**Exhibit 99.1**

 

**DYAXCORP.**

 

**Important Factors That May AffectFuture Operations and Results**

 

**March 2005**

 

In this Exhibit 99.1, “we,” “us,” “our” and “Dyax”refer to Dyax Corp. and its subsidiaries.

 

From time to time, we may make forward-looking publicstatements, such as statements concerning our then expected results ofoperations, financial resources or our projected plans for research anddevelopment programs, clinical trials and collaborations, as well as otherestimates relating to future operations. Forward-looking statements may be inreports filed under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), in press releases or informal statements made with the approval of anauthorized executive officer. In some cases, words or phrases of expectation oruncertainty like “expect,” “believe,” “continue,” “anticipate,” “estimate,” “may,”“will,” “could,” “opportunity,” “future,” “project,” or similar expressionsidentify “forward-looking statements” within the meaning of Section 21E of theExchange Act and Section 27A of the Securities Act of 1933, as amended, asenacted by the Private Securities Litigation Reform Act of 1995.

 

Statements that are not historical facts are based onour current expectations, beliefs, assumptions, estimates, forecasts andprojections for our business and the industry and markets in which we compete.These statements are not guarantees of future performance and involve certainrisks, uncertainties and assumptions, which are difficult to predict.Therefore, actual outcomes and results may differ materially from what isexpressed in such forward-looking statements.

 

We caution you not to place undue reliance on theseforward-looking statements, which speak only as of the date on which they aremade. In addition, we advise you that the factors listed below, as well asother factors we have not currently identified, could affect our financial orother performance and could cause our actual results for future periods todiffer materially from any opinions or statements expressed with respect tofuture periods or events in any forward-looking statement.  We will not undertake and specificallydecline any obligation to publicly release revisions to these forward-lookingstatements to reflect either circumstances after the date of the statements orthe occurrence of events which may cause us to re-evaluate our forward-lookingstatements, except as may be required by law.

 

In connection with the “safe harbor” provisions of thePrivate Securities Litigation Reform Act, we are hereby filing cautionarystatements identifying important factors that could cause our actual results todiffer materially from those projected in forward-looking statements made by usor on our behalf.

 

***Wehave a history of operating losses and expect to incur significant additionaloperating losses.***

 

We have incurredoperating losses since our inception in 1989. As of December 31, 2004, we had an accumulated deficit of approximately $151.4 million.  We expect to incur substantial additionaloperating losses over the next several years as our research, development,pre-clinical testing and clinical trial activities increase, particularly withrespect to our current product candidates, DX-88 and DX-890.  We have not generated any revenue fromproduct sales to date, and it is possible that we will never have significant,if any, product sales revenue.

 

Currently, we generaterevenue from collaborators through research and development funding and throughlicense and maintenance fees that we receive in connection with the licensingof our phage display technology.  Weexpect to continue to be dependent upon revenue generated from ourcollaborative arrangements and our licensing efforts over the next severalyears.

 

To become profitable, we,either alone or with our collaborators, must successfully develop, manufactureand market our current product candidates, DX-88 and DX-890, and other productsand continue to leverage our phage

 

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display technology togenerate research funding and licensing revenue.  It is possible that we will never havesignificant product sales revenue or receive significant royalties on ourlicensed product candidates or licensed technology.

 

***Wemay be unable to raise the capital that we will need to sustain our operations.***

 

We expect that existingcash, 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 2006. We may, however, need or chooseto raise additional funds before then. We will need additional funds if our cash requirements exceed ourcurrent expectations or if we generate less revenue than we expect.

 

Our future capitalrequirements will depend on many factors, including:

 

•                  theprogress of our drug discovery and development programs;

 

•                  ourability to develop and commercialize our product candidates;

 

•                  maintainingor expanding our existing collaborative and license arrangements and enteringinto additional ones;

 

•                  theprogress of the development and commercialization of milestone androyalty-bearing compounds by our collaborators and licensees;

 

**•**                  ourdecision to manufacture materials used in our product candidates;

 

**•**                  competingtechnological and market developments;

 

**•**                  costsof defending our patents and other intellectual property rights; and

 

**•**                  theamount and timing of additional capital equipment purchases.

 

We also may seekadditional funding through collaborative arrangements and public or privatefinancings.  We may not be able to obtainfinancing on acceptable terms or at all or we may not be able to enter intoadditional collaborative arrangements. In addition, the terms of any financing may adversely affect theholdings or the rights of our stockholders. If we are unable to obtain funding on a timely basis, we may be requiredto curtail significantly one or more of our research or developmentprograms.  We also could be required toseek funds through arrangements with collaborators or others that may requireus to relinquish rights to some of our technologies, product candidates orproducts that we would otherwise pursue on our own.

