common stock held by nonaffiliates of the registrant as ofthe last business day of the registrant’s most recently completed fiscal secondquarter, June 30, 2005, based on the last reported sale price of theregistrant’s common stock on The NASDAQ National Market as of the close ofbusiness on that day, was $4.71. The number of shares outstanding of theregistrant’s Common Stock, $.01 Par Value, as of February 28, 2006, was38,069,096.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s Definitive Proxy Statement for its 2006 Annual Meeting ofShareholders to be held on May 18, 2006, which Definitive Proxy Statementwill be filed with the Securities and Exchange Commission not later than120 days after the registrant’s fiscal year-end of December 31, 2005,are incorporated by reference into Part III of this Form 10-K.

 

----

As used in this Form 10-K,“Dyax,” “the Company,” “we,” “ours,” and “us” refer to Dyax Corp., except wherethe context otherwise requires or as otherwise indicated.

**NOTE REGARDING FORWARD-LOOKING STATEMENTS**

This Annual Report on Form 10-K containsforward-looking statements, including statements regarding our results ofoperations, financial resources, research and development programs,pre-clinical studies, clinical trials and collaborations. Statements that arenot historical facts are based on our current expectations, beliefs,assumptions, estimates, forecasts and projections for our business and theindustry and markets in which we compete. The statements contained in thisreport are not guarantees of future performance and involve certain risks, uncertaintiesand assumptions, which are difficult to predict. Therefore, actual outcomes andresults may differ materially from what is expressed in such forward-lookingstatements. Important factors which may affect future operating results,research and development programs, pre-clinical studies, clinical trials, andcollaborations include, without limitation, those set forth in Item 1A of thisreport entitled “Risk Factors”. Youshould carefully review the risks described herein and in other documents wefile from time to time with the Securities and Exchange Commission (“SEC”),including the Quarterly Reports on Form 10-Q to be filed in 2006.

----

**ANNUAL REPORT ON FORM 10-K**

**INDEX**

| Item No. | ** ** | ** **                                                                                                               | ** ** | **Page** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |
| 1.            |       | Business                                                                                                                 |       | 1        |       |
| 1A.           |       | Risk Factors                                                                                                             |       | 15       |       |
| 1B.           |       | Unresolved  Staff Comments                                                                                               |       | 27       |       |
| 2.            |       | Properties                                                                                                               |       | 27       |       |
| 3.            |       | Legal  Proceedings                                                                                                       |       | 28       |       |
| 4.            |       | Submission  of Matters to a Vote of Security Holders                                                                     |       | 28       |       |
| PART II  |
| 5.            |       | Market  for the Company’s Common Equity, Related Security Holder Matters and Issuer  Purchases of Equity Securities |       | 28       |       |
| 6.            |       | Selected  Consolidated Financial Data                                                                                    |       | 29       |       |
| 7.            |       | Management’s  Discussion and Analysis of Financial Condition and Results of  Operations                             |       | 30       |       |
| 7A.           |       | Quantitative  and Qualitative Disclosures about Market Risk                                                              |       | 43       |       |
| 8.            |       | Financial  Statements and Supplementary Data                                                                             |       | 44       |       |
| 9.            |       | Changes in and Disagreements with Accountants on  Accounting and Financial  Disclosure                                   |       | 73       |       |
| 9A.           |       | Controls  and Procedures                                                                                                 |       | 73       |       |
| 9B.           |       | Other  Information                                                                                                       |       | 73       |       |
| PART III |
| 10.           |       | Directors  and Executive Officers of the Company                                                                         |       | 74       |       |
| 11.           |       | Executive  Compensation                                                                                                  |       | 74       |       |
| 12.           |       | Security  Ownership of Certain Beneficial Owners and Management                                                          |       | 74       |       |
| 13.           |       | Certain  Relationships and Related Transactions                                                                          |       | 75       |       |
| 14.           |       | Principal  Accountant Fees and Services                                                                                  |       | 75       |       |
| PART IV  |
| 15.           |       | Exhibits  and Financial Statement Schedules                                                                              |       | 75       |       |
|          |       | Signatures                                                                                                               |       | 80       |       |

 

----

**PART I**

**ITEM 1.   BUSINESS**

**Overview**

We are a biopharmaceutical company focused on thediscovery, development and commercialization of novel biotherapeutics for unmetmedical needs, with an emphasis on cancer and inflammatory indications. We useour proprietary drug discovery technology to identify antibody, small proteinand peptide compounds for clinical development.

Our lead product candidate, DX-88, is arecombinant form of a small protein that is currently in clinical trials forits therapeutic potential in two separate indications. In collaboration withGenzyme Corporation, we have successfully completed two Phase II trials of DX-88for the treatment of hereditary angioedema (HAE). In January, 2006, we treatedour last patient in a third Phase II trial and we commenced a pivotal Phase IIItrial in December, 2005. Independently, we have successfully completed a PhaseI/II trial of DX-88 for the prevention of blood loss during certainon-pump heart procedures, specifically coronary artery bypass graft (CABG) surgeryand we are currently in partnering discussions for further development of DX-88in this indication. Furthermore, as we continue to negotiate with potentialpartners, we have designed a Phase IIb study to be started as soon as practicalto ensure the continuing development for this indication. DX-88 hasorphan drug designation in the US and EU, as well as Fast Track designation inthe US for the treatment of angioedema.

In addition to our clinical stage programs, we have 12other product candidates in our discovery and development pipeline, one ofwhich is currently in formal development. The most advanced of these productcandidates is DX-2240, a fully human monoclonal antibody that targets theTie-1 receptor, a protein receptor that scientists believe is importantin the process of tumor blood vessel formation known as angiogenesis. DX-2240offers a novel mechanism of action for inhibiting tumor growth, which webelieve may have potential application in the treatment of various types ofcancer. All of the compounds in our pipeline were discovered using ourproprietary phage display technology which rapidly generates product candidatesthat bind with high affinity and specificity to therapeutic targets. Althoughthis technology is used primarily to advance our own internal developmentactivities, we also leverage this technology broadly with over 75 revenuegenerating licenses and collaborations. Currently, our licensees andcollaborators have 12 product candidates in clinical trials that were generatedfrom our technology and we estimate that over 70 additional product candidatesthat were generated using our technology are in various stages of research and preclinicaldevelopment. We are entitled to receive milestones and royalties from ourlicensees and collaborators to the extent that any of these product candidatesadvance in development and are ultimately commercialized.

Our business strategy is to builda broad portfolio of biotherapeutic products developed using ourproprietary phage display technology. In the near term, we expect to focus ourefforts on completing the clinical development of DX-88 for the treatmentof HAE and obtaining market approval of DX-88 in the U.S. in thatindication in the second half of 2007. In addition, we expect to move forwardon the clinical development of DX-88 as a treatment for patientsundergoing CABG surgery, and to advance up to three pre-clinical productcandidates, including DX-2240, into development in 2007. In the longterm, we expect that we, together with our licensees and collaborators, willcontinue to use our technology and expertise to identify and develop newproducts and work to bring those products to the marketplace on a regular basis.We do not expect to generate profits until the therapeutic products from ourdevelopment portfolio reach the market after being subjected to theuncertainties of the regulatory approval process.

We incorporated inDelaware in 1989 and merged with Protein Engineering Corporation in August 1995.Our principal executive offices are located at 300 Technology Square,Cambridge, Massachusetts, 02139.

1

----

**Our Clinical Development Programs**

Our clinical development program consists of ongoingprograms to develop DX-88, our lead product candidate, in two separate indications.

***What isDX-88?***   DX-88 is a compound thatwe developed using phage display and that we have shown *in vitro*tobe a high affinity, high specificity inhibitor of human plasma kallikrein. Plasmakallikrein, which is an enzyme in the liquid portion of blood, is believed tobe a key component responsible for the regulation of the inflammation andcoagulation pathways. Excess plasma kallikrein activity is thought to play arole in a number of inflammatory and autoimmune diseases. We believe that theprofile of DX-88 may allow for fewer side effects and/or greater efficacythan other marketed inhibitors of kallikrein, which lack DX-88’sspecificity and affinity for plasma kallikrein.

***DX-88 for theTreatment of HAE.***   Hereditary angioedema, or HAE, affectsbetween 13,000 and 66,000 individuals in the United States and Europe. HAE is agenetic disease that can cause swelling of the larynx, gastrointestinal tractand extremities. Severe swelling of the larynx is life threatening and mayrequire insertion of a breathing tube into the airway to prevent asphyxiation. Inthe United States, the only currently approved and available treatments aresteroids, pain control, restriction of the inciting activity (e.g., repetitivemotion such as typing or hammering), and rehydration. Patients are frequentlygiven synthetic anabolic steroids which have a variety of side effects and maynot be well tolerated. Published research indicates that plasma kallikrein is aprimary mediator of both the pain and swelling in HAE. We believe that DX-88has the potential to decrease both the severity and frequency of symptomsduring acute HAE attacks and, therefore, may provide an effective treatment forthis disease.

In collaboration with Genzyme, we are developing DX-88as a treatment for HAE. In March 2003, we successfully completed a ninepatient Phase II, dose ranging clinical trial in Europe and reported positiveresults. In May 2004, we successfully completed a Phase II, 48 patient,dose escalating placebo-controlled study, known as EDEMA1. In January 2006,we treated the last patient in a third Phase II trial, known as EDEMA2, and wecommenced a pivotal, placebo-controlled, worldwide, multi-center Phase IIItrial, known as EDEMA3, at the end of 2005. As of February 22, 2006, inall of our Phase I and II HAE clinical trials, DX-88 had been used in thetreatment of 293 HAE attacks in a total of 111 patients. To date, our studyresults suggest that DX-88 can provide repeated therapeutic benefit to HAEpatients for all types of HAE attacks, including potentially fatal laryngealattacks. Furthermore, there is no apparent decrease in DX-88’stherapeutic effects on HAE attacks in patients exposed to multiple doses. Theoverall safety profile of DX-88 has been acceptable across all doselevels. During the trials, three patients were identified as having developedantibodies to DX-88 and two of these patients had an acute reaction(nausea, flushing) that resolved. These patients have since been retreated withDX-88 without a recurrence of side effects.

In the initial clinical studies of DX-88 forHAE, DX-88 was administered using an intravenous route of administration.During 2005, we completed the transition of our clinical trials to the morepatient-friendly subcutaneous route of administration, and we are now usingthis route of administration at all ongoing EDEMA3 trial sites. In the recentlycompleted EDEMA2 trial, the subcutaneous route of administration had been usedin the treatment of 66 HAE attacks in 32 separate patients with 16 patientsreceiving multiple treatments. We plan to seek marketing approval using thisroute of administration.

We are also exploring further improvements to the formand method of administration of DX-88 for HAE, including a lyophilizedformulation. This formulation might have advantages in terms of stability andinjection volume over the current liquid formulation and would have thegreatest potential to allow for at home administration. We believe that anat-home product will give patients the most control over the debilitatingeffects of HAE and also maximize the market potential for DX-88.

2

----

Contingent on the successful and timely completion ofthe EDEMA3 trial, we, together with Genzyme, plan to commence filing aBiologics License Application (BLA) in the second half of 2006 for regulatoryapproval by the FDA of DX-88 for the treatment of HAE. Shortly after thecompletion of the FDA submission, we plan to file a Marketing AuthorizationApplication with the European Medicines Agency seeking approval of DX-88in the European Union. Based on this timeline, we anticipate receivingmarketing approval of DX-88 for HAE in the United States in the secondhalf of 2007, followed by approval in the European Union.

***DX-88 in CABG*****  **Worldwide, it is estimated that over one millionsurgical procedures involving cardio-pulmonary bypass surgery are performedeach year, the vast majority of which involve a procedure known as coronary artery bypass grafting, orCABG. CABG procedures are performed for patients who have narrowings orblockages of the coronary arteries and typically involve use of a heart-lungmachine, which is commonly referred to as the “pump”. In these procedures, theheart is stopped with medications and the pump does the work of the heart andlungs during surgery. This allows the surgeon to position the heart as needed,to accurately identify the arteries and perform the bypass while the heart isstationary.

The use of the pump during CABG surgery elicits asystemic inflammatory response, which adversely affects the patientpost-operatively. Many patients undergoing CABG surgery experience significantintraoperative blood loss, requiring transfusion. Kallikrein has beenimplicated in the body’s response to on-pump, heart surgery as a majorcontributor to the significant blood loss seen in CABG patients and to thepathologic inflammation that plays a role in the complications of CABG surgery.The only currently approved and available inhibitor of plasma kallikrein isaprotinin, currently marketed by Bayer AG under the name of Trasylol®, which is used in approximately 30% of all CABGprocedures.

We are currentlydeveloping DX-88 as an alternative treatment for patients undergoing CABGsurgery. Since this program is being conducted independent of our collaborationwith Genzyme with respect to DX-88 for the treatment of HAE, we retainall commercial rights to DX-88 for all surgical indications. In December 2003,we completed the evaluation of DX-88 in a Phase I/II trial in the UnitedStates in patients undergoing CABG surgery and we are currently in partneringdiscussions for further development of DX-88 in this indication. Furthermore,as we continue to negotiate with potential partners, we have designed a PhaseIIb study to be started as soon as practical to ensure the continuingdevelopment of this valuable asset. We believe that DX-88 may havebenefits over this existing therapy, as it is a recombinant human proteinrather than animal derived, which may make it appear less foreign to thepatient’s immune system. DX-88 has also been shown *in vitro* to be 1,000 times more potentthan aprotinin as an inhibitor of plasma kallikrein. In addition, prior studieshave also demonstrated neuroprotective effects of DX-88 on brain ischemiaand reperfusion injury in an animal model, indicating the potential for DX-88to treat or prevent neurocognitive deficit that may occur as a result of CABGsurgery. These findings have led us to consider expanding the profile of DX-88to include an evaluation of neurocognitive protection in future clinicaltrials.

**OtherBiopharmaceutical Discovery and Development Programs**

We are pursuing biopharmaceutical discovery anddevelopment programs in the fields of immunology, tumor angiogenesis, tumorbiology and inflammation using our optimized libraries of a small bacterialvirus, the bacteriophage, known as phage libraries, that express up to tens ofbillions of different human antibodies, peptides or small proteins. We havebeen able to establish a broad discovery platform to identify compounds thatinteract with a wide array of targets that are membrane proteins or circulatingproteins and that have been shown to be involved in pathologic processes. Ourdiscovery processes have been automated, thus we are now able to evaluate alarge number of molecules binding to each target. In this way we can rapidlyidentify and select a specific antibody, peptide or small protein with thedesired biochemical and biological characteristics. While our discoveryresearch efforts are focused primarily on 

3

----

monoclonal antibodies, weare also testing the *in vitro*and*in vivo* efficacy of several ofour peptide and small protein compounds.

In addition to our lead product candidate, DX-88,we have one other product candidate in formal development. DX-2240 is afully human monoclonal antibody that was discovered using our proprietary phagedisplay technology. It targets the Tie-1 receptor on the tumor bloodvessels. This antibody inhibits tumor vascular development by a mechanismdistinct from the ones targeting other pathways such as the VEGF pathway. Todate, we have demonstrated statistically significant inhibition of lung,colorectal and renal tumor progression in mouse xenograft models using DX-2240.Histological analysis of tumors from DX-2240 treated mice revealed thatanti-Tie-1 treatment can cause a change in vascular morphology andincreased death of tumor cells. We are evaluating the potential of DX-2240for increasing the anti-tumor potential of existing cancer drugs.

We also have a total offour discovery programs underway in oncology. We also have four discovery programsfocused on targets that are believed to be important mediators of inflammation,one of which we are developing in collaboration with another company. Inaddition, in collaboration with another company, we have a discovery programfocused on an infectious disease target.

**Our Development Collaborations**

***Genzyme Corporation***   Wecollaborate with Genzyme in the development of our lead product candidate, DX-88,for the treatment of HAE. Under our collaboration agreement with GenzymeCorporation, we have established a joint venture, Dyax—Genzyme LLC, tocoordinate on-going development of DX-88 for the treatment of HAE. Dyaxand Genzyme are each responsible for 50% of all costs incurred in connectionwith the development and commercialization of DX-88 for HAE and each willbe entitled to receive approximately 50% of any profits realized from it. Inaddition, we are entitled to receive potential milestone payments from Genzymein connection with the development of DX-88. We received the first suchmilestone payment, approximately $3.0 million, in December, 2005, when wedosed the first patient in the pivotal EDEMA3 trial of DX-88 for HAE. Inaddition, we will be entitled to receive potential milestone payments of$10.0 million for the first FDA-approved product derived from DX-88,and up to $15.0 million for additional therapeutic indications developedunder the collaboration.

The term of the joint venture is perpetual unlessterminated by either party with prior written notice, upon a material breach bythe other party or immediately upon a change of control or bankruptcy of theother party. We currently anticipate that this collaboration will not terminateuntil the parties determine that no commercial products will result from thecollaboration or, if commercial products are eventually sold, until the sale ofthose products is no longer profitable. Because the drug discovery and approvalprocess is lengthy and uncertain, we do not expect to be able to determinewhether any commercial products will result under this collaboration until thecompletion of clinical trials.

Genzyme has loaned us $7.0 million under a seniorpromissory note secured by the tangible and intangible personal propertyarising out of the DX-88 program and our right to revenues from licensesof our fundamental phage display patent portfolio. The note is subject tofinancial covenants, under which we must maintain at least $20.0 millionin cash, cash equivalents or short-term investments based on our quarterlyconsolidated financial statements and we must continue to satisfy at least onecontinued listing standard for the NASDAQ National Market.

***Debiopharm S.A.***   In December, 2005, we entered into a newlicense agreement with Debiopharm, which effectively terminated ourlong-standing collaboration with Debiopharm for the development of DX-890,a neutrophil elastase inhibitor discoveredby Dyax, for the treatment of cystic fibrosis.

Under the prior collaboration agreement, Debiopharmhad been developing DX-890, a neutrophil elastase inhibitor, for thetreatment of cystic fibrosis (CF). Debiopharm was responsible for allpreclinical 

4

----

and clinical trials andall costs associated with the clinical development of DX-890 under thatagreement and had exclusive rights to commercialize DX-890 in Europe forcystic fibrosis, acute respiratory distress syndrome (ARDS) and chronicobstructive pulmonary disease (COPD), and for these indications Dyax retainedthe rights to North America and the rest of the world. Also under the prioragreement, if Dyax wished to outlicense the commercialization of any of theseindications to a third party outside of Europe, Debiopharm had a right of firstrefusal to obtain the outlicensing rights. Dyax was entitled to receive apercentage of revenues generated by Debiopharm from the commercialization ofthe cystic fibrosis product in Europe and was obligated to pay Debiopharm apercentage of any royalties received on product sales outside of Europe underthe prior license agreement. As none of the product candidates developed underthe prior license agreement were approved for sale during the term of thatagreement, Dyax neither paid nor received any royalties thereunder.

Under the new license agreement, Debiopharm hasexclusive worldwide rights for the development, manufacture andcommercialization of a native form of DX-890 in CF and ARDS. We willreceive milestone payments and royalties from Debiopharm to the extent that DX-890advances in development and is ultimately commercialized in these indications. Uponexecution of the new license agreement, we received, in December 2005, amilestone payment of $1.5 million in connection with Debiopharm’s recentinitiation of Phase I clinical studies of DX-890 in ARDS patients.

In addition, we retain allrights to develop DX-890 in other indications, as well as all rights todevelop other internally discovered neutrophil elastase inhibitors in allindications, including CF and ARDS. We are currently exploring the therapeuticpotential of an extended half-life version of DX-890 in chronicobstructive pulmonary disease (COPD).

**Our Phage Display Technology**

Molecular binding is the key to the function of mostbiopharmaceutical products. The binding of a molecule to a target is themechanism nature uses to modulate biochemical and physiological processes suchas cellular growth, differentiation, metabolism and death. Naturally occurringbinding molecules typically distinguish between the correct target and otherclosely related molecules (specificity), and bind more tightly to the targetthan non-target molecules (affinity), under appropriate physiologicalconditions. Biopharmaceutical products bind to targets, including cellularreceptors and enzymes, to achieve a desired effect, and those with higheraffinity and specificity are thought to be preferable. Binding also plays asignificant role in diagnostics, research reagents and separations products.

Living organisms, such as viruses, have the ability todisplay a foreign gene product, or protein, on their surfaces. Based on thisability of organisms to display proteins, our scientists in the late 1980sinvented protein phage display, a novel method to individually display up totens of billions of human antibodies, peptides or small proteins on the surfaceof a small bacterial virus called a bacteriophage, or phage. Using phagedisplay, we are able to produce and search through large collections, orlibraries, of antibodies, small proteins or peptides to rapidly identify thosecompounds that bind with high affinity and high specificity to targets ofinterest.

Our phage displayprocess generally consists of the following steps:

·       Generatinga phage display library

·       Screeningthe phage display library against a target of interest

·       Evaluatingthe selected compounds that bind to the target of interest

***Generating a PhageDisplay Library.***   The generation of a phagedisplay library is based upon a single protein framework and contains tens ofbillions of variations of this protein. The first step in generating a libraryis the selection of the protein framework upon which the library will becreated. This selection is 

5

----

based on the desiredproduct properties, such as structure, size, stability, or lack ofimmunogenicity. We then determine which amino acids in the framework will bevaried, but do not vary amino acids that contribute to the framework structure.We also control the exact numbers and types of different amino acids that arevaried, so that the resulting phage display library consists of a diverse setof chemical entities, each of which retains the desired physical and chemicalproperties of the original framework.

The next step is the creation of a collection of genesthat encode the designed variations of the framework protein. We can easilygenerate diverse collections of up to hundreds of millions of differentsynthetic DNA sequences. Each new DNA sequence, or gene, encodes a singleprotein sequence that will be displayed on the surface of the individual phagethat contains this gene. The scientists combine the new DNA sequences withphage genome DNA and certain enzymes so that the new DNA is inserted into aspecific location of the phage genome. The result is that the new protein is displayedon the phage surface fused to one of the naturally occurring phage proteins. Thephage acts as a physical link between the displayed protein and its gene.

In addition to fused synthetic DNA sequences, we canalso use naturally occurring genes, such as cDNA, which are sequences thatrepresent all of the expressed genes in a cell or organism, to create a library.We have also inserted genes from antibody expressing human cells into the phagegenome. Using these genes, we have constructed phage display libraries thatexpress tens of billions of different human antibodies on the phage surface. Fromone of these libraries, individual antibody fragments can be selected and usedto build highly specific human monoclonal antibodies.

The new phage genome is then transferred intolaboratory bacteria, where the phage genome directs the bacterial cells toproduce thousands of copies of each new phage. The collection of phagedisplaying multiple antibodies, peptides or small proteins is referred to as aphage display library. Because we can reproduce the phage display library byinfecting a new culture of laboratory bacteria to produce millions ofadditional copies of each phage, we can use each library for a potentiallyunlimited number of screenings.

***Screening the PhageDisplay Library Against a Target of Interest.***   Wecan then select binding compounds with high affinity and high specificity byexposing the library to a specified target of interest and isolating thevarious phage that display compounds that bind to the target. Each individualphage contains the gene encoding one potential binding compound, and when itsdisplayed protein is selected in the screening procedure, it can be retrievedand amplified by growth in laboratory bacteria.

To screen a phage display library, we expose thelibrary to the target under desired binding conditions. The target is normallyattached to a fixed surface, such as the bottom of a tube, or a bead, allowingremoval of phage that do not express binding compounds that recognize thetarget. Once these unbound phage are washed away, the phage containing theselected binding compounds can be released from the target. Since the phage arestill viable, they can be amplified rapidly by again infecting bacteria. Thecapacity of the phage to replicate itself is an important feature that makes itparticularly well suited for rapid discovery of specific binding compounds. Wecan amplify a single phage by injecting it into bacteria and producing millionsof identical phage in one day.

If the binding affinity of the compounds identified inan initial screening for a target is not considered sufficiently high,information derived from the binding compounds identified in the initialscreening can be used to design a new focused library. The design, constructionand screening of a second generation library, known as affinity maturation, canlead to increases of 10- to 100-fold in the affinity of the bindingcompounds for the target.

***Evaluating theSelected Compounds That Bind to the Target of Interest.***   Screeningphage display libraries generally results in the identification of one or moregroups of related binding compounds such as antibodies, peptides or smallproteins. These groups of compounds are valuable in providing information aboutwhich chemical features are necessary for binding to the target with affinityand specificity, as well as 

6

----

which features can bealtered without affecting binding. Using DNA sequencing, we can determine theamino acid sequences of the binding compounds and identify the essentialcomponents of desired binding properties by comparing similarities anddifferences in such sequences. If desired, scientists can further optimize thebinding compounds by building additional phage display libraries based on thesekey components and repeating this process. We can complete the entire selectionprocess in several weeks. We can produce small amounts of the binding compoundby growing and purifying the phage. For production of larger amounts, we canremove the gene from the phage DNA and place it into a standard recombinantprotein expression system. Alternatively, if the identified binding compound issufficiently small, it can be chemically synthesized. These binding compoundscan be evaluated for desired properties including affinity, specificity andstability under conditions that will be encountered during its intended use. Fromeach group of compounds, scientists can identify, develop and test a compoundwith the desired properties for utility as a biopharmaceutical, diagnostic,research reagent or affinity separations product.

The entire phage display process for identifyingcompounds that bind to targets of interest is nearly identical whether theultimate product is to be used for biopharmaceuticals, diagnostics, researchreagents or separations, which allows for an efficient use of scientificresources across a broad array of commercial applications.

***Advantages of PhageDisplay Technology in Therapeutic Drug Discovery.***   Webelieve our phage display technology has the following advantages over otherdrug discovery technologies:

·       *Diversity and abundance.  *Many of our phage displaylibraries contain billions of potential binding compounds that arerationally-designed variations of a particular antibody, peptide or small proteinframework. Furthermore, we can isolate a diverse family of genes by including,for example, those that encode human antibodies. The size and diversity of ourlibraries significantly increase the likelihood of identifying bindingcompounds with high affinity and high specificity for the target. Once wegenerate libraries, we can reproduce them rapidly in phage and use them for anunlimited number of screenings.

·       *Speed and cost effectiveness.  *We can construct phagedisplay libraries in a few months and screen them in a few weeks to identifybinding compounds. Conventional or combinatorial chemistry approaches requirebetween several months and several years to complete this process. Similarly,mouse and human-mouse technologies generally require four to six months toidentify an antibody. As a result, our phage display technology cansignificantly reduce the time and expense required to identify an antibody,peptide or small protein with desired binding characteristics.

·       *Automated parallel screening.  *In an automated format,we can apply our phage display technology to many targets simultaneously todiscover specific, high-affinity proteins, including human monoclonalantibodies, for each target. In contrast, human-mouse antibody technologyidentifies antibodies that bind to a single target per test group of mice andis difficult to automate. Among antibody technologies, phage display isparticularly well suited for functional genomic applications, due to the largenumber of genetic targets that need to be screened for specific antibodies.

·       *Rapidoptimization.  *We screen phage display libraries to identifybinding compounds with high affinity and high specificity for the desiredtarget and can design and produce successive generations of phage displaylibraries to further optimize the leads. We have demonstrated between 10-and 1000-fold improvement in binding affinity with second-generationphage display libraries. Optimization of humanized mouse or human-mouseantibodies is more difficult and cannot progress as rapidly.

7

----

**Leveraging Phage Display**

Scientists can use phage display to improve the speedand cost effectiveness of drug discovery and optimization. Phage display offersimportant advantages over, and can be used to improve, other drug discoverytechnologies which are currently employed to identify binding proteins, such ascombinatorial chemistry, single target high-throughput screening andconventional hybridoma technology. Over the past decade, our scientists,collaborators and licensees have applied this powerful technology to a widerange of biopharmaceutical applications. We and our collaborators and licenseesare using phage display technology at many stages of the drug discovery processto identify and determine the function of novel targets and to discoverbiopharmaceutical leads.

Over the past several years, we have brought on-linehigh-throughput automated capacity, developed state-of-the-art antibody phagedisplay libraries, and successfully implemented a strategy under which we haveobtained freedom to operate in the antibody phage display area throughcross-licenses with Affimed Therapeutics AG, Affitech AS, Biosite Incorporated,Genentech, Inc. and XOMA Ireland Limited. In addition, during 2003, weamended our existing cross-license agreement with Cambridge Antibody TechnologyLimited (CAT). As a result of the amended CAT agreement, we have a worldwideresearch license under all the CAT antibody phage display patents and now havemore options to obtain product licenses from CAT to develop and commercializetherapeutic and diagnostic antibody products, for which CAT will receivemilestones and royalties. We also have given CAT an option to develop with usour own therapeutic antibody products and further agreed to pay CAT a portionof the revenues that we generate from certain other applications of antibodyphage display. Under the terms of the amended CAT agreement, we agreed that CATwill no longer have any royalty obligations to us with regard to any productscovered by our phage display patents.

With our phage display technology, we have establishedthe capability to identify fully human antibodies with high specificity andhigh affinity. We also have proprietary high-throughput technologies availableto increase the affinity and specificity of antibody panels and for batchreformatting and protein expression. Our technologies allow us to move productcandidates rapidly into both *in vitro*testing and optimization. We continue to use our increased capabilities tosupport our discovery and development programs for antibody-based therapeuticsand to expand our revenue-generating collaborations.

In addition to using this technology to advance our own internaldevelopment activities, we leverage our phage display technology throughlicenses and collaborations designed to enhance the discovery and developmentof therapeutic leads. In general, these licenses and collaborations fall intoone of four distinct structures:

·       *Patent License*.   Under our patent license program, wegrant other biopharmaceutical and pharmaceutical companies non-exclusivelicenses to use core phage display patents (known as the Ladner patents), todiscover and develop biologic compounds for use in specified fields. Wegenerally grant licenses on a non-exclusive basis so that we may retain broadrights to practice our phage display technology in multiple fields. Our licenseagreements generally provide for up-front license fees, annual maintenancefees, milestone payments based on successful product development, and royaltiesbased on any future product sales. In addition, under the terms of our licenseagreements, most licensees have agreed not to sue us for using phage displayimprovement patents which they developed and some have granted us specificaccess to certain phage-display technologies which they have developed or whichthey control. We believe that these provisions allow us to practiceenhancements to phage display developed by our licensees. We currently haveover 75 patent licensees worldwide.

