**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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Form 10-K

**x**                              AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934.

**Forthe fiscal year ended December 31, 2004**

**OR**

**o**                                 TransitionReport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**Forthe transition period from                         *** * to                         * *

**CommissionFile Number 000-24537**

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DYAX CORP.

(Exact name of Company asspecified in its charter)
| **Delaware**                                                               | **04-3053198**                     |
|----------------------------------------------------------------------------|------------------------------------|
| (State of  Incorporation)                                                  | (IRS Employer  Identification No.) |
| **300 Technology Square, Cambridge, Massachusetts 02139**                  |
| (Address of  principal executive offices and zip code)                     |
| Company’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)*               |

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Indicate by checkmark whetherthe Company (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 x  No o

Indicate by checkmark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of Company’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes x  No o

The aggregate market value of the Company’s commonstock held by nonaffiliates of the Company as of the last business day of theCompany’s most recently completed fiscal second quarter, June 30, 2004,based on the last reported sale price of the Company’s common stock on TheNASDAQ National Market as of the close of business on that day, was $368,368,105. The number of sharesoutstanding of the Company’s Common Stock, $.01 Par Value, as of February 25,2005, was 31,578,981.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portionsof the Company’s Definitive Proxy Statement for its 2005 Annual Meeting ofShareholders to be held on May 19, 2005, which Definitive Proxy Statementwill be filed with the Securities and Exchange Commission not later than120 days after the Company’s fiscal year-end of December 31, 2004,are incorporated by reference into Part III of this Form 10-K.

 

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As used in this Form 10-K,“Dyax,” “Company,” “we,” “ours,” and “us” refer to Dyax Corp., except where thecontext 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, clinicaltrials and collaborations. Statements that are not historical facts are basedon our current expectations, beliefs, assumptions, estimates, forecasts andprojections for our business and the industry and markets in which we compete.The statements contained in this report are not guarantees of futureperformance and involve certain risks, uncertainties and assumptions, which aredifficult to predict. Therefore, actual outcomes and results may differmaterially from what is expressed in such forward-looking statements.Important factors which may affect future operating results, research anddevelopment programs, clinical trials and collaborations include, withoutlimitation, those set forth in Exhibit 99.1 “Important Factors That May AffectFuture Operations and Results” to this Form 10-K, which isincorporated into this report by this reference.

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**ANNUAL REPORT ONFORM 10-KINDEX**
| Item No. | ** **                                                                                                               | **Page** |
|---------------|--------------------------------------------------------------------------------------------------------------------------|----------|
| PART I   |
| 1.            | Business                                                                                                                 | 1        |
| 2.            | Properties                                                                                                               | 17       |
| 3.            | Legal Proceedings                                                                                                        | 17       |
| 4.            | Submission of Matters to a Vote of  Security Holders                                                                     | 17       |
| PART II  |                                                                                                                     |
| 5.            | Market  for the Company’s Common Equity, Related Security Holder Matters and Issuer  Purchases of Equity Securities | 17       |
| 6.            | Selected  Consolidated Financial Data                                                                                    | 18       |
| 7.            | Management’s  Discussion and Analysis of Financial Condition and Results of  Operations                             | 19       |
| 7A.           | Quantitative  and Qualitative Disclosures about Market Risk                                                              | 34       |
| 8.            | Financial  Statements and Supplementary Data                                                                             | 35       |
| 9.            | Changes  in and Disagreements with Accountants on Accounting and Financial  Disclosure                                   | 63       |
| 9A.           | Controls  and Procedures                                                                                                 | 63       |
| 9B.           | Other  Information                                                                                                       | 63       |
| PART III |                                                                                                                     |
| 10.           | Directors  and Executive Officers of the Company                                                                         | 64       |
| 11.           | Executive  Compensation                                                                                                  | 64       |
| 12.           | Security  Ownership of Certain Beneficial Owners and Management                                                          | 64       |
| 13.           | Certain  Relationships and Related Transactions                                                                          | 65       |
| 14.           | Principal  Accountant Fees and Services                                                                                  | 65       |
| PART IV  |                                                                                                                     |
| 15.           | Exhibits  and Financial Statement Schedules                                                                              | 65       |
|          | Signatures                                                                                                               | 69       |
|               |                                                                                                                          |          |  |

 

 

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**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. Wecurrently have two product candidates in or entering into Phase II clinicaltrials for three indications, and we are planning to initiate a Phase III trialof our lead product candidate in the first half of 2005. DX-88, a novelkallikrein inhibitor, is being studied in collaboration with GenzymeCorporation for the treatment of hereditary angioedema, or HAE, a geneticdisease that can cause swelling of the larynx, gastrointestinal tract andextremities. Independent of our collaboration with Genzyme, we are alsostudying DX-88 for the prevention of blood loss and other systemicinflammatory responses for patients undergoing on-pump, open-heart surgery,specifically coronary artery bypass graft, or CABG, surgery. Our second productcandidate, DX-890, a novel inhibitor of neutrophil elastase, is beingdeveloped in collaboration with Debiopharm S.A. which is studying it for thetreatment of cystic fibrosis. Both DX-88 and DX-890 have receivedorphan drug designation for their lead indications in the United States and theEuropean Union and DX-88 has been granted Fast Track designation by theU.S. Food and Drug Administration, or FDA, for the treatment of HAE.

DX-88 and DX-890 were identified using ourpatented phage display technology, which rapidly selects antibodies, peptidesand small proteins that bind with high affinity and specificity to therapeutictargets. We are using this powerful discovery engine to build a pipeline ofdrug candidates that we may advance into clinical development on our own or inpartnership with other companies. We also leverage phage display technologybroadly through collaborations and licenses that are structured to generaterevenues through research funding, license fees, technical and clinicalmilestone payments, and royalties. Currently, over 75 companies and researchinstitutions, including Amgen Inc., Biogen Idec, Inc., GenzymeCorporation, ImClone Systems, Inc., Human Genome Sciences, Inc.MedImmune, Inc. and Tanox, Inc., have licenses to use our phagedisplay technology and phage display derived compounds to research and developtherapeutic, diagnostic and other products.