 

***Ourbiopharmaceutical or diagnostic product candidates must undergo rigorousclinical trials and regulatory approvals, which could substantially delay orprevent 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 approval process is typically lengthyand expensive, and approval is never certain. Positive results from pre-clinical studies and early clinical trials donot ensure positive results in late stage clinical trials designed to permitapplication for regulatory approval.  Wedo not know when, or if, our current clinical trials will be completed.  We also cannot accurately predict when otherplanned clinical trials will begin or be completed.  Many factors affect patient enrollment,including the size of the patient population, the proximity of patients toclinical sites, the eligibility criteria for the trial, alternative therapies,competing clinical trials and new drugs approved for the conditions we areinvestigating.  For example, three othercompanies are conducting clinical trials of treatments for HAE and haveannounced plans for future trials that are seeking or likely to seek patientswith HAE.  In addition, competition for

 

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patients incardiovascular disease trials is particularly intense because of the limitednumber of leading cardiologists and the geographic concentration of majorclinical centers.  As a result of all ofthese factors, our trials may take longer to enroll patients than weanticipate.  Such delays may increase ourcosts and slow down our product development and the regulatory approvalprocess.  Our product development costswill also increase if we need to perform more or larger clinical trials than planned.  The occurrence of any of these events willdelay our ability to generate revenue from product sales and impair our abilityto become profitable, which may cause us to have insufficient capital resourcesto support our operations.

 

Because of the risks anduncertainties in biopharmaceutical development, products that we or ourcollaborators develop could take a significantly longer time to gain regulatoryapproval than we expect or may never gain approval.  If we or our collaborators do not receivethese necessary approvals, we will not be able to generate substantial productor royalty revenues and may not become profitable.  We and our collaborators may encountersignificant delays or excessive costs in our efforts to secure regulatoryapprovals.  Factors that raiseuncertainty in obtaining these regulatory approvals include the following:

 

•                  wemust demonstrate through clinical trials that the proposed product is safe andeffective for its intended use;

 

•                  wehave limited experience in conducting the clinical trials necessary to obtain regulatoryapproval; and

 

•                  dataobtained from pre-clinical and clinical activities are susceptible to varyinginterpretations, which could delay, limit or prevent regulatory approvals.

 

Regulatory authoritiesmay delay, suspend or terminate clinical trials at any time if they believethat the patients participating in trials are being exposed to unacceptablehealth risks or if they find deficiencies in the clinical trialprocedures.  Our Investigational New DrugApplications for our recombinant protein DX-88, for example, were placed onclinical hold by the FDA in May 2004, following the FDA’s evaluation ofcertain animal test data submitted by us. Although the study was allowed to continue, we were required by the FDAto conduct additional testing at additional expense, and there is no guaranteethat we would be able to resolve similar issues in the future, either asquickly, 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.

 

On January 10, 2005, weannounced our plans to initiate a Phase III clinical trial of DX-88 for thetreatment of HAE during the first half of 2005. Before filing a BiologicLicense Application (BLA) for marketing approval of this product in thisindication, which we plan to file in 2006, we will need to complete this PhaseIII trial. HAE is an indication with a particularly small patient population,and our planned Phase III trial may, for this or any of the other reasonsdescribed above, take longer than anticipated to initiate and/or to complete.