·       *Library License*.   Under our library license program, wegrant our licensees rights to use our proprietary phage display libraries inconnection with their internal therapeutic development programs. We alsoprovide these licensees with related materials and training so that they may 

8

----

rapidly identify compoundsthat bind with high affinity to therapeutic targets. In addition, with respectto our antibody library license agreements, we include sublicenses totechnology that we have cross licensed from Affimed Therapeutics, Affitech,Biosite, Cambridge Antibody Technology, Genentech and XOMA. The period duringwhich our licensees may use our libraries is typically limited to a 4 to 5 yearterm. Library license agreements contain significant up-front license fees,annual maintenance fees, milestone payments based on successful productdevelopment, and royalties based on any future product sales. Our librarylicensees currently include Amgen, Biogen Idec, Genzyme, ImClone Systems, HumanGenome Sciences, Merck KGaA, MedImmune, Tanox and Zenyth Therapeutics.

·       *Funded Research.  *Under our fundedresearch program, we perform funded research for various collaborators usingour phage display technology to identify, characterize and optimize antibodiesthat bind to disease targets provided by the collaborators. Our funded researchcollaborators include AstraZeneca, Baxter Healthcare and Biogen Idec.

·       *Co-Development.  *Under ourco-development program, we collaborate with other biopharmaceutical companiesto discover and jointly develop therapeutic leads. Under the typicalco-development collaboration, we use our phage display libraries to identifyantibody, peptide and small protein compounds that bind disease targetsprovided by our co-development collaborator. With our collaborator, we evaluatethe leads that we generate during the research phase of our collaboration todetermine if we wish to jointly develop and commercialize such leads astherapeutics. Our co-development collaborators currently include Inhibitex andSyntonix Pharmaceuticals.

While our focus is on therapeutic programs, we areable to leverage our phage display technology in a number of other ways. Forexample, often the binding compounds that we discover for biopharmaceuticaltargets can be used in diagnostic or imaging formats to assess therapeuticeffectiveness and monitor disease progression. In addition, other bindingcompounds we discover, known as ligands, have a high affinity and highspecificity, and can be used for the purification of biopharmaceuticals. Bindingcompounds are also active components of many research products used for drugdiscovery and development, specifically to detect and analyze proteins.

In the diagnostic imaging and research product fields,we have formed collaborations, and we also license others to practice our phagedisplay technology in other fields. For example, we have granted a non-exclusivelicense to our phage display technology for the development of diagnosticimaging products to Bracco, a leader in the imaging products market. Wepreviously used our phage display technology to identify peptides for EpixMedical to use in blood clot imaging applications in the magnetic resonanceimaging field.

In the area of affinity separations, we have grantedlicenses to Wyeth and Human Genome Sciences to use ligands we developed forthem. Wyeth is using a Dyax ligand for purification of its recombinant bloodfactor product, ReFacto AF, for treating hemophilia and Human Genome Sciencesis using a Dyax ligand to purify its B-Lymphocyte Stimulator Protein. Wehave also granted a non-exclusive license to Amersham Biosciences, a marketleader in the separations media field, to practice our phage display patents todiscover ligands from libraries for use as affinity-based media forchromatography separations.

9

----

Currently,12 product candidates generated by our licensees or collaborators using ourtechnology are in clinical trials. The table below indicates the stage ofdevelopment for these various programs as of March 1, 2006:

| **Stage of Development** | ** ** | ** ** | ** **   | **Number and Compound Type** | ** ** | **Field, Indication**    | ** ** |
|------------------------------------|------------|------------|--------------|---------------------------------------------|------------|-------------------------------|------------|
| Phase I                            |       |       | 6-Antibodies |                                        |       | Therapeutics  (Oncology,      |       |
|                                    |       |       |         |                                        |       | Infectious  Disease, Other)   |       |
|                               |       |       | 2-Peptides   |                                        |       | Therapeutics  (Oncology,      |       |
|                               |       |       |         |                                        |       | Inflammation)                 |       |
| Phase II                           |       |       | 2-Antibodies |                                        |       | Therapeutics  (Oncology,      |       |
|                                    |       |       |         |                                        |       | Infectious  Disease)          |       |
|                               |       |       | 1-Peptide    |                                        |       | Imaging  (Cardiovascular)     |       |
| Phase III                          |       |       | 1-Peptide    |                                        |       | Separations (Blood  Disorder) |       |

 

Furthermore, we estimatethat our licensees and collaborators have over 70 additional product candidatesin various stages of research and preclinical development that were generatedusing our technology. We anticipate that we will receive milestones androyalties from our licensees and collaborators to the extent that these productcandidates advance in development and are ultimately commercialized.

**Competition**

We compete in industries characterized by intensecompetition and rapid technological change. New developments occur and areexpected to continue to occur at a rapid pace. Discoveries or commercialdevelopments by our competitors may render some or all of our technologies,products or potential products obsolete or non-competitive.

Our principal focus is on the development oftherapeutic products. We will conduct research and development programs todevelop and test product candidates and demonstrate to appropriate regulatoryagencies that these products are safe and effective for therapeutic use inparticular indications. Therefore our principal competition going forward, asfurther described below, will be companies who either are already marketingproducts in those indications or are developing new products for thoseindications. Many of our competitors have greater financial resources andexperience than we do.

For DX-88 as a treatment for HAE, our principalcompetitors include ZLB Behring, Jerini AG, Pharming Group N.V., and LevPharmaceuticals, Inc. ZLB Behring currently markets a plasma-derived C1esterase inhibitor (Berinert®) that is approved for the treatment of HAE in severalEuropean countries. ZLB Behring received an orphan drug designation from theFDA for its plasma-derived C1 esterase inhibitor and has initiated a Phase IIIclinical trial in the United States. Jerini has received a Fast Trackdesignation from the FDA, as well as orphan drug designations from both the FDAand EMEA for its bradykinin receptor antagonist, which is injected subcutaneously.Jerini has initiated Phase III clinical trials of this compound for HAE in boththe United States and Europe. Pharming has received orphan drug designationsfrom both the FDA and EMEA for its recombinant form of the C1 inhibitor and hasinitiated Phase II/III clinical trials in both the United States and Europe.Lev Pharmaceuticals has received both Fast Track and orphan drug designationsfrom the FDA for its plasma-derived C1 esterase inhibitor and has initiated aPhase III clinical trial in the United States. Other competitors includecompanies that market or are developing corticosteroid drugs or otheranti-inflammatory compounds.

 

10

----

For DX-88 as a treatment for reducing blood loss inCABG surgery, our principal competitor is Bayer AG, which currently markets itsTrasylol® version of aprotinin for the reduction ofblood loss in CABG patients. A number of other companies, including NovoNordisk, and Inspire Pharmaceutical, are developing products for thisindication, as is Vanderbilt University.

For potential oncology product candidates coming outof our biopharmaceutical discovery and development programs, our potentialcompetitors include numerous pharmaceutical and biotechnology companies, mostof which have substantially greater financial resources and experience than wedo.

In addition, most large pharmaceutical companies seekto develop orally available small molecule compounds against many of thetargets for which others and we are seeking to develop antibody, peptide and/orsmall protein products.

Our phage display technology is one of severaltechnologies available to generate libraries of compounds that can be used todiscover and develop new antibody, peptide and/or small protein products. Theprimary competing technology platforms that pharmaceutical, diagnostics andbiotechnology companies use to identify antibodies that bind to a desiredtarget are transgenic mouse technology and the humanization of murineantibodies derived from hybridomas. Abgenix Inc., Medarex Inc., Genmab A/S, andProtein Design Labs, Inc. are leaders in these technologies. Further, welicense our phage display patents and libraries to other parties in the fieldsof therapeutics and diagnostic products on a non-exclusive basis. Ourlicensees may compete with us in the development of specific therapeutic anddiagnostic products. In particular, Cambridge Antibody Technology Group plc(CAT), Morphosys AG, and BioInvent International AB, all of which have licensesto our base technology, compete with us, both to develop therapeutics and tooffer research services to larger pharmaceutical and biotechnology companies. BiositeIncorporated, which is also a patent licensee of ours, has partnered withMedarex, Inc. to combine phage display technology with transgenic mousetechnology to create antibody libraries derived from the RNA of immunized mice.Other companies are attempting to develop new antibody engineering technology. Theseinclude CAT, which is developing ribosomal display technology and antibodymimics, Diversa Corp., which is developing combinatorial arrays for large-scalescreening of antibodies, our patent licensee Domantis Limited, which makessingle domain antibody libraries, and Novagen, Inc., which is developingcDNA display technology.

In addition, we mayexperience competition from companies that have acquired or may acquiretechnology from universities and other research institutions. As these companiesdevelop their technologies, they may develop proprietary positions that mayprevent us from successfully commercializing our products.

**Patents and Proprietary Rights**

Our success is significantly dependent upon ourability to obtain patent protection for our products and technologies, todefend and enforce our issued patents, including patents related to phagedisplay, and to avoid the infringement of patents issued to others. Our policygenerally is to file for patent protection on methods and technology useful forthe display of binding molecules and on biopharmaceutical, diagnostic andseparation product candidates.

Our proprietary position in the field of phage displayis based upon patent rights, technology, proprietary information, trade secretsand know-how. Our patents and patent applications for phage display, known asthe Ladner patents, include U.S. Patent Nos. 5,837,500, which expires June 29,2010, 5,571,698, which expires June 29, 2010, 5,403,484, which expires April 4,2012, 5,223,409, which expires June 29, 2010, and 6,979,538, which expiresJune 29, 2010, issued patents in Canada and Israel, and pending patentapplications in the United States and other countries. These phage displaypatent rights contain claims covering inventions in the field of the surfacedisplay of proteins and certain other peptides, including surface display onbacteriophage.

11

----

For our therapeutic product candidates, we file forpatent protection on groups of antibodies, peptides and small proteins that weidentify using phage display. These patent rights now include U.S. Patent No. 5,666,143,which expires September 2, 2014, and European Patent Nos. 573,603,which expires February 28, 2012, and 797,666, which expires December 15,2015, and an issued Canadian patent claiming sequences of peptides that haveneutrophil elastase inhibitory activity, including the sequence for DX-890; andU.S. Patent Nos. 5,994,125, which expires January 11, 2014, 5,795,865,which expires August 18, 2015, 6,057,287, which expires August 18, 2015,and 6,333,402, which expires January 11, 2014 and European Patent No. 739355which expires January 11, 2015 claiming sequences of peptides that havehuman kallikrein inhibitory activity, including the sequence for DX-88, andpolynucleotide sequences encoding these peptides.

There are no legal challenges to our phage displaypatent rights or our other patent rights now pending in the United States.However, we cannot assure that a challenge will not be brought in the future.We plan to protect our patent rights in a manner consistent with our productdevelopment and business strategies. If we bring legal action against analleged infringer of any of our patents, we expect the alleged infringer toclaim that our patent is invalid, not infringed, or not enforceable for one ormore reasons, thus subjecting that patent to a judicial determination ofinfringement, validity and enforceability. In addition, in certain situations,an alleged infringer could seek a declaratory judgment of non-infringement,invalidity or unenforceability of one or more of our patents. We cannot be surethat we will have sufficient resources to enforce or defend our patents againstany such challenges or that a challenge will not result in an adverse judgmentagainst us or the loss of one or more of our patents. Uncertainties resultingfrom the initiation and continuation of any patent or related litigation,including those involving our patent rights, could have a material adverseeffect on our ability to maintain and expand our licensing program andcollaborations, and to compete in the marketplace.

Our first phage display patent in Europe, EuropeanPatent No. 436,597, known as the 597 Patent was ultimately revoked in 2002in a proceeding in the European Patent Office. We have one divisional patentapplication of the 597 Patent pending in the European Patent Office. We willnot be able to prevent other parties from using our phage display technology inEurope if the European Patent Office does not grant us another patent. Wecannot be assured that we will prevail in the prosecution of either of thesepatent applications.

Our phage display patent rights are central to ournon-exclusive patent licensing program. We offer non-exclusive licenses underour phage display patent rights to companies and non-profit institutions in thefields of therapeutics, diagnostics and other select fields. In jurisdictionswhere we have not applied for, obtained, or maintained patent rights, we willbe unable to prevent others from developing or selling products or technologiesderived using phage display. In addition, in jurisdictions where we have phagedisplay patent rights, we cannot assure that we will be able to prevent othersfrom selling or importing products or technologies derived using phage display.

We are aware that otherparties have patents and pending applications to various products and processesrelating to phage display technology. Through licensing our phage displaypatent rights, we have secured a limited ability to practice under some of thethird party patent rights relating to phage display technology. These rightsare a result of our standard license agreement, which contains a covenant bythe licensee that it will not sue us under the licensee’s phage displayimprovement patents. In addition, we have sought and obtained affirmativerights of license or ownership under certain patent rights relating to phagedisplay technology owned by other parties. For example, in addition to ouramended license agreement with CAT, we have entered into licensing agreementswith Affimed Therapeutics AG, Affitech AS, Biosite Incorporated and Genentech, Inc.under which we granted each of those companies rights to practice our phagedisplay patents and in return received rights to practice under their phagedisplay related patents. These types of agreements in which each party licensetechnology to the other are referred to as cross-licensing agreements. Wehave also entered into a cross-licensing agreement with XOMA 

12

----

IrelandLimited under which we received a license to use XOMA’s antibody expressiontechnology to develop antibody products for ourselves and our collaborators. Wealso received a license from XOMA to produce antibodies. In exchange we agreedto pay XOMA a license fee and a royalty in connection with the sale of any ofour antibody products. We also granted XOMA a license to our phage displaypatents and agreed to provide them with one of our antibody phage displaylibraries.

**Government Regulation**

The production and marketing of any of our futurebiopharmaceutical or diagnostic products will be subject to numerousgovernmental laws and regulations on safety, effectiveness and quality, both inthe United States and in other countries where we intend to sell the products.In addition, our research and development activities in the United States aresubject to various health and safety, employment and other laws andregulations.

***UnitedStates FDA Approval*****.**   In the United States, the U.S. Food & DrugAdministration (FDA) rigorously regulates products intended for diagnostic ortherapeutic use in humans.

The steps requiredbefore a new pharmaceutical can be sold in the United States include:

·       preclinical tests;

·       submissionof an Investigational New Drug Application to the FDA, which must become effectivebefore initial human clinical testing can begin;

·       humanclinical trials that are frequently time consuming and costly to establishsafety and effectiveness of the product, which normally occurs in three phaseseach monitored by the FDA;

·       submissionto FDA of a New Drug or Biologics License Application containing the safety andeffectiveness data developed by the company, followed by FDA review and, ifwarranted, approval of the application; and

·       compliancewith the FDA’s Good Manufacturing Practices regulations in the manufacture,processing and packing of regulated products and facility and equipmentvalidations and inspection.

The requirements for testing and approval for *in vitro* diagnostic products, which areusually regulated as medical devices, can be somewhat less onerous than forpharmaceutical products, but similar steps are usually required. All ourinternal product candidates, including our plasma kallikrein inhibitor, DX-88,and the pharmaceutical and diagnostic products of our collaborators andlicensees, will need to complete successfully the FDA-required testing andapprovals before they can be marketed. There is no assurance that ourcollaborators or we can gain the necessary approvals. Failure to do so wouldhave a material adverse effect on our ability to achieve our business goals andimplement our business strategy. In addition, following approval, manufacturersmust continue to report all adverse events of which they become aware to theFDA. On occasion such events may be sufficiently serious to warrant changes inthe approved uses of products, or in especially serious cases, removal from themarket. This, should it occur, could also produce material adverse effects onfuture business.

***ForeignRegulatory Approval.***   In many countries outside the United States,especially within the European Union (EU), governmental regulatory authoritiessimilar to the FDA must approve the investigational program and/or marketingapplication for pharmaceutical and diagnostic products. New legislation forinvestigative medicinal product was implemented by all EU member states on May 1,2004. Despite attempts to harmonize regulations in all member states,differences continue to exist which may result in delays in the initiation ofclinical trials. Following the conclusion of the clinical evaluation of amedicinal product, a marketing authorization is prepared and submitted. Theformat of the required documentation has been harmonized in the United States,the European Union, and Japan. However, some variations continue to exist. Inaddition, the national laws governing manufacturing requirements, 

13

----

*advertisingand promotion, and pricing and reimbursement may vary widely. Therefore, thetime to market can vary widely among different regions and countries. Inaddition, the export to foreign countries for investigation and /or marketingof medicinal products that have been manufactured in the US but not approvedfor marketing by the FDA is subject to US law as well as the laws of theimporting country and may require one or more regulatory authorizations. Thereis no assurance that we will be able to gain the necessary authorizations in atimely fashion or at all. Failure to do so would have a material adverse effecton our ability to achieve our business goals and implement our businessstrategy.*

***Environmental, Health, Safety and Other Regulations.***   In addition to the laws and regulations that apply tothe development, manufacture and sale of our products, our operations aresubject to numerous foreign, federal, state and local laws and regulations. Ourresearch and development activities involve the use, storage, handling anddisposal of hazardous materials, chemicals and, as a result, we are required tocomply with regulations and standards of the Occupational Safety and Health Actand other safety and environmental laws. Although we believe that ouractivities currently comply with all applicable laws and regulations, the riskof accidental contamination or injury cannot be completely eliminated. In theevent of such an accident, we could be held liable for any damages that result,which could have a material adverse effect on our business, financial conditionand results of operations.

**Manufacturing**

We currently rely on contract manufacturers for theproduction of DX-88 for preclinical and clinical studies, including themanufacture of both the bulk drug substance and the final pharmaceuticalproduct. The testing of the resultant products is our responsibility or theresponsibility of the contract manufacturer and /or an independent testinglaboratory. These materials must be manufactured and tested according to strictregulatory standards established for pharmaceutical products. Despite our closeoversight of these activities, there is no assurance that the technology can bereadily transferred from our facility to those of the contractors, that the processcan be scaled up adequately to support clinical trials, or that the requiredquality standards can be achieved. To date, we have identified only a fewfacilities that are capable of performing these activities and willing tocontract their services. There is no assurance that contractors will have thecapacity to manufacture or test our products at the required scale and withinthe required time frame. There is no assurance that the supply of clinicalmaterials can be maintained during the clinical development of our productcandidates.

It is our current intentto rely on contract manufacturers and / or development or commercializationpartners for the production and testing of marketed pharmaceuticals followingthe approval of one or more of our products. The quality standards for marketedpharmaceuticals are even greater than for investigational products. Theinability of these contractors and / or development or commercializationpartners to meet the required standards and/or to provide an adequate andconstant supply of the pharmaceutical product would have a material adverseeffect on our business.

**Sales and Marketing**

***TherapeuticProducts.***   We donot currently have any therapeutic products approved for sale. Under ourcollaboration with Genzyme, in the event that DX-88 obtains market approval,Genzyme will be responsible for all sales and marketing activities worldwide. Forany other products that are approved in the future for diseases where patientsare treated primarily by limited numbers of physicians, we intend in some casesto conduct sales and marketing activities ourselves in North America and,possibly, in Europe. For any product that we intend to market and sellourselves, we do not expect to establish direct sales capability until shortlybefore the products are approved for commercial sale, but we will begin productmanagement and market education activities earlier during clinical trials. Formarkets outside of North America, including possibly European markets, we willseek to establish arrangements where our products are sold by pharmaceuticalcompanies that are already well established in these regions. For products that

14

----

*are indicatedfor conditions where patients may be treated by large numbers of internists,general surgeons, or family practitioners, we will seek to establisharrangements under which our products will be sold and marketed by largepharmaceutical organizations with established sales forces. We expect thatthese arrangements will generally be worldwide on a product-by-product basis.*

***Other Product Areas.***   For areas other than therapeutic products, we willgenerally seek to establish arrangements with leading companies in particularbusiness areas under which those companies develop the products based on ourtechnology and conduct sales and marketing activities through their establishedchannels.

**Segment Information**

We provide financialinformation by geographical area in Note 15 to our Consolidated FinancialStatements included in Item 8 of this report. We are incorporating thatinformation into this section by this reference.

**Employees**

As of December 31,2005, we had 144 employees worldwide, including 28 with Ph.D.s and/orM.D.s. Approximately 102 of our employees are in research and development,3 in business development and 39 in administration. Our workforce isnon-unionized, and we believe that our relations with employees are good.

**Additional Information**

We make our Annual Reporton Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,and amendments to these reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934 available without chargethrough our website, www.dyax.com, as soon as reasonably practicable afterfiling them with or furnishing them to the Securities and Exchange Commission.Information contained on the website is not part of this report.

**ITEM 1A.**        RISKFACTORS

This Annual Report on Form 10-K and certainother communications made by us contain forward-looking statements, includingstatements about our growth and future operating results, discovery anddevelopment of products, strategic alliances and intellectual property. Forthis purpose, any statement that is not a statement of historical fact shouldbe considered a forward-looking statement. We often use the words or phrases ofexpectation or uncertainty like “believe,” “anticipate,” “plan,” “expect,”“intend,” “project,” “future,” “may,” “will,” “could,” “would” and similarwords to help identify forward-looking statements.

Statements that are nothistorical facts are based on our current expectations and beliefs includingour assumptions, estimates, forecasts and projections for our business and theindustry and markets in which we compete. These statements are not guaranteesof future performance and involve certain risks, uncertainties and assumptions,which are difficult to predict. We cannot assure investors that our expectationsand beliefs will prove to have been correct. Important factors could cause ouractual results to differ materially from those indicated or implied byforward-looking statements. Factors that could cause or contribute to suchdifferences include the factors discussed below. We caution you not to placeundue reliance on these forward looking statements, which speak only as of thedate on which they are made. We undertake no intention or obligation to updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

15

----

***We have a history of operating losses and expect toincur significant additional operating losses.***

We have incurred operatinglosses since our inception in 1989. As of December 31, 2005, we had anaccumulated deficit of approximately $182.3 million. We expect to incursubstantial additional operating losses over the next several years as ourresearch, development, pre-clinical testing and clinical trial activitiesincrease, particularly with respect to our current lead product candidate, DX-88.We have not generated any revenue from product sales to date, and it ispossible that we will never have significant, if any, product sales revenue.

Currently, we generate revenuefrom collaborators through research and development funding and through licenseand maintenance fees that we receive in connection with the licensing of ourphage display technology. We expect to continue to be dependent upon revenuegenerated from our collaborative arrangements and our licensing efforts overthe next several years.

Tobecome profitable, we, either alone or with our collaborators, mustsuccessfully develop, manufacture and market our current product candidates,including DX-88, and other products and continue to leverage our phagedisplay technology to generate research funding and licensing revenue. It ispossible that we will never have significant product sales revenue or receivesignificant royalties on our licensed product candidates or licensedtechnology.

***We may be unable to raise the capital that we willneed to sustain our operations.***

We expect that existing cash,cash equivalents, and short-term investments plus anticipated cash flow fromproduct development, license fees and collaborations will be sufficient tosupport our current operating plans into 2007. We may, however, need or chooseto raise additional funds before then. We will need additional funds if ourcash requirements exceed our current expectations or if we generate lessrevenue than we expect.

Our future capital requirements will depend on many factors, including:

·       the progress of our drug discovery and development programs;

·       our ability to develop and commercialize our product candidates;

·       maintaining or expanding our existing collaborative and licensearrangements and entering into additional ones;

·       the progress of the development and commercialization of milestone androyalty-bearing compounds by our collaborators and licensees;

·       our decision to manufacture materials used in our product candidates;

·       competing technological and market developments;

·       costs of defending our patents and other intellectual property rights;and

·       the amount and timing of additional capital equipment purchases.

Wealso may seek additional funding through collaborative arrangements and publicor private financings. We may not be able to obtain financing on acceptableterms or at all or we may not be able to enter into additional collaborativearrangements. In addition, the terms of any financing may adversely affect theholdings or the rights of our stockholders. If we are unable to obtain fundingon a timely basis, we may be required to curtail significantly one or more ofour research or development programs. We also could be required to seek fundsthrough arrangements with collaborators or others that may require us to relinquishrights to some of our technologies, product candidates or products that wewould otherwise pursue on our own.

16

----

***Our biopharmaceutical or diagnostic product candidatesmust undergo rigorous clinical trials and regulatory approvals, which couldsubstantially delay or prevent their development or marketing.***

Any biopharmaceutical ordiagnostic product that we develop will be subject to rigorous clinical trialsand an extensive regulatory approval process implemented by the Food and DrugAdministration (FDA) and analogous foreign regulatory agencies. This approvalprocess is typically lengthy and expensive, and approval is never certain. Positiveresults from pre-clinical studies and early clinical trials do not ensurepositive results in late stage clinical trials designed to permit applicationfor regulatory approval. We do not know when, or if, our current clinicaltrials will be completed. We also cannot accurately predict when other plannedclinical trials will begin or be completed. Many factors affect patientenrollment, including the size of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, alternativetherapies, competing clinical trials and new drugs approved for the conditionswe are investigating. For example, four other companies are conducting clinicaltrials of treatments for HAE and have announced plans for trials that areseeking or likely to seek patients with HAE. In addition, competition forpatients in cardiovascular disease trials is particularly intense because ofthe limited number of leading cardiologists and the geographic concentration ofmajor clinical centers. As a result of all of these factors, our trials maytake longer to enroll patients than we anticipate. Such delays may increase ourcosts and slow down our product development and the regulatory approval process.Our product development costs will also increase if we need to perform more orlarger clinical trials than planned. The occurrence of any of theseevents will delay our ability to generate revenue from product sales and impairour ability to become profitable, which may cause us to have insufficientcapital resources to support our operations.

Because of therisks and uncertainties in biopharmaceutical development, products that we orour collaborators develop could take a significantly longer time to gainregulatory approval than we expect or may never gain approval. If we or ourcollaborators do not receive these necessary approvals, we will not be able togenerate substantial product or royalty revenues and may not become profitable.We and our collaborators may encounter significant delays or excessive costs inour efforts to secure regulatory approvals. Factors that raise uncertainty inobtaining these regulatory approvals include the following:

·       we must demonstrate through clinical trials that the proposed product issafe and effective for its intended use;

·       we have limited experience in conducting the clinical trials necessary toobtain regulatory approval; and

·       data obtained from pre-clinical and clinical activities are susceptibleto varying interpretations, which could delay, limit or prevent regulatoryapprovals.

Regulatory authorities may delay, suspend or terminateclinical trials at any time if they believe that the patients participating intrials are being exposed to unacceptable health risks or if they finddeficiencies in the clinical trial procedures. Our Investigational New DrugApplications for our recombinant protein DX-88, for example, were placedon clinical hold by the FDA in May 2004, following the FDA’s evaluation ofcertain animal test data submitted by us. Although the study was allowed tocontinue, we were required by the FDA to conduct additional testing atadditional expense, and there is no guarantee that we would be able to resolvesimilar issues in the future, either as quickly, or at all. In addition, our orour collaborators’ failure to comply with applicable regulatory requirementsmay result in criminal prosecution, civil penalties and other actions thatcould impair our ability to conduct our business.

We initiated a Phase IIIclinical trial of DX-88 for the treatment of HAE in December 2005.Before filing a Biologic License Application (BLA) for marketing approval ofthis product in this indication, which we plan to commence filing during thesecond half of 2006, we will need to complete this Phase III trial. HAE is anindication with a particularly small patient population, and our planned PhaseIII trial may, for 

17

----

this orany of the other reasons described above, take longer than anticipated toinitiate and/or to complete.

***We lack experience in conducting clinical trials,handling regulatory processes, and conducting sales and marketing activities,any or all of which may adversely affect our ability to commercialize anybiopharmaceuticals that we may develop.***

We have hired experienced clinical development,regulatory, and marketing staff to develop and supervise our clinical trials,regulatory processes, and sales and marketing activities. However, we willremain dependent upon third party contract research organizations to carry outsome of our clinical and pre-clinical research studies for the foreseeablefuture. As a result, we have had and will continue to have less control overthe conduct of the clinical trials, the timing and completion of the trials,the required reporting of adverse events and the management of data developedthrough the trial than would be the case if we were relying entirely upon ourown staff. Communicating with outside parties can also be challenging,potentially leading to mistakes as well as difficulties in coordinatingactivities. Outside parties may have staffing difficulties, may undergo changesin priorities or may become financially distressed, adversely affecting theirwillingness or ability to conduct our trials. We may also experience unexpectedcost increases that are beyond our control. Problems with the timeliness orquality of the work of a contract research organization may lead us to seek toterminate the relationship and use an alternative service provider. However,changing our service provider may be costly and may delay our trials, andcontractual restrictions may make such a change difficult or impossible. Additionally,it may be impossible to find a replacement organization that can conduct ourtrials in an acceptable manner and at an acceptable cost.

Similarly, we may be unable to enter into third partyarrangements for the marketing and sale of biopharmaceuticals on acceptable terms.For certain products, we may incur substantial expenses to develop our ownmarketing and sales force in order to commercialize our biopharmaceuticals andour efforts may not be successful or the product may not be approved.

As a result we may experiencedelays in the commercialization of our biopharmaceuticals and we may be unableto compete effectively.

***Because we currently lack the resources, capabilityand experience necessary to manufacture biopharmaceuticals, we will depend onthird parties to perform this function, which may adversely affect our abilityto commercialize any biopharmaceuticals we may develop.***

We do not currently operate manufacturing facilitiesfor the clinical or commercial production of biopharmaceuticals. We also lackthe resources, capability and experience necessary to manufacturebiopharmaceuticals. As a result, we will depend on collaborators, partners,licensees and other third parties to manufacture clinical and commercial scalequantities of our biopharmaceutical candidates. If we enter into these types ofthird party arrangements, then we will be dependent on the efforts of others,which if not successful could result in decreased revenue to us.