We have accumulated losses since inception as we haveinvested in the development of our therapeutic product candidates and in ourongoing research and discovery programs. We seek to offset some of theseresearch and development costs by generating revenue from the partnering of ourportfolio of product candidates and by leveraging our phage display technology.We do not expect to generate profits until therapeutic products from ourdevelopment portfolio reach the market. Obtaining regulatory approvals tomarket therapeutic products is a long and arduous process. While we cannotcurrently predict with any accuracy when, if ever, we will obtain suchapprovals, we anticipate filing a BLA for DX-88 for HAE in 2006 if theplanned Phase III clinical trial is successful and completed on schedule.

We incorporated inDelaware in 1989 and merged with Protein Engineering Corporation in August 1995.

**Our Business Strategy**

The following are the principal elements of ourstrategy:

***Develop our proprietary biopharmaceutical products now in the clinic.  ***Wehave two internally discovered and developed small proteins now in clinicaltrials for three indications.

·  *DX-88 for HAE.  *In a 50/50 collaboration withGenzyme, we are developing DX-88 as a treatment for HAE. Currently, weare conducting an open-label, repeat dose Phase II clinical trial known asEDEMA2 and plan to initiate a Phase III clinical trial, referred to as EDEMA3,during the first half 

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of 2005. If the EDEMA3trial is successful and completed on schedule, we, together with Genzyme,currently anticipate filing a BLA for DX-88 for the treatment of HAE inthe United States and an equivalent Marketing Authorization Application for DX-88for the treatment of HAE in the European Union in 2006.

In parallel with ourclinical program in HAE, in collaboration withGenzyme we are also developing a subcutaneous formulation ofDX-88 for at-home use. We are currently accelerating thedevelopment of the subcutaneous formulation because we believe that an at-homeproduct would give patients the most control over the debilitating effects ofHAE and will also maximize the market potential for DX-88.

·  *DX-88 for CABG.  *We are independently developingDX-88 as a treatment for patients undergoing CABG surgery. We retain allcommercial rights for DX-88 in all surgical indications. Subject to thesuccessful completion of ongoing negotiations to partner this indication withanother company, we are planning to conduct a Phase II trial in the UnitedStates to compare DX-88 to aprotinin, currently marketed by Bayer AGunder the name Trasylol®, for reduction of blood lossin CABG patients. The trial in the United States is currently planned toinvolve approximately 100****patients andmay be expanded to a larger trial following an interim analysis of the data.

·  *DX-890 for cystic fibrosis.  *In collaborationwith Debiopharm S.A., DX-890 is being developed as a treatment for cysticfibrosis and Debiopharm recently initiated a placebo-controlled Phase IIclinical trial for this indication. We are currently negotiating withDebiopharm to amend our collaboration agreement in order to provide Debiopharmworldwide rights to independently develop and commercialize DX-890 forcystic fibrosis and acute respiratorydistress syndrome (ARDS). Under the proposed amendment, we would receivemilestones and royalties from Debiopharm in connection with its ongoingdevelopment of DX-890. We would also receive worldwide rights tocommercialize our independently developed, long-acting, pegylated form of DX-890(known as PEG-DX-890). Currently, we are exploring the potential foradvancing PEG-DX-890 into development for other pulmonaryindications, which could include chronic obstructive pulmonary disease (COPD)and alpha-1 antitrypsin deficiency.

***Discover and develop additionalproprietary biopharmaceutical products.  ***We are alsoexpanding our pipeline by identifying antibodies, peptides and small proteinsthat may be developed as product candidates, primarily for the treatment ofsome inflammatory diseases and cancers. We intend to discover new leads fortargets that we identify or license from others. We intend to develop andcommercialize these leads ourselves or through collaborative arrangements.

***Leverage our phage display technology******.****  *We useour phage display technology to advance our business objectives in a variety ofways:

·  *Through biopharmaceutical product collaborations.  *Weare leveraging our technology and maximizing our opportunities throughcollaborative arrangements with several biotechnology and pharmaceuticalcompanies for the discovery and/or development of antibody and peptide-basedbiopharmaceuticals.

·  *By licensing our phage display patents and libraries.  *Weare further creating value from our phage display technology by licensing ourpatents and phage display libraries to companies and institutions on anon-exclusive basis to encourage the broad application of our technology.

·  *In non-therapeutic areas.  *We also offer our phagedisplay technology to collaborators and licensees operating outside of thetherapeutic field to develop diagnostic products for *in vivo*imaging and in the areas of separations and research reagents.

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***Continue toextend our intellectual property and technology.  ***Weplan to continue to develop our technology internally and may acquiretechnology that is complementary to our existing technology. Through our patentlicensing program, we will continue to enhance our phage display technology bygaining access to phage display improvements that our licensees develop. Wehave also entered into cross licensing agreements under which we have licensedour phage display patents to third parties and have received in the sameagreements rights to practice under the phage display related patents of thesethird parties.

**Clinical Development Programs**

Our clinical development program consists of two productcandidates that we discovered and developed using our proprietary phage displaytechnology. These product candidates are now in clinical trials for threeindications.

***DX-88.  ***Theenzyme plasma kallikrein is a key component responsible for the regulation ofthe inflammation and coagulation pathways. Excess plasma kallikrein activity isthought to play a role in a number of inflammatory and autoimmune diseases. Usingphage display, we have developed DX-88, which we have shown *in vitro* to be a high affinity, highspecificity inhibitor of human plasma kallikrein. We believe that the profileof DX-88 may allow for fewer side effects and/or greater efficacy thanother marketed inhibitors of kallikrein, which lack DX-88’s specificityand affinity for plasma kallikrein.