 

***Welack experience in conducting clinical trials, handling regulatory processes,and conducting sales and marketing activities, any or all of which mayadversely affect our ability to commercialize any biopharmaceuticals that wemay develop.***

 

We have hired experiencedclinical development, regulatory, and marketing staff to develop and superviseour clinical trials, regulatory processes, and sales and marketingactivities.  However, we will remaindependent upon third party contract research organizations to carry out some ofour clinical and pre-clinical research studies for the foreseeable future.  As a result, we have had and will continue tohave less control over the conduct of the clinical trials, the timing andcompletion of the trials, the required reporting of adverse events and themanagement of data developed through the trial than would be the case if wewere relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentiallyleading to mistakes as well as difficulties in coordinating activities.  Outside parties may have staffingdifficulties, may undergo changes in priorities or may become financiallydistressed, adversely affecting their willingness or ability to conduct ourtrials.  We may also experienceunexpected cost increases that are beyond our control.  Problems with the timeliness or quality ofthe work of a contract research organization may lead us

 

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to seek to terminate therelationship and use an alternative service provider.  However, changing our service provider may becostly and may delay our trials, and contractual restrictions may make such achange difficult or impossible. Additionally, it may be impossible to find a replacement organizationthat can conduct our trials in an acceptable manner and at an acceptable cost.

 

Similarly, we may beunable to enter into third party arrangements for the marketing and sale ofbiopharmaceuticals on acceptable terms. For certain products, we may incur substantial expenses to develop ourown marketing and sales force in order to commercialize our biopharmaceuticalsand our efforts may not be successful or the product may not be approved.

 

As a result we mayexperience delays in the commercialization of our biopharmaceuticals and we maybe unable to compete effectively.

 

***Becausewe currently lack the resources, capability and experience necessary to manufacturebiopharmaceuticals, we will depend on third parties to perform this function,which may adversely affect our ability to commercialize any biopharmaceuticalswe may develop.***

 

We do not currentlyoperate manufacturing facilities for the clinical or commercial production ofbiopharmaceuticals.  We also lack theresources, capability and experience necessary to manufacturebiopharmaceuticals.  As a result, we willdepend on collaborators, partners, licensees and other third parties tomanufacture clinical and commercial scale quantities of our biopharmaceuticalcandidates.  If we enter into these typesof third party arrangements, then we will be dependent on the efforts ofothers, which if not successful could result in decreased revenue to us.

 

To date we haveidentified only a few facilities that are capable of producing material forpre-clinical and clinical studies and we cannot assure you that they will beable to supply sufficient clinical materials during the clinical development ofour biopharmaceutical candidates.  Thereis no assurance that contractors will have the capacity to manufacture or testour products at the required scale and within the required time frame.  There is no assurance that the supply ofclinical materials can be maintained during the clinical development of ourbiopharmaceutical candidates.  We willalso be dependent on contract manufacturers to produce and test anybiopharmaceuticals that are approved for market.

 

***Weare substantially dependent on our collaborator’s ability to successfully andtimely complete clinical trials and obtain regulatory approval to market DX-890for cystic fibrosis.  Our business may bematerially harmed and our stock price adversely affected if regulatory approvalof DX-890  is not obtained or is substantiallydelayed.***

 

Under our existingcollaboration agreement for the development of DX-890, Debiopharm S.A. isresponsible for the management of the pre-clinical and clinical development ofDX-890.  Consequently, the success of theDX-890 development program is largely dependent on Debiopharm’s ability todemonstrate positive results in pre-clinical and clinical trials designed topermit application for regulatory approval of DX-890 as a treatment for cysticfibrosis.  To date, Debiopharm’s progresshas been slower than expected, especially with regard to achieving itsmilestones under the agreement.  In theevent that Debiopharm is unable to successfully complete pre-clinical andclinical trials in a timely fashion, our business may be materially harmed andour stock price adversely affected.  Inaddition, depending on the development strategy we pursue, we may be unable touse some or all of our existing data on DX-890 in this indication.

 

As a result of theseissues, we are currently negotiating with Debiopharm to amend our collaborationagreement in order to provide Debiopharm worldwide rights to independentlydevelop and commercialize DX-890 for cystic fibrosis and acute respiratorydistress syndrome (known as ARDS).  Underthe proposed amendment, we would receive milestones and royalties fromDebiopharm in connection with the ongoing development of DX-890.  Additionally, independent of Debiopharm, wehave developed a long-acting pegylated form of DX-890 (known as PEG-DX-890),and are exploring the potential for advancing this compound into developmentfor certain other pulmonary

 

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indications, which couldinclude chronic obstructive pulmonary disease (known as COPD) and alpha-1antitrypsin deficiency.  Any suchdevelopment would involve significant additional costs.