To date we have identifiedonly a few facilities that are capable of producing material for pre-clinicaland clinical studies and we cannot assure you that they will be able to supplysufficient clinical materials during the clinical development of ourbiopharmaceutical candidates. There is no assurance that contractors will havethe capacity to manufacture or test our products at the required scale andwithin the required time frame. There is no assurance that the supply ofclinical materials can be maintained during the clinical development of ourbiopharmaceutical candidates. We will also be dependent on contractmanufacturers to produce and test any biopharmaceuticals that are approved formarket.

18

----

***Product liability and other claims against us mayreduce demand for our product candidates or result in substantial damages.***

We face an inherent risk of product liability exposurerelated to testing our product candidates in human clinical trials and willface even greater risks if we sell our product candidates commercially. Anindividual may bring a product liability claim against us if one of our productcandidates causes, or merely appears to have caused, an injury. Moreover, insome of our clinical trials, we test our product candidates in indicationswhere the onset of certain symptoms or “attacks” could be fatal. Although theprotocols for these trials include emergency treatments in the event a patientappears to be suffering a potentially fatal incident, patient deaths maynonetheless occur. As a result, we may face additional liability if are foundor alleged to be responsible for any such deaths.

These types ofproduct liability claims may result in:

·       decreased demand for our product candidates;

·       injury to our reputation;

·       withdrawal of clinical trial volunteers;

·       related litigation costs; and

·       substantialmonetary awards to plaintiffs.

***If we fail to establish and maintain strategiclicense, research and collaborative relationships, or if our collaborators arenot able to successfully develop and commercialize product candidates, ourability to generate revenues could be adversely affected.***

Our businessstrategy includes leveraging some of our product candidates, as well as ourproprietary phage display technology, through collaborations and licenses thatare structured to generate revenues through license fees, technical and clinicalmilestone payments, and royalties. For us to continue to receive anysignificant payments from our licenses and collaborations, the relevant productcandidates must advance through clinical trials, establish safety and efficacy,and achieve regulatory approvals and market acceptance. In general, however,under our existing license and collaboration agreements, our licensees andcollaborators:

·       are not obligated to develop or market product candidates discoveredusing our phage display technology;

·       may pursue alternative technologies or develop competing products;

·       control many of the decisions with respect to research, clinical trialsand commercialization of product candidates we discover or develop with them;

·       may terminate their collaborative arrangements with us under specifiedcircumstances, including, for example, a change of control, with short notice;and

·       may disagree with us as to whether a milestone or royalty payment is dueor as to the amount that is due under the terms of our collaborativearrangements.

We cannot assure you thatwe will be able to maintain our current licensing and collaborative efforts norcan we assure the success of any current or future licensing and collaborativerelationships. If any significant portion of our licensing and collaborativeefforts fail, our business and financial condition would be materially harmed.

19

----

***We and our collaborators may not be able to gainmarket acceptance of our biopharmaceuticals, which could adversely affect ourrevenues.***

We cannot becertain that any of our biopharmaceutical candidates, even if successfullyapproved, will gain market acceptance among physicians, patients, healthcarepayors, pharmaceutical manufacturers or others. We may not achieve marketacceptance even if clinical trials demonstrate safety and efficacy of ourbiopharmaceutical candidates and the necessary regulatory and reimbursementapprovals are obtained. The degree of market acceptance of ourbiopharmaceutical candidates will depend on a number of factors, including:

·       their clinical efficacy and safety;

·       their cost-effectiveness;

·       their potential advantage over alternative treatment methods;

·       their marketing and distribution support;

·       reimbursement policies of government and third-party payors; and

·       market penetration and pricing strategies of competing and futureproducts.

If our products do notachieve significant market acceptance, our revenues could be adverselyaffected.

***Competition and technological change may make ourpotential products and technologies less attractive or obsolete.***

We compete in industries characterized by intensecompetition and rapid technological change. New developments occur and areexpected to continue to occur at a rapid pace. Discoveries or commercialdevelopments by our competitors may render some or all of our technologies,products or potential products obsolete or non-competitive.

Our principal focus is on the development oftherapeutic products. We will conduct research and development programs todevelop and test product candidates and demonstrate to appropriate regulatoryagencies that these products are safe and effective for therapeutic use inparticular indications. Therefore our principal competition going forward, asfurther described below, will be companies who either are already marketingproducts in those indications or are developing new products for thoseindications. Many of our competitors have greater financial resources andexperience than we do.

For DX-88 as a treatment for HAE, our principalcompetitors include ZLB Behring, Jerini, Pharming Group N.V., and LevPharmaceuticals. ZLB Behring currently markets a plasma-derived C1 esteraseinhibitor that is approved for the treatment of HAE in several Europeancountries. ZLB Behring has initiated a Phase II/III clinical trial of itsplasma-derived C1 esterase inhibitor in the United States. Jerini has receiveda Fast Track designation from the FDA, as well as orphan drug designations fromboth the FDA and EMEA for its bradykinin receptor antagonist. Jerini has initiatedPhase III clinical trials in both the United States and Europe. Pharming hasreceived orphan drug designations from both the FDA and EMEA for itsrecombinant C1 inhibitor and has initiated Phase III clinical trials in boththe United States and Europe. Lev Pharmaceuticals has received both Fast Trackand orphan drug designations from the FDA for its plasma-derived C1 esteraseinhibitor and has initiated a Phase III clinical trial in the United States.Other competitors include companies that market or are developingcorticosteroid drugs or other anti-inflammatory compounds.

For DX-88 as a treatment for reducing blood lossin CABG surgery, our principal competitor is Bayer AG, which currently marketsTrasylol® (aprotinin) for the reduction of blood loss inCABG patients. A 

20

----

number of other companies,including Novo Nordisk, and Inspire Pharmaceutical, as well as VanderbiltUniversity, are developing products for this indication.

For potential oncology product candidates coming outof our biopharmaceutical discovery and development programs, our potentialcompetitors include numerous pharmaceutical and biotechnology companies, mostof which have substantially greater financial resources and experience than wedo.

In addition, most large pharmaceutical companies seekto develop orally available small molecule compounds against many of thetargets for which others and we are seeking to develop antibody, peptide and/orsmall protein products.

Our phage display technology is one of severaltechnologies available to generate libraries of compounds that can be used todiscover and develop new antibody, peptide and/or small protein products. Theprimary competing technology platforms that pharmaceutical, diagnostics andbiotechnology companies use to identify antibodies that bind to a desiredtarget are transgenic mouse technology and the humanization of murineantibodies derived from hybridomas. Abgenix Inc., Medarex Inc., Genmab A/S, andProtein Design Labs, Inc. are leaders in these technologies. Further, welicense our phage display patents and libraries to other parties in the fieldsof therapeutics and diagnostic products on a non-exclusive basis. Our licenseesmay compete with us in the development of specific therapeutic and diagnosticproducts. In particular, Cambridge Antibody Technology Group plc (CAT),Morphosys AG, and BioInvent International AB, all of which have licenses to ourbase technology, compete with us, both to develop therapeutics and to offerresearch services to larger pharmaceutical and biotechnology companies. BiositeIncorporated, which is also a patent licensee of ours, has partnered withMedarex, Inc. to combine phage display technology with transgenic mousetechnology to create antibody libraries derived from the RNA of immunized mice.Other companies are attempting to develop new antibody engineering technology.These include CAT, which is developing ribosomal display technology andantibody mimics, Diversa Corp., which is developing combinatorial arrays forlarge-scale screening of antibodies, our patent licensee Domantis Limited,which makes single domain antibody libraries, and Novagen, Inc., which isdeveloping cDNA display technology.

In addition, we mayexperience competition from companies that have acquired or may acquiretechnology from universities and other research institutions. As thesecompanies develop their technologies, they may develop proprietary positionsthat may prevent us from successfully commercializing our products.

***Our success depends significantly upon our ability toobtain and maintain intellectual property protection for our products andtechnologies and third parties not obtaining patents that would prevent us fromcommercializing any of our products.***

We face risks anduncertainties related to our intellectual property rights. For example:

·       wemay be unable to obtain or maintain patent or other intellectual propertyprotection for any products or processes that we may develop;

·       thirdparties may obtain patents covering the manufacture, use or sale of these products,which may prevent us from commercializing any of our products under developmentglobally or in certain regions; or

·       ourpatents or any future patents that we may obtain may not prevent othercompanies from competing with us by designing their products or conductingtheir activities so as to avoid the coverage of our patents.

21

----

Our phage display patent rights are central to ournon-exclusive patent licensing program. As part of that licensing program, wegenerally seek to negotiate a phage display license agreement with partiespracticing technology covered by our patents. In countries where we do not haveand/or have not applied for phage display patent rights, we will be unable toprevent others from using phage display or developing or selling products ortechnologies derived using phage display. In addition, in jurisdictions wherewe have phage display patent rights, we may be unable to prevent others fromselling or importing products or technologies derived elsewhere using phagedisplay. Any inability to protect and enforce our phage display patent rights,whether by licensing or any invalidity of our patents or otherwise, wouldnegatively affect our research and revenues.

In all of our activities, we also rely substantiallyupon proprietary materials, information, trade secrets and know-how to conductour research and development activities and to attract and retaincollaborators, licensees and customers. Although we take steps to protect ourproprietary rights and information, including the use of confidentiality andother agreements with our employees and consultants and in our academic andcommercial relationships, these steps may be inadequate, these agreements maybe violated, or there may be no adequate remedy available for a violation. Also,our trade secrets or similar technology may otherwise become known to, or beindependently developed or duplicated by, our competitors.

Before we and our collaborators can market some of ourprocesses or products, we and our collaborators may need to obtain licensesfrom other parties who have patent or other intellectual property rightscovering those processes or products. Third parties have patent rights relatedto phage display, particularly in the area of antibodies. While we have gainedaccess to key patents in the antibody area through the cross licenses withAffimed Therapeutics AG, Affitech AS, Biosite Incorporated, Genentech, Inc.,XOMA Ireland Limited and Cambridge Antibody Technology Limited, other thirdparty patent owners may contend that we need a license or other rights undertheir patents in order for us to commercialize a process or product. Inaddition, we may choose to license patent rights from other third parties. Inorder for us to commercialize a process or product, we may need to license thepatent rights of other parties. If a third party does not offer us a neededlicense or offers us a license only on terms that are unacceptable, we may beunable to commercialize one or more of our products. If a third party does notoffer a needed license to our collaborators and as a result our collaboratorsstop work under their agreement with us, we might lose future milestonepayments and royalties. If we decide not to seek a license, or if licenses arenot available on reasonable terms, we may become subject to infringement claimsor other legal proceedings, which could result in substantial legal expenses. Ifwe are unsuccessful in these actions, adverse decisions may prevent us fromcommercializing the affected process or products.

We seek affirmative rightsof license or ownership under existing patent rights relating to phage displaytechnology of others. For example, through our patent licensing program, wehave secured a limited freedom to practice some of these patent rights pursuantto our standard license agreement, which contains a covenant by the licenseethat it will not sue us under certain of the licensee’s phage displayimprovement patents. We cannot guarantee, however, that we will be successfulin enforcing any agreements from our licensees, including agreements not to sueunder their phage display improvement patents, or in acquiring similaragreements in the future, or that we will be able to obtain commerciallysatisfactory licenses to the technology and patents of others. If we cannotobtain and maintain these licenses and enforce these agreements, this couldhave a negative effect on our business.

***Proceedings to obtain, enforce or defend patents andto defend against charges of infringement are time consuming and expensiveactivities. Unfavorable outcomes in these proceedings could limit our patentrights and our activities, which could materially affect our business.***

Obtaining, protecting and defending against patent andproprietary rights can be expensive. For example, if a competitor files apatent application claiming technology also invented by us, we may have toparticipate in an expensive and time-consuming interference proceeding beforethe U.S. Patent and 

22

----

Trademark Office toaddress who was first to invent the subject matter of the claim and whetherthat subject matter was patentable. Moreover, an unfavorable outcome in aninterference proceeding could require us to cease using the technology or toattempt to license rights to it from the prevailing party. Our business wouldbe harmed if a prevailing third party does not offer us a license on terms thatare acceptable to us.

In patent offices outside the United States, we may beforced to respond to third party challenges to our patents. For example, ourfirst phage display patent in Europe, European Patent No. 436,597, knownas the 597 Patent, was ultimately revoked in 2002 in proceedings in theEuropean Patent Office. We have two divisional patent applications of the 597Patent pending in the European Patent Office. We will not be able to preventother parties from using our phage display technology in Europe if the EuropeanPatent Office does not grant us another patent. We cannot be assured that wewill prevail in the prosecution of either of these patent applications.

The issues relating to the validity, enforceabilityand possible infringement of our patents present complex factual and legalissues that we periodically reevaluate. Third parties have patent rightsrelated to phage display, particularly in the area of antibodies. While we havegained access to key patents in the antibody area through our cross-licensingagreement with Affimed, Affitech, Biosite, Genentech, XOMA and CAT, other thirdparty patent owners may contend that we need a license or other rights undertheir patents in order for us to commercialize a process or product. In addition,we may choose to license patent rights from third parties. While we believethat we will be able to obtain any needed licenses, we cannot assure that theselicenses, or licenses to other patent rights that we identify as necessary inthe future, will be available on reasonable terms, if at all. If we decide notto seek a license, or if licenses are not available on reasonable terms, we maybecome subject to infringement claims or other legal proceedings, which couldresult in substantial legal expenses. For example, George Pieczenik and I.C.Technologies America, Inc. have sued us in a variety of patentinfringement actions since 1999, all of which have been dismissed and noappeals are pending at this time. If we are unsuccessful in these actions,adverse decisions may prevent us from commercializing the affected process orproducts. Moreover, if we are unable to maintain the covenants with regard tophage display improvements that we obtain from our licensees through our patentlicensing program and the licenses that we have obtained to third party phagedisplay patent rights it could have a material adverse effect on our business.

We incurred substantial costs as a result of thePieczenik litigation and we would expect to incur substantial costs in connectionwith any other litigation or patent proceeding. In addition, our management’sefforts would be diverted, regardless of the results of the litigation. Anunfavorable result could subject us to significant liabilities to thirdparties, require us to cease manufacturing or selling the affected products orusing the affected processes, require us to license the disputed rights fromthird parties or result in awards of substantial damages against us. Ourbusiness will be harmed if we cannot obtain a license, can obtain a licenseonly on terms we consider to be unacceptable or if we are unable to redesignour products or processes to avoid infringement.

In all of our activities,we substantially rely on proprietary materials and information, trade secrets andknow-how to conduct research and development activities and to attract andretain collaborative partners, licensees and customers. Although we take stepsto protect these materials and information, including the use ofconfidentiality and other agreements with our employees and consultants in bothacademic and commercial relationships, we cannot assure you that these stepswill be adequate, that these agreements will not be violated, or that therewill be an available or sufficient remedy for any such violation, or thatothers will not also develop similar proprietary information.

23

----

***Our revenues and operating results have fluctuatedsignificantly in the past, and we expect this to continue in the future.***

Our revenues andoperating results have fluctuated significantly on a quarter to quarter basis. Weexpect these fluctuations to continue in the future. Fluctuations in revenuesand operating results will depend on:

·       thetiming of our increased research and development expenses;

·       theestablishment of new collaborative and licensing arrangements;

·       thetiming and results of clinical trials;

·       thedevelopment and marketing programs of current and prospective collaborators;and

·       thecompletion of certain milestones.

If the revenues we receiveare less than the revenues we expect for a given fiscal period, then we may beunable to reduce our expenses quickly enough to compensate for the shortfall. Ourrevenues in any period are not a reliable indicator of our future performance. Inaddition, our fluctuating revenues and operating results may fail to meet theexpectations of securities analysts or investors. Our failure to meet theseexpectations may cause the price of our common stock to decline.

***If we lose or are unable to hire and retain qualifiedpersonnel, then we may not be able to develop our products or processes.***

We are highly dependent onqualified scientific and management personnel, and we face intense competitionfrom other companies and research and academic institutions for qualifiedpersonnel. If we lose an executive officer, a manager of one of our principalbusiness units or research programs, or a significant number of any of ourstaff or are unable to hire and retain qualified personnel, then our ability todevelop and commercialize our products and processes may be delayed orprevented.

***We use and generate hazardous materials in ourbusiness, and any claims relating to the improper handling, storage, release ordisposal of these materials could be time-consuming and expensive.***

Our phage display researchand development involves the controlled storage, use and disposal of chemicalsand solvents, as well as biological and radioactive materials. We are subjectto foreign, federal, state and local laws and regulations governing the use,manufacture and storage and the handling and disposal of materials and wasteproducts. Although we believe that our safety procedures for handling anddisposing of these hazardous materials comply with the standards prescribed bylaws and regulations, we cannot completely eliminate the risk of contaminationor injury from hazardous materials. If an accident occurs, an injured partycould seek to hold us liable for any damages that result and any liabilitycould exceed the limits or fall outside the coverage of our insurance. We maynot be able to maintain insurance on acceptable terms, or at all. We may incursignificant costs to comply with current or future environmental laws andregulations.

***We may have significant product liability exposure.***

We face exposure to productliability and other claims if products or processes are alleged to have causedharm. These risks are inherent in the testing, manufacturing and marketing ofhuman therapeutic products. Although we currently maintain product liabilityinsurance, we may not have sufficient insurance coverage, and we may not beable to obtain sufficient coverage at a reasonable cost. Our inability toobtain product liability insurance at an acceptable cost or to otherwiseprotect against potential product liability claims could prevent or inhibit thecommercialization of any products that we or our collaborators develop. 

24

----

If weare sued for any injury caused by our products or processes, then our liabilitycould exceed our product liability insurance coverage and our total assets.

***Our business is subject to risks associated withinternational operations and collaborations.***

We receive productdevelopment and license fees from international collaborations. For the yearended December 31, 2005, we earned revenue of approximately $8.9 millionfrom non-US based companies. All of our revenue contracts are paid in USdollars. We expect that international product development and license fees willcontinue to account for a significant percentage of our revenues for theforeseeable future. In addition, we have direct investments in subsidiarieslocated in the European Union. Our operations could be limited or disrupted,and the value of our direct investments may be diminished, by any of thefollowing:

·       fluctuationsin currency exchange rates;

·       theimposition of governmental controls;

·       lessfavorable intellectual property or other applicable laws;

·       theinability to obtain any necessary foreign regulatory approvals of products in atimely manner;

·       importand export license requirements;

·       politicalinstability;

·       terroristactivities; and

·       difficultiesin staffing and managing international operations.

A portion of our businessis conducted in currencies other than our reporting currency, the U.S. dollar. Werecognize foreign currency gains or losses arising from our operations in theperiod in which we incur those gains or losses. As a result, currencyfluctuations among the U.S. dollar and the currencies in which we do businesshave caused foreign currency transaction gains and losses in the past and willlikely do so in the future. Because of the variability of currency exposuresand the potential volatility of currency exchange rates, we may suffersignificant foreign currency transaction losses in the future due to the effectof exchange rate fluctuations on our future operating results.

***If we fail to maintain an effective system of internalcontrols in the future, we may not be able to accurately report our financialresults or prevent fraud. As a result, investors may lose confidence in ourfinancial reporting.***

The Sarbanes-Oxley Act of2002 requires that we report annually on the effectiveness of our internalcontrols over financial reporting. Among other things, we must perform systemsand processes evaluation and testing. We must also conduct an assessment of ourinternal controls to allow management to report on, and our independentregistered public accounting firm to attest to, our assessment of our internalcontrols over financial reporting, as required by Section 404 of the Sarbanes-OxleyAct. In the future, our continued assessment, or the subsequent assessment byour independent registered public accounting firm, may reveal significantdeficiencies or material weaknesses in our internal controls, which may need tobe disclosed in future Annual Reports on Form 10-K. Disclosures ofthis type could cause investors to lose confidence in our financial reportingand may negatively affect the price of our common stock. Moreover, effectiveinternal controls are necessary to produce reliable financial reports and toprevent fraud. If we have deficiencies in our internal controls over financialreporting, it may negatively impact our business and operations.

25

----

***Compliance with changing regulation of corporategovernance and public disclosure may result in additional expenses.***

Keeping abreast of, and incompliance with, changing laws, regulations, and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002, new SEC regulations, and NASDAQ Stock Market rules, have required anincreased amount of management attention and external resources. We intend toinvest all reasonably necessary resources to comply with evolving corporategovernance and public disclosure standards, and this investment may result inincreased general and administrative expenses and a diversion of managementtime and attention from revenue-generating activities to compliance activities.

***We may not succeed in acquiring technology andintegrating complementary businesses.***

We may acquireadditional technology and complementary businesses in the future. Acquisitionsinvolve many risks, any one of which could materially harm our business,including:

·       thediversion of management’s attention from core business concerns;

·       thefailure to exploit effectively acquired technologies or integrate successfullythe acquired businesses;

·       theloss of key employees from either our current business or any acquiredbusinesses; and

·       theassumption of significant liabilities of acquired businesses.

We may be unable to makeany future acquisitions in an effective manner. In addition, the ownershiprepresented by the shares of our common stock held by you will be diluted if weissue equity securities in connection with any acquisition. If we make anysignificant acquisitions using cash consideration, we may be required to use asubstantial portion of our available cash. If we issue debt securities tofinance acquisitions, then the debt holders would have rights senior to theholders of shares of our common stock to make claims on our assets and theterms of any debt could restrict our operations, including our ability to paydividends on our shares of common stock. Acquisition financing may not beavailable on acceptable terms, or at all. In addition, we may be required toamortize significant amounts of intangible assets in connection with futureacquisitions. We might also have to recognize significant amounts of goodwillthat will have to be tested periodically for impairment. These amounts could besignificant, which could harm our operating results.

***Our common stock may continue to have a volatilepublic trading price and low trading volume.***

The market price of our common stock has been highlyvolatile. Since our initial public offering in August 2000 through February 22,2006, the price of our common stock on the NASDAQ Stock Market has rangedbetween $54.12 and $1.05. The market has experienced significant price andvolume fluctuations for many reasons, some of which may be unrelated to ouroperating performance.

Many factors mayhave a negative effect on the market price of our common stock, including:

·       publicannouncements by us, our competitors or others;

·       developmentsconcerning proprietary rights, including patents and litigation matters;

·       publicityregarding actual or potential results with respect to products or compounds weor our collaborators are developing;

·       regulatorydevelopments in both the United States and abroad;

·       publicconcern about the safety or efficacy of new technologies;

26

----

·       generalmarket conditions and comments by securities analysts; and

·       quarterly fluctuations inour revenues and financial results.

***Anti-takeover provisions in our governing documentsand under Delaware law and our shareholder rights plan may make an acquisitionof us more difficult.***

We are incorporated in Delaware. We are subject tovarious legal and contractual provisions that may make a change in control ofus more difficult. Our board of directors has the flexibility to adoptadditional anti-takeover measures.

Our charter authorizes our board of directors to issueup to 1,000,000 shares of preferred stock and to determine the terms of thoseshares of stock without any further action by our stockholders. If the board ofdirectors exercises this power to issue preferred stock, it could be moredifficult for a third party to acquire a majority of our outstanding votingstock. Our charter also provides staggered terms for the members of our boardof directors. This may prevent stockholders from replacing the entire board ina single proxy contest, making it more difficult for a third party to acquirecontrol of us without the consent of our board of directors. Our equityincentive plans generally permit our board of directors to provide foracceleration of vesting of options granted under these plans in the event ofcertain transactions that result in a change of control. If our board ofdirectors used its authority to accelerate vesting of options, then this actioncould make an acquisition more costly, and it could prevent an acquisition fromgoing forward. Our shareholder rights plan could result in the significantdilution of the proportionate ownership of any person that engages in anunsolicited attempt to take over our company and, accordingly, could discouragepotential acquirers.

Section 203 of the Delaware General CorporationLaw prohibits a corporation from engaging in a business combination with anyholder of 15% or more of its capital stock until the holder has held the stockfor three years unless, among other possibilities, the board of directorsapproves the transaction. Our board of directors could use this provision toprevent changes in management.

The provisions describedabove, as well as other provisions in our charter and bylaws and under theDelaware General Corporation Law, may make it more difficult for a third partyto acquire our company, even if the acquisition attempt was at a premium overthe market value of our common stock at that time.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

In June of 2001, wesigned a ten-year lease with the Massachusetts Institute of Technology. Theleased property is located in Cambridge, Massachusetts and serves as ourcorporate headquarters and main research facility. We have initially leased67,197 square feet, of which we have subleased a total of approximately 14,000square feet to two different biotechnology companies. The first sublease,covering approximately 11,000 square feet, is due to expire on June 30,2006, while the other, covering approximately 3,000 square feet, is due toexpire on October 31, 2006. We are obligated to lease an additional 24,122square feet on November 1, 2007. We have the option to extend the leasefor two additional five-year terms. We have provided the lessor with a Letterof Credit in the amount of $4.3 million, which may be reduced after thefifth year of the lease term. Through our subsidiary, Dyax S.A., we maintain10,000 square feet of leased laboratory and office space in Liege, Belgium tosupport our research efforts.

27

----

**ITEM 3.**                LEGALPROCEEDINGS

We are not a party to anymaterial legal proceedings.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

During the quarter ended December 31,2005, no matters were submitted to a vote of security holders through thesolicitation of proxies or otherwise.

**PART II**

**ITEM 5.**                MARKETFOR THE COMPANY’S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

Our common stock is traded on The NASDAQ NationalMarket under the symbol DYAX. As of February 22,, 2006, there were38,069,096 shares of our common stock outstanding, which were held byapproximately 238 common stockholders of record, and approximately 3,649beneficial owners.

Thefollowing table sets forth, for the periods indicated, the high and low sellingprices for our common stock as reported on NASDAQ National Market:

| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal year ended  December 31, 2005: |       |     |       |    |       |
| First Quarter                              |       | $        | 7.53       |    | $          | 3.15 |   |
| Second Quarter                             |       | $        | 5.60       |    | $          | 3.04 |   |
| Third Quarter                              |       | $        | 6.82       |    | $          | 4.57 |   |
| Fourth Quarter                             |       | $        | 5.79       |    | $          | 3.98 |   |

 

| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal year ended  December 31, 2004: |       |     |       |    |       |
| First Quarter                              |       | $        | 14.54      |    | $          | 7.56 |   |
| Second Quarter                             |       | $        | 15.65      |    | $          | 9.20 |   |
| Third Quarter                              |       | $        | 11.97      |    | $          | 6.30 |   |
| Fourth Quarter                             |       | $        | 9.80       |    | $          | 5.46 |   |

 

We have never declared orpaid cash dividends on our capital stock. We currently intend to retain ourfuture earnings, if any, for use in our business and therefore do notanticipate paying cash dividends in the foreseeable future. Payment of futuredividends, if any, will be at the discretion of our Board of Directors aftertaking into account various factors, including our financial condition,operating results, current and anticipated cash needs and plans for expansion.

28

----

**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

Thefollowing table summarizes certain selected consolidated financial data, whichshould be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our consolidated financialstatements and related notes included elsewhere in this Form 10-K.The selected consolidated financial data at December 31, 2005 and 2004,and for the years ended December 31, 2005, 2004 and 2003 have beenprepared from our audited financial statements and the selected consolidatedfinancial data at December 31, 2003, 2002, and 2001, and for the yearsended December 31, 2002 and 2001 has been prepared from our accountingrecords. On October 29, 2003, we completed the sale of our wholly ownedseparations product subsidiary known as Biotage. The following data includesall activities of Biotage presented as discontinued operations.

| ** **                                                                                  | ** ** | **December 31,**                                                         | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands, except share  and per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                                              |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Product development and license fee revenues                                                |       | $                                                                             | 19,859     |   | $ | 16,590 |   | $ | 16,853 |   | $ | 17,750 |   | $ | 14,237 |   |
| Research and development:                                                                   |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Research and development                                                                    |       | 47,376                                                                        |       | 39,432 |   | 29,990 |   | 28,713 |   | 16,795 |   |
| Less research and development expenses reimbursed by  joint venture (Dyax–Genzyme LLC) |       | (20,688                                                                       | )          | (10,408 | ) | (5,203 | ) | — |   | — |   |
| Net research and development                                                                |       | 26,688                                                                        |       | 29,024 |   | 24,787 |   | 28,713 |   | 16,795 |   |
| Equity loss in joint venture (Dyax–Genzyme LLC)                                        |       | 11,952                                                                        |       | 5,988 |   | 2,243 |   | — |   | — |   |
| General and administrative                                                                  |       | 12,784                                                                        |       | 14,451 |   | 13,205 |   | 14,882 |   | 14,186 |   |
| Total operating expenses                                                                    |       | 51,424                                                                        |       | 49,463 |   | 40,235 |   | 43,595 |   | 30,981 |   |
| Loss from operations                                                                        |       | (31,565                                                                       | )          | (32,873 | ) | (23,382 | ) | (25,845 | ) | (16,744 | ) |
| Other (expense) income, net                                                                 |       | 621                                                                           |       | (241 | ) | (1,112 | ) | (795 | ) | 2,136 |   |
| Loss from continuing operations                                                             |       | (30,944                                                                       | )          | (33,114 | ) | (24,494 | ) | (26,640 | ) | (14,608 | ) |
| Gain on sale of Biotage, net of tax                                                         |       | —                                                                        |       | — |   | 18,959 |   | — |   | — |   |
| Loss from discontinued operations of Biotage, net of  tax                                   |       | —                                                                        |       | — |   | (1,880 | ) | (178 | ) | (2,557 | ) |
| Net Loss                                                                                    |       | $                                                                             | (30,944    | ) | $ | (33,114 | ) | $ | (7,415 | ) | $ | (26,818 | ) | $ | (17,165 | ) |
| Basic and diluted loss per share:                                                           |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Loss from continuing operations                                                             |       | $                                                                             | (0.87      | ) | $ | (1.06 | ) | $ | (1.04 | ) | $ | (1.35 | ) | $ | (0.76 | ) |
| Gain on sale of Biotage                                                                     |       | —                                                                        |       | — |   | 0.81 |   | — |   | — |   |
| Loss from discontinued operations of  Biotage                                               |       | —                                                                        |       | — |   | (0.08 | ) | (0.01 | ) | (0.13 | ) |
| Net loss                                                                                    |       | $                                                                             | (0.87      | ) | $ | (1.06 | ) | $ | (0.31 | ) | $ | (1.36 | ) | $ | (0.89 | ) |
| Shares used in  computing basic and diluted net loss per share                              |       | 35,455,782                                                                    |       | 31,207,218 |   | 23,546,524 |   | 19,652,474 |   | 19,244,809 |   |

 

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                   | ** ** | **(In  thousands)**   | ** ** |
| **Consolidated  Balance Sheet Data:**        |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                   |       | $                     | 8,640      |   | $ | 6,978 |   | $ | 36,508 |   | $ | 28,199 |   | $ | 51,034 |   |
| Short-term  investments                      |       | 42,024                |       | 50,163 |   | — |   | — |   | — |   |
| Working capital                              |       | 41,756                |       | 46,832 |   | 27,219 |   | 14,095 |   | 39,984 |   |
| Total assets                                 |       | 75,917                |       | 82,760 |   | 71,187 |   | 76,042 |   | 81,441 |   |
| Long-term  obligations, less current portion |       | 9,819                 |       | 10,645 |   | 10,648 |   | 13,809 |   | 3,756 |   |
| Accumulated  deficit                         |       | (182,300              | )          | (151,356 | ) | (118,242 | ) | (110,827 | ) | (84,009 | ) |
| Total stockholders’  equity             |       | 40,938                |       | 47,831 |   | 33,945 |   | 30,843 |   | 55,464 |   |
|                                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

29

----

**ITEM 7.     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Overview**

We are a biopharmaceutical company focused on thediscovery, development and commercialization of novel biotherapeutics for unmetmedical needs, with an emphasis on cancer and inflammatory indications. We useour proprietary drug discovery technology to identify antibody, small proteinand peptide compounds for clinical development.