·  *Treatment of HAE.  *Hereditary angioedema, or HAE,affects between 13,000 and 66,000 individuals in the United States and Europe. HAEis a genetic disease that can cause swelling of the larynx, gastrointestinaltract and extremities. Severe swelling of the larynx is life threatening andmay require insertion of a breathing tube into the airway to preventasphyxiation. In the United States, the only currently approved and availabletreatments are steroids, pain control, restriction of the inciting activity(e.g., repetitive motion such as typing or hammering), and rehydration. Patientsare frequently given synthetic anabolic steroids but these have a variety ofside effects and may not be well tolerated. Published research indicates thatplasma kallikrein is a primary mediator of both the pain and swelling in HAE. Webelieve that DX-88 has the potential to decrease both the severity andfrequency of symptoms during acute HAE attacks and, therefore, may provide aneffective treatment for this disease.

In collaboration withGenzyme, we are developing DX-88 as a treatment for HAE. In March 2003,we successfully completed a nine patient Phase II, dose ranging clinical trialin Europe and reported positive results. In May 2004, we successfullycompleted a Phase II, 48 patient, dose escalating placebo-controlled study,known as EDEMA1, in which DX-88 achieved statistical significance withrespect to the primary clinical endpoint of the trial: significant improvementwithin four hours. Additionally, DX-88 was well tolerated and a clinicalbenefit was observed for all types of HAE attacks, including potentially fatallaryngeal attacks. Currently, we are conducting an open-label, repeat dosePhase II clinical trial known as EDEMA2, a multi-center trial with 21investigationalsites in the United States and Canada. EDEMA2 is designed to evaluate thesafety and efficacy of DX-88 when administered to patients sufferingmultiple, separate attacks of HAE. To date, there have been no serious adverseevents reported in the EDEMA2 trial and the interim results, based on theanalysis of 61 attacks treated with DX-88 in 34 patients, suggest that DX-88can provide repeated therapeutic benefit to HAE patients and that there is noapparent decrease in DX-88’s effects on HAE in patients exposed tomultiple doses. We also plan to initiate a Phase III clinical trial of DX-88for the treatment of HAE, referred to as EDEMA3, during the first half of 2005.If the EDEMA3 trial is successful and completed on schedule, we, together withGenzyme, currently anticipate filing a BLA for DX-88 for the treatment ofHAE in the United States and an equivalent Marketing Authorization Applicationfor DX-88 for the treatment of HAE in the European Union 

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in 2006. DX-88 forthe treatment of HAE has received orphan drug designation in the United Statesand the European Union and has been granted Fast Track designation by the FDA.

In addition to theintravenous formulation of DX-88 that hasbeen and is being used in our currentclinical trials, Dyax and Genzyme are developing a subcutaneous formulation that would allow at-home use. Webelieve that an at-home product will give patients the most control over thedebilitating effects of HAE and also maximize the market potential for DX-88.Therefore, we are currently accelerating the development of the subcutaneousformulation.

·  *Mitigation of complications of CABG.  *In the UnitedStates, there are over 500,000 cardiac surgeries annually that use cardiopulmonarybypass, the majority of which involve CABG procedures. On-pump, open-heartsurgery elicits a systemic inflammatory response, which adversely affects thepatient post-operatively. Many patients undergoing CABG experience significantintraoperative blood loss, requiring transfusion. In addition, an estimated 25%of patients have post-operative cardiac, pulmonary, hematologic or renaldysfunction. Kallikrein has been implicated in the body’s response to on-pump,open-heart surgery as a major contributor to the significant blood loss seen inCABG patients and to the pathologic inflammation that plays a role in thecomplications of CABG surgery.

We are currentlydeveloping DX-88 as a treatment for patients undergoing CABG surgery. Thisprogram is being conducted independent of our collaboration with Genzyme withrespect to DX-88 for the treatment of HAE and we retain all commercialrights to DX-88 for all surgical indications. In December 2003, wecompleted the evaluation of DX-88 in a Phase I/II trial in the UnitedStates in patients undergoing CABG surgery. Subject to the successfulcompletion of ongoing negotiations to partner this indication with anothercompany, we are planning to conduct a Phase II trial in the United States tocompare DX-88 to aprotinin, currently marketed by Bayer AG under the nameof Trasylol®, forreduction of blood loss in CABG patients. The trial in the United States iscurrently planned to involve approximately 100****patientsand may be expanded to a larger clinical trial following an interim analysis ofthe data. We believe that DX-88 may have benefits over this existingtherapy, as it is a recombinant human protein rather than animal derived, whichmay make it appear less foreign to the patient’s immune system. DX-88 hasalso been shown *in vitro* to be1,000 times more potent than aprotinin as an inhibitor of plasma kallikrein. Inaddition, recent studies have also demonstrated neuroprotective effects of DX-88on brain ischemia and reperfusion injury in an animal model, indicating thepotential for DX-88 to treat or prevent neurocognitive deficit that mayoccur as a result of CABG surgery. These findings have led us to considerexpanding the profile of DX-88 to include an evaluation of neurocognitiveprotection in future clinical trials.

***DX-890.  ***Ina number of inflammatory diseases, the body secretes an excessive amount of theenzyme known as neutrophil elastase, or elastase. While elastase plays animportant role in normal body function, in inflammatory conditions it can leadto the destruction of normal tissue. Using phage display technology, we havedeveloped a novel human neutrophil elastase inhibitor, DX-890. Thisinhibitor binds to elastase with high affinity and high specificity, suggestingthat it may be a potent inhibitor for treatment of elastase mediated diseases.

There are approximately 55,000 patients in the UnitedStates and Europe who suffer from cystic fibrosis. The median survival age ofcystic fibrosis patients is approximately 32 years. A genetic mutation causes anumber of problems including progressive lung destruction and frequentinfections in these patients. Large amounts of elastase are found in the lungsof cystic fibrosis patients where it is thought to play a significant role inthe disease process. The elastase directly destroys lung tissue and contributesto recurrent pulmonary infections, a cycle of inflammation, and repeated tissuedestruction. Current treatments inadequately prevent this cycle ofinflammation, infection, and destruction of tissue. By 

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blocking elastase, webelieve that DX-890 may significantly prevent tissue destruction incystic fibrosis and preserve pulmonary function.