 

***Productliability and other claims against us may reduce demand for our productcandidates or result in substantial damages.***

 

We face an inherent riskof product liability exposure related to testing our product candidates inhuman clinical trials and will face even greater risks if we sell our productcandidates commercially. An individual may bring a product liability claimagainst us if one of our product candidates causes, or merely appears to havecaused, an injury. Moreover, in some of our clinical trials, we test ourproduct candidates in indications where the onset of certain symptoms or “attacks”could be fatal.  Although the protocolsfor these trials include emergency treatments in the event a patient appears tobe suffering a potentially fatal incident, patient deaths may nonethelessoccur.  As a result, we may faceadditional liability if are found or alleged to be responsible for any suchdeaths.

 

These types of productliability claims may result in:

 

•                  decreaseddemand for our product candidates;

 

•                  injuryto our reputation;

 

•                  withdrawalof clinical trial volunteers;

 

•                  relatedlitigation costs; and

 

•                  substantialmonetary awards to plaintiffs.

 

***If wefail to establish and maintain strategic license, research and collaborativerelationships, or if our collaborators are not able to successfully develop andcommercialize product candidates, our ability to generate revenues could beadversely affected.***

 

Our business strategyincludes leveraging some of our product candidates, as well as our proprietaryphage display technology, through collaborations and licenses that arestructured to generate revenues through license fees, technical and clinicalmilestone payments, and royalties.  Forus to continue to receive any significant payments from our licenses andcollaboratoions, the relevant product candidates must advance through clinicaltrials, establish safety and efficacy, and achieve regulatory approvals andmarket acceptance.  In general, however,under our existing license and collaboration agreements, our licensees andcollaborators:

 

•                  arenot obligated to develop or market product candidates discovered using ourphage display technology;

 

•                  maypursue alternative technologies or develop competing products;

 

•                  controlmany of the decisions with respect to research, clinical trials andcommercialization of product candidates we discover or develop with them;

 

•                  mayterminate their collaborative arrangements with us under specifiedcircumstances, including, for example, a change of control, with short notice;and

 

•                  maydisagree with us as to whether a milestone or royalty payment is due or as tothe amount that is due under the terms of our collaborative arrangements.

 

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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 significantportion of our licensing and collaborative efforts fail, our business andfinancial condition would be materially harmed.

 

***Weand our collaborators may not be able to gain market acceptance of ourbiopharmaceuticals, which could adversely affect our revenues.***

 

We cannot be certain thatany of our biopharmaceutical candidates, even if successfully approved, willgain market acceptance among physicians, patients, healthcare payors,pharmaceutical manufacturers or others. We may not achieve market acceptance even if clinical trials demonstratesafety and efficacy of our biopharmaceutical candidates and the necessaryregulatory and reimbursement approvals are obtained.  The degree of market acceptance of ourbiopharmaceutical candidates will depend on a number of factors, including:

 

•                  theirclinical efficacy and safety;

 

•                  theircost-effectiveness;

 

•                  theirpotential advantage over alternative treatment methods;

 

•                  theirmarketing and distribution support;

 

•                  reimbursementpolicies of government and third-party payors; and

 

•                  marketpenetration and pricing strategies of competing and future products.

 

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

 

***Competitionand technological change may make our potential products and technologies lessattractive or obsolete.***

 

We compete in industries characterized by intensecompetition and rapid technological change. New developments occur and are expected to continue to occur at a rapidpace.  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 conductresearch and development programs to develop and test product candidates anddemonstrate to appropriate regulatory agencies that these products are safe andeffective for therapeutic use in particular indications.  Therefore our principal competition goingforward, as further described below, will be companies who either are alreadymarketing products in those indications or are developing new products forthose indications.  Many of ourcompetitors have greater financial resources and experience than we do.