Our lead product candidate, DX-88, is arecombinant form of a small protein that is currently in clinical trials forits therapeutic potential in two separate indications. In collaboration withGenzyme Corporation, we have successfully completed two Phase II trials of DX-88for the treatment of hereditary angioedema (HAE). In January, 2006, we treatedour last patient in a third Phase II trial and we commenced a pivotal Phase IIItrial in December, 2005. Independently, we have successfully completed a PhaseI/II trial of DX-88 for the prevention of blood loss during certain on-pumpheart procedures, specifically coronary artery bypass graft (CABG) surgery andwe are currently in partnering discussions for further development of DX-88in this indication. Furthermore, as we continue to negotiate with potentialpartners, we have designed a Phase IIb study to be started as soon as practicalto ensure the continuing development for this indication. DX-88 hasorphan drug designation in the US and EU, as well as Fast Track designation inthe US for the treatment of angioedema.

In addition to our clinical stage programs, we have 12other product candidates in our discovery and development pipeline, one ofwhich is currently in formal development. The most advanced of these productcandidates is DX-2240, a fully human monoclonal antibody that targets theTie-1 receptor, a protein receptor that scientists believe is importantin the process of tumor blood vessel formation known as angiogenesis. DX-2240offers a novel mechanism of action for inhibiting tumor growth, which webelieve may have potential application in the treatment of various types ofcancer. All of the compounds in our pipeline were discovered using ourproprietary phage display technology which rapidly generates product candidatesthat bind with high affinity and specificity to therapeutic targets. Althoughthis technology is used primarily to advance our own internal developmentactivities, we also leverage this technology broadly with over 75 revenuegenerating licenses and collaborations. Currently, our licensees andcollaborators have 12 product candidates in clinical trials that were generatedfrom our technology and we estimate that over 70 additional product candidatesthat were generated using our technology are in various stages of research andpreclinical development. We are entitled to receive milestones and royaltiesfrom our licensees and collaborators to the extent that any of these productcandidates advance in development and are ultimately commercialized.

Our business strategy is to builda broad portfolio of biotherapeutic products developed using ourproprietary phage display technology. In the near term, we expect to focus ourefforts on completing the clinical development of DX-88 for the treatmentof HAE and obtaining market approval of DX-88 in the U.S. in that indicationin the second half of 2007. In addition, we expect to move forward on theclinical development of DX-88 as a treatment for patients undergoing CABGsurgery, and to advance up to three pre-clinical product candidates, includingDX-2240, into development in 2007. In the long term, we expect that we,together with our licensees and collaborators, will continue to use ourtechnology and expertise to identify and develop new products and work to bringthose products to the marketplace on a regular basis.

We continued to incurlosses in 2005 and expect to incur significant operating losses over at leastthe next several years and do not expect to generate profits until thetherapeutic products from our development portfolio reach the market afterbeing subjected to the uncertainties of the regulatory approval process.

30

----

**Clinical Development Programs**

***DX-88for HAE.***   In collaboration with Genzyme, weare developing DX-88 as a treatment for HAE. This collaboration ismanaged through Dyax–Genzyme LLC(formerly known as Kallikrein LLC), a jointly owned limited liability company. InMay 2004, we successfully completed a Phase II, 48 patient, doseescalating placebo-controlled study, known as EDEMA1. In January 2006, wetreated the last patient in third Phase II trial, known as EDEMA2, and wecommenced a pivotal, placebo-controlled, worldwide, multi-center Phase IIItrial, known as EDEMA 3, at the end of 2005. In connection with thiscommencement, we received a $3.0 million milestone for the dosing of the first patient in this trial. During 2005,we completed the transition of our clinical trials to the more patient-friendlysubcutaneous route of administration, and we are now using this route ofadministration at all ongoing EDEMA3 trial sites. We also expect to seekmarketing approval using this route of administration.

Contingent on the successful and timely completion of theEDEMA3 trial, we, together with Genzyme, plan to commence filing a BiologicsLicense Application (BLA) in the second half of 2006 for regulatory approval bythe FDA of DX-88 for the treatment of HAE. Shortly after the completionof the FDA submission, we plan to file a Marketing Authorization Applicationwith the European Medicines Agency seeking approval of DX-88 for HAE inthe European Union. Based on this timeline and contingent on the successful andtimely completion of the EDEMA 3 trial, we anticipate being in a position toreceive marketing approval of DX-88 for HAE in the United States in thesecond half of 2007, followed by approval in the European Union. We estimateDyax–Genzyme LLC’s total remainingcosts to commercialization to be in the range of $65 million to$75 million. We will be responsible for funding one half of these costs,or approximately $33 million to $38 million.

Thefollowing table illustrates the activity associated with DX-88 for HAEincluded in our consolidated statements of operations and comprehensive loss:

| ** **                                                                                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                   | ** ** | ** **                                  | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| DX-88 for  HAE costs included within research and development expenses in the  consolidated statements of operations and comprehensive loss                  |       | $                                           | 20,537     |   |   | $ | 10,440 |   |   | $ | 7,067 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax-Genzyme LLC) per the  consolidated statements of operations and comprehensive loss |       | (20,688                                     | )          |   | (10,408 | ) |   | (5,203 | ) |
| Net research and  development expenses for DX-88 for HAE                                                                                                     |       | (151                                        | )          |   | 32 |   |   | 1,864 |   |
| Equity loss in  joint venture (Dyax-Genzyme LLC) separately classified within the  consolidated statements of operations and comprehensive loss         |       | 11,952                                      |       |   | 5,988 |   |   | 2,243 |   |
| Net loss on DX-88  for HAE program                                                                                                                           |       | $                                           | 11,801     |   |   | $ | 6,020 |   |   | $ | 4,107 |   |

 

During 2005, our research and development expenses onthe DX-88 for HAE program totaled $20.5 million compared with$10.4 million in 2004 and $7.1 million in 2003. Research and developmentexpenses increased $10.1 million in 2005 over 2004 principally due to increasedactivity in the areas of manufacturing and clinical trial costs. Research anddevelopment expenses increased in 2004 over 2003 principally due to increasedactivity in the areas of manufacturing and preclinical pharmacology andtoxicology studies.

Dyax–GenyzmeLLC became responsible for the reimbursement of all development expensesrelated to the HAE program incurred after the 2003 completion of the firstPhase II clinical trial for HAE. During2005, Dyax–Genzyme LLC reimbursed us for $20.7 million of our research anddevelopment expenses. This 

31

----

reimbursementis recorded as research and development expenses reimbursed by joint venture(Dyax–Genzyme LLC) in our consolidated statements of operations andcomprehensive loss. In 2004 and 2003, Dyax–Genzyme LLC reimbursed us $10.4million and $5.2 million, respectively, for our expenses relating to theprogram. The $1.9 million of net research and development expenses in 2003 forDX-88 for HAE represent costs we incurred prior to the initiation of thejoint venture.

Dyax–GenzymeLLC had net losses of approximately $23.9 million, $12.0 million and $4.5million for the years ended December 31, 2005, 2004 and 2003,respectively. These losses represent the total research and development expensesincurred by Dyax and Genzyme on DX-88 for HAE. Our portions of thelosses, accounted for under the equity method, were $12.0 million, $6.0 millionand $2.2 million for the years ended December 31, 2005, 2004 and 2003,respectively and were proportional to our 50.01% financial interest in theprogram. Our portions of the losses, referred to as our equity loss in jointventure, is separately classified within our consolidated statements ofoperations and comprehensive loss.

See Footnote 14 “Investment in Joint Venture (Dyax–Genzyme LLC) and Other Related PartyTransactions” of Item 8 “Financial Statements and Supplementary Data” forsummary financial information and other disclosures regarding Dyax–Genzyme LLC and see Exhibit 99.1 forDyax–Genzyme LLC’s financialstatements.

***DX-88 forCABG.***   Independent of our collaboration withGenzyme, we are developing DX-88 as a treatment for patients undergoingheart surgery, specifically coronary artery bypass graft surgery (CABG). Duringthe first quarter of 2003, we exercised an option to purchase from Genzyme fullrights to DX-88 for this and other surgical indications. The cost forexercising the option was $1.0 million and was expensed in the secondquarter of 2003.

Expenses on this program totaled $858,000, $3.1million and $2.6 million for the years ended December 31, 2005, 2004 and2003, respectively. The decrease in spending from 2004 to 2005 is attributableto our prior decision to defer further clinical trial activities with respectto CABG until we had secured a partner for this indication.

***Goals for Clinical Development Programs.***   Ourgoal for both of our ongoing clinical development programs is to obtainmarketing approval from the FDA and analogous international regulatoryagencies. Because of the risks and uncertainties associated with theseprograms, including our ongoing clinical trials, our need to locate adevelopment partner or obtain the additional funding needed to completeclinical trials in the CABG program, the preparation and filing of a BLA, theregulatory review process and the risk that we may have to repeat, revise orexpand the scope of trials or conduct additional clinical trials not presentlyplanned to secure marketing approvals, we are unable to accurately predict thecosts to complete the development of DX-88 in the CABG indication, orwhether this program will be successfully completed at all. Material cashinflows for either of these programs other than milestone payments will notcommence until after marketing approvals are obtained, and then only if theproduct candidate finds acceptance in the marketplace as a treatment for itsdisease indication. Because of the many risks and uncertainties related to thecompletion of clinical trials, receipt of marketing approvals and acceptance inthe marketplace, we cannot predict when material cash inflows from theseprograms will commence, if ever.

**Discovery Programs**

Through internal discoveryactivities and business relationships with academic institutions andbiotechnology and pharmaceutical companies, we use our proprietary phagedisplay technology to identify compounds with therapeutic and diagnosticpotential. We have a total of four discovery programs underway in oncology.These programs are focused on the discovery of therapies that fight cancerprimarily in three ways: inhibiting angiogenesis (the growth of blood vessels),inhibiting proteases believed to be associated with tumor growth andproliferation, and targeting cell surface proteins believed to be 

32

----

overexpressed by certain tumors. We also have four discovery programs focused ontargets that are believed to be important mediators of inflammation, one ofwhich we are developing in collaboration with another company. In addition, incollaboration with another company, we have a discovery program focused on aninfectious disease target.

**LicenseAgreement with Debiopharm S.A.**

In December, 2005, weentered into a license agreement with Debiopharm, which effectively terminatedour long-standing collaboration for the development of DX-890, aneutrophil elastase inhibitor discovered by Dyax. Under the new licenseagreement, Debiopharm has exclusive worldwide rights for the development,manufacture and commercialization of a native form of DX-890 in CF andARDS. We will receive milestone payments and royalties from Debiopharm to theextent that DX-890 advances in development and is ultimatelycommercialized in these indications. Upon execution of the new licenseagreement, we received a milestone payment of $1.5 million in connection withDebiopharm’s recent initiation of Phase I clinical studies in ARDS patient. Alsounder the new license agreement, we retain all rights to develop DX-890in other indications and we are currently exploring the therapeutic potentialof an extended half-life version of DX-890 in COPD. We also retain allrights to develop other internally discovered neutrophil elastase inhibitors inall indications, including CF and ARDS.

During 2005, we incurredresearch, development and manufacturing expenses for the now terminated DX-890collaboration of $5.4 million compared with $6.3 million in 2004. Research anddevelopment expenses on this program decreased from 2004 principally due to adecrease in internal resource costs, offset by increased manufacturing costs. Thesecosts were fully funded by Debiopharm, this funding is reflected in our productdevelopment revenues. Under the prior collaboration agreement, Debiopharm wasresponsible for the management of all preclinical and clinical trials, and allcosts associated with such trials and any costs incurred by Dyax in connectionwith the manufacture and testing of the active pharmaceutical ingredient for DX-890were fully funded by Debiopharm. This financial structure has been amendedunder the new license agreement, and, therefore, no revenue or expenseassociated with the manufacture of DX-890 for Debiopharm will appear inour financial statements for periods after the first half of 2006. During thefirst half of 2006, there will be revenue and expenses associated with thewinding down of our activities and completing the transfer of technology toDebiopharm.

**Licensingand Funded Research Activities**

Although our proprietaryphage display technology is used primarily to advance our own internaldevelopment activities, we also leverage this technology broadly with over 75revenue generating licenses and collaborations. These licenses andcollaborations allow others to gain access to our technology in therapeuticdiscovery and in non-core areas such as diagnostic imaging, research reagentsand separations. Currently, our licensees have 12 product candidates inclinical trials that were generated from our technology and we estimate thatover 70 additional product candidates that were generated using our technologyare in various stages of research and preclinical development. These licensesand collaborations generate revenues for us in the form of license fees andmilestones and royalties, which we receive from our licensees and collaboratorsto the extent that product candidates advance in development and are ultimatelycommercialized.

**Saleof Separations Business**

On October 29, 2003,we completed the sale of our wholly owned separations product subsidiary knownas Biotage for a gross purchase price of $35.0 million. The sale ofBiotage has allowed us to focus exclusively on biotherapeutics, and the cashgenerated by the sale of Biotage helped us advance our clinical programs aswell as the preclinical candidates in our pipeline. For the year ended December 31,2003, we have recognized a $19.0 million gain on this sale. For the year ended December 31,2003, operations of Biotage are presented as discontinued operations in ourconsolidated financial statements.

33

----

**Results ofOperations**

***Revenues.******  ***Substantiallyall our revenues have come from licensing, funded research and development activities,including milestone payments from our licensees and collaborators. Theserevenues fluctuate from year to year due to the nature of our agreements. Totalrevenues for 2005 were $19.9 million, compared with $16.6 million in 2004and $16.9 million in 2003. The increase from 2004 to 2005 was due to therecognition of a $3.0 million milestone received in December 2005 fromGenzyme for dosing the first patient in the pivotal EDEMA3 trial of DX-88for HAE and a $1.2 million increase in licensing activities. These increaseswere partially offset by a $908,000 decrease in other funded research anddevelopment activities. The net increase in licensing activities was due to thereceipt $1.5 million under a patent license partially offset a decrease of$293,000 in other licensing activities. During 2005, one of our patentlicensees exercised a $1.5 million option to convert its license to afully-paid, irrevocable license. This fee was immediately recognized as revenuebecause we have no future obligations to the licensee. The $908,000 decrease inother funded research and development activities was due to a $718,000 decreasein revenue arising from our DX-890 product collaboration with Debiopharmand a $190,000 decrease in funded research revenue under existing andcontinuing relationships. Under our new agreement with Debiopharm, we will nolonger be responsible for manufacturing DX-890 for Debiopharm. However,during 2006, we will be reimbursed for the winding down of our activites andcompleting the transfer of technology to Debiopharm. As part of the newagreement, we received a $1.5 million payment in December 2005 for anachieved milestone. This payment is refundable to Debiopharm if we do notcomplete the technology transfer by June 19, 2006. Due to the potentiallyrefundable nature of this milestone, no revenue on it was recognized in 2005,and it is included in the current portion of deferred revenue on our balancesheet at December 31, 2005. Revenue will be recognized if a successfultransition is completed by June 19, 2006.

The decrease from 2003 to2004 was due to a $1.7 million decrease in funded research and developmentactivities and a $1.4 million increase in licensing activities. Our decrease infunded research and development revenue was due to a $1.6 million decrease froma funded research agreement with Bracco and a $1.5 million decrease from afunded research agreement with Human Genome Sciences. The agreement with HumanGenome Sciences. was completed in June 2003. These decreases in fundedresearch and development activities were partially offset by a $1.7 millionincrease in revenue arising from our now terminated DX-890 productcollaboration with Debiopharm. Our increase in licensing revenue was primarilydue to revenue recognized for new licenses of our proprietary phage displaylibraries and milestones under existing licenses.

***Research andDevelopment.******  ***Our research and development expensesfor the years ended December 31, 2005, 2004 and 2003, are summarized asfollows:

| ** **                                                                                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                    | ** ** | ** **                                 | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Research and  development per consolidated statements of operations and comprehensive  loss                                                              |       | $                                          | 47,376     |   |   | $ | 39,432 |   |   | $ | 29,990 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax–Genzyme LLC) per consolidated statements of operations and  comprehensive loss |       | (20,688                                    | )          |   | (10,408 | ) |   | (5,203 | ) |
| Net research and  development expenses per consolidated statements of operations and  comprehensive loss                                                      |       | 26,688                                     |       |   | 29,024 |   |   | 24,787 |   |
| Equity loss in  joint venture (Dyax–Genzyme LLC)  separately classified within the consolidated statements of operations and  comprehensive loss         |       | 11,952                                     |       |   | 5,988 |   |   | 2,243 |   |
| Research and development  expenses adjusted to include equity loss in joint venture                                                                      |       | $                                          | 38,640     |   |   | $ | 35,012 |   |   | $ | 27,030 |   |

 

34

----

Our research and development expenses arise primarilyfrom compensation and other related costs, including personnel dedicated toresearch and development activities and from the fees paid and costs reimbursedto outside professionals to conduct research and clinical trials and tomanufacture drug compounds prior to FDA approval. The expenses we incur on theDX-88 program for HAE are included in our overall research anddevelopment expenses, but then are reimbursed by the Dyax–Genzyme LLC joint venture and excludedfrom net research and development expenses. However, we jointly fund the lossesof that program with Genzyme, so our line item for equity loss in joint venturerepresents our share of all expenses for the development of DX-88 forHAE, including any incurred by Genzyme.

Combining our net research and development expensesand our equity loss in joint venture to show our total expenses for researchand development, our adjusted net research and development expenses increased$3.6 million from 2004 to 2005 primarily due to a $6.0 million increases in ourequity loss in joint venture, offset by a $2.3 million decrease in net researchand development expenses. The increase in our equity loss in joint venture wasa result of increase in manufacturing expenses, preclinical and clinical costsfor the development of DX-88 for HAE. The $2.3 million decrease in netresearch and development expenses is a result of reduced program costsassociated with the deferral of DX-88 for CABG activities and a $862,000decrease in program costs associated with DX-890 product collaborationwith Debiopharm, consisting primarily of decreases in internal resource costs,partially offset by increased manufacturing costs.

Compared to 2003, in 2004 manufacturing costsassociated with our DX-890 for CF program increased $1.1 million andmanufacturing, and marketing and other external costs associated with our DX-88for CABG program increased $1.1 million, exclusive of the cost of exercising a$1.0 million option to purchase from Genzyme the rights to DX-88 forCABG and other surgical indications, which occurred in 2003. Equity loss injoint venture (Dyax–Genzyme LLC)increased $3.7 million primarily due to an increase in manufacturing expenses,ongoing pharmacology and toxicology studies, as well as increased clinicaltrial costs and the associated internal costs to support these activities.

Our management believes that the above presentation ofadjusted net research and development expenses, although a non-GAAP measure, provides investors a better understanding of howtotal research and development efforts affect our consolidated statements ofoperations and comprehensive loss. Our presentation of this measure, however,may not be comparable to similarly titled measures used by other companies.

***General andAdministrative.******  ***Our general and administrativeexpenses consist primarily of the costs of our management and administrativestaff, as well as expenses related to business development, protecting ourintellectual property, administrative occupancy, professional fees, marketresearch and promotion activities and the reporting requirements of a publiccompany. Total general and administrative expenses were $12.8 million in 2005compared to $14.5 million in 2004 and $13.2 million for 2003. Thedecrease of $1.7 million from 2004 to 2005 was due to reductions in otherprofessional fees and marketing expenses. The reductions in other professionalfees is attributable to reduced auditing and consulting fees as a result ofgaining efficiencies from year two of our Sarbanes-Oxley 404 compliance efforts.The decrease in marketing expenses is related to our decision to defer furtherclinical marketing activities with respect to CABG until we have secured apartner for this indication.

The $1.3 million increase in general andadministrative expenses from 2003 to 2004 was primarily due to an increase inprofessional fees, including approximately $900,000 in external costsassociated with Sarbanes-Oxley compliance and internal headcount.

***DiscontinuedOperations.******  ***Our activities from discontinuedoperations were the operations of our formerseparations product subsidiary known as Biotage, which was sold in October 2003.Our gain on the sale of Biotage was comprised of a $19.0 million gain onsale and a loss of $1.9 million on Biotage’s operations for theyear-to-date period ended October 29, 2003.

35

----

**Liquidityand Capital Resources**

***Condensed Consolidated Statements of Cash Flows (inthousands):***

| ** **                                               | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                     | ** ** |
| Net loss                                                 |       | $                                           | (30,944    | ) | $ | (33,114 | ) | $ | (7,415 | ) |
| Gain on sale of Biotage,  net of tax                     |       | —                                      |       | — |   | (18,959 | ) |
| Loss for discontinued  operations, net of tax            |       | —                                      |       | — |   | 1,880 |   |
| Depreciation and  amortization                           |       | 3,579                                       |       | 3,976 |   | 3,777 |   |
| Equity loss in joint  venture (Dyax-Genzyme LLC)         |       | 11,952                                      |       | 5,988 |   | 2,243 |   |
| Change in accounts  receivable                           |       | 1,382                                       |       | 1,594 |   | (1,611 | ) |
| Change in accounts  payable and accrued expenses         |       | (2,356                                      | )          | (3,014 | ) | 4,567 |   |
| Due from joint venture  (Dyax-Genzyme LLC)               |       | (2,202                                      | )          | (255 | ) | — |   |
| Due to joint venture  (Dyax-Genzyme LLC)                 |       | 950                                         |       | — |   | — |   |
| Deferred revenue                                         |       | 1,110                                       |       | 2,092 |   | 506 |   |
| Other changes in operating  activities                   |       | (1,764                                      | )          | 3,565 |   | 598 |   |
| Net cash used in  operating activities                   |       | (18,293                                     | )          | (21,260 | ) | (14,920 | ) |
| Net cash provided by  (used in) investing activities     |       | (3,062                                      | )          | (53,157 | ) | 21,750 |   |
| Net cash provided by  financing activities               |       | 23,084                                      |       | 44,907 |   | 5,954 |   |
| Effect of foreign  currency translation on cash balances |       | (67                                         | )          | (20 | ) | 30 |   |
| Net cash used in  discontinued operations                |       | —                                      |       | — |   | (4,505 | ) |
| Net increase (decrease) in cash and cash equivalents     |       | $                                           | 1,662      |   | $ | (29,530 | ) | $ | 8,309 |   |

 

We require cash to fundour operating expenses, to make capital expenditures, acquisitions andinvestments, and to pay debt service. Through December 31, 2005, we havefunded our operations principally through the sale of equity securities, whichhave provided aggregate net cash proceeds since inception of approximately $212million, including net proceeds of $23.5 million from our May 2005registered direct offering, $44.7 million from our January 2004underwritten offering, $8.3 million from our March 2003 registereddirected offering and $62.4 million from our August 2000 initialpublic offering. We have also generated funds from biopharmaceutical productdevelopment and license fee revenues, our sale of our Biotage subsidiary in2003 that raised $25.4 million in cash with another $5.0 million received in2004, separations product revenues of our former Biotage division, interestincome, long-term obligations and other sources. As of December 31, 2005,we had cash and cash equivalents and short-term investments aggregating $50.7million. Our excess funds are currently invested in short-term investmentsprimarily consisting of U.S. Treasury notes and bills, and money market fundsbacked by U.S. Treasury obligations.

Operating activities usedcash of approximately $18.3 million in 2005, $21.3 million in 2004 and $14.9 millionin 2003. Our cash used in operating activities for 2005 consisted primarily ofour net loss of $30.9 million and a $2.0 million change in operating assets andliabilities, partially offset by adjustments for non-cash items, includingdepreciation and amortization of fixed assets and intangibles totaling $3.6 millionand equity loss in joint venture (Dyax–Genzyme LLC) of $12.0 million. Thechange in operating assets and liabilities includes a reimbursement due fromjoint venture (Dyax–Genzyme LLC) totaling $2.2 million which represents coststhat we incurred in the DX-88 for HAE program during the 2005 Period thathave not been reimbursed as of December 31, 2005, an amount due to jointventure (Dyax–Genzyme LLC) totaling $950,000, which is our contribution payableto the joint venture to fund a portion of its costs incurred in 2005, adecrease in accounts payable and accrued expenses of $2.4 million due primarilyto a decrease in accounts payable of $1.9 million from timing of payments and adecrease in accruals. Additionally, there was a decrease in accounts receivableof $1.4 million primarily due to a decrease in accounts receivable fromDebiopharm of $1.2 million due to the timing of manufacturing activities, andan increase in deferred revenue of $1.1 million. Our cash used in operatingactivities for 2004 consisted primarily of our net loss of $33.1 million,partially offset by adjustments for non-cash items, including depreciation andamortization of fixed assets and intangibles totaling $4.0 million and equityloss 

36

----

in jointventure (Dyax-Genzyme LLC) of $6.0 million, and a $1.0 million change inoperating assets and liabilities. The change in operating assets andliabilities includes a decrease in accounts payable and accrued expenses of$3.0 million, a decrease in accounts receivable of $1.6 million and an increasein deferred revenue of $2.1 million. Our cash used in operating activities for2003 consisted primarily of our net loss of $7.4 million, gain on sale ofBiotage, net of tax, of $19.0 million, partially offset by loss fromdiscontinued operations, net of tax, of $1.9 million, an increase in accountsreceivable of $1.6 million due to the timing of billings to Debiopharmunder our collaboration agreement, and an increase in prepaid expense and otherassets of $1.3 million. These uses of cash were partially offset by anincrease in accounts payable and accrued expenses of $4.6 million dueprimarily to the timing of payments made to our contract manufacturer and adjustmentsfor non-cash items, including depreciation and amortization of fixed assets andintangibles totaling $3.8 million and equity loss in joint venture(Dyax-Genzyme LLC) of $2.2 million.

Investing activities usedcash totaling approximately $3.1 million in 2005 and $53.2 million in 2004, andprovided cash of $21.8 million in 2003. In 2005 the purchase of short-terminvestments was $106.9 million, offset by the maturity of short-terminvestments of $115.8 million. We contributed $10.8 million to Dyax-Genzyme LLCand purchased $1.4 million in fixed assets. In 2004 the purchase of short-terminvestments was $51.0 million, we contributed $5.4 million to Dyax-GenzymeLLC and purchased $2.3 million in fixed assets. We also received $5.0 millionof cash released from escrow relating to the sale of Biotage. In 2003 theCompany received $25.4 million from the sale of Biotage, $1.3 million foremployees for the repayment of employee notes, and purchased fixed assets andintangibles totaling $2.4 million, and contributed $3.1 million to Dyax-GenzymeLLC.

Financing activitiesprovided cash of approximately $23.1 million, $44.9 million and $6.0 million in2005, 2004 and 2003 respectively. In 2005 we sold 6.3 million shares of commonstock resulting in net proceeds of $23.5 million. We also made repaymentstotaling $1.9 million on long-term obligations. In 2004 we sold 6 millionshares of common stock resulting in net proceeds of $44.7 million. Proceedsfrom the issuance of common stock under the employee stock option plan andexercise of stock options totaled $2.1 million. We also collected proceeds fromlong-term obligations of $1.4 million and made repayments of long-termobligations of $3.3 million. In 2003 we sold 4.7 million shares of common stockresulting in net proceeds of $8.3 million and made repayments of long-termliabilities of $3.4 million.

We have financed fixedasset purchases through capital leases and debt. Capital lease obligations arecollateralized by the assets under lease.

In conjunction with our collaborationagreement with Genzyme for the development of DX-88, Genzyme loaned us$7.0 million pursuant to a senior secured promissory note and securityagreement, and we granted Genzyme a continuing security interest in certaintangible and intangible personal property arising out of the DX-88program. In addition, the security agreement, as amended contains certainfinancial covenants under which we must (i) maintainat least $20.0 million in cash, cash equivalents and short-term marketablesecurities based on the Company’s quarterly consolidated financial statementsand (ii) continue to satisfy at least one standard for continued listingof our securities on the NASDAQ National Market. During the quarterended June 30, 2005, the Company exercised its right to extend thematurity date of the note from May 31, 2005 to May 31, 2007.Accordingly, the note is classified as a long-term liability in theconsolidated balance sheet. We have borrowed the full $7.0 millionavailable under the note, the terms of which are discussed in Note 14 tothe consolidated financial statements.