Our collaborator for DX-890,Debiopharm, has completed two Phase IIa clinical trials of DX-890 inEurope, one in adult and one in pediatric cystic fibrosis patients, and hasrecently initiated a placebo-controlled Phase IIb trial for cystic fibrosis. Currently,we are in negotiations with Debiopharm to amend our collaboration agreement inorder to provide Debiopharm worldwide rights to independently develop andcommercialize DX-890 for cystic fibrosis and acute respiratory distresssyndrome (ARDS). Under the proposed amendment, we would receive milestones androyalties from Debiopharm in connection with its ongoing development of DX-890.We would also receive worldwide rights to commercialize our independentlydeveloped, long-acting, pegylated form of DX-890 (known as PEG-DX-890).Currently, we are exploring the potential for advancing PEG-DX-890intodevelopment for other pulmonary indications, which could include chronicobstructive pulmonary disease (COPD) and alpha-1 antitrypsin deficiency.

**CollaborationsFor Clinical Development**

***Genzyme.  ***Under our collaboration agreement with GenzymeCorporation, we have established a joint venture, Dyax–Genzyme LLC(formerly known as Kallikrein LLC), which now owns the rights to DX-88for the treatment of HAE. Dyax and Genzyme are each responsible for 50% ofongoing costs incurred in connection with the development and commercializationof DX-88 for HAE and each will be entitled to receive approximately 50%of any profits realized as a result. In addition, we are entitled to receivepotential milestone payments from Genzyme in connection with the development ofDX-88. The first such milestone payment, approximately $3.0 million,is due upon dosing the first patient in a pivotal clinical trial of DX-88for HAE, which we anticipate will occur during 2005. In addition, we will beentitled to receive potential milestone payments of $10.0 million for thefirst FDA-approved product derived from DX-88, and up to$15.0 million for additional therapeutic indications developed under thecollaboration.

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.

When we first amended the collaboration agreement in May 2002,we also executed a senior secured promissory note and security agreement underwhich Genzyme agreed to loan us up to $7.0 million and we agreed to grantGenzyme a continuing security interest in certain tangible and intangiblepersonal property arising out of the DX-88 program. In addition, underthe terms of the security agreement, once we exercised our option to purchaseGenzyme’s interest in the application of DX-88 in on-pump, open-heartsurgery and other surgical indications, we were required to pledge to Genzyme apercentage interest in our wholly owned subsidiary, Biotage. Under an amendmentto the security agreement executed on October 15, 2003, Genzyme agreed torelease the interest in Biotage pledged to it in exchange for a continuingsecurity interest in Dyax’s rights to revenues from licenses of its fundamentalphage display patent portfolio known as the Ladner patents. The securityagreement, as amended, contains certain financial covenants under which we must(i) maintain at least $20.0 million in cash, cash equivalents andshort-term marketable securities based on the Company’s quarterly consolidatedfinancial statements and (ii) continue to satisfy at least one standardfor continued listing of our securities on the NASDAQ National Market. As of December 31,2004, we had borrowed the full $7.0 million available under the note.

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***Debiopharm.  ***We have acollaboration and license agreement with Debiopharm S.A., under whichDebiopharm is developing our neutrophil elastase inhibitor, DX-890, forthe treatment of cystic fibrosis. This agreement arose out of our March 1997research and development program with Debiopharm for the clinical developmentof DX-890. Debiopharm is responsible for all preclinical and clinicaltrials and all costs associated with the clinical development of DX-890.Under our collaboration and license agreement, Debiopharm has exclusive rightsto commercialize DX-890 in Europe for cystic fibrosis, acute respiratorydistress syndrome (ARDS) and chronic obstructive pulmonary disease (COPD) andfor these indications we have retained the rights to North America and the restof the world. If we wish to outlicense the commercialization of any of theseindications to a third party outside of Europe, Debiopharm has a right of firstrefusal to obtain the outlicensing rights. We have also retained worldwiderights to DX-890 for all other therapeutic indications, subject toDebiopharm’s first right to negotiate for a license in Europe should anotherparty not already have such rights or if we do not wish to retain theindication. Under this collaboration, we are entitled to receive a percentageof revenues generated by Debiopharm from the commercialization of the cysticfibrosis product in Europe and we will pay Debiopharm a percentage of royaltieswe receive on product sales outside of Europe. None of the product candidatesdeveloped under this collaboration has been approved for sale. Thus, we haveneither paid nor received any royalties to date and our future receipts ofroyalties will depend on future sales of any products that may be developed andapproved for sale. The parties’ financial obligations to each other on productsales will expire on the later of ten years from the first commercial sale of aproduct or the life of the patent rights covering the product.

To date, Debiopharm’sprogress in connection with the clinical development of DX-890 has beenslower than expected, especially with regard to achieving clinical milestonesestablished under our collaboration agreement. As a result of this issue, weare currently negotiating with Debiopharm to amend our collaboration agreementin order to provide Debiopharm worldwide rights to independently develop andcommercialize DX-890 for cystic fibrosis and ARDS. Under the proposedamendment, we would receive milestones and royalties from Debiopharm inconnection with its ongoing development of DX-890. We would also receiveworldwide rights to commercialize our independently developed, long-acting,pegylated form of DX-890 (known as PEG-DX-890). Currently, we areexploring the potential for advancing PEG-DX-890 into development forother pulmonary indications, which could include chronic obstructive pulmonarydisease (COPD) and alpha-1 antitrypsin deficiency.

**OtherBiopharmaceutical Discovery and Development Programs**

We are pursuingbiopharmaceutical discovery and development programs in the fields ofimmunology, tumor angiogenesis, tumor biology and inflammation using ouroptimized phage libraries that express human antibodies, peptides and smallproteins. We have been able to establish a broad discovery platform to identifycompounds that interact with a wide array of targets that have been shown to beinvolved in pathologic processes and are membrane proteins or circulatingproteins. Our discovery processes have been automated, thus we are now able toevaluate a large number of molecules binding to each target. In this way we canrapidly identify and select a specific antibody, peptide or small protein withthe desired biochemical and biological characteristics. While our discoveryresearch efforts are focused primarily on monoclonal antibodies, we are alsotesting the *in vitro*and *in vivo* efficacy of several of our peptideand small protein compounds.