 

For DX-88 as a treatment for HAE, our principalcompetitors include ZLB Behring, Jerini AG, Pharming Group N.V., and Lev Pharmaceuticals,Inc.  ZLB Behring currently marketsplasma-derived C1 esterase inhibitor products that are approved for thetreatment of HAE in Europe.  Jerini hasreceived Fast Track and orphan drug designations from the FDA for itsbradykinin receptor antagonist for the treatment of HAE and has announced thatit will be initiating Phase III clinical trials for HAE in both the UnitedStates and Europe. Pharming is developing a transgenic human C1 inhibitor forthe treatment of HAE and has announced that it has completed a Phase IIclinical trial with positive results, has initiated a pivotal Phase IIIclinical trial in Europe and has received FDA approval of an IND applicationfor a Phase III clinical trial in the United States.  Lev Pharmaceuticals, whose product candidatesis a plasma derived C1 esterase inhibitor, filed an IND with the FDA to begin aPhase III clinical trial of C1 esterase inhibitor for the treatment of HAE andexpects to initiate this Phase III trial during the first half of 2005.  Lev Pharmaceuticals has received orphan drugdesignation from the FDA for this product candidate.  Other competitors include companies thatmarket and develop corticosteroid drugs or other anti-inflammatory compounds.

 

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For DX-88 as a treatment for CABG surgery patients,our principle competitor is Bayer AG, which currently markets aprotinin underthe name Trasylol® for reduction of blood loss in CABG patients.  A number of other companies, includingAlexion Pharmaceuticals, Inc., Avant Immunotherapeutics, Inc. and Zymogenetics,Inc., are developing additional products to reduce the complications associatedwith cardiopulmonary bypass procedures.

 

For our DX-890 product candidate, companies withmarketed products for the treatment of cystic fibrosis include Genentech, Inc.,which produces Pulmozyme®, and Chiron Corporation, which produces TOBI®.  In addition, a number of companies aredeveloping products for the treatment of cystic fibrosis, including InspirePharmaceuticals Inc., Genaera Corporation, Targeted Genetics Corporation andBCY LifeSciences, Inc.  A number of othercompanies are also developing neutrophil elastase inhibitors for broaderindications.  These include Ono Pharmaceuticals,Teijin Institute for Bio-medical Research, Arriva Pharmaceuticals, Inc., andIvax Corporation.

 

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 displaytechnology is one of several technologies available to generate libraries ofcompounds that can be used to discover and develop new antibody, peptide and/orsmall protein products.  The primarycompeting 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, and Protein Design Labs, Inc.are leaders in these technologies. Further, we license our phage display patents and libraries to otherparties in the fields of therapeutics and diagnostic products on anon-exclusive basis.  Our licensees maycompete with us in the development of specific therapeutic and diagnosticproducts.  In particular, CambridgeAntibody Technology Group plc (CAT), Morphosys AG, and BioInvent InternationalAB, all of which have licenses to our base technology, compete with us, both todevelop therapeutics and to offer research services to larger pharmaceuticaland biotechnology companies.  BiositeIncorporated, which is also a patent licensee of ours, has partnered with Medarex,Inc. to combine phage display technology with transgenic mouse technology tocreate antibody libraries derived from the RNA of immunized mice.  Other companies are attempting to develop newantibody 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 developing cDNAdisplay technology.

 

In addition, we mayexperience competition from companies that have acquired or may acquiretechnology from universities and other research institutions.  As these companies develop theirtechnologies, they may develop proprietary positions that may prevent us fromsuccessfully commercializing our products.

 

***Oursuccess depends significantly upon our ability to obtain and maintainintellectual property protection for our products and technologies and thirdparties not obtaining patents that would prevent us from commercializing any ofour 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 theseproducts, which may prevent us from commercializing any of our products underdevelopment globally or in certain regions; or

 

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•                  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.

 

Our phage display patentrights are central to our non-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 have and/or have not applied for phagedisplay patent rights, we will be unable to prevent others from using phagedisplay or developing or selling products or technologies derived using phagedisplay.  In addition, in jurisdictionswhere we have phage display patent rights, we may be unable to prevent othersfrom selling or importing products or technologies derived elsewhere usingphage display.  Any inability to protectand enforce our phage display patent rights, whether by licensing or anyinvalidity of our patents or otherwise, would negatively affect our researchand revenues.

 

In all of our activities,we also rely substantially upon proprietary materials, information, tradesecrets and know-how to conduct our research and development activities and toattract and retain collaborators, 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 technologymay otherwise become known to, or be independently developed or duplicated by,our competitors.