We believe that existingcash and cash equivalents and short-term investments plus anticipated cash flowfrom product development, license fees and collaborations will be sufficient tosupport our current operating plans into 2007. Currently, we expect to useapproximately $35 million in cash during 2006. For the foreseeable future, weexpect to continue to fund any deficit from our operations through the sale ofadditional equity or debt securities. The sale of any equity or debt securitiesmay result in additional dilution to our stockholders, and we cannot be certainthat additional financing will be available in amounts or on terms acceptableto us, if at all. If we are unable to obtain any required additional financing,

37

----

we maybe required to reduce the scope of our planned research, development andcommercialization activities, which could harm our financial condition andoperating results.

We have no off-balancesheet arrangements with the exception of operating leases.

**ContractualObligations**

Contractualobligations represent future cash commitments and liabilities under agreementswith third parties, and exclude contingent liabilities which we cannotreasonably predict future payment. The following chart represents our totalcontractual obligations, including principal and interest, at December 31,2005, aggregated by type (in thousands):

| ** **                                                  | ** ** | **Payments due by period** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations**                            | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Obligation to related  party                                |       | $                                         | 7,972      |   |   | $ | 702 |   |   | $ | 7,270 |   | $ | — |   |   | $ | — |   |   |
| Capital leases                                              |       | 3,046                                     |       |   | 1,726 |   |   | 1,309 |   | 11 |   |   | — |   |   |
| Leasehold improvement  arrangements                         |       | 2,544                                     |       |   | 413 |   |   | 825 |   | 825 |   |   | 481 |   |   |
| Operating lease  obligations(1)                             |       | 31,254                                    |       |   | 3,604 |   |   | 10,792 |   | 10,797 |   |   | 6,061 |   |   |
| Patent and product  license obligations(2)                  |       | 9,802                                     |       |   | 742 |   |   | 2,482 |   | 1,458 |   |   | 5,120 |   |   |
| Obligations for  research, development and manufacturing(3) |       | 5,073                                     |       |   | 4,748 |   |   | 265 |   | 60 |   |   | — |   |   |
| Total contractual obligations                               |       | $                                         | 59,691     |   |   | $ | 11,935 |   |   | $ | 22,943 |   | $ | 13,151 |   |   | $ | 11,662 |   |   |
|                                                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Theseamounts are net of contractually committed sublease income.

(2)          Theseamounts exclude any royalties and milestones that we may owe in connection withthe development or commercialization of any of our product candidates. Sincethe prospect of development and commercialization of any particular productcandidate is uncertain, we believe the timing and amounts of any potentialroyalties and other milestones are not currently calculable in any manner thatwould fairly present purchase obligations.

(3)          Theseamounts represent the cash commitment due on research, development andmanufacturing contracts. We will not owe any royalties or milestones inconnection with these contracts.

In addition, we havereceived a grant from the Walloon region of Belgium. This grant includesspecific criteria regarding employment and investment levels that need to bemet through 2006. If we do not meet the criteria, we will be required to refundall or a portion of amounts received under this grant. As of December 31,2004, the Company had received the entire grant amount of €825,000.This amount translates to $977,000 and $1.1 million at December 31, 2005and 2004, respectively.

**CriticalAccounting Estimates**

Our discussion and analysisof our results of operations and liquidity and capital resources are based onour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses. On an ongoing basis, we evaluate our estimates and judgments,including those related to revenue recognition, receivable collectibles, usefullives with respect to long-lived and intangible assets and valuation of commonstock, related stock options, and deferred tax assets. We base our estimates onhistorical and anticipated results and trends and on various other assumptionsthat we believe are reasonable under the circumstances, including assumptionsas to future events. These estimates form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparent fromother sources. By their nature, estimates are subject to an inherent degree ofuncertainty. Actual results may differ from our estimates. We believe that ourjudgment and assumptions with respect 

38

----

to thefollowing significant accounting policies are most critical to the accountingestimates used in the preparation of our consolidated financial statements.

***Revenue Recognition.******  ***We makesignificant assumptions and estimates relating to revenue recognition, whichinclude the expected term of the agreement and total expected cost. Ourassumptions and estimates may prove to be inaccurate. Therefore, although wemake every effort to ensure the accuracy of our estimates, any significantunanticipated changes in our estimates could have a material impact on revenuesand our results of operations.

Our revenue recognitionpolicies are in accordance with the Securities and Exchange Commission’s (SEC)Staff Accounting Bulletin No. 101, *Revenue Recognition inFinancial Statements*, as amended by SEC Staff Accounting Bulletin No. 104,*Revenue Recognition,* and Emerging IssuesTask Force Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables*.

Weenter into biopharmaceutical product development agreements with collaboratorsfor the research and development of therapeutic, diagnostic and other products.The terms of the agreements may include non-refundable signing and licensingfees, funding for research and development, milestone payments and royalties onany product sales derived from the collaborations. Non-refundable signing andlicensing fees are recognized as services are performed over the expected termof the collaboration. Funding for research and development, where the amountsrecorded are non-refundable, is recognized as the related expenses areincurred. Milestones that are based on designated achievements points and thatare considered at risk and substantive at the inception of the collaborationare recognized as earned when the corresponding payment is consideredreasonably assured. We evaluate whether milestones are at risk and substantivebased on the contingent nature of the milestone, specifically reviewing factorssuch as the technological and commercial risk that must be overcome and thelevel of the investment required. Milestones that are not considered at riskand substantive are recognized, when achieved, in proportion to the percentageof the collaboration completed through the date of achievement. The remainderis recognized as services are performed over the remaining term of thecollaboration. Royalties are recognized when earned. We evaluate allcollaborative agreements on a quarterly basis to determine the appropriaterevenue recognition for that period. The evaluation includes all of thepotential revenue components from each specific collaborative agreement.

We generally license ourpatent rights covering phage display as well as our proprietary phage displaylibraries on a non-exclusive basis to third parties for use in connection withthe research and development of therapeutic, diagnostic, and other products.Standard terms of the license patent rights agreements, for which we have nofuture obligations, generally include non-refundable signing fees,non-refundable license maintenance fees, development milestone payments androyalties on product sales. Signing fees and maintenance fees are recognizedratably over the period to which the payment applies. Perpetual patent licensesare recognized immediately if we have no future obligations. Standard terms ofthe proprietary phage display libraries agreements generally includenon-refundable signing fees, non-refundable license maintenance fees,development milestone payments and royalties on product sales. Signing fees andmaintenance fees are recognized ratably over the period to which the paymentapplies, which is normally between 3 and 5 years, but have been determined tobe up to 14 years. Upon the achievement of milestones under non-exclusive phagedisplay patent licenses and phage display libraries a portion of the milestoneequal payment to the percentage of the license agreement that has elapsed isrecognized as revenue. Milestone payments under these license arrangements arerecognized when the milestone is achieved if the Company has no futureobligations under the license, and royalties are recognized when they areearned.

Payments received thathave not met the appropriate criteria for revenue recognition are recorded asdeferred revenue. At December 31, 2005 and 2004, our deferred revenuerelated to product development agreements was $10.9 million and$9.8 million, respectively. Of the $10.9 million deferred at December 31,2005, $5.5 million, $1.4 million and $660,000 is expected to be recognized asrevenue in 2006, 2007 and 2008 respectively, and the remaining is expected tobe recognized over the next 13 years.

39

----

***Allowance for Doubtful Accounts.******  ***We estimatethe uncollectibility of our accounts receivable. When evaluating the adequacyof our allowance for doubtful accounts, we analyze our accounts receivableaging, historical bad debts, customer concentrations, customer credit-worthinessand current economic trends. If the financial condition of our customers wereto deteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required. Our accounts receivable balance net ofallowances for doubtful accounts was $1.7 million and $3.1 million atDecember 31, 2005 and 2004, respectively. At December 31, 2005 and2004 the provision for doubtful accounts was $105,000 and $75,000 respectively.

***Valuation of Long-Lived and Intangible Assets.******  ***We reviewlong-lived assets, including capitalized license rights, for impairment wheneverevents or changes in business circumstances indicate that the carrying amountof assets may not be fully recoverable or that the useful lives of these assetsare no longer appropriate. Factors considered important which could trigger animpairment review include the following:

·       Significantchange relative to historical or projected future operating results;

·       Significantchanges in the use of the assets or the strategy for the overall business;

·       Significantindustry or economic trends and developments.

Each impairment test isbased on a comparison of the undiscounted cash flow to the recorded value ofthe asset. When it is determined that the carrying value of intangibles andlong-lived assets may not be recoverable based upon the existence of one ormore of the above indicators of impairment, the asset is written down to itsestimated fair value on a discounted cash flow basis. Our intangible assets atthe end of 2005 consisted of licenses for antibody technology from thirdparties. The balance of our other intangible assets net of accumulatedamortization was $1.9 million and $2.4 million at December 31, 2005and 2004, respectively. No impairment losses have been recognized in any of theperiods presented in our consolidated financial statements.

**Related PartyTransactions**

Our Chairman, Presidentand Chief Executive Officer also serves as an outside director of GenzymeCorporation and was a consultant to Genzyme until 2001. Two of our otherdirectors are former directors of Genzyme and another was a senior advisor tothe Chief Executive Officer of Genzyme and a former officer.

We have a collaborationagreement with Genzyme for the development and commercialization of DX-88for HAE. Under this collaboration, Dyax and Genzyme have formed a joint venture,known as Dyax–Genzyme LLC (formerly known as Kallikrein LLC), through which wejointly own the rights to DX-88 for the treatment of HAE. Dyax andGenzyme are each responsible for approximately 50% of ongoing costs incurred inconnection with the development and commercialization of DX-88 for HAEand each will be entitled to receive approximately 50% of any profits realizedfrom it. In addition, we are entitled to receive potential milestone paymentsfrom Genzyme in connection with the development of DX-88. We received thefirst such milestone payment of $3.0 million for dosing the first patientin the pivotal clinical trial of DX-88 for HAE in December, 2005. Inaddition, we will be entitled to receive potential milestone payments of$10.0 million for the first FDA-approved product derived from DX-88,and up to $15.0 million for additional therapeutic indications developedunder the collaboration.

Genzyme has loaned us $7.0million under a senior promissory note secured by a continuing securityinterest in tangible and intangible personal property arising out of the DX-88program and our rights to revenues from licenses of its fundamental phagedisplay patents. The note is also subject to certain financial covenants, underwhich we must maintain at least $20.0 million in cash, cash equivalents orshort-term investments based on our quarterly consolidated financialstatements and at least one continued listing standard for the NASDAQ NationalMarket.

We pay interest on theGenzyme note at the prime rate, (7.25 % at December 31, 2005) plus 2%. Duringthe quarter ended June 30, 2005, we exercised our right to extend thematurity date of the note 

40

----

from May 31,2005 to May 31, 2007. At December 31, 2005 and 2004, we owed $54,000and $82,000, respectively, of interest on this note, which is included inaccounts payable and accrued expenses due to current nature of this liability.

All research anddevelopment expenses incurred by each party related to the HAE program arebilled to and reimbursed by Dyax–Genzyme LLC. Dyax and Genzyme are eachrequired to fund 50% of the forecasted monthly expenses of Dyax–Genzyme LLC, asneeded. We have accounted for our interest in Dyax–Genzyme LLC using the equitymethod of accounting. Under this method, the reimbursement of expenses to us isrecorded as a reduction to research and development expenses because itincludes funding that we provided to Dyax–Genzyme LLC. Our 50.01% share of Dyax–GenzymeLLC loss is recorded as an equity loss in joint venture (Dyax–Genzyme LLC) inthe consolidated statements of operations and comprehensive loss. At December 31,2005 and 2004, our investment in the joint venture was $782,000 and $254,000,respectively, which is recorded as an investment in joint venture (Dyax–GenzymeLLC) in the consolidated balance sheets.

We have evaluated thisagreement to determine if the related joint venture qualifies as a variableinterest entity under Financial Accounting Standards Board (FASB)Interpretation No. 46R, *Consolidation of VariableInterest Entities* (FIN 46R). Both we and Genzyme fund the operationsof Dyax–Genzyme LLC on a monthly basis and therefore under Paragraph 5a of FIN46R, the joint venture qualifies as a variable interest entity because itstotal equity investment at risk is not sufficient to finance its activitieswithout additional subordinated financial support. We have a financial interestin Dyax–Genzyme LLC. However, based on our analysis of the agreement, webelieve that our exposure to the expected losses of Dyax–Genzyme LLC are less thanGenzyme’s and therefore we are not the primary beneficiary of Dyax–Genzyme LLCunder Paragraph 17 of FIN 46R. Accordingly, we have not consolidated Dyax–Genzyme LLC.

During 1996, we signed twopatent license agreements with Genzyme under our standard license terms. Werecorded license revenues of $50,000, for each years ended December 31,2005, 2004 and 2003, in connection with the maintenance fees on these twoagreements. As of December 31, 2005 and 2004, there were no outstandingaccounts receivable due from Genzyme related to the patent license agreements.

During 2004, we signed alibrary license agreement with Genzyme consistent with our standard licenseterms. We received $1.3 million from Genzyme in 2004 and recorded licenserevenues of $225,000 and $275,000, for the years ended December 31, 2005and 2004, respectively, in connection with the technology access fees on thisagreement. Of the $1.3 million received under this agreement, approximately$750,000 has not been recognized as revenue and is included in deferred revenueon the consolidated balance sheet. This amount will be recognized ratably overthe next 40 months. As of December 31, 2005 and 2004, there were nooutstanding accounts receivable due from Genzyme related to the library licenseagreement.

**Tax LossCarryforwards**

As of December 31,2005, we had federal net operating loss (NOL) and research and experimentationcredit carryforwards of approximately $142.6 million and $17.9 million,respectively, which may be available to offset future federal income taxliabilities and which begin to expire in 2006. We have recorded a deferred taxasset of approximately $2.2 million reflecting the benefit of deductionsfrom the exercise of stock options. This deferred asset has been fully reserveduntil it is more likely than not that the benefit from the exercise of stockoptions will be realized. The benefit from this $2.2 million deferred tax assetwill be recorded as a credit to additional paid-in capital when realized. Asrequired by SFAS No. 109, our management has evaluated the positive andnegative evidence bearing upon the realizability of its deferred tax assets,which are comprised principally of NOL and research and experimentation creditcarryforwards. Management has determined at this time that it is more likelythan not that we will not recognize the 

41

----

benefitsof federal and state deferred tax assets and, as a result, a valuationallowance of approximately $79.9 million has been established at December 31,2005.

**RecentPronouncements**

In December 2004, theFinancial Accounting Standards Board, known as FASB, issued a revision to SFAS No. 123*,* also known as SFAS 123R, that amendsexisting accounting pronouncements for share-based payment transactionsin which an enterprise receives employee and certain non-employee services inexchange for (a) equity instruments of the enterprise or (b) liabilitiesthat are based on the fair value of the enterprise’s equity instruments or thatmay be settled by the issuance of such equity instruments. SFAS 123R eliminatesthe ability to account for share-based compensation transactions using APB 25and generally requires such transactions be accounted for using afair-value-based method. SFAS 123R would be applicable for awards that aregranted, modified, become vested, or settled in cash in annual periodsbeginning after June 15, 2005. SFAS 123R includes three transitionmethods: one that provides for prospective application and two that provide forretrospective application. The Company intends to adopt SFAS 123R prospectivelycommencing in the first quarter of the fiscal year ending December 31,2006. It is expected that the adoption of SFAS 123R will cause the Company torecord, as expense, a non-cash accounting charge approximating the fair valueof such share based compensation meeting the criteria outlined in theprovisions of SFAS 123R. The Company plans to adopt SFAS 123R on a modifiedprospective basis. The adoption of SFAS 123R will have a material impact on theCompany’s results of operations but not its operating cash flows. Futureresults will be affected by the number and value of additional equity awards aswell as the value of existing unvested equity awards.

In March 2005, theFASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations,” which is an interpretation of FASB Statement No. 143,“Accounting for Asset Retirement Obligations.” The interpretation requires thata liability for the fair value of a conditional asset retirement obligation berecognized if the fair value of the liability can be reasonably estimated. Theinterpretation is effective for years ending after December 15, 2005. Theinterpretation did not have a material impact on the Company’s results ofoperations, financial position or cash flows.

In May 2005, the FASBissued FASB Statement No. 154, “Accounting Changes and Error Corrections,a replacement of APB Opinion No. 20 Accounting Changes and FASB Statement No. 3,Reporting Accounting changes in Interim Financial Statements” (FAS 154). FAS154 provides guidance on the accounting for and reporting of accounting changesand error corrections. It established, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. FAS 154 also provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospectiveapplication is impracticable. The provisions of this Statement are effectivefor accounting changes and corrections of errors made in fiscal periodsbeginning after December 15, 2005.

**ImportantFactors That May Affect Future Operations and Results**

This Annual Report on Form 10-Kcontains forward-looking statements. These forward-lookingstatements appear principally in the sections entitled “Business” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”Forward-looking statements may appear in other sections of this report aswell. Forward-looking statements may appear in other sections of this report aswell. Generally, the forward-looking statements in this report use words like “believe,”“anticipate,” “plan,” “expect,” “intend,” “project,” “future,” “may,” “will,” “could,”“would” and similar expressions.

These risks anduncertainties are discussed in more detail in Item 1A—“Risk Factors” of this Form 10-K.

42

----

**ITEM 7A.**        QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cashand cash equivalents, and short-term investments. We place our investments inhigh-quality financial instruments, primarily U.S. Treasury notes and bills,which we believe are subject to limited credit risk. We currently do not hedgeinterest rate exposure. As of December 31, 2005, we had cash and cashequivalents, and short-term investments of $50.7 million, consisting of cashand short-term investments. Our short-term investments will decline by animmaterial amount if market interest rates increase, and therefore, ourexposure to interest rate changes is immaterial. Declines of interest ratesover time will, however, reduce our interest income from our short-terminvestments.

As of December 31, 2005, we had $11.6 millionoutstanding under long-term obligations. Interest rates on $4.6 million ofthese obligations are fixed and therefore are not subject to interest ratefluctuations. The interest rate on the remaining $7 million under theGenzyme promissory note is variable based on the prime interest rate and istherefore subject to interest rate fluctuations. A 2% increase in the primerate would result in an additional $140,000 in annual interest expense.

Most of our transactions are conducted in U.S.dollars. We have collaboration and technology license agreements with partieslocated outside of the United States. We also have a research facility locatedin Europe. Transactions under certain of the agreements between us and partieslocated outside of the United States, as well as transactions conducted by ourforeign facility are conducted in local foreign currencies. If exchange ratesundergo a change of up to 10%, we do not believe that it would have a materialimpact on our results of operations or cash flows.

43

----

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**Indexto Consolidated Financial Statements**

|                                                                                                                                  | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent  Registered Public Accounting Firm                                                                         |       | 45       |       |
| Consolidated Balance Sheets  as of December 31, 2005 and 2004                                                               |       | 47       |       |
| Consolidated Statements of  Operations and Comprehensive Loss for the years ended December 31, 2005,  2004 and 2003         |       | 48       |       |
| Consolidated Statements of  Changes in Stockholders’ Equity for the years ended  December 31, 2005, 2004 and 2003 |       | 49       |       |
| Consolidated Statements of Cash  Flows for the years ended December 31, 2005, 2004 and 2003                            |       | 50       |       |
| Notes to  Consolidated Financial Statements                                                                                      |       | 51       |       |
| Financial Statement Schedule                                                                                                     |       | 75       |       |

 

44

----

**Report of Independent Registered Public AccountingFirm**

To****the Board ofDirectors and Stockholders of Dyax Corp.:

We have completedintegrated audits of Dyax Corp.’s 2005 and 2004 consolidated financialstatements and of its internal control over financial reporting as of December 31,2005, and an audit of its 2003 consolidated financial statements in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). Our opinions, based on ouraudits, are presented below.

*Consolidated financial statements and financial statement schedule*

In our opinion, the consolidated financial statements listed inthe accompanying index presentfairly, in all material respects, the financial position of Dyax Corp. and itssubsidiaries****at December 31, 2005 and2004, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2005 in conformity withaccounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the accompanying index presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements. These financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule****basedon our audits. We conducted our audits of these statements in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.An audit of financial statements includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial Reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of December 31, 2005 based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria.Furthermore, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2005, based on criteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for 

45

----

external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.
| /s/ PricewaterhouseCoopers  LLP |
|---------------------------------|
| Boston,  Massachusetts          |
| March 3,  2006             |

 

46

----

**Dyax Corp. andSubsidiariesConsolidated Balance Sheets**

| ** **                                                                                                                                                                                                        | ** ** | **  December 31,    2005**       | ** ** | **  December 31,    2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **(In thousands, except share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                        |       |
| Current assets:                                                                                                                                                                                                   |       |                                                      |       |                                                |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                        |       |                                                      | $          | 8,640                                               |       |   |   | $ | 6,978 |   |   |
| Short-term investments                                                                                                                                                                                            |       |                                                      | 42,024     |                                                |       |   | 50,163 |   |   |
| Accounts receivable, net  of allowances for doubtful accounts of $105 and $75 at December 31, 2005  and 2004 respectively                                                                                    |       |                                                      | 1,677      |                                                |       |   | 3,089 |   |   |
| Prepaid research and  development                                                                                                                                                                                 |       |                                                      | 2,159      |                                                |       |   | 1,955 |   |   |
| Due from joint venture  (Dyax-Genzyme LLC)                                                                                                                                                                        |       |                                                      | 2,457      |                                                |       |   | 255 |   |   |
| Other current assets                                                                                                                                                                                              |       |                                                      | 1,675      |                                                |       |   | 1,120 |   |   |
| Total current assets                                                                                                                                                                                              |       |                                                      | 58,632     |                                                |       |   | 63,560 |   |   |
| Fixed assets, net                                                                                                                                                                                                 |       |                                                      | 10,160     |                                                |       |   | 11,867 |   |   |
| Intangibles, net                                                                                                                                                                                                  |       |                                                      | 1,935      |                                                |       |   | 2,437 |   |   |
| Restricted cash                                                                                                                                                                                                   |       |                                                      | 4,408      |                                                |       |   | 4,642 |   |   |
| Investment in joint  venture (Dyax-Genzyme LLC)                                                                                                                                                                   |       |                                                      | 782        |                                                |       |   | 254 |   |   |
| Total assets                                                                                                                                                                                                      |       |                                                      | $          | 75,917                                              |       |   |   | $ | 82,760 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                    |       |
| Current liabilities:                                                                                                                                                                                              |       |                                                      |       |                                                |       |   |   |   |   |
| Accounts payable and  accrued expenses                                                                                                                                                                            |       |                                                      | $          | 6,986                                               |       |   |   | $ | 9,611 |   |   |
| Current portion of  deferred revenue                                                                                                                                                                              |       |                                                      | 5,450      |                                                |       |   | 5,280 |   |   |
| Due to joint venture  (Dyax-Genzyme LLC)                                                                                                                                                                          |       |                                                      | 2,670      |                                                |       |   | — |   |   |
| Current portion of long-term  obligations                                                                                                                                                                         |       |                                                      | 1,770      |                                                |       |   | 1,837 |   |   |
| Total current  liabilities                                                                                                                                                                                        |       |                                                      | 16,876     |                                                |       |   | 16,728 |   |   |
| Deferred revenue                                                                                                                                                                                                  |       |                                                      | 5,425      |                                                |       |   | 4,485 |   |   |
| Obligation to related  party                                                                                                                                                                                      |       |                                                      | 7,000      |                                                |       |   | 7,000 |   |   |
| Long-term  obligations                                                                                                                                                                                            |       |                                                      | 2,819      |                                                |       |   | 3,645 |   |   |
| Deferred rent                                                                                                                                                                                                     |       |                                                      | 1,847      |                                                |       |   | 1,914 |   |   |
| Other long-term  liabilities                                                                                                                                                                                      |       |                                                      | 1,012      |                                                |       |   | 1,157 |   |   |
| Total liabilities                                                                                                                                                                                                 |       |                                                      | 34,979     |                                                |       |   | 34,929 |   |   |
| Commitments and Contingencies (Notes 8, 9, 10,  12 and 17)                                                                                                                                                   |       |                                                      |       |                                                |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                        |       |                                                      |       |                                                |       |   |   |   |   |
| Preferred stock, $0.01  par value; 1,000,000 shares authorized at December 31, 2005 and 2004; 0  shares issued and outstanding at December 31, 2005 and 2004                                            |       |                                                      | —     |                                                |       |   | — |   |   |
| Common stock, $0.01 par  value; 125,000,000 shares authorized at December 31, 2005 and 2004;  38,028,363 and 31,547,627 shares issued and outstanding at  December 31, 2005 and 2004, respectively |       |                                                      | 380        |                                                |       |   | 315 |   |   |
| Additional paid-in  capital                                                                                                                                                                                       |       |                                                      | 222,437    |                                                |       |   | 198,446 |   |   |
| Accumulated deficit                                                                                                                                                                                               |       |                                                      | (182,300   | )                                                   |       |   | (151,356 | ) |   |
| Deferred compensation                                                                                                                                                                                             |       |                                                      | —     |                                                |       |   | — |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                           |       |                                                      | 421        |                                                |       |   | 426 |   |   |
| Total stockholders’  equity                                                                                                                                                                                  |       |                                                      | 40,938     |                                                |       |   | 47,831 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                   |       |                                                      | $          | 75,917                                              |       |   |   | $ | 82,760 |   |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

47

----

**Dyax Corp. and SubsidiariesConsolidated Statements of Operations and ComprehensiveLoss**

| ** **                                                                                  | ** ** | **Years Ended December 31,**                                            | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands, except share and per share data)** | ** ** |
| Product  development and license fee revenues                                               |       | $                                                                                      | 19,859     |   | $ | 16,590 |   | $ | 16,853 |   |
| Research and  development:                                                                  |       |                                                                                   |       |   |   |   |   |
| Research and development                                                                    |       | 47,376                                                                                 |       | 39,432 |   | 29,990 |   |
| Less research and development expenses reimbursed by joint  venture (Dyax-Genzyme LLC) |       | (20,688                                                                                | )          | (10,408 | ) | (5,203 | ) |
| Net research and development                                                                |       | 26,688                                                                                 |       | 29,024 |   | 24,787 |   |
| Equity loss in joint venture (Dyax-Genzyme LLC)                                             |       | 11,952                                                                                 |       | 5,988 |   | 2,243 |   |
| General and administrative                                                                  |       | 12,784                                                                                 |       | 14,451 |   | 13,205 |   |
| Total operating  expenses                                                                   |       | 51,424                                                                                 |       | 49,463 |   | 40,235 |   |
| Loss from  operations                                                                       |       | (31,565                                                                                | )          | (32,873 | ) | (23,382 | ) |
| Other income (expense):                                                                     |       |                                                                                   |       |   |   |   |   |
| Interest income                                                                             |       | 1,671                                                                                  |       | 786 |   | 208 |   |
| Interest expense                                                                            |       | (1,050                                                                                 | )          | (1,027 | ) | (1,320 | ) |
| Total other income (expense), net                                                           |       | 621                                                                                    |       | (241 | ) | (1,112 | ) |
| Loss from  continuing operations                                                            |       | (30,944                                                                                | )          | (33,114 | ) | (24,494 | ) |
| Gain on sale of Biotage,  net of tax                                                        |       | —                                                                                 |       | — |   | 18,959 |   |
| Loss from  discontinued operations of Biotage, net of tax                                   |       | —                                                                                 |       | — |   | (1,880 | ) |
| Net loss                                                                                    |       | (30,944                                                                                | )          | (33,114 | ) | (7,415 | ) |
| Other comprehensive  (loss) income:                                                         |       |                                                                                   |       |   |   |   |   |
| Foreign currency translation adjustments                                                    |       | (50                                                                                    | )          | (27 | ) | 36 |   |
| Unrealized loss on short-term investments                                                   |       | 45                                                                                     |       | (87 | ) | — |   |
| Comprehensive  loss                                                                         |       | $                                                                                      | (30,949    | ) | $ | (33,228 | ) | $ | (7,379 | ) |
| Basic and diluted loss  per share:                                                          |       |                                                                                   |       |   |   |   |   |
| Loss from continuing operations                                                             |       | $                                                                                      | (0.87      | ) | $ | (1.06 | ) | $ | (1.04 | ) |
| Gain on sale of Biotage                                                                     |       | —                                                                                 |       | — |   | 0.81 |   |
| Loss from discontinued operations of Biotage                                                |       | —                                                                                 |       | — |   | (0.08 | ) |
| Net loss                                                                                    |       | $                                                                                      | (0.87      | ) | $ | (1.06 | ) | $ | (0.31 | ) |
| Shares used in computing  basic and diluted net loss per share                              |       | 35,455,782                                                                             |       | 31,207,218 |   | 23,546,524 |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