We have a total of sevendiscovery and development programs underway in oncology, three of which are incollaboration with other companies. These programs are focused on the discoveryand development of therapies that fight cancer primarily in three ways:inhibiting angiogenesis (the growth of blood vessels); inhibiting proteasesbelieved to be associated with tumor growth and proliferation; and targetingcell surface proteins believed to be over expressed by certain tumors. We alsohave four discovery and development programs focused on targets that arebelieved to be important mediators of inflammation, one of which we aredeveloping in collaboration with another company. In addition, in collaborationwith another company, we have a discovery and development program focused on aninfectious disease target.

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**Dyax’s 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 and small proteins on thesurface of 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 and peptides to rapidly identify thosecompounds that bind with high affinity and high specificity to targets ofinterest. Our phage display process generally consists of the following steps:

***Generating a phage displaylibrary.  ***The generation of a phage display libraryis based upon a single protein framework and contains tens of billions ofvariations of this protein. The first step in generating a library is theselection of the protein framework upon which the library will be created. Thisselection is based on the desired product properties, such as structure, size,stability, or lack of immunogenicity. We then determine which amino acids inthe framework will be varied, but do not vary amino acids that contribute tothe framework structure. We also control the exact numbers and types ofdifferent amino acids that are varied, so that the resulting phage displaylibrary consists of a diverse set of chemical entities, each of which retainsthe desired physical and chemical properties 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 isdisplayed on the phage surface fused to one of the naturally occurring phageproteins. The phage acts as a physical link between the displayed protein andits 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 phage display libraries.  ***Wecan then select binding compounds with high affinity and high specificity byexposing the library to specified targets of interest and isolating the phagethat display compounds that bind to the target. For certain applications ofphage display, such as separations, we can 

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design the binding andrelease conditions into the selection process. Each individual phage containsthe gene encoding one potential binding compound, and when its displayedprotein is selected in the screening procedure, it can be retrieved andamplified 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.

***Evaluation of selected bindingcompounds.  ***Screening phage display librariesgenerally results in the identification of one or more groups of relatedbinding compounds such as antibodies, peptides or small proteins. These groupsof compounds are valuable in providing information about which chemicalfeatures are necessary for binding to the target with affinity and specificity,as well as which features can be altered without affecting binding. Using DNAsequencing, we can determine the amino acid sequences of the binding compoundsand identify the essential components of desired binding properties bycomparing similarities and differences in such sequences. If desired,scientists can further optimize the binding compounds by building additional phagedisplay libraries based on these key components and repeating this process. Wecan complete the entire selection process in several weeks. We can producesmall amounts of the binding compound by growing and purifying the phage. Forproduction of larger amounts, we can remove the gene from the phage DNA andplace it into a standard recombinant protein expression system. Alternatively,if the identified binding compound is sufficiently small, it can be chemicallysynthesized. These binding compounds can be evaluated for desired propertiesincluding affinity, specificity and stability under conditions that will beencountered during its intended use. From each group of compounds, scientistscan identify, develop and test a compound with the desired properties forutility as a biopharmaceutical, diagnostic, research reagent or affinityseparations 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 phage display 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 smallprotein framework. Furthermore, we can isolate a diverse family of genes byincluding, for example, those that encode human antibodies. The size anddiversity of our libraries significantly increase the likelihood of identifyingbinding compounds with high affinity and high specificity for the target. Oncewe generate libraries, we can reproduce them rapidly in phage and use them foran unlimited number of screenings.

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·       *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.

·       *Rapid optimization.  *We screen phage display librariesto identify binding compounds with high affinity and high specificity for thedesired target and can design and produce successive generations of phagedisplay libraries to further optimize the leads. We have demonstrated between 10-and 100-fold improvement in binding affinity with second-generation phagedisplay libraries. Optimization of humanized mouse or human-mouse antibodies ismore difficult and cannot progress as rapidly.

**Leveraging PhageDisplay**

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 few 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.

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***Phage display collaborations fortherapeutics.  ***In addition to our therapeuticproduct development collaborations with Genzyme and Debiopharm, we leverage ourphage display technology in a variety of other collaborations to enhance thediscovery and development of therapeutic leads:

·       *Funded Research.  *We perform fundedresearch for various collaborators using our phage display technology toidentify, characterize and optimize antibodies that bind to disease targetsprovided by the collaborators. Our funded research collaborators includeAstraZeneca AB, Baxter Healthcare S.A., and Biogen Idec, Inc.

·       *Co-Development.  *We also collaboratewith other biotechnology companies to co-develop therapeutic leads. Under thetypical co-development collaboration, we use our phage display libraries toidentify antibody, peptide and small protein compounds that bind diseasetargets provided by our co-development collaborator. With our collaborator, weevaluate the leads that we generate during the research phase of ourcollaboration to determine if we wish to jointly develop and commercialize suchleads as therapeutics. Our co-development collaborators currently includeDendreon Corporation, Inhibitex, Inc. and Syntonix Pharmaceuticals, Inc.