 

Before we and ourcollaborators can market some of our processes or products, we and ourcollaborators may need to obtain licenses from other parties who have patent orother intellectual property rights covering those processes or products.  Third parties have patent rights related tophage display, particularly in the area of antibodies.  While we have gained access to key patents inthe antibody area through the cross licenses with Affimed Therapeutics AG,Affitech AS, Biosite Incorporated, Genentech, Inc., XOMA Ireland Limitedand Cambridge Antibody Technology Limited, other third party patent owners maycontend that we need a license or other rights under their patents in order forus to commercialize a process or product. In addition, we may choose to license patent rights from other thirdparties.  In order for us tocommercialize a process or product, we may need to license the patent rights ofother parties.  If a third party does notoffer us a needed license or offers us a license only on terms that areunacceptable, we may be unable to commercialize one or more of ourproducts.  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 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.  Ifwe are unsuccessful in these actions, adverse decisions may prevent us fromcommercializing the affected process or products.

 

We seek affirmativerights of license or ownership under existing patent rights relating to phagedisplay technology of others.  Forexample, through our patent licensing program, we have secured a limitedfreedom to practice some of these patent rights pursuant to our standardlicense agreement, which contains a covenant by the licensee that it will notsue us under certain of the licensee’s phage display improvement patents.  We cannot guarantee, however, that we will besuccessful in enforcing any agreements from our licensees, including agreementsnot to sue under their phage display improvement patents, or in acquiringsimilar agreements in the future, or that we will be able to obtaincommercially satisfactory licenses to the technology and patents ofothers.  If we cannot obtain and maintainthese licenses and enforce these agreements, this could have a negative effecton our business.

 

***Proceedingsto obtain, enforce or defend patents and to defend against charges ofinfringement are time consuming and expensive activities.  Unfavorable outcomes in these proceedingscould limit our patent rights and our activities, which could materially affectour business.***

 

Obtaining, protecting anddefending against patent and proprietary rights can be expensive.  For example, if a competitor files a patentapplication claiming technology also invented by us, we may have to participatein an expensive and time-consuming interference proceeding before the U.S.Patent and Trademark Office to address who

 

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was first to invent thesubject matter of the claim and whether that subject matter waspatentable.  Moreover, an unfavorableoutcome in an interference proceeding could require us to cease using thetechnology or to attempt to license rights to it from the prevailingparty.  Our business would be harmed if aprevailing third party does not offer us a license on terms that are acceptableto us.

 

In patent offices outsidethe United States, we may be forced to respond to third party challenges to ourpatents.  For example, our first phagedisplay patent in Europe, European Patent No. 436,597, known as the 597Patent, was ultimately revoked in 2002 in proceedings in the European PatentOffice.  We have two divisional patentapplications of the 597 Patent pending in the European Patent Office.  We will not be able to prevent other partiesfrom using our phage display technology in Europe if the European Patent Officedoes not grant us another patent.  Wecannot be assured that we will prevail in the prosecution of either of thesepatent applications.

 

The issues relating tothe validity, enforceability and possible infringement of our patents presentcomplex factual and legal issues that we periodically reevaluate. Third partieshave patent rights related to phage display, particularly in the area ofantibodies. While we have gained access to key patents in the antibody areathrough our cross-licensing agreement with Affimed, Affitech, Biosite,Genentech, XOMA and CAT, other third party patent owners may contend that weneed a license or other rights under their patents in order for us tocommercialize a process or product. In addition, we may choose to licensepatent rights from third parties. While we believe that we will be able toobtain any needed licenses, we cannot assure that these licenses, or licensesto other patent rights that we identify as necessary in the future, will beavailable on reasonable terms, if at all. If we decide not to seek a license,or if licenses are not available on reasonable terms, we may become subject toinfringement claims or other legal proceedings, which could result insubstantial legal expenses. For example, George Pieczenik and I.C. TechnologiesAmerica, Inc. have sued us in a variety of patent infringement actions since1999, all of which have been dismissed and no appeals are pending at thistime.  If we are unsuccessful in theseactions, adverse decisions may prevent us from commercializing the affectedprocess or products. Moreover, if we are unable to maintain the covenants withregard to phage display improvements that we obtain from our licensees throughour patent licensing program and the licenses that we have obtained to thirdparty phage display patent rights it could have a material adverse effect onour business.