48

----

**Dyax Corp. and SubsidiariesConsolidated Statements of Changes in Stockholders’EquityFor the years ended December 31, 2005, 2004 and 2003(In thousands, except share data)**

| ** **                                                 | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | ** **       | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|-----------------|------------|------------------|------------|------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **      | ** ** | **Other**        | ** ** | ** **             | ** ** |
| ** **                                                 | ** ** | ** **            | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Deferred**     | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Shares**            | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Deficit**     | ** ** | **Compensation** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance at December 31, 2002                          |       | 19,705,040            |       |           | $          | 197         |       |            |       | $                | 141,637    |                   |       |       | $          | (110,827 | ) |   |   | $ | (668 | ) |   |   | $ | 504 |   |   | $ | 30,843 |   |
| Exercise of stock options                                  |       | 351,703               |       |           | 4          |        |       |            | 786        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 790 |   |
| Issuance of common stock for employee stock purchase  plan |       | 109,389               |       |           | 1          |        |       |            | 162        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 163 |   |
| Sale of common stock, net of expenses of $521              |       | 4,721,625             |       |           | 47         |        |       |            | 8,214      |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 8,261 |   |
| Deferred compensation                                      |       | —                |       |           | —     |        |       |            | (66        | )                |       |                   | —     |       |       |   | 621 |   |   |   | — |   |   | 555 |   |
| Compensation expense associated with stock options         |       | —                |       |           | —     |        |       |            | 712        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 712 |   |
| Foreign currency translation                               |       | —                |       |           | —     |        |       |            | —     |             |       |                   |       |       |       |   | — |   |   |   | 36 |   |   | 36 |   |
| Net Loss                                                   |       | —                |       |           | —     |        |       |            | —     |             |       |                   | (7,415     | )          |       |   | — |   |   |   | — |   |   | (7,415 | ) |
| Balance at December 31, 2003                          |       | 24,887,757            |       |           | 249        |        |       |            | 151,445    |             |       |                   | (118,242   | )          |       |   | (47 | ) |   |   | 540 |   |   | 33,945 |   |
| Exercise of stock options                                  |       | 632,414               |       |           | 6          |        |       |            | 1,924      |             |       |                   |       |       |       |   |   |   |   |   |   |   |   | 1,930 |   |
| Issuance of common stock for employee stock purchase  plan |       | 27,456                |       |           | —     |        |       |            | 124        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 124 |   |
| Sale of common stock, net of expenses of $215              |       | 6,000,000             |       |           | 60         |        |       |            | 44,689     |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 44,749 |   |
| Deferred compensation                                      |       | —                |       |           | —     |        |       |            |       |             |       |                   | —     |       |       |   | 47 |   |   |   | — |   |   | 47 |   |
| Compensation expense associated with stock options         |       | —                |       |           | —     |        |       |            | 264        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 264 |   |
| Unrealized loss on short-term investments                  |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | (87 | ) |   | (87 | ) |
| Foreign currency translation                               |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | (27 | ) |   | (27 | ) |
| Net Loss                                                   |       | —                |       |           | —     |        |       |            | —     |             |       |                   | (33,114    | )          |       |   | — |   |   |   |   |   |   | (33,114 | ) |
| Balance at December 31, 2004                          |       | 31,547,627            |       |           | 315        |        |       |            | 198,446    |             |       |                   | (151,356   | )          |       |   | — |   |   |   | 426 |   |   | 47,831 |   |
| Exercise of stock options                                  |       | 118,947               |       |           | 2          |        |       |            | 264        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 266 |   |
| Issuance of common stock for employee stock purchase  plan |       | 46,789                |       |           |       |        |       |            | 222        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 222 |   |
| Sale of common stock, net of expenses of $200              |       | 6,315,000             |       |           | 63         |        |       |            | 23,481     |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 23,544 |   |
| Compensation expense associated with stock options         |       | —                |       |           | —     |        |       |            | 24         |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 24 |   |
| Unrealized loss on short-term investments                  |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | 45 |   |   | 45 |   |
| Foreign currency translation                               |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | (50 | ) |   | (50 | ) |
| Net Loss                                                   |       | —                |       |           |       |        |       |            |       |             |       |                   | (30,944    | )          |       |   | — |   |   |   | — |   |   | (30,944 | ) |
| Balance at  December 31, 2005                         |       | 38,028,363            |       |           | $          | 380         |       |            |       | $                | 222,437    |                   |       |       | $          | (182,300 | ) |   |   | $ | — |   |   |   | $ | 421 |   |   | $ | 40,938 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

49

 

----

**Dyax Corp. andSubsidiariesConsolidated Statements of Cash Flows**

| ** **                                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003 (revised)** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands)**                     | ** ** |
| **Cash flows from operating activities:**                                                                     |       |                                        |       |   |   |   |   |   |   |
| Net loss                                                                                                      |       | $                                           | (30,944    | ) | $ | (33,114 | ) |   | $ | (7,415 | ) |   |
| Gain on sale of Biotage,  net of tax                                                                          |       | —                                      |       | — |   |   | (18,959 | ) |   |
| Loss for discontinued  operations, net of tax                                                                 |       | —                                      |       | — |   |   | 1,880 |   |   |
| Adjustments to reconcile net loss to net cash used in  operating activities:                                  |       |                                        |       |   |   |   |   |   |   |
| Amortization of purchased  premium/discount                                                                   |       | (733                                        | )          | 754 |   |   | — |   |   |
| Depreciation and  amortization of fixed assets                                                                |       | 3,077                                       |       | 3,476 |   |   | 3,277 |   |   |
| Amortization of  intangibles                                                                                  |       | 502                                         |       | 500 |   |   | 500 |   |   |
| Amortization of deferred  rent                                                                                |       | (235                                        | )          | (235 | ) |   | (235 | ) |   |
| Loss on disposal of fixed  assets                                                                             |       | 19                                          |       | 24 |   |   | 24 |   |   |
| Compensation expenses  associated with stock options                                                          |       | 24                                          |       | 311 |   |   | 1,267 |   |   |
| Equity loss in joint  venture (Dyax-Genzyme LLC)                                                              |       | 11,952                                      |       | 5,988 |   |   | 2,243 |   |   |
| Provision for doubtful  accounts                                                                              |       | 30                                          |       | — |   |   | — |   |   |
| Changes in operating assets and liabilities, net of  divestiture                                              |       |                                        |       |   |   |   |   |   |   |
| Accounts receivable                                                                                           |       | 1,382                                       |       | 1,594 |   |   | (1,611 | ) |   |
| Due from joint venture  (Dyax-Genzyme LLC)                                                                    |       | (2,202                                      | )          | (255 | ) |   | — |   |   |
| Prepaid research and  development, and other assets                                                           |       | (781                                        | )          | 296 |   |   | (1,342 | ) |   |
| Accounts payable and  accrued expenses                                                                        |       | (2,356                                      | )          | (3,014 | ) |   | 4,567 |   |   |
| Due to joint venture  (Dyax-Genzyme LLC)                                                                      |       | 950                                         |       | — |   |   | — |   |   |
| Deferred revenue                                                                                              |       | 1,110                                       |       | 2,092 |   |   | 506 |   |   |
| Other long-term  liabilities                                                                                  |       | (88                                         | )          | 323 |   |   | 378 |   |   |
| Net cash used in  operating activities                                                                        |       | (18,293                                     | )          | (21,260 | ) |   | (14,920 | ) |   |
| **Cash flows from investing activities:**                                                                     |       |                                        |       |   |   |   |   |   |   |
| Purchase of short-term  investments                                                                           |       | (106,867                                    | )          | (51,004 | ) |   | — |   |   |
| Proceeds from maturity of  short term investments                                                             |       | 115,784                                     |       | — |   |   | — |   |   |
| Purchase of fixed assets                                                                                      |       | (1,440                                      | )          | (2,305 | ) |   | (444 | ) |   |
| Sale of fixed assets                                                                                          |       | 22                                          |       | — |   |   | — |   |   |
| Cash received for sale of  Biotage                                                                            |       | —                                      |       | 5,000 |   |   | 25,427 |   |   |
| Restricted cash                                                                                               |       | 199                                         |       | 597 |   |   | 507 |   |   |
| Notes receivable,  employees                                                                                  |       | —                                      |       | — |   |   | 1,320 |   |   |
| Licensed patent  technology                                                                                   |       | —                                      |       | (20 | ) |   | (2,000 | ) |   |
| Investment in joint  venture (Dyax-Genzyme LLC)                                                               |       | (10,760                                     | )          | (5,425 | ) |   | (3,060 | ) |   |
| Net cash provided by (used  in) investing activities                                                          |       | (3,062                                      | )          | (53,157 | ) |   | 21,750 |   |   |
| **Cash flows from financing activities:**                                                                     |       |                                        |       |   |   |   |   |   |   |
| Proceeds from the  issuance of common stock under employee stock purchase plan and exercise of  stock options |       | 488                                         |       | 2,054 |   |   | 953 |   |   |
| Net proceeds from common  stock offerings                                                                     |       | 23,544                                      |       | 44,749 |   |   | 8,261 |   |   |
| Proceeds from long-term  obligations                                                                          |       | 941                                         |       | 1,408 |   |   | 171 |   |   |
| Repayment of long-term  obligations                                                                           |       | (1,889                                      | )          | (3,304 | ) |   | (3,431 | ) |   |
| Net cash provided by  financing activities                                                                    |       | 23,084                                      |       | 44,907 |   |   | 5,954 |   |   |
| Effect of foreign  currency translation on cash balances                                                      |       | (67                                         | )          | (20 | ) |   | 30 |   |   |
| Net cash used in  operating activities of discontinued operations                                             |       | —                                      |       | — |   |   | (3,796 | ) |   |
| Net cash provided by  investing activities of discontinued operations                                         |       | —                                      |       | — |   |   | 4,269 |   |   |
| Net cash used in  financing activities of discontinued operations                                             |       | —                                      |       | — |   |   | (4,978 | ) |   |
| Net increase (decrease)  in cash and cash equivalents                                                         |       | 1,662                                       |       | (29,530 | ) |   | 8,309 |   |   |
| Cash and cash equivalents  at beginning of the period                                                         |       | 6,978                                       |       | 36,508 |   |   | 28,199 |   |   |
| Cash and cash equivalents  at end of the period                                                               |       | $                                           | 8,640      |   | $ | 6,978 |   |   | $ | 36,508 |   |   |
| **Supplemental disclosure of cash flow  information:**                                                        |       |                                        |       |   |   |   |   |   |   |
| Interest paid                                                                                                 |       | $                                           | 1,077      |   | $ | 1,432 |   |   | $ | 1,104 |   |   |
| **Supplemental disclosure of non cash investing  and financing activities:**                                  |       |                                        |       |   |   |   |   |   |   |
| Acquisition of property  and equipment under long-term obligations                                            |       | $                                           | 204        |   | $ | 212 |   |   | $ | 306 |   |   |
| Cash paid for licensed patent technology                                                                      |       | $                                           | —     |   | $ | 20 |   |   | $ | 2,000 |   |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

50

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements**

**1.   Nature of Business**

Dyax Corp. (Dyax or the Company) is abiopharmaceutical company focused on the discovery, development andcommercialization of novel biotherapeutics for unmet medical needs, with anemphasis on cancer and inflammatory indications.  To help achieve this goal, Dyax has developeda proprietary drug discovery technology to identify antibody, small protein andpeptide compounds for clinical development. Dyax also leverages this technologythrough collaborations and licenses designed to generate revenues throughfunded research, license fees, milestone payments and royalties.

On October 29, 2003, the Company completed thesale of its wholly owned subsidiary know as Biotage. The operations of Biotagefor the period ended October 29, 2003 are presented as discontinuedoperations in the consolidated statements of operations and comprehensive loss,and the statements of cash flows.

The Company is subject torisks common to companies in the biotechnology industry including, but notlimited to, risks of preclinical and clinical trials, dependence oncollaborative arrangements, development by the Company or its competitors ofnew technological innovations, dependence on key personnel, protection ofproprietary technology, and compliance with FDA and other governmentalregulations and approval requirements.

**2.   Accounting Policies**

*Basisof Consolidation:*   The accompanying consolidatedfinancial statements include the accounts of the Company and its Europeanresearch subsidiaries Dyax S.A. and Dyax BV (formerly known as TargetQuest BV),and through October 29, 2003, the date of disposal, Biotage and itsforeign sales subsidiaries. All inter-company accounts and transactions havebeen eliminated.

*Reclassifications:*   Certainreclassifications have been made to the prior years’ financial statements toconform to current presentation.

*Useof Estimates:*   The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make certain estimates andassumptions that affect the amounts of assets and liabilities reported anddisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of revenue and expenses during thereporting periods. The significant estimates and assumptions in these financialstatements include revenue recognition, receivable collectibility, useful liveswith respect to long lived assets, valuation of stock options, accrued expensesand tax valuation reserves. Actual results could differ from those estimates.

*Concentrationof Credit Risk:*   Financial instruments thatpotentially subject the Company to concentrations of credit risk consistprincipally of cash, cash equivalents, short-tem investments and trade accountsreceivable. At December 31, 2005 and 2004, approximately 83% and 93% ofthe Company’s cash, cash equivalents and short-term-investments were investedin money market funds backed by U.S. Treasury obligations, and U.S. Treasurynotes and bills, and obligations of U.S. government agencies held by onefinancial institution. The Company maintains balances in various operatingaccounts in excess of federally insured limits.

The Company provides most of its services and licensesits technology to pharmaceutical and biomedical companies worldwide.Concentrations of credit risk with respect to trade receivable balances arelimited due to the diverse number of customers comprising the Company’scustomer base. Receivable 

51

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**2.**   Accounting Policies (Continued)

write offs in 2005, 2004and 2003 were nominal. One customer accounted for approximately 24% and 52% ofthe Company’s accounts receivable balance at December 31, 2005 and 2004,respectively. Another customer accounted for approximately 18% and 11% of theCompany’s accounts receivable balance at December 31, 2005 and 2004. Oneother customer accounted for approximately 22% of the Company’s accountsreceivable balance at December 31, 2005 and another customer accounted forapproximately 21% of the Company’s accounts receivable balance at December 31,2004.

*Cashand Cash Equivalents:*   All highly liquidinvestments purchased with an original maturity of three months or less areconsidered to be cash equivalents. Cash and cash equivalents consistprincipally of cash and U.S. Treasury funds. The Company currently invests itsexcess cash in U.S. Treasury funds.

*Short-termInvestments:*   Short-term investments consistprimarily of investments with original maturities greater than ninety days andless than one year when purchased. The Company considers its investmentportfolio of short-term investments available-for-sale as defined by Statementof Financial Accounting Standards (SFAS) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*. Accordingly, these investments are recorded at fairvalue, which is based on quoted market prices. As of December 31, 2005,the Company’s short-term investments consist of U.S. Treasury notes and billswith an amortized cost and estimated fair value of $42.0 million and had anunrealized loss of $42,000, which is recorded in other comprehensive income onthe accompanying consolidated balance sheets. All short-term investments maturein one year or less. As of December 31, 2004 the company’s short-terminvestments consisted of U.S. Treasury notes and bills, and obligations of U.S.government agencies with an amortized cost of $50.3 million, estimated fairvalue of $50.2 million and had an unrealized loss of $87,000, which is recordedin other comprehensive income on the accompanying consolidated balance sheets.

*FixedAssets:*   Property and equipment are recorded atcost and depreciated over the estimated useful lives of the related assetsusing the straight-line method. Laboratory and production equipment, andfurniture and office equipment are depreciated over a three to seven yearperiod. Leasehold improvements are stated at cost and are amortized over thelesser of the non-cancelable term of the related lease or their estimateduseful lives. Leased equipment is amortized over the lesser of the life of thelease or their estimated useful lives. Maintenance and repairs are charged toexpense as incurred. When assets are retired or otherwise disposed of, the costof these assets and related accumulated depreciation and amortization areeliminated from the balance sheet and any resulting gains or losses areincluded in operations in the period of disposal.

*Intangibles:*   Intangiblesare recorded at cost and amortized over the estimated useful lives.

*Impairmentof Long-Lived Assets:*   The Company reviews itslong-lived assets for impairment whenever events or changes in businesscircumstances indicate that the carrying amount of assets may not be fullyrecoverable or that the useful lives of these assets are no longer appropriate.Each impairment test is based on a comparison of the undiscounted cash flow tothe recorded value of the asset. If an impairment is indicated, the asset iswritten down to its estimated fair value on a discounted cash flow basis.

*RevenueRecognition:*   The Company’s revenue recognitionpolicies are in accordance with the Securities and Exchange Commission’s (SEC)Staff Accounting Bulletin No. 101, *Revenue Recognition inFinancial Statements*, as amended by SEC Staff Accounting Bulletin No. 104,*Revenue Recognition,* and Emerging IssuesTask Force Issue No. 00-21, *Revenue Arrangements withMultiple Deliverables*.

52

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**2.**   Accounting Policies (Continued)

The Company enters into biopharmaceutical productdevelopment agreements with collaborative partners for the research anddevelopment of therapeutic, diagnostic and separations products. The terms ofthe agreements may include non-refundable signing and licensing fees, fundingfor research and development, milestone payments and royalties on any productsales derived from collaborations. Non-refundable signing and licensing feesare recognized as services are performed over the expected term of thecollaboration. Funding for research and development, where the amounts recordedare non-refundable is recognized as revenue as the related expenses areincurred. Milestones that are based on designated achievements points and thatare considered at risk and substantive at the inception of the collaborationare recognized as earned when the corresponding payment is consideredreasonably assured. The Company evaluates whether milestones are at risk andsubstantive based on the contingent nature of the milestone, specificallyreviewing factors such as the technological and commercial risk that must beovercome and the level of the investment required. Milestones that are notconsidered at risk and substantive are recognized, when achieved, in proportionto the percentage of the collaboration completed through the date ofachievement. The remainder is recognized as services are performed over theremaining term of the collaboration. Royalties are recognized when earned.Costs of revenues related to product development and license fees areclassified as research and development in the consolidated statements ofoperations and comprehensive loss. The Company evaluates all collaborativeagreements on a quarterly basis to determine the appropriate revenuerecognition for that period. The evaluation includes all of the potentialrevenue components from each specific collaborative agreement.

Debiopharm S.A. accounted for approximately 31%, 36%and 25% of product development and license fee revenues in 2005, 2004 and 2003,respectively. Bracco Imaging S.p.A accounted for approximately 11%, 11% and 21%of product development and license fee revenues in 2005, 2004 and 2003,respectively.

The Company generally licenses its patent rightscovering phage display as well as its proprietary phage display libraries on anon-exclusive basis to third parties for use in connection with the researchand development of therapeutic, diagnostic, and other products. Standard termsof the license patent rights agreements, for which the Company has no futureobligations, generally include non-refundable signing fees, non-refundablelicense maintenance fees, development milestone payments and royalties onproduct sales. Signing fees and maintenance fees are recognized ratably overthe period to which the payment applies. Perpetual patent licenses arerecognized immediately if the Company has no future obligations. Standard termsof the proprietary phage display libraries agreements generally includenon-refundable signing fees, non-refundable license maintenance fees,development milestone payments and royalties on product sales. Signing fees andmaintenance fees are recognized ratably over the period to which the paymentapplies. Upon the achievement of a milestone under non-exclusive phage displaypatent licenses or phage display libraries a portion of the milestone equalpayment to the percentage of the license period that has elapsed is recognizedas revenue. The remainder is recognized over the remaining term of the licenseagreement. Milestone payments under these license arrangements are recognizedwhen the milestone is achieved if the Company has no future obligations underthe license. Royalties are recognized when they are earned.

Payments received that have not met the appropriatecriteria for revenue recognition are recorded as deferred revenue.

53

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**2.**   Accounting Policies (Continued)

The Company has received a grant from the Walloonregion of Belgium, which is included in long-term liabilities on theconsolidated balance sheet. This grant includes specific criteria regardingemployment and corporate investment that need to be met through 2006. If theCompany does not meet the criteria, it will be required to refund all or aportion of amounts received under this grant. As of December 31, 2004, theCompany had received the entire grant amount of €825,000.This amount translates to $977,000 and $1.1 million at December 31, 2005and 2004, respectively.

*Guarantees:*   InNovember 2002, the Financial Accounting Standards Board (FASB) issued FIN No. 45*Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers*. Thefollowing is a summary of our agreements that the Company has determined arewithin the scope of FIN No. 45:

The Company generally does not provide indemnificationto licensees of its phage display technology. The Company does generallyprovide indemnifications for claims of third parties that arise out ofactivities that the Company performs under its collaboration, productdevelopment and cross-licensing agreements. The maximum potential amountof future payments the Company could be required to make under theindemnification provisions in some instances may be unlimited. The Company hasnot incurred any costs to defend lawsuits or settle claims related to anyindemnification obligations under its license agreements. As a result, theCompany believes the estimated fair value of these obligations is minimal. TheCompany has no liabilities recorded for any of its indemnification obligationsrecorded as of December 31, 2005 and 2004.

*Investmentin Joint Venture (Dyax–Genzyme LLC):*   In September 2003,Genzyme and Dyax formed a joint venture, Dyax–Genzyme LLC (the LLC), formerlyknown as Kallikrein LLC, to manage the DX-88 program for HAE. Dyax andGenzyme hold a 50.01% and 49.99% interest in the LLC, respectively. Allresearch and development expenses incurred by each party related to the HAEprogram are billed to and reimbursed by the LLC. The Company presents thisreimbursement as a reduction in research and development expenses because itincludes funding that the Company provided to the LLC. The Company hasevaluated this agreement to determine if the related joint venture qualifies asa variable interest entity under FASB Interpretation No. 46R, *Consolidation of Variable Interest Entities* (FIN 46R). Genzymeand Dyax fund the operations of the LLC on a monthly basis and therefore underParagraph 5a of FIN 46R, the joint venture qualifies as a variable interestentity because its total equity investment at risk is not sufficient to financeits activities without additional subordinated financial support. The Companyhas a financial interest in the LLC. However, based on its analysis of theagreement, the Company believes that its exposure to the expected losses of theLLC are slightly less than Genzyme’s and therefore is not the primarybeneficiary of the LLC under Paragraph 17 of FIN 46R. Accordingly, the Companyhas not consolidated the LLC. The Company has accounted for its interest in theLLC using the equity method of accounting. Dyax’s 50.01% share of the jointventure’s loss is recorded as an Equity Loss in Joint Venture (Dyax–GenzymeLLC).

*Researchand Development:*   Research and development costsinclude all direct costs, including salaries and benefits for research anddevelopment personnel, outside consultants, costs of clinical trials, sponsoredresearch, clinical trials insurance, other outside costs, depreciation andfacility costs related to the development of drug candidates. These costs arepartially offset by the reimbursement of expenses by the LLC. These costs havebeen charged to research and development expense as incurred. Prepaid researchand development on the consolidated balance sheets represents external drugmanufacturing 

54

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**2.**   Accounting Policies (Continued)

costs, and research anddevelopment service costs that have been paid for in absence of the relatedproduct being received or the services being performed.

*IncomeTaxes:*   The Company utilizes the asset andliability method of accounting for income taxes as set forth in SFAS No. 109,*Accounting for Income Taxes* (SFASNo. 109). Under this method, deferred tax assets and liabilities arerecognized for the expected future tax consequences of temporary differencesbetween the carrying amounts and the tax basis of assets and liabilities usingthe current statutory tax rates.

*Translationof Foreign Currencies:*   Assets and liabilities ofthe Company’s foreign subsidiaries are translated at period end exchange rates.Amounts included in the statements of operations are translated at the averageexchange rate for the period. The resulting currency translation adjustmentsare made directly to a separate component of stockholders’ equity in theconsolidated balance sheets. For the year ending December 31, 2005 and2004 losses from transactions in foreign currencies were $50,000 and $27,000and for the year ending December 31, 2003 gains from transactions inforeign currencies were $36,000, which are included in the consolidatedstatements of operations and comprehensive loss.

*StockOptions:*   At December 31, 2005, the Companyhas stock-based employee compensation plans, which are described morefully in Note 11. The Company uses the intrinsic value method prescribedunder the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations in accounting for its plans. Stock-basedemployee compensation cost is reflected as an operating expense, as thedifference between the exercise price and the market value of the underlying commonstock on the date of grant. The following table illustrates the effect on netloss and loss per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*(SFAS No. 123), to stock-basedemployee compensation. The fair value of each stock option granted is estimatedunder the Black-Scholes option pricing model on the grant date.

| ** **                                                                                                      | ** ** | **Year Ended December 31,**                         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| Net loss as  reported                                                                                           |       | $                                                                  | (30,944    | ) | $ | (33,114 | ) | $ | (7,415 | ) |
| Stock-based  employee compensation included in net loss as reported                                             |       | 24                                                                 |       | 312 |   | 1,267 |   |
| Less: Total stock-based  employee compensation expense determined under fair value based method for  all awards |       | (8,563                                                             | )          | (10,890 | ) | (10,178 | ) |
| Pro forma net  loss                                                                                             |       | $                                                                  | (39,483    | ) | $ | (43,692 | ) | $ | (16,326 | ) |
| Basic and diluted  net loss per share as reported                                                               |       | $                                                                  | (0.87      | ) | $ | (1.06 | ) | $ | (0.31 | ) |
| Pro forma basic and  diluted net loss per share                                                                 |       | $                                                                  | (1.11      | ) | $ | (1.40 | ) | $ | (0.69 | ) |

 

The pro forma effects of applying SFAS No. 123 inthis pro forma disclosure are not indicative of future amounts. The Companyanticipates granting additional awards in future years.

On December 28, 2005, the Company approved anamendment to accelerate the vesting of approximately 713,516 unvested, “out-of-the-money,”stock options granted to current employees, including executive officers, ofthe Company.  For this purpose, a stockoption was considered “out-of-the-money” if the option exercise price wasgreater than $6.00 per share. The closing price of Dyax’s common 

55

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**2.**   Accounting Policies (Continued)

stock on December 27,2005, the day before the date the Company approved the acceleration of vestingof “out-of-the-money” options, was $4.92. The purpose of the acceleration is toenable the Company to avoid recognizing compensation expense associated withthese options in future periods in its consolidated statements of operations,upon effectiveness of the application of SFAS No. 123(R), which Dyax willadopt effective as of January 1, 2006. The unaudited, pre-tax charge,estimated by Dyax to be avoided as a result of the acceleration isapproximately $7.2 million over the course of the original vesting periods,which on average is approximately 2.5 years from the effective date of theacceleration. The avoided estimated, unaudited, pre-tax charge is $2.4 millionin 2006, $2.4 million in 2007, $2.3 million in 2008 and $100,000 in 2009. TheCompany also believes that because the options that have been accelerated haveexercise prices in excess of the current market value of Dyax’s common stock,the options have more limited perceived value to employees and are not fullyachieving their original objective of incentive compensation and employeeretention.

*NetLoss Per Share:*   The Company accounts for anddiscloses earnings per share (EPS) under SFAS No. 128, *Earnings per Share* (SFAS No. 128).Under SFAS No. 128, the Company is required to present two EPS amounts,basic and diluted. Basic net loss per share is computed using the weightedaverage number of shares of common stock outstanding. Diluted net loss pershare does not differ from basic net loss per share since potential commonshares from the exercise of stock options are anti-dilutive for all periodspresented and, therefore, are excluded from the calculation of diluted net lossper share. Stock options, which are potentially dilutive, totaling 4,949,927;3,845,785 and 3,711,114, were outstanding at December 31, 2005, 2004 and2003, respectively.

*ComprehensiveIncome (Loss):*   The Company accounts forcomprehensive income (loss) under SFAS No. 130, *Reporting Comprehensive Income.*Thestatement established standards for reporting and displaying comprehensiveincome and its components in a full set of general purpose financialstatements. The statement required that all components of comprehensive incomebe reported in a financial statement that is displayed with the same prominenceas other financial statements.

*BusinessSegments:*   The Company discloses businesssegments under SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information* (SFAS No. 131).The statement established standards for reporting information about operatingsegments in annual financial statements of public enterprises and in interim financialreports issued to shareholders. It also established standards for relateddisclosures about products and services, geographic areas and major customers.The Company operates as one business segment in two geographic areas.

*RecentPronouncements:*   InDecember 2004, the FASB issued a revision to SFAS No. 123*,* also known as SFAS 123R, that amendsexisting accounting pronouncements for share-based payment transactions inwhich an enterprise receives employee and certain non-employee services inexchange for (a) equity instruments of the enterprise or (b) liabilitiesthat are based on the fair value of the enterprise’s equity instruments or thatmay be settled by the issuance of such equity instruments. SFAS 123R eliminatesthe ability to account for share-based compensation transactions using APB 25and generally requires such transactions be accounted for using afair-value-based method. SFAS 123R would be applicable for awards that aregranted, modified, become vested, or settled in cash in annual periodsbeginning after June 15, 2005. SFAS 123R includes three transitionmethods: one that provides for prospective application and two that provide forretrospective application. The Company intends to adopt SFAS 123R prospectivelycommencing in the first quarter of the fiscal year ending December 31,2006. It is 

56

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**2.**   Accounting Policies (Continued)

expected that the adoptionof SFAS 123R will cause the Company to record, as expense, a non-cashaccounting charge approximating the fair value of such share based compensationmeeting the criteria outlined in the provisions of SFAS 123R. The adoption ofSFAS 123R will have a material impact on the Company’s results of operationsbut not its operating cash flows. Company plans to adopt SFAS 123R on amodified prospective basis. Future results will be impacted by the number andvalue of additional equity awards as well as the value of existing unvestedequity awards.

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations,” which is an interpretation of FASB Statement No. 143, “Accountingfor Asset Retirement Obligations.” The interpretation requires that a liabilityfor the fair value of a conditional asset retirement obligation be recognizedif the fair value of the liability can be reasonably estimated. The interpretationis effective for years ending after December 15, 2005. The interpretation didnot have a material impact on the Company’s results of operations, financialposition or cash flows.

In May 2005, the FASBissued FASB Statement No. 154, “Accounting Changes and Error Corrections,a replacement of APB Opinion No. 20 Accounting Changes and FASB Statement No. 3,Reporting Accounting changes in Interim Financial Statements” (FAS 154). FAS154 provides guidance on the accounting for and reporting of accounting changesand error corrections. It established, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to the newlyadopted accounting principle. FAS 154 also provides guidance for determiningwhether retrospective application of a change in accounting principle isimpracticable and for reporting a change when retrospective application isimpracticable. The provisions of this Statement are effective for accountingchanges and corrections of errors made in fiscal periods beginning after December 15,2005.