***Patent and library licensingprograms.  ***We have established a broad licensingprogram for our phage display patents for use in the fields of therapeutic,diagnostic and other products. Through this program, we grant companies andresearch institutions non-exclusive licenses to practice our phage displaypatents in their discovery and development efforts in the licensed fields. Currently,over 75 companies and research institutions, including Amgen Inc., Biogen Idec, Inc.,Genzyme Corporation, ImClone Systems, Inc., Human Genome Sciences, Inc.,MedImmune, Inc. and Tanox, Inc., have licenses to use our phagedisplay technology and phage display derived compounds to research and developtherapeutic,**diagnostic and otherproducts. We believe that the success of our patent licensing program providessupport for our patent position in phage display, enhances the usefulness ofphage display as an enabling discovery technology and generates short-term andlong-term value for us through licensing fees, milestones and royalties. Ourbusiness model is to grant non-exclusive licenses so that we may retain theright to practice our phage display technology in multiple fields. Our licenseagreements generally provide for signing or technology transfer fees, annualmaintenance fees, milestone payments based on successful product development,and royalties based on any future product sales. In addition, under the termsof our license agreements, most licensees have agreed not to sue us for usingphage display improvement patents developed by the licensee that are dominatedby our phage display patents and some have granted us specific access tocertain technologies developed or controlled by the licensee. We believe thatthese covenants and provisions allow us to practice enhancements to phagedisplay developed by our licensees. We have also entered into cross licensingagreements with third parties under which we have granted rights to our phagedisplay patents and have received rights to practice under the phage displayrelated patents of such third parties.

***Phage display collaborations innon-core areas.  ***While our focus is on therapeuticprograms, we are able to leverage our phage display technology in a number ofother ways. For example, often the binding compounds that we discover forbiopharmaceutical targets can be used in diagnostic or imaging formats toassess therapeutic effectiveness and monitor disease progression. In addition,other binding compounds we discover, known as ligands, have a high affinity andhigh specificity, 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 thediagnostic imaging and research product fields, we have formed collaborations,and we also license others to practice our phage display technology in otherfields. For example, we have granted a non-exclusive license to our phagedisplay technology for the development of diagnostic imaging products to BraccoImaging S.p.A., a subsidiary of Bracco S.p.A., a leader in the imaging productsmarket. We previously used our phage display technology to identify peptidesfor Epix Medical, Inc. to use in blood clot imaging applications in themagnetic resonance imaging field. In the area of affinity separations, we have grantedlicenses to Wyeth 

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and Human GenomeSciences, Inc. to use ligands we developed for them. Wyeth is using a Dyaxligand for purification of its recombinant blood factor product, ReFacto AF,for treating hemophilia and Human Genome Sciences is using a Dyax ligand topurify its B-Lymphocyte Stimulator Protein. We have also granted anon-exclusive license to Amersham Biosciences, a market leader in theseparations media field, to practice our phage display patents to discoverligands from libraries for use as affinity-based media for chromatographyseparations.

**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 plasma-derived C1esterase inhibitor products that are approved for the treatment of HAE inEurope. Jerini has received Fast Track and orphan drug designations from theFDA for its bradykinin receptor antagonist for the treatment of HAE and hasannounced that it will be initiating Phase III clinical trials for HAE in boththe United States and Europe. Pharming is developing a transgenic human C1inhibitor for the treatment of HAE and has announced that it has completed aPhase II clinical trial with positive results, has initiated a pivotal PhaseIII clinical trial in Europe and has received FDA approval of an INDapplication for a Phase III clinical trial in the United States. LevPharmaceuticals, whose product candidates is a plasma derived C1 esteraseinhibitor, filed an IND with the FDA to begin a Phase III clinical trial of C1esterase inhibitor for the treatment of HAE and expects to initiate this PhaseIII trial during the first half of 2005. Lev Pharmaceuticals has receivedorphan drug designation from the FDA for this product candidate. Othercompetitors include companies that market and develop corticosteroid drugs orother anti-inflammatory compounds.

For DX-88 as a treatment for CABG surgerypatients, our principle competitor is Bayer AG, which currently marketsaprotinin under the name Trasylol® for reduction of blood loss in CABG patients. Anumber of other companies, including Alexion Pharmaceuticals, Inc., AvantImmunotherapeutics, Inc. and Zymogenetics, Inc., are developingadditional products to reduce the complications associated with cardiopulmonarybypass 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 are developingproducts for the treatment of cystic fibrosis, including InspirePharmaceuticals Inc., Genaera Corporation, Targeted Genetics Corporation andBCY LifeSciences, Inc. A number of other companies are also developingneutrophil elastase inhibitors for broader indications. These include Ono Pharmaceuticals,Teijin Institute for Bio-medical Research, Arriva Pharmaceuticals, Inc.,and Ivax 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.

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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. 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 andProprietary 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, and 5,223,409, which expires June 29, 2010, issued patents in Canadaand Israel, and pending patent applications in the United States and othercountries. These phage display patent rights contain claims covering inventionsin the field of the surface display of proteins and certain other peptides,including surface display on bacteriophage.

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 No. 573,603,which expires February 28, 2012, claiming sequences of peptides that haveneutrophil elastase inhibitory activity, including the sequence for DX-890;and U.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 

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sequences of peptides thathave human kallikrein inhibitory activity, including the sequence for DX-88,and polynucleotide sequences encoding these peptides.

For our affinity separation technology, our patentrights include U.S. Patent No. 6,326,155, which expires March 20,2016. The patent rights cover methods for identifying affinity ligands topurify biological molecules. The patented method can be used in combinationwith our proprietary phage display technology, making it a powerful tool forbiological purification, discovery and development.

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 two divisional patentapplications 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 other parties have patents andpending applications to various products and processes relating to phagedisplay technology. Through licensing our phage display patent rights, we havesecured a limited ability to practice under some of the third party patentrights relating to phage display technology. These rights are a result of ourstandard license agreement, which contains a covenant by the licensee that itwill not sue us under the licensee’s phage display improvement patents. Inaddition, we have sought and obtained affirmative rights of license orownership under certain patent rights relating to phage display technologyowned by other parties. For example, in addition to our amended licenseagreement with CAT, we have entered into licensing agreements with AffimedTherapeutics 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 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 

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the sale of any of ourantibody products. We also granted XOMA a license to our phage display patentsand agreed to provide them with one of our antibody phage display libraries.