 

We incurred substantialcosts as a result of the Pieczenik litigation and we would expect to incursubstantial costs in connection withany other litigation or patentproceeding.  In addition, our management’sefforts would be diverted, regardless of the results of the litigation.  An unfavorable result could subject us tosignificant liabilities to third parties, require us to cease manufacturing orselling the affected products or using the affected processes, require us tolicense the disputed rights from third parties or result in awards ofsubstantial 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 secretsand know-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.

 

***Ourrevenues and operating results have fluctuated significantly in the past, andwe expect this to continue in the future.***

 

Our revenues andoperating results have fluctuated significantly on a quarter to quarterbasis.  We expect these fluctuations tocontinue in the future.  Fluctuations inrevenues and operating results will depend on:

 

•                  thetiming of our increased research and development expenses;

 

•                  theestablishment of new collaborative and licensing arrangements;

 

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•                  thetiming and results of clinical trials;

 

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

 

•                  thecompletion of certain milestones.

 

If the revenues wereceive are less than the revenues we expect for a given fiscal period, then wemay be unable to reduce our expenses quickly enough to compensate for theshortfall.  Our revenues in any periodare not a reliable indicator of our future performance.  In addition, our fluctuating revenues andoperating results may fail to meet the expectations of securities analysts orinvestors.  Our failure to meet theseexpectations may cause the price of our common stock to decline.

 

***If welose or are unable to hire and retain qualified personnel, then we may not beable to develop our products or processes.***

 

We are highly dependenton qualified scientific and management personnel, and we face intensecompetition from other companies and research and academic institutions forqualified personnel.  If we lose anexecutive officer, a manager of one of our principal business units or researchprograms, or a significant number of any of our staff or are unable to hire andretain qualified personnel, then our ability to develop and commercialize our productsand processes may be delayed or prevented.

 

***Weuse and generate hazardous materials in our business, and any claims relatingto the improper handling, storage, release or disposal of these materials couldbe time-consuming and expensive.***

 

Our phage displayresearch and development involves the controlled storage, use and disposal ofchemicals and solvents, as well as biological and radioactive materials.  We are subject to foreign, federal, state andlocal laws and regulations governing the use, manufacture and storage and thehandling and disposal of materials and waste products.  Although we believe that our safetyprocedures for handling and disposing of these hazardous materials comply withthe standards prescribed by laws and regulations, we cannot completelyeliminate the risk of contamination or injury from hazardous materials.  If an accident occurs, an injured party couldseek to hold us liable for any damages that result and any liability couldexceed the limits or fall outside the coverage of our insurance.  We may not be able to maintain insurance onacceptable terms, or at all.  We mayincur significant costs to comply with current or future environmental laws andregulations.

 

***Wemay have significant product liability exposure.***

 

We face exposure toproduct liability and other claims if products or processes are alleged to havecaused harm.  These risks are inherent inthe testing, manufacturing and marketing of human therapeutic products.  Although we currently maintain productliability insurance, we may not have sufficient insurance coverage, and we maynot be able to obtain sufficient coverage at a reasonable cost.  Our inability to obtain product liabilityinsurance at an acceptable cost or to otherwise protect against potentialproduct liability claims could prevent or inhibit the commercialization of anyproducts that we or our collaborators develop. If we are sued for any injury caused by our products or processes, thenour liability could exceed our product liability insurance coverage and ourtotal assets.

 

***Ourbusiness is subject to risks associated with international operations andcollaborations.***

 

We receive productdevelopment and license fees from international collaborations.  For the year ended December 31, 2004, weearned revenue of approximately $10.3 million from non-US based companies.  All of our revenue contracts are paid in USdollars.  We expect that internationalproduct development and license fees will continue to account for a significantpercentage of our revenues for the foreseeable future.  In addition, we have direct

 

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investments insubsidiaries located in the European Union. Our operations could be limited or disrupted, and the value of ourdirect investments may be diminished, by any of the following:

 

•                  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.  We recognize foreign currencygains or losses arising from our operations in the period in which we incurthose gains or losses.  As a result,currency fluctuations among the U.S. dollar and the currencies in which we dobusiness have caused foreign currency transaction gains and losses in the pastand will likely do so in the future. Because of the variability of currency exposures and the potentialvolatility of currency exchange rates, we may suffer significant foreigncurrency transaction losses in the future due to the effect of exchange ratefluctuations on our future operating results.