**3.   Discontinued Operations of Biotage**

On October 29, 2003, the Company sold its whollyowned subsidiary known as Biotage. The purchase price was $35.0 millionbefore transaction expenses of approximately $3.0 million, includingnon-cash expenses of $519,000, and a reduction of approximately$4.6 million of Biotage debt. Dyax received $25.4 million in cash atclosing and paid approximately $2.5 million in transaction expenses. Anadditional $5.0 million was received in 2004 that was being held in anindemnity escrow. For the year ended December 31, 2003, the Companyrecognized a $19.0 million gain on this sale in the consolidatedstatements of operations and comprehensive loss. Prior period amounts have beenreclassified to be consistent with the treatment of Biotage as a discontinuedoperation.

The Company has revisedour 2003 statement of cash flows to separately disclose the operating,investing and financing portions of the cash flows attributable to ourdiscontinued operations. The Company has previously reported these amounts on acombined basis. This revision had noimpact to the previously reported total amounts for operating, investing andfinancing activities for continuing operations in 2003.

***Accounting Policies of Discontinued Operations ofBiotage***

*Inventories:*   Inventorieswere stated at the lower of cost or market. Cost is determined using thefirst-in, first-out (FIFO) method. Inventories are reviewed for slow moving,obsolete and excess items on a quarterly basis and, if necessary, a charge wasrecorded in the results of operations.

57

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**3.**   Discontinued Operations of Biotage (Continued)

*OtherIntangibles:*   Biotage capitalized softwaredevelopment costs for software products in accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to Be Sold, Leased orOtherwise Marketed.* Capitalized software costs are amortized to costof sales over the estimated useful lives of the related software products,which was 5 years.

*RevenueRecognition:*   Biotage has utilized the guidanceof Staff Accounting Bulletin 104, *Revenue Recognition*,for all periods presented in these financial statements. Product revenue wasderived from sales of chromatography separations systems and cartridges.Revenue was generally recognized on product sales arrangements based on productshipment if no installation obligations exist. For product sale arrangementsthat required installation services that are not considered essential to thefunctionality of the product, revenue was recognized upon shipment and aportion of revenue equal to the fair value of the installation service isdeferred and recognized upon the completion of the installation. For productsale arrangements that required significant installation services and containcustomer acceptance criteria, all revenue was recognized upon the completion ofthe installation and satisfaction of the customer acceptance criteria.

*Shippingand Handling:*   Shipping and handling costs wereincluded within cost of products sold, with the related sales value includedwithin product revenues.

*ProductWarranty:*   Biotage provided customers with atwelve-month warranty on its chromatography systems from the date ofshipment. Estimated warranty obligations, which were included in the results ofoperations as cost of products sold, were evaluated and provided for at thetime of sale.

*Advertising:*   Advertisingcosts were expensed as incurred and were included in selling, general andadministrative in the results of discontinued operations. Advertising costs forthe period ended October 29, 2003 were $396,000.

Thefollowing table presents operating results for the discontinued operations ofBiotage for the period ended October 29, 2003:

| ** **                          | ** ** | **Period Ended  October 29, 2003** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **(In thousands)**                           | ** ** |
| Separations  product revenues       |       |                                              | $          | 16,527 |   |   |
| Costs and  expenses:                |       |                                              |       |   |   |
| Cost of products sold               |       |                                              | 7,468      |   |   |
| Research and development            |       |                                              | 2,251      |   |   |
| Selling, general and administrative |       |                                              | 8,701      |   |   |
| Total costs and  expenses           |       |                                              | 18,420     |   |   |
| Loss from  operations               |       |                                              | (1,893     | ) |   |
| Other income  (expense), net        |       |                                              | 13         |   |   |
| Loss from discontinued  operations  |       |                                              | $          | (1,880 | ) |   |

 

58

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**3.**   Discontinued Operations of Biotage (Continued)

The following tablereconciles the purchase price to the gain on sale of Biotage as presented inthe consolidated statements of operations and comprehensive loss:

| ** **                                    | ** ** | **(In thousands)** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| Unadjusted  purchase price                    |       |                    | $          | 35,000 |   |   |
| Less debt assumed  by the buyer               |       |                    | (4,573     | ) |   |
| Professional fees                             |       |                    | (1,821     | ) |   |
| Stock based  compensation and bonuses         |       |                    | (1,162     | ) |   |
| Net assets  disposed on October 29, 2003 |       |                    | (8,485     | ) |   |
| Gain on sale of Biotage,  net of tax          |       |                    | $          | 18,959 |   |   |

 

**4.**   Fixed Assets

Fixedassets consist of the following:

| ** **                                       | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| Laboratory  equipment                            |       | 9,497                   |       | $ | 9,011 |   |
| Furniture and  office equipment                  |       | 1,235                   |       | 1,334 |   |
| Software and  computers                          |       | 3,167                   |       | 2,821 |   |
| Leasehold  improvements                          |       | 10,380                  |       | 10,108 |   |
| Total                                            |       | 24,279                  |       | 23,274 |   |
| Less: accumulated  depreciation and amortization |       | (14,119                 | )          | (11,407 | ) |
|                                             |       | $                       | 10,160     |   | $ | 11,867 |   |
|                                                  |            |                         |            |  |  |  |  |

 

There was $8.9 million and$8.6 million of assets under capital leases, which includes laboratory andoffice equipment, with related accumulated amortization of $6.2 million and$5.2 million, at December 31, 2005 and 2004, respectively. Amortization ofassets under capital leases is included in depreciation and amortization offixed assets on the consolidated statements of cash flow.

**5.**   Notes Receivable,Employees

In June 1999, the Company provided a loan to anofficer of the Company in the amount of $100,000. Prior to 2003, the Companyforgave $20,000 of principal and all accrued interest on June 14 annually.During March 2003, the Company received payment of the remaining $40,000outstanding principal on this loan.

In October 1998, the Company provided a mortgageloan and pledge agreement in the amount of $1.3 million to its ChiefExecutive Officer, who is also Chairman of the Company’s Board of Directors, topurchase a residence within commuting distance of the Company’s headquarters.Payments in the amount of $8,220 were due monthly to the Company. During June 2003,the Company’s Chief Executive Officer paid the Company the remaining balance onhis mortgage loan agreement, totaling $1.2 million.

During 2003, the Companyreceived $51,000 in cash on additional notes to employees that were outstandingat December 31, 2002.

59

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**6.   Intangible Assets**

On October 16, 2002, the Company entered into across-licensing agreement with XOMA Ireland Limited under which the Companyreceived a license to use XOMA’s patents and bacterial expression technology todiscover antibody products using phage display. The Company also received alicense from XOMA to produce antibodies under the XOMA patents. In exchange forthe rights to XOMA’s technology, the Company agreed to pay a technology licensefee of $3.5 million due over six installments through December 15,2003, and to pay a 0.5% royalty on net sales of any antibody productcommercialized by the Company or any development partner. This fee wascapitalized and is being amortized ratably over 7 years, management’sestimate of the period that the capitalized license will generate revenues. TheCompany also granted XOMA a license to its phage display patents and agreed toprovide XOMA one of the Company’s antibody phage display libraries. Thetechnology license fee due to XOMA was fully paid in 2003. At of December 31, 2005 and 2004, the grosscarrying amount of the intangible assets, consisting of the licensed patenttechnology, was $3.5 million and the related accumulated amortization was$1.6 million and $1.1 million, respectively.

Estimatedfour year future amortization expense for other intangible assets as of December 31,2005 are as follows:

| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2006       |       |                    | $          | 502 |   |   |
| 2007       |       |                    | 502        |   |   |
| 2008       |       |                    | 502        |   |   |
| 2009       |       |                    | 419        |   |   |

 

**7.**   Accounts Payableand Accrued Expenses

Accountspayable and accrued expenses consist of the following:

| ** **                                                            | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **(In thousands)** | ** ** |
| Accounts payable                                                      |       | $                       | 698        |   | $ | 2,599 |   |
| Accrued employee  compensation and related taxes                      |       | 2,509                   |       | 2,220 |   |
| Accrued external  research and development and contract manufacturing |       | 1,597                   |       | 1,682 |   |
| Other accrued  liabilities                                            |       | 1,473                   |       | 2,285 |   |
| Accrued legal                                                         |       | 709                     |       | 825 |   |
|                                                                  |       | $                       | 6,986      |   | $ | 9,611 |   |

 

60

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**8.**   Long-termObligations

Long-termobligations consist of the following:

| ** **                                           | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(In thousands)** | ** ** |
| Obligations under  capital lease arrangements        |       | $                       | 2,797      |   | $ | 3,490 |   |
| Obligation under  leasehold improvement arrangements |       | 1,792                   |       | 1,992 |   |
| Total long-term  obligations                         |       | 4,589                   |       | 5,482 |   |
| Less: current  portion                               |       | (1,770                  | )          | (1,837 | ) |
| Long-term  obligations                               |       | $                       | 2,819      |   | $ | 3,645 |   |

 

*Obligations undercapital lease arrangement:*

During 2001, Dyax S.A., the Company’s researchsubsidiary located in Belgium, signed a capital lease for the purchase ofqualified fixed assets. During the years ended December 31, 2005, 2004 and2003, Dyax S.A. sold to and leased back from the lender a total of$25,000, $431,000 and $176,000, respectively, of laboratory and officeequipment. No gain or loss was recorded as part of these transactions. Interestpursuant to this capital lease ranges between 4.38% and 11.18%. Principal andinterest are payable quarterly over 60 months. Dyax S.A. was required toprovide cash collateral totaling $108,000 and $342,000 at December 31,2005 and 2004, which is included in restricted cash on the Company’sconsolidated balance sheets. As of December 31, 2005 and 2004, there was$621,000 and $1.3 million (included in obligations under capital leasearrangements) outstanding under the loan, which is included in long-termobligations on the Company’s consolidated balance sheets.

During 2005, Dyax S.A. signed a capital lease for thepurchase of qualified fixed assets. During the year ended December 31,2005 Dyax S.A. sold to and leased back from the lender a total of $31,000 oflaboratory and office equipment. No gain or loss was recorded as part of thistransaction. Interest pursuant to this capital lease is 7.17%. Principle andinterest are payable quarterly over 36 months. As of December 31, 2005there was $24,000 (included in obligations under capital lease arrangements)outstanding under the loan, which is included in long-term obligations on theCompany’s consolidated balance sheets.

During 2001, the Company signed a capital lease anddebt agreement for the purchase of qualified fixed assets and leaseholdimprovements. Interest pursuant to this agreement ranges between 7.95% and10.33%. Principal and interest are payable ratably over 24 months to42 months. Capital lease obligations are collateralized by the assetsunder lease. During the years ended December 31, 2005, 2004 and 2003, theCompany sold to and leased back from the lender $1.1 million, $1.1 million and$306,000, respectively, of leasehold improvements, laboratory, production andoffice equipment. During August 2003, the Company refinanced $1.3 millionof the outstanding capital leases under the agreement. No gain or loss wasrecorded as part of these transactions. As of December 31, 2005 and 2004,there was $2.2 million and $2.1 million (included in obligations undercapital lease arrangements) outstanding related to capital leases, which isincluded in long-term obligations on the Company’s consolidated balance sheets.During 2004, the Company paid off its debt relating to leasehold improvementsand as of December 31, 2005 and 2004 there was $0 (included in obligationsunder promissory notes) outstanding related to the leasehold improvements debtagreement.

61

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**8.**   Long-term Obligations (Continued)

During 1997, the Company signed a capital leaseagreement for the purchase of qualified fixed assets from a lender for a totalof $2.9 million of laboratory and office equipment. Interest pursuant to thisagreement ranges between 10.42% and 14.02%. Principal and interest are payablemonthly over 60 months. The capital lease obligations are collateralizedby the assets under the lease. As of December 31, 2005 and 2004, there was$0 and $26,000 (included in obligations under capital lease arrangements)outstanding under the loan, which is included in long-term obligations on theCompany’s consolidated balance sheets.

The Company also has acapital lease for equipment in Belgium. In 2000, the Company sold to the lessorand leased back $287,000 of laboratory equipment under this facility. No gainor loss was recorded as part of this transaction. Interest pursuant to thisagreement is at 5.60%. Principal and interest is payable monthly over60 months. As of December 31, 2005 and 2004, there was $0 and $27,000(included in obligations under capital lease arrangements) outstanding underthe loan, which is included in long-term obligations on the Company’sconsolidated balance sheets.

*Obligation underleasehold improvement arrangements:*

In June 2001, the Company entered into anagreement to initially lease approximately 67,000 square feet of laboratory andoffice space in Cambridge, Massachusetts. Under the terms of the agreement, thelandlord loaned the Company approximately $2.4 million to be used towardsthe cost of leasehold improvements. The loan bears interest at a rate of 12.00%and is payable in 98 equal monthly installments through February 2012. Asof December 31, 2005, and 2004, there was $1.8 million and$2.0 million outstanding under the loan, which is included in long-termobligations on the Company’s consolidated balance sheets.

Minimumfuture payments under the Company’s long-term obligations as of December 31,2005 are as follows:

| ** **                                | ** ** | **(In thousands)** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| 2006                                      |       |                    | $          | 2,139 |   |   |
| 2007                                      |       |                    | 1,360      |   |   |
| 2008                                      |       |                    | 774        |   |   |
| 2009                                      |       |                    | 423        |   |   |
| 2010                                      |       |                    | 413        |   |   |
| Thereafter                                |       |                    | 481        |   |   |
| Total future  minimum payments            |       |                    | 5,590      |   |   |
| Less: amount  representing interest       |       |                    | 1,001      |   |   |
| Present value of  future minimum payments |       |                    | 4,589      |   |   |
| Less: current  portion                    |       |                    | 1,770      |   |   |
| Long-term  obligations                    |       |                    | $          | 2,819 |   |   |

 

**9.**   Operating Leases

In June 2001, the Company entered into anagreement to initially lease approximately 67,000 square feet of laboratory andoffice space in Cambridge, Massachusetts. Of the space initially leased, theCompany has subleased a total of approximately 14,000 square feet to twodifferent biotechnology 

62

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**9.**   Operating Leases (Continued)

companies under subleases,the first, approximately 11,000 square feet, is due to expire on June 30,2006, while the other is due to expire on October 31, 2006. The leasecommenced in the first quarter of 2002 and has an initial term of ten years,expiring February 2012. As part of the lease agreement, the Companyreceived a $2.3 million leasehold improvement incentive in 2002. The leaseholdimprovement incentive was recorded as deferred rent and is being amortized as areduction to rent expense over the lease term. Also, as part of the leaseagreement, the Company was required to provide a cash-collateralized letter ofcredit in the amount of $4.3 million, which may be reduced after the fifthyear of the lease term. The cash collateral is included in restricted cash onthe Company’s consolidated balance sheets. Under the terms of the leaseagreement, the Company is obligated to lease an additional 24,122 square feetof space on November 1, 2007 and has the option to extend the entire leasefor two additional five-year terms.

Minimum future lease payments under the Company’snon-cancelable operating leases as of December 31, 2005 are as follows:

| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2006       |       |                    | $          | 4,010 |   |   |
| 2007       |       |                    | 5,371      |   |   |
| 2008       |       |                    | 5,421      |   |   |
| 2009       |       |                    | 5,409      |   |   |
| 2010       |       |                    | 5,388      |   |   |
| Thereafter |       |                    | 6,061      |   |   |

 

In addition, the Company subleases a portion of itsCambridge facility, for which minimum future receipts under the non-cancelablesubleasing agreement as of December 31, 2005 are $406,000 which will allbe received in 2006.

Rent expense for the yearsended December 31, 2005, 2004 and 2003 was approximately $3.8 million,$3.6 million and $2.9 million, respectively. Rent expense for December 31,2005, 2004 and 2003 was net of sublease payments of $806,000, $1.2 million and$1.6 million respectively.

**10.**   Litigation

As of December 31,2005, the Company was not engaged in any active court proceedings. The Companymakes provisions for claims specifically identified for which it believes thelikelihood of an unfavorable outcome is probable and reasonably estimable. TheCompany records at least the minimum estimated liability related to claimswhere there is a range of loss and the loss is considered probable. Asadditional information becomes available, the Company assesses the potentialliability related to its pending claims and revises its estimates. Futurerevisions in the estimates of the potential liability could materially impactthe results of operations and financial position. The Company maintainsinsurance coverage that limits the exposure for any single claim as well astotal amounts incurred per policy year, and it believes that its insurancecoverage is adequate. The Company makes every effort to use the bestinformation available in determining the level of liability reserves. As of December 31,2005, there were no reserves for litigation settlements.

63

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**11.**   Stockholders’Equity

*PreferredStock:*   As of December 31, 2005 and 2004,there were a total of 1,000,000 shares of $0.01 par value preferred stockauthorized with 950,000 undesignated and 50,000 shares of previouslyundesignated preferred stock designated as Series A Junior ParticipatingPreferred Stock.

*CommonStock:*   On March 19, 2003, the Companycompleted the sale of 4,721,625 shares of common stock at a price of $1.85 pershare in a registered directed offering covered by our shelf registration on Form S-3,which resulted in proceeds of $8.3 million, net of expenses of $521,000.

In January 2004, the Company sold 6,000,000shares of common stock (including 780,000 shares pursuant to the exercise bythe underwriters of their over-allotment option), at a price of $7.93 per sharein a registered underwritten public offering, which resulted in aggregateproceeds of approximately $47.6 million, not including underwriterdiscount of $2.6 million and expenses of approximately $215,000.

At the May 20, 2004Annual Meeting of Stockholders, the shareholders approved an amendment to Dyax’sRestated Certificate of Incorporation  to increase the number ofauthorized shares of our common stock by 75,000,000 shares from 50,000,000 to125,000,000 shares.

In May 2005, the Company sold 6,315,000 shares ofcommon stock at a price of $4.00 per share in a registered direct offering,which resulted in aggregate proceeds of approximately $23.5 million, net ofexpenses of approximately $200,000.

*StockOptions:*   The Company’s 1995 Equity IncentivePlan (the “Plan”) is an equity plan under which equity awards, including awardsof restricted stock and incentive and nonqualified stock options to purchaseshares of common stock to employees and consultants of the Company, may begranted by action of the Compensation Committee of the Board of Directors.Although in certain circumstances option awards may be granted below fairmarket value, options are generally granted at the current fair market value onthe date of grant, generally vest ratably over a 48 month period, andexpire within ten years from date of grant. At December 31, 2005, therewere 7,455,991 shares of common stock reserved for issuance under the Plan ofwhich 2,506,064 shares remained available for future grant. Since the Plan’sinception, 2,744,577 shares have been issued under the Plan.

64

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**11.**   Stockholders’ Equity (Continued)

Stock option activity forthe 1995 Equity Incentive Plan is summarized as follows:

| ** **                             | ** ** | **Option Shares** | ** ** | **Weighted-Avg.  Exercise Price** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------------------------|------------|
| Outstanding at  December 31, 2002 |       |                   | 4,306,313  |                                   |       |   | $ | 6.94 |   |   |
| Granted at fair  market value          |       |                   | 1,020,135  |                                   |       |   | 3.39 |   |   |
| Exercised                              |       |                   | (351,703   | )                                      |       |   | 2.25 |   |   |
| Canceled                               |       |                   | (1,263,631 | )                                      |       |   | 7.18 |   |   |
| Outstanding at  December 31, 2003 |       |                   | 3,711,114  |                                   |       |   | $ | 6.33 |   |   |
| Granted at fair  market value          |       |                   | 1,252,753  |                                   |       |   | 10.99 |   |   |
| Exercised                              |       |                   | (632,414   | )                                      |       |   | 3.05 |   |   |
| Canceled                               |       |                   | (485,668   | )                                      |       |   | 12.33 |   |   |
| Outstanding at  December 31, 2004 |       |                   | 3,845,785  |                                   |       |   | $ | 7.58 |   |   |
| Granted at fair  market value          |       |                   | 2,351,750  |                                   |       |   | 4.60 |   |   |
| Exercised                              |       |                   | (118,947   | )                                      |       |   | 2.24 |   |   |
| Canceled                               |       |                   | 1,128,161  |                                   |       |   | 5.85 |   |   |
| Outstanding at  December 31, 2005 |       |                   | 4,949,927  |                                   |       |   | $ | 6.69 |   |   |

 

Summarizedinformation about stock options outstanding at December 31, 2005 is asfollows:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Weighted-Average  Remaining  Contractual  Life-Years** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $0.30 to $1.36                              |       |                         | 352,161    |                         |       |   | 6.51 |   |   |   | 1.33 |   |   | 271,801 |   |   | 1.33 |   |   |
| $1.49 to $1.99                              |       |                         | 260,250    |                         |       |   | 5.47 |   |   |   | 1.78 |   |   | 207,990 |   |   | 1.77 |   |   |
| $2.00                                       |       |                         | 412,217    |                         |       |   | 3.36 |   |   |   | 2.00 |   |   | 412,217 |   |   | 2.00 |   |   |
| $2.25 to $3.80                              |       |                         | 379,442    |                         |       |   | 6.91 |   |   |   | 3.39 |   |   | 238,594 |   |   | 3.43 |   |   |
| $3.90 to $4.41                              |       |                         | 220,168    |                         |       |   | 8.73 |   |   |   | 4.27 |   |   | 51,359 |   |   | 4.12 |   |   |
| $4.43 to $4.52                              |       |                         | 1,055,205  |                         |       |   | 9.50 |   |   |   | 4.52 |   |   | 134,777 |   |   | 4.52 |   |   |
| $4.59 to $9.62                              |       |                         | 686,737    |                         |       |   | 8.29 |   |   |   | 6.48 |   |   | 447,791 |   |   | 7.37 |   |   |
| $9.70 to $10.97                             |       |                         | 341,417    |                         |       |   | 6.10 |   |   |   | 10.39 |   |   | 341,417 |   |   | 10.39 |   |   |
| $11.41                                      |       |                         | 800,696    |                         |       |   | 8.28 |   |   |   | 11.41 |   |   | 757,683 |   |   | 11.41 |   |   |
| $11.50 to $48.69                            |       |                         | 441,634    |                         |       |   | 5.51 |   |   |   | 16.37 |   |   | 441,634 |   |   | 16.37 |   |   |
|                                        |       |                         | 4,949,927  |                         |       |   | 7.37 |   |   |   | 6.69 |   |   | 3,305,263 |   |   | 7.84 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average fair value of options grantedunder the Plan during 2005, 2004 and 2003, as determined under the Black-Scholesoption pricing model was $3.48, $10.91 and $3.36, respectively. Total optionsexercisable at December 31, 2005, 2004 and 2003 were 3,305,263; 2,022,701and 2,179,588 respectively.

65

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**11.**   Stockholders’ Equity (Continued)

The fair value of eachstock option granted is estimated on the grant date using the minimum valuemethod with the following weighted average assumptions:

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected option term     |       | 6.0                                        |       | 6.0 |   | 6.0 |   |
| Risk-free  interest rate |       | 4.10                                       | %          | 3.79 | % | 3.35 | % |
| Expected dividend  yield |       | None                                       |       | None |   | None |   |
| Volatility factor        |       | 89                                         | %          | 217 | % | 208 | % |

 

In 2005, 2004, and 2003, the Company did not recordany additional deferred compensation related to stock option grants toemployees.

In 2004 and 2003, the Company modified certain stockoptions grants. In accordance with FASB Interpretation 44 *Accountingfor Certain Transactions involving Stock Compensation an interpretation of APBOpinion No. 25* the Company recorded compensation expenseassociated with these modifications. The expense recognized in 2004 totaled$264,000. Of these expenses, $203,000 is included in research and developmentexpenses and $61,000 is included in general and administrative expenses in theconsolidated statements of operations and comprehensive loss. The expenserecognized in 2003 totaled $712,000. Of this amount, $519,000, related to themodification of stock options granted to Biotage employees due to thetriggering of change of control provisions in employment agreements, isincluded in gain on sale of Biotage in the consolidated statements ofoperations and comprehensive loss as the related expense is a direct andincremental cost associated with the disposition. The remaining $193,000, whichdoes not relate to Biotage employees, is included in general and administrativeexpenses in the consolidated statements of operations and comprehensive loss.

*Employee Stock PurchasePlan:*   The Company’s 1998 Employee Stock PurchasePlan (the “Purchase Plan”), as amended in May 2002, allows employees topurchase shares of common stock at a discount from fair market value. As of December 31,2005, there were 162,451 shares of common stock reserved for issuance under theamended Purchase Plan. Rights to purchase common stock under the Purchase Planare granted at the discretion of the Compensation Committee, which determinesthe frequency and duration of individual offerings under the Purchase Plan andthe dates when stock may be purchased. Eligible employees participatevoluntarily and may withdraw from any offering before the stock is purchased.The purchase price per share of common stock in an offering is 85% of thelesser of its fair market value at the beginning of the offering period or onthe applicable exercise date and may be paid through payroll deductions. Forthe years ended December 31, 2005, 2004 and 2003, 46,789; 27,456 and109,389 shares, respectively, had been issued under the Purchase Plan.

**12.**   Employee Savingsand Retirement Plans

The Company has anemployee savings and retirement plan (the “Retirement Plan”), qualified undersection 401(k) of the Internal Revenue Code, covering substantiallyall of the Company’s U.S. employees. Employees may elect to contribute aportion of their pretax compensation to the Retirement Plan up to the annualmaximum allowed under the Retirement Plan. In 2001, the Company began matching50% of employee contributions up to 6% of eligible pay. Employees are 100% vestedin company matching 

66

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**12.**   Employee Savings and Retirement Plans (Continued)

contributionsimmediately. For the years ended December 31, 2005, 2004 and 2003, theCompany’s contributions amounted to $276,000, $232,000 and $339,000,respectively.

**13.**   Income Taxes

Deferred tax assets and deferred tax liabilities arerecognized based on temporary differences between the financial reporting andtax basis of assets and liabilities using future expected enacted rates. Avaluation allowance is recorded against deferred tax assets if it is morelikely than not that some or all of the deferred tax assets will not berealized.

Theprovision for income taxes for continuing operations was at rates differentfrom the U.S. federal statutory income tax rate for the following reasons: 

| ** **                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal  income taxes                                       |       | 34.00    | %          | 34.00    | %          | 34.00    | %          |
| State income  taxes, net of federal benefit                           |       | 5.67     | %          | 6.71     | %          | 5.44     | %          |
| Research and  development tax credits                                 |       | 15.04    | %          | 13.49    | %          | 13.18    | %          |
| Other                                                                 |       | 0.18     | %          | (2.20    | )%         | (5.04    | )%         |
| True up for reduction  in NOL and Research Credit carryforwards  |       | 9.87     | %          | (4.74    | )%         | (71.15   | )%         |
| Valuation  allowance                                                  |       | (64.76   | )%         | (47.27   | )%         | 23.57    | %          |
| Effective income tax  rate                                            |       | —   | %          | —   | %          | —   | %          |

 

The principal components of the Company’s deferred taxassets and liabilities at December 31, 2005 and 2004, respectively are asfollows:

| ** **                        | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                        | ** ** | **(in Thousands)** | ** ** |
| Deferred Tax Asset:               |       |                    |       |     |       |
| Allowance for  doubtful accounts  |       | $                       | 42         |     | $          | 30 |   |
| Depreciation and  amortization    |       | 1,533                   |       | 1,215    |       |
| Accrued expenses                  |       | 140                     |       | 121      |       |
| Other                             |       | 25                      |       | 37       |       |
| Deferred revenue                  |       | 4,048                   |       | 2,808    |       |
| Research credit  carryforwards    |       | 19,731                  |       | 12,282   |       |
| Net operating  loss carryforwards |       | 54,375                  |       | 43,327   |       |
| Total gross  deferred tax asset   |       | 79,894                  |       | 59,820   |       |
| Valuation  allowance              |       | (79,894                 | )          | (59,820  | )          |
| Net deferred tax asset            |       | $                       | —     |     | $          | — |   |

 

As of December 31, 2005, the Company had federalnet operating loss (NOL) and research and experimentation credit carryforwardsof approximately $142.6 million and $17.9 million, respectively,which may be available to offset future federal income tax liabilities whichbegin to expire in 2006. The Company has recorded a deferred tax asset ofapproximately $2.2 million and $2.3 million at December 31, 2005 and 2004,respectively, reflecting the benefit of deductions from the exercise of stockoptions. This deferred asset has been fully reserved until it is more likelythan not that the benefit from the exercise of 

67

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**13.**   Income Taxes (Continued)

stock options will berealized. The benefit from the December 31, 2005 $2.2 million deferred taxasset will be recorded as a credit to additional paid-in capital when realized.As required by SFAS No. 109, management of the Company has evaluated thepositive and negative evidence bearing upon the realizability of its deferredtax assets, which are comprised principally of NOL and research andexperimentation credit carryforwards. Management has determined at this timethat it is more likely than not that the Company will not recognize thebenefits of federal and state deferred tax assets and, as a result, a valuationallowance of approximately $79.9 million and $59.8 million has been establishedat December 31, 2005 and 2004, respectively.

Ownership changes, asdefined in the Internal Revenue Code, may have limited the amount of NOLcarryforwards that can be utilized annually to offset future taxable income.Subsequent ownership changes could further affect the limitation in futureyears.

The cumulative unremittedearnings of foreign subsidiaries are immaterial for all years presented.

**14.**   Investment in JointVenture (Dyax–Genzyme LLC) and Other Related Party Transactions

The Company has a collaboration agreement with Genzymefor the development and commercialization of DX-88 for hereditaryangioedema (HAE). Under this collaboration, the Company and Genzyme have formeda joint venture, known as Dyax–Genzyme LLC (formerly known as Kallikrein LLC),through which they jointly own the rights to DX-88 for the treatment ofHAE. Dyax and Genzyme are each responsible for approximately 50% of ongoingcosts incurred in connection with the development and commercialization of DX-88for HAE and each will be entitled to receive approximately 50% of any profitsrealized as a result. In addition, the Company is entitled to receive potentialmilestone payments from Genzyme in connection with the development of DX-88.The first such milestone payment of $3.0 million for dosing the firstpatient in the pivotal clinical trial of DX-88 for HAE was received in December 2005.The Company recognized the $3.0 million milestone as revenue in the fourthquarter of 2005 given that the milestone was considered to be at risk andsubstantive. In addition, the Company will be entitled to receive potentialmilestone payments of $10.0 million for the first FDA-approved productderived from DX-88, and up to $15.0 million for additionaltherapeutic indications developed under the collaboration.