The issues relating to the validity, enforceabilityand possible infringement of such 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. Inaddition, we may choose to license patent rights from third parties. While webelieve that we will be able to obtain any needed licenses, we cannot assurethat these licenses, or licenses to other patent rights that we identify asnecessary in the future, will be available on reasonable terms, if at all. Ifwe decide not to seek a license, or if licenses are not available on reasonableterms, we may become subject to infringement claims or other legal proceedings,which could result in substantial legal expenses. For example, George Pieczenikand 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.

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.

**GovernmentRegulation**

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.

***United States FDAApproval.  ***In the United States, the U.S. Food &Drug Administration (FDA) rigorously regulates products intended for diagnosticor therapeutic use in humans.

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

·       preclinicaltests;

·       submissionof an Investigational New Drug Application to the FDA, which must becomeeffective before 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

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·       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 ourbiopharmaceutical or diagnostic product leads, including our neutrophilelastase inhibitor, DX-890, 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.

***Foreign RegulatoryApproval.  ***In many countries outside the UnitedStates, especially within the European Union (EU), governmental regulatoryauthorities similar to the FDA must approve the investigational program and/ormarketing application for pharmaceutical and diagnostic products. Newlegislation for investigative medicinal product was implemented by all EUmember states on May 1, 2004. Some delays in the time required to initiatea clinical trial in the EU are expected until processes become wellestablished. Following the conclusion of the clinical evaluation of a medicinalproduct, a marketing authorization is prepared and submitted. The format of therequired documentation has been harmonized in the United States, the EuropeanUnion, and Japan. However, some variations continue to exist. In addition, thenational laws governing manufacturing requirements, advertising and promotion,and pricing and reimbursement may vary widely. Therefore, the time to marketcan vary widely among different regions and countries. In addition, the exportto foreign countries for investigation and /or marketing of medicinal productsthat have been manufactured in the US but not approved for marketing by the FDAis subject to US law as well as the laws of the importing country and mayrequire one or more regulatory authorizations. There is no assurance that wewill be able to gain the necessary authorizations in a timely fashion or atall. Failure to do so would have a material adverse effect on our ability toachieve our business goals and implement our business strategy.

***Environmental, Health, Safety and Other Regulations.  ***Inaddition to the laws and regulations that apply to the development, manufactureand sale of our products, our operations are subject to numerous foreign,federal, state and local laws and regulations. Our research and developmentactivities involve the use, storage, handling and disposal of hazardousmaterials, chemicals and, as a result, we are required to comply withregulations and standards of the Occupational Safety and Health Act and othersafety and environmental laws. Although we believe that our activitiescurrently comply with all applicable laws and regulations, the risk ofaccidental 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 our therapeutic recombinant proteins for preclinical and clinicalstudies, including the manufacture of both the bulk drug substance and thefinal pharmaceutical product. The testing of the resultant products is theresponsibility of the contract manufacturer, the Company, and /or anindependent testing laboratory. These materials must be manufactured and testedaccording to strict regulatory standards established for pharmaceuticalproducts. Despite our close oversight of these activities, there is noassurance that the technology can be readily transferred from our facility tothose of the contractors, that the process can be scaled up adequately to 

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support clinical trials,or that the required quality standards can be achieved. To date, we haveidentified only a few facilities that are capable of performing theseactivities and willing to contract their services. There is no assurance thatcontractors will have the capacity to manufacture or test our products at therequired scale and within the required time frame. There is no assurance thatthe supply of clinical materials can be maintained during the clinicaldevelopment of our product candidates.

It is our current intentto rely on contract manufacturers for the production and testing of marketedpharmaceuticals following the approval of one or more of our products. Thequality standards for marketed pharmaceuticals are even greater than forinvestigational products. The inability of these contractors to meet therequired standards and/or to provide an adequate and constant supply of thepharmaceutical product would have a material adverse effect on our business.

**Sales and Marketing**

***TherapeuticProducts.  ***We do not currently have any therapeuticproducts approved for sale. For any products that are approved in the futurefor diseases where patients are treated primarily by limited numbers ofphysicians, we intend in most cases to conduct sales and marketing activitiesourselves in North America and, possibly, in Europe. For any product that weintend to market and sell ourselves, we do not expect to establish direct salescapability until shortly before the products are approved for commercial sale,but we will begin product management and market education activities earlierduring clinical trials. For markets outside of North America, includingpossibly European markets, we will seek to establish arrangements where ourproducts are sold by pharmaceutical companies, which are already wellestablished in these regions. For products that are indicated for conditionswhere patients may be treated by large numbers of internists, general surgeons,or family practitioners, we will seek to establish arrangements under which ourproducts will be sold and marketed by large pharmaceutical organizations withestablished sales representatives. We expect that these arrangements willgenerally be worldwide on a product-by-product basis.

***Other Product Areas.  ***For areasother than therapeutic products, we will generally seek to establisharrangements with leading companies in particular business areas under whichthose companies develop the products based on our technology and conduct salesand marketing activities through their established channels.

**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 31,2004, we had 131 employees worldwide, including 32 with Ph.D.s and/or M.D.s.Approximately 92 of our employees are in research and development, 3 inbusiness development and 36 in administration. Our workforce is non-unionized,and we believe that our relations with employees are good.

**AdditionalInformation**

We make our Annual Reporton Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K, and amendments to these reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 available without charge through our website,www.dyax.com, as soon as reasonably practicable after filing them with orfurnishing them to the Securities and Exchange Commission. Informationcontained on the website is not part of this report.

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**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 our corporateheadquarters and main research facility. Under the terms of the lease, we haveinitially leased 67,197 square feet. Of the space we initially leased, we havesubleased a total of approximately 14,000 square feet to two differentbiotechnology companies under subleases, both of which are due to expire,unless extended, on October 31, 2005. We are obligated to lease anadditional 24,122 square feet on November 1, 2007. We have the option toextend the lease for two additional five-year terms. We have provided thelessor with a Letter of Credit in the amount of $4.3 million, which may bereduced after the fifth year of the lease term. Through our subsidiary, DyaxS.A., we maintain 10,000 square feet of laboratory and office space in Liege,Belgium to support our research efforts.

**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 31,2004, no matters were submitted to a vote of security holders through thesolicitation of proxies or otherwise.

**PART II**

**ITEM 5.**                MARKET FOR THECOMPANY’S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES

Our common stock is traded on The NASDAQ NationalMarket under the symbol DYAX. As of February 25, 2005, there were31,578,981 shares of our common stock outstanding, which were held byapproximately 275 common stockholders of record, and approximately 2,550beneficial owners.

The following table sets forth, for the periodsindicated, the high and low selling prices for our common stock as reported onNASDAQ National Market:
| ** **                                 | ** ** | **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 |   |

 
| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal year ended  December 31, 2003: |       |     |       |    |       |
| First Quarter                              |       | $        | 2.25       |    | $          | 1.52 |   |
| Second Quarter                             |       | $        | 4.90       |    | $          | 1.67 |   |
| Third Quarter                              |       | $        | 7.50       |    | $          | 2.58 |   |
| Fourth Quarter                             |       | $        | 9.05       |    | $          | 4.45 |   |

 

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.

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**ITEM 6.   SELECTED CONSOLIDATED 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. Theselected consolidated financial data at December 31, 2004 and 2003, andfor the years ended December 31, 2004, 2003, and 2002 have been preparedfrom our audited financial statements and the selected consolidated financialdata at December 31, 2002, 2001 and 2000, and for the years ended December 31,2001 and 2000 has been prepared from our accounting records. On October 29,2003, we completed the sale of our wholly owned separations product subsidiaryknown as Biotage. The following data includes all activities of Biotagepresented as discontinued operations.
| ** **                                                                                  | ** ** | **December 31,**                                              | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product  development and license fee revenues                                          |       | $                                                                  | 16,590     |   | $ | 16,853 |   | $ | 17,750 |   | $ | 14,237 |   | $ | 9,434 |   |
| Research and development:                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                                                                    |       | 39,432                                                             |       | 29,990 |   | 28,713 |   | 16,795 |   | 12,104 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax–Genzyme LLC) |       | (10,408                                                            | )          | (5,203 | ) | — |   | — |   | — |   |
| Net research and  development                                                               |       | 29,024                                                             |       | 24,787 |   | 28,713 |   | 16,795 |   | 12,104 |   |
| Equity loss in joint  venture (Dyax–Genzyme LLC)                                       |       | 5,988                                                              |       | 2,243 |   | — |   | — |   | — |   |
| General and  administrative                                                                 |       | 14,451                                                             |       | 13,205 |   | 14,882 |   | 14,186 |   | 11,307 |   |
| Total operating  expenses                                                                   |       | 49,463                                                             |       | 40,235 |   | 43,595 |   | 30,981 |   | 23,411 |   |
| Loss from  operations                                                                       |       | (32,873                                                            | )          | (23,382 | ) | (25,845 | ) | (16,744 | ) | (13,977 | ) |
| Other (expense) income,  net                                                                |       | (241                                                               | )          | (1,112 | ) | (795 | ) | 2,136 |   | 1,981 |   |
| Loss from  continuing operations                                                            |       | (33,114                                                            | )          | (24,494 | ) | (26,640 | ) | (14,608 | ) | (11,996 | ) |
| Gain on sale of  Biotage, net of tax                                                        |       | —                                                             |       | 18,959 |   | — |   | — |   | — |   |
| Loss from  discontinued operations of Biotage, net of tax                                   |       | —                                                             |       | (1,880 | ) | (178 | ) | (2,557 | ) | (3,193 | ) |
| Net Loss                                                                                    |       | $                                                                  | (33,114    | ) | $ | (7,415 | ) | $ | (26,818 | ) | $ | (17,165 | ) | $ | (15,189 | ) |
| Basic and diluted loss per share:                                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss from continuing  operations                                                            |       | $                                                                  | (1.06      | ) | $ | (1.04 | ) | $ | (1.35 | ) | $ | (0.76 | ) | $ | (1.40 | ) |
| Gain on sale of Biotage                                                                     |       | —                                                             |       | 0.81 |   | — |   | — |   | — |   |
| Loss from discontinued  operations of   Biotage                                             |       | —                                                             |       | (0.08 | ) | (0.01 | ) | (0.13 | ) | (0.37 | ) |
| Net loss                                                                                    |       | $                                                                  | (1.06      | ) | $ | (0.31 | ) | $ | (1.36 | ) | $ | (0.89 | ) | $ | (1.77 | ) |
| Shares used in  computing basic and diluted net loss per share                              |       | 31,207,218                                                         |       | 23,546,524 |   | 19,652,474 |   | 19,244,809 |   | 8,577,912 |   |

 
| ** **                                   | ** ** | **December 31,**  | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                   | ** ** | **In thousands:** | ** ** |
| **Consolidated Balance Sheet  Data:**        |       |                   |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                   |       | $                      | 6,978      |   | $ | 36,508 |   | $ | 28,199 |   | $ | 51,034 |   | $ | 74,205 |   |
| Short-term  investments                      |       | 50,163                 |       | — |   | — |   | — |   | — |   |
| Working capital                              |       | 46,832                 |       | 27,219 |   | 14,095 |   | 39,984 |   | 68,380 |   |
| Total assets                                 |       | 82,760                 |       | 71,187 |   | 76,042 |   | 81,441 |   | 91,405 |   |
| Long-term  obligations, less current portion |       | 10,645                 |       | 10,648 |   | 13,809 |   | 3,756 |   | 1,190 |   |
| Accumulated  deficit                         |       | (151,356               | )          | (118,242 | ) | (110,827 | ) | (84,009 | ) | (66,844 | ) |
| Total  stockholders’ equity             |       | 47,831                 |       | 33,945 |   | 30,843 |   | 55,464 |   | 69,857 |   |
|                                              |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**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 currently have two product candidates in orentering into Phase II clinical trials for three indications, and we areplanning to initiate a Phase III trial of our lead product candidate in thefirst half