 

***If wefail to maintain an effective system of internal controls in the future, we maynot be able to accurately report our financial results or prevent fraud.  As a result, investors may lose confidence inour financial reporting.***

 

The Sarbanes-Oxley Act of2002 requires that we report annually on the effectiveness of our internalcontrols over financial reporting.  Amongother things, we must perform systems and processes evaluation andtesting.  We must also conduct anassessment of our internal controls to allow management to report on, and ourindependent registered public accounting firm to attest to, our assessment ofour internal controls over financial reporting, as required by Section 404 ofthe Sarbanes-Oxley Act.  In the future,our continued assessment, or the subsequent assessment by our independentregistered public accounting firm, may reveal significant deficiencies ormaterial weaknesses in our internal controls, which may need to be disclosed infuture Annual Reports on Form 10-K. Disclosures of this type could cause investors to lose confidence in ourfinancial reporting and may negatively affect the price of our commonstock.  Moreover, effective internalcontrols are necessary to produce reliable financial reports and to preventfraud.  If we have deficiencies in ourinternal controls over financial reporting, it may negatively impact ourbusiness and operations.

 

***Compliancewith changing regulation relating to corporate governance and public disclosuremay result in additional expenses.***

 

Keeping abreast of, andin compliance with, changing laws, regulations, and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002, new SEC regulations, and revised NASDAQ Stock Market rules, have requiredan increased amount of management attention and external resources.  We intend to invest all reasonably necessaryresources to comply with evolving corporate governance and public disclosurestandards, and this investment may result in increased general andadministrative expenses and a diversion of management time and attention fromrevenue-generating activities to compliance activities.

 

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***Wemay not succeed in acquiring technology and integrating complementarybusinesses.***

 

We may acquire additionaltechnology and complementary businesses in the future.  Acquisitions involve many risks, any one ofwhich 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 make any future acquisitions in aneffective manner.  In addition, theownership represented by the shares of our common stock held by you will be dilutedif we issue equity securities in connection with any acquisition.  If we make any significant acquisitions usingcash consideration, we may be required to use a substantial portion of ouravailable cash.  If we issue debtsecurities to finance acquisitions, then the debt holders would have rightssenior to the holders of shares of our common stock to make claims on ourassets and the terms of any debt could restrict our operations, including ourability to pay dividends on our shares of common stock.  Acquisition financing may not be available onacceptable terms, or at all.  Inaddition, we may be required to amortize significant amounts of intangibleassets in connection with future acquisitions. We might also have to recognize significant amounts of goodwill thatwill have to be tested periodically for impairment.  These amounts could be significant, whichcould harm our operating results.

 

***Our common stock may continue to have a volatile public trading priceand low trading volume.***

 

The market price of our common stock has been highlyvolatile. Since our initial public offering in August 2000 through February2005, the price of our common stock on the NASDAQ Stock Market has rangedbetween $54.12 and $1.05.  We mayexperience significant price and volume fluctuations in the future for manyreasons , some of which may be unrelated to our operating performance.

 

Many factors may have a negative effect on the marketprice 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;

 

•                  public concernabout the safety or efficacy of new technologies;

 

•                  general marketconditions and comments by securities analysts; and

 

•                  quarterlyfluctuations in our revenues and financial results.

 

***Anti-takeover provisions in our governing documents and under Delawarelaw and our shareholder rights plan may make an acquisition of us moredifficult.***

 

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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 rightsplan could result in the significant dilution of the proportionate ownership ofany person that engages in an unsolicited attempt to take over our company and,accordingly, could discourage potential acquirers.

 

Section 203 of the Delaware General Corporation Lawprohibits a corporation from engaging in a business combination with any holderof 15% or more of its capital stock until the holder has held the stock forthree years unless, among other possibilities, the board of directors approvesthe transaction. Our board of directors could use this provision to preventchanges in management.

 

The provisions described above, as well as otherprovisions in our charter and bylaws and under the Delaware General CorporationLaw, may make it more difficult for a third party to acquire our company, evenif the acquisition attempt was at a premium over the market value of our commonstock at that time.

 

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