In May 2002, the Company and Genzyme executed asenior secured promissory note under which Genzyme agreed to loan the Companyup to $7.0 million. This note is secured by a continuing security interestin certain tangible and intangible personal property arising out of the DX-88program and the Company’s rights to revenues from licenses of its fundamentalphage display patent portfolio. The note is also subject to certain financialcovenants, under which the Company must maintain at least $20.0 million incash, cash equivalents or short-term investments based on the Company’squarterly consolidated financial statements and at least one continued listingstandard for the NASDAQ National Market.

On October 18, 2002, the Company received the$7.0 million under this Genzyme note. The note bears interest at the primerate (7.25% at December 31, 2005) plus 2%. Interest is payable quarterly.The principal and all unpaid interest will be due on the maturity date of May 31,2007. During the quarter ended June 30, 2005, the Company exercised itsright to extend the maturity date of the note from May 31, 2005 to May 31,2007. At December 31, 2005 and 2004, there was $7.0 millionoutstanding under the loan. 

68

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**14.**   Investment in Joint Venture (Dyax–Genzyme LLC) and Other Related Party Transactions (Continued)

At December 31, 2005and 2004, the Company owed $54,000 and $82,000, respectively, of interest onthis note, which is included in accounts payable and accrued expenses due tocurrent nature of this liability.

All research and development expenses incurred by eachparty related to the HAE program are billed to and reimbursed by Dyax–GenzymeLLC. The Company and Genzyme are each required to fund 50% of the monthlyexpenses of Dyax–Genzyme LLC. If either the Company or Genzyme fails to makeall or two or more of the monthly funding obligations, and the other party doesnot exercise its right to terminate the Collaboration Agreement or compelperformance of the funding obligation, the defaulting party’s percentageinterest in the Joint Venture and future funding responsibility will beadjusted proportionately. The Company has accounted for its interest in Dyax–GenzymeLLC using the equity method of accounting. Under this method, the reimbursementof expenses to Dyax is recorded as a reduction to research and developmentexpenses because it includes funding that the Company provided to Dyax–GenzymeLLC. Dyax’s 50.01% share of Dyax–Genzyme LLC loss is recorded as an Equity Lossin Joint Venture (Dyax–Genzyme LLC) in the consolidated statements ofoperations and comprehensive loss. At December 31, 2005 and 2004, theCompany’s investment in the joint venture was $782,000 and $254,000,respectively, which is recorded as an Investment in Joint Venture (Dyax–GenzymeLLC) in the consolidated balance sheets.

The Company has evaluated this agreement to determineif the related joint venture qualifies as a variable interest entity under FIN46R. Genzyme and Dyax fund the operations of Dyax–Genzyme LLC on a monthlybasis and therefore under Paragraph 5a of FIN 46R, the joint venture qualifiesas a variable interest entity because its total equity investment at risk isnot sufficient to finance its activities without additional subordinatedfinancial support. The Company has a financial interest in Dyax–Genzyme LLC. However,based on its analysis of the agreement, the Company believes that its exposureto the expected losses of Dyax–Genzyme LLC are less than Genzyme’s andtherefore the Company is not the primary beneficiary of Dyax–Genzyme LLC underParagraph 17 of FIN 46R. Accordingly, the Company has not consolidated Dyax–GenzymeLLC.

69

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**14.**   Investment in Joint Venture (Dyax–Genzyme LLC) and Other RelatedParty Transactions (Continued)

As of December 31, 2005and 2004, the Company had approximately $782,000 and $254,000, respectively, inits investment account that represents the Company’s portion of thecontributions to Dyax–Genzyme LLC offset by the Company’s portion of the LLC’slosses. Summary financial information for Dyax–Genzyme LLC was as follows:

| ** **                                                                             | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                                             | ** ** | **(In thousands)**                     | ** ** |
| Research and  development                                                              |       | $                                           | 23,111     |   | $ | 11,779 |   |
| Selling and  marketing                                                                 |       | 624                                         |       | 225 |   |
| General and  administrative                                                            |       | 167                                         |       | — |   |
| Interest income                                                                        |       | (2                                          | )          | (8 | ) |
| Net loss                                                                               |       | $                                           | 23,900     |   | $ | 11,996 |   |
| Current assets                                                                         |       | $                                           | 3,442      |   | $ | 54 |   |
| Non-current  assets                                                                    |       | 615                                         |       | 708 |   |
| Current  liabilities                                                                   |       | (2,493                                      | )          | (255 | ) |
| Non-current  liabilities                                                               |       | —                                      |       | — |   |
| Net assets                                                                             |       | $                                           | 1,564      |   | $ | 507 |   |
| Amount due to Dyax from Dyax–Genzyme LLC (included  in current liabilities above) |       | $                                           | 1,508      |   | $ | 255 |   |
| Amount due from Dyax to  Dyax–Genzyme LLC (included in current assets above)      |       | $                                           | 1,721      |   | $ | — |   |

 

The Company’s Chairman, President and Chief ExecutiveOfficer also serves as an outside director of Genzyme Corporation and was aconsultant to Genzyme until 2001. Two of our other directors are formerdirectors of Genzyme and another was a senior advisor to the Chief ExecutiveOfficer of Genzyme and a former officer.

At December 31, 2005 and 2004, Genzyme ownedapproximately 1.5% and 1.8%, respectively of the Company’s common stockoutstanding.

During 1996, the Company signed two patent licenseagreements with Genzyme consistent with our standard license terms. The Companyrecorded license revenues of $50,000, for each year ended December 31,2005, 2004 and 2003, in connection with the maintenance fees on these twoagreements. As of December 31, 2005 and 2004, there were no outstandingaccounts receivable due from Genzyme related to the patent license agreement.

During 2004, the Companysigned a library license agreement with Genzyme consistent with its standardlicense terms. The Company received $1.3 million from Genzyme and recordedlicense revenues of $225,000 and $275,000, for the years ended December 31,2005 and 2004 respectively, in connection with the technology access fees onthis agreement. As of December 31, 2005 and 2004, there were nooutstanding accounts receivable due from Genzyme related to the library licenseagreement.

70

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**15.**   Business Segments

The Company disclosesbusiness segments under SFAS 131, “Disclosures about Segments of anEnterprise and Related Information,” which established standards for reportinginformation about operating segments in annual financial statements of publicbusiness enterprises. It also establishes standards for related disclosuresabout products and service, geographic areas and major customers. On October 29,2003, the Company sold its separations products business known as Biotage,which was previously disclosed as the Separations segment. The Company hasreevaluated its business activities that are regularly reviewed by the ChiefExecutive Officer for which discrete financial information is available. As aresult of this evaluation, the Company determined that it has one segment withoperations in two geographic locations. As of December 31, 2005, 2004 and2003, the Company had approximately $1.2 million, $2.0 million and $1.9million, respectively, of long-lived assets located in Europe, with theremainder held in the United States. For the years ended December 31,2005, 2004 and 2003, the Company did not have any external revenues outside theUnited States.

**16.**   ComprehensiveIncome (Loss)

Accumulatedother comprehensive income (loss) is calculated as follows:

| ** **                         | ** ** | **Unrealized Loss on  Short-term Investments** | ** ** | **Foreign Currency  Translation  Adjustment** | ** ** | **Accumulated Other  Comprehensive  Income** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **(In thousands)**                                       | ** ** |
| Balance at  December 31, 2002 |       |                                                          | $          | —                                             |       |                                              |       | $504 |   |   |   | $ | 504 |   |   |
| Change for 2003                    |       |                                                          | —     |                                               |       |                                              | 36         |   |   |   | 36 |   |   |
| Balance at  December 31, 2003 |       |                                                          | —     |                                               |       |                                              | 540        |   |   |   | 540 |   |   |
| Change for 2004                    |       |                                                          | (87        | )                                                  |       |                                              | (27        | ) |   |   | (114 | ) |   |
| Balance at  December 31, 2004 |       |                                                          | (87        | )                                                  |       |                                              | 513        |   |   |   | 426 |   |   |
| Change for 2005                    |       |                                                          | 45         |                                               |       |                                              | (50        | ) |   |   | (5 | ) |   |
| Balance at  December 31, 2005 |       |                                                          | $          | (42                                                | )          |                                              |       | $ | 463 |   |   |   | $ | 421 |   |   |
|                                    |            |                                                               |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

**17.**   License Agreements

On December 31, 1997, the Company and CambridgeAntibody Technology Limited (CAT) entered into agreements under which eachparty was granted a license to certain intellectual property owned orcontrolled by the other party in the field of phage display.  This cross-licensing arrangement was furtheramended and expanded by two separate amendment agreements executed by andbetween the Company and CAT on January 3, 2003 and September 18,2003, respectively. Under the terms of the amended agreement, CAT granted theCompany worldwide licenses for research and certain other purposes for all CATantibody phage display patents (the CAT patents). The Company also receivedoptions for licenses to develop therapeutic and diagnostic antibody productsunder the CAT patents. CAT will receive milestone and royalty payments inconnection with antibody products advanced into clinical trials by the Company,its collaborators or its customers, which will be recorded as cost of revenueswithin research and development expenses when incurred. CAT will have theoption to co-fund and co-develop antibodies developed by the Company and toshare the Company’s revenues from certain other applications of antibody phagedisplay technology. Additionally, CAT is not required to pay the Companyroyalties related to the Company’s Ladner patents on antibody productsdeveloped by CAT.

71

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**17.**   License Agreements (Continued)

See also Note 14,Investment in Joint Venture (Dyax–Genzyme LLC) and Other Related PartyTransactions.

**18.**   Unaudited QuarterlyOperating Results

The following is a summary of unaudited quarterlyresults of operations for the years ended December 31, 2005 and 2004:

| **Year ended December 31, 2005** | ** ** | ** **                                               | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                           | ** ** | **(in thousands, except per share)** | ** ** |
| Revenue                                              |       | $                                                        | 3,707      |               | $          | 6,693               |       | $                  | 2,157      |                | $          | 7,302 |   |
| Loss from  continuing operations                     |       | $                                                        | (8,458     | )                  | $          | (8,067              | )          | $                  | (9,212     | )                   | $          | (5,828 | ) |
| Net loss                                             |       | $                                                        | (8,447     | )                  | $          | (7,925              | )          | $                  | (8,963     | )                   | $          | (5,609 | ) |
| **Basic and diluted net loss per  share:**           |       |                                                     |       |               |       |                |       |               |       |
| Net loss                                             |       | $                                                        | (0.27      | )                  | $          | (0.23               | )          | $                  | (0.24      | )                   | $          | (0.15 | ) |

 

| **Year ended December 31, 2004** | ** ** | ** **                                               | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                           | ** ** | **(in thousands, except per share)** | ** ** |
| Revenue                                              |       | $                                                        | 5,697      |               | $          | 4,074               |       | $                  | 3,260      |                | $          | 3,559 |   |
| Loss from continuing  operations                     |       | $                                                        | (7,282     | )                  | $          | (8,146              | )          | $                  | (7,930     | )                   | $          | (9,515 | ) |
| Net income (loss)                                    |       | $                                                        | (7,435     | )                  | $          | (8,176              | )          | $                  | (7,963     | )                   | $          | (9,540 | ) |
| **Basic and diluted net income (loss) per share:**   |       |                                                     |       |               |       |                |       |               |       |
| Net income (loss)                                    |       | $                                                        | (0.24      | )                  | $          | (0.26               | )          | $                  | (0.25      | )                   | $          | (0.31 | ) |

 

72

----

**Dyax Corp. and Subsidiaries Notes to Consolidated Financial Statements (Continued)**

**ITEM9.     CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the Exchange Act). Basedon this evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this annual report.

**Management’sReport on Internal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting of the Company, as such term is defined in Exchange Act Rule 13a-15(f).Under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control—IntegratedFramework,*our management concluded that our internal control overfinancial reporting was effective as of December 31, 2005. Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2005 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

**ITEM 9B.**       OTHERINFORMATION

None.

73

----

**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE COMPANY

Portions of the response to this item are incorporatedherein by reference from the discussion responsive thereto under the captions “Electionof Directors—Nominees for Director”, “Section 16(a) BeneficialOwnership Reporting Compliance”, “Executive Officers and Key Employees” and “Electionof Directors—Board and Committee Matters” in the Company’s Definitive ProxyStatement relating to the 2006 Annual Meeting of Stockholders (the “2006 ProxyStatement”).

We have adopted a Code ofBusiness Conduct and Ethics (the “code of ethics”) that applies to all of ourdirectors, officers and employees. The code of ethics is filed as an exhibit tothis Report. In addition, if we make any substantive amendments to the code ofethics or grant any waiver, including any implicit waiver, from a provision ofthe code to any of our executive officers or directors, we will disclose thenature of such amendment or waiver as required by applicable law.

**ITEM 11.**         EXECUTIVECOMPENSATION

The response to this itemis incorporated herein by reference from the discussion responsive theretounder the following captions in the 2006 Proxy Statement: “Election ofDirectors—Director Compensation,” “Executive Compensation” and “Election ofDirectors—Compensation Committee Interlocks and Insider Participation.”

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated herein byreference in part from the discussion responsive thereto under the caption “ShareOwnership” in the 2006 Proxy Statement.

The following tableprovides information about the securities authorized for issuance under theCompany’s equity compensation plans as of December 31, 2005:

**EquityCompensation Plan Information**

| **Plan Category**                                          | ** ** | ** ** | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                          | ** ** | **(c)**                                                                                                     | ** ** |
| Equity  compensation plans approved by security holders(1) |       |       | 4,949,927  |                                                                                                                                             |       |                                                                                                        | $          | 6.69                                                                                                                                                                                                             |       |   |   | 2,715,304 |   |   |
| Equity  compensation plans not approved by security holders:    |       |       | —     |                                                                                                                                             |       |                                                                                                        | —     |                                                                                                                                                                                                             |       |   | — |   |   |
| **Totals:**                                                     |       |       | 4,949,927  | (2)                                                                                                                                              |       |                                                                                                        | $          | 6.69                                                                                                                                                                                                             |       |   |   | 2,715,304 | (3) |   |

----

(1)          Consists of the Amendedand Restated 1995 Equity Incentive Plan and the 1998 Employee Stock PurchasePlan.

(2)          Does not includepurchase rights currently accruing under the 1998 Employee Stock Purchase Plan,because the purchase price (and therefore the number of shares to be purchased)will not be determined until the end of the purchase period, which is June 30,2006.

(3)          Includes209,240 shares issuable under the 1998 Employee Stock Purchase Plan, of whichup to 50,000 are issuable in connection with the current offering period whichends on June 30, 2006. The remaining shares consist of 2,506,064 under the1995 Amended and Restated Equity Incentive Plan. 

74

----

No incentive stock optionsmay be granted under the plan more than ten years after the plan’s July 13,1995 effective date. The plan may be amended, suspended, or terminated by theCompensation Committee of the Board of Directors at any time, subject to anyrequired stockholder approval.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The response to this itemis incorporated herein by reference from the discussion responsive theretounder the caption “Election of Directors—Certain Relationships and RelatedTransactions” in the 2006 Proxy Statement.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The response to this itemis incorporated herein by reference from the discussion responsive theretounder the captions “Election of Directors—Board and Committee Matters” and “InformationConcerning Our Auditors” in the 2006 Proxy Statement.

**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULE

**(a) 1.   FINANCIAL STATEMENTS**

The financial statementsare included under Part II, Item 8 of this Report.

**2.   FINANCIALSTATEMENTS SCHEDULE**

**SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

**For the years ended December 2005, 2004 and 2003**

**(In thousands)**

| ** **                        | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------------|------------|
| Allowance for  Doubtful Accounts: |       |                                           |       |          |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| 2005                              |       |                                           | $          | 75            |       |           |       | $                                        | 30         |   |   |   | $ | — |   |   |   | $ | 105 |   |   |
| 2004                              |       |                                           | $          | 75            |       |           |       | $                                        | —     |   |   |   | $ | — |   |   |   | $ | 75 |   |   |
| 2003                              |       |                                           | $          | 75            |       |           |       | $                                        | 25         |   |   |   | $ | 25 |   |   |   | $ | 75 |   |   |

 

| ** **                               | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------------|------------|
| Deferred Tax  Asset Valuation Allowance: |       |                                           |       |          |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| 2005                                     |       |                                           | $          | 59,820        |       |           |       | $                                        | 20,783     |   |   |   | $ | 709 |   |   |   | $ | 79,894 |   |   |
| 2004                                     |       |                                           | $          | 43,419        |       |           |       | $                                        | 18,257     |   |   |   | $ | 1,856 |   |   |   | $ | 59,820 |   |   |
| 2003                                     |       |                                           | $          | 45,066        |       |           |       | $                                        | 975        |   |   |   | $ | 2,622 |   |   |   | $ | 43,419 |   |   |

 

75

----

**3.   EXHIBITS**

The exhibits are listedbelow under Part IV, Item 15(b) of this Report.

**(b)**   EXHIBITS

| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                             |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Purchase Agreement dated October 13, 2003 by  and among Pyrosequencing AB, Dyax Corp. and Biotage, LLC. Filed as  Exhibit 2.1 to the Company’s Current Report on Form 8-K (File  No. 000-24537) filed on November 7, 2003 and incorporated  herein by reference.                                                                              |
| 3.1              |       | Amended and Restated  Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the  Company’s Quarterly Report on Form 10-Q (File No. 000-24537)  for the quarter ended June 30, 2004 and incorporated herein by  reference.                                                                                                           |
| 3.2              |       | Amended and Restated  By-laws of the Company. Filed as Exhibit 3.2 to the Company’s Quarterly  Report on Form 10-Q (File No. 000-24537) for the  quarter ended September 30, 2000 and incorporated herein by reference                                                                                                                             |
| 3.3              |       | Certificate of  Designations Designating the Series A Junior Participating Preferred  Stock of the Company. Filed as Exhibit 3.1 to the Company’s Current  Report on Form 8-K (File No. 000-24537) and  incorporated herein by reference.                                                                                                          |
| 4.1              |       | Specimen Common Stock  Certificate. Filed as Exhibit 4.1 to the Company’s Registration  Statement on Form S-1 (File No. 333-37394) and  incorporated herein by reference.                                                                                                                                                                               |
| 4.2              |       | Rights Agreement, dated  June 27, 2001 between American Stock Transfer & Trust Company,  as Rights Agent, and the Company. Filed as Exhibit 4.1 to the Company’s  Current Report on Form 8-K (File No. 000-24537) and  incorporated herein by reference.                                                                                  |
| 10.1             |       | Amended and Restated  1995 Equity Incentive Plan, as amended through May 19, 2005. Filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  (File No. 000-24537) for the quarter ended June 30, 2005 and  incorporated herein by reference.                                                                                     |
| 10.2             |       | 1998 Employee Stock  Purchase Plan. Filed as Exhibit 10.2 to the Company’s Registration  Statement on Form S-1 (File No. 333-37394) and  incorporated herein by reference.                                                                                                                                                                              |
| 10.3*            |       | Form of Change of  Control Agreement between the Company and Clive R. Wood, Ph.D. and Ivana Magovcevic-Liebisch,  Ph.D., J.D. Filed as Exhibit 10.3 to the Company’s Annual Report on  Form 10-K (File No. 000-24537) for the year ended  December 31, 2003 and incorporated herein by reference.                                             |
| 10.4*            |       | Employment Letter  Agreement, dated September 1, 1999, between Stephen S. Galliker and the  Company. Filed as Exhibit 10.3 to the Company’s Registration Statement  on Form S-1 (File No. 333-37394) and incorporated  herein by reference.                                                                                                        |
| 10.5†       |       | License Agreement, dated  January 24, 2001, between Debiopharm S.A. and the Company. Filed as  Exhibit 10.26 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 2000 (File No. 000-24537) and  incorporated herein by reference.                                                                                    |
| 10.6             |       | Form of  Indemnification Agreement by and between certain directors and executive  officers of the Company and the Company. Filed as Exhibit 10.32 to  the Company’s Registration Statement on Form S-1 (File  No. 333-37394) and incorporated herein by reference.                                                                           |
| 10.7             |       | Amended and Restated  Registration Rights Agreement, dated as of February 12, 2001, between  holders of the Company’s capital stock named therein and the Company. Filed  as Exhibit 10.33 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2000 (File No. 000-24537) and  incorporated herein by reference. |

76

----

 

| 10.8†  |   | Collaboration and  License Agreement, dated October 31, 2000, between Bracco Holding, B.V.  and Bracco International, B.V. and the Company. Filed as Exhibit 10.2 to  the Company’s Quarterly Report on Form 10-Q (File No. 000-24537)  for the quarter ended September 30, 2000 and incorporated herein by  reference.      |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9†  |   | First Amendment to the  Collaboration and License Agreement, by and between Bracco Imaging S.p.A. and  the Company, effective as of December 31, 2003. Filed as  Exhibit 10.11 to the Company’s Annual Report on Form 10-K  (File No. 000-24537) for the year ended December 31, 2003 and  incorporated herein by reference. |
| 10.10       |   | Lease, dated  June 13, 2001, between the Massachusetts Institute of Technology and the  Company. Filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q (File No. 000-24537) for the quarter ended  June 30, 2001 and incorporated herein by reference.                                                       |
| 10.11       |   | Master Lease Agreement  and related documents between the Company and General Electric Capital  Corporation dated as of May 1, 2001. Filed as Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-Q (File No. 000-24537)  for the quarter ended March 31, 2002 and incorporated herein by  reference.                 |
| 10.12       |   | Amended and Restated  Collaboration Agreement between Genzyme Corporation and the Company dated  May 31, 2002. Filed as Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q (File No. 000-24537) for the  quarter ended June 30, 2002 and incorporated herein by reference.                                         |
| 10.13       |   | Senior Secured  Promissory Note between Genzyme Corporation and the Company dated  May 31, 2002. Filed as Exhibit 10.2 to the Company’s Quarterly  Report on Form 10-Q (File No. 000-24537) for the  quarter ended June 30, 2002 and incorporated herein by reference.                                                       |
| 10.14       |   | Security Agreement  between Genzyme Corporation and the Company dated May 31, 2002. Filed as  Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q  (File No. 000-24537) for the quarter ended June 30, 2002 and  incorporated herein by reference.                                                                   |
| 10.15       |   | Amendment No. 1 to  Amended and Restated Collaboration Agreement between Genzyme Corporation and  the Company, dated as of September 30, 2003. Filed as Exhibit 10.17  to the Company’s Annual Report on Form 10-K (File No. 000-24537)  for the year ended December 31, 2003 and incorporated herein by  reference.    |
| 10.16       |   | First Amendment to  Security Agreement between Genzyme Corporation and the Company dated as of  October 15, 2003. Filed as Exhibit 10.18 to the Company’s Annual  Report on Form 10-K (File No. 000-24537) for the year  ended December 31, 2003 and incorporated herein by reference.                                       |
| 10.17       |   | License Agreement  between XOMA Ireland Limited and the Company dated October 16, 2002.  Filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-  K for the year ended December 31, 2002 (File No. 000-24537)  and incorporated herein by reference.                                                               |
| 10.18† |   | Amendment Agreement  between Cambridge Antibody Technology Limited and the Company dated  January 6, 2003. Filed as Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q (File No. 000-24537) for the  quarter ended March 31, 2003 and incorporated herein by reference.                                            |
| 10.19† |   | Second Amendment  Agreement between Cambridge Antibody Technology Limited and the Company dated  September 18, 2003. Filed as Exhibit 99.2 to the Company’s Current  Report on Form 8-K (File No. 000-24537) filed on  December 29, 2003 and incorporated herein by reference.                                               |

77

----

 

| 10.20  |   | Form of the  Company’s Incentive Stock Option Certificate under the Company’s Amended and  Restated 1995 Equity Incentive Plan for all U.S. employees, including its  executive officers. Filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  (File No. 000-24537) for the quarter ended September 30, 2004  and incorporated herein by reference.    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21  |   | Form of the  Company’s Nonstatutory Stock Option Certificate under the Company’s Amended  and Restated 1995 Equity Incentive Plan for its U.S. employees, including its  executive officers. Filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  (File No. 000-24537) for the quarter ended September 30, 2004  and incorporated herein by reference. |
| 10.22  |   | Form of the  Company’s Nonstatutory Stock Option Certificate under the Company’s Amended  and Restated 1995 Equity Incentive Plan for its non-employee directors. Filed as Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q (File No. 000-24537) for the  quarter ended September 30, 2004 and incorporated herein by reference.                             |
| 10.23  |   | Second Amendment to the  Collaboration and License Agreement, by and between Bracco Imaging S.p.A. and  the Company, effective as of January 3, 2005. Filed as  Exhibit 10.23 to the Company’s Annual Report on Form 10-K  (File No. 000-24537) for the year ended December 31, 2004 and  incorporated herein by reference.                                                        |
| 10.24* |   | Employment Letter  Agreement dated June 27, 2003 between Clive R. Wood, Ph.D. and the  Company. Filed as Exhibit 10.3 to the Company’s Quarterly Report on  Form 10-Q (File No. 000-24537) for the quarter ended  March 31, 2004 and incorporated herein by reference.                                                                                                             |
| 10.25  |   | Non-Employee Director  Compensation. Filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q (File No. 000-24537) for the quarter ended  March 31, 2005 and incorporated herein by reference.                                                                                                                                                                             |
| 10.26  |   | Summary of Current  Compensation for Named Executive Officers. Filed as Exhibit 10.2 to the  Company’s Quarterly Report on Form 10-Q (File No. 000-24537)  for the quarter ended March 31, 2005 and incorporated herein by  reference.                                                                                                                                                  |
| 10.27* |   | Employment Letter  Agreement between Dyax Corp. and Thomas R. Beck, M.D., effective as of  June 1, 2005. Filed as Exhibit 10.1 to the Company’s Current Report  on Form 8-K filed with the Commission on June 6, 2005 (File  No. 000-24537) and incorporated herein by reference.                                                                                                  |
| 10.28  |   | Amendment No. 2 to  Amended and Restated Collaboration Agreement between Genzyme Corporation and  the Company, executed by Dyax on September 29, 2005. Filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  (File No. 000-24537) for the quarter ended September 30, 2005  and incorporated herein by reference.                                            |
| 10.29* |   | Executive Compensation  Summary. Filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K (File No. 000-24537) filed on  December 14, 2005 and incorporated herein by reference.                                                                                                                                                                                              |
| 14.1   |   | Code of Business Conduct  and Ethics of the Company. Filed as Exhibit 14.1 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2004  (File No. 000-24537) and incorporated herein by reference.                                                                                                                                                                |
| 21.1   |   | Subsidiaries of the  Company. Filed herewith.                                                                                                                                                                                                                                                                                                                                                                    |
| 23.1   |   | Consent of  PricewaterhouseCoopers LLP, an independent registered public accounting firm.  Filed herewith.                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of Chief  Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the  Securities Exchange Act of 1934, as amended. Filed herewith.                                                                                                                                                                                                                                                  |

78

----

 

| 31.2 |   | Certification of Chief  Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the  Securities Exchange Act of 1934, as amended. Filed herewith. |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 |   | Certification pursuant  to 18 U.S.C. Section 1350. Filed herewith.                                                                                         |
| 99.1 |   | Dyax–Genzyme LLC  Financial Statements. Filed herewith.                                                                                                    |

----

*                    Indicates a contractwith management.

†                    This Exhibit hasbeen filed separately with the Commission pursuant to an application forconfidential treatment. The confidential portions of this Exhibit havebeen omitted and are marked by an asterisk.

79

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Company has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized, this third day of March, 2006.
|          | DYAX CORP. |
|----------|------------|
|     | By:        | /s/  Henry E. Blair |
| * * | * *   | Henry E.  Blair |
| * * | * *   | *Chief  Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Company in thecapacities and on the dates indicated.
|                                         | **Name** | ** **                                  | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-----------------------------------------|----------|---------------------------------------------|------------|---------------------|-----------|------------|------------|--|----------|------------|
| /s/ Henry E. Blair                 |     | Chief Executive Officer, and                |       |                |
| Henry E.  Blair                    |     | Chairman of the  Board of Directors         |       | March 3,  2006 |
|                                    |     | (Principal  Executive Officer)              |       |                |
| /s/ Stephen S. Galliker            |     | Executive Vice President, Finance and       |       |                |
| Stephen S.  Galliker               |     | Administration  and Chief Financial Officer |       | March 3,  2006 |
|                                    |     | (Principal  Financial Officer)              |       |                |
| /s/ Constantine E. Anagnostopoulos |     |                                        |       |                |
| Constantine E.  Anagnostopoulos    |     | Director                                    |       | March 3,  2006 |
| /s/ Susan B. Bayh                       |     |                                        |       |                |
| Susan  B. Bayh                          |     | Director                                    |       | March 3,  2006 |
| /s/ James W. Fordyce               |     |                                        |       |                |
| James W.  Fordyce                  |     | Director                                    |       | March 3,  2006 |
| /s/ Thomas L. Kempner              |     |                                        |       |                |
| Thomas L.  Kempner                 |     | Director                                    |       | March 3,  2006 |
| /s/ Henry R. Lewis                 |     |                                        |       |                |
| Henry R.  Lewis                    |     | Director                                    |       | March 3,  2006 |
| /s/ David J. McLachlan             |     |                                        |       |                |
| David J.  McLachlan                |     | Director                                    |       | March 3,  2006 |
| /s/ Mary Ann Gray                       |     |                                        |       |                |
| Mary Ann Gray                           |     | Director                                    |       | March 3, 2006  |

 

 

80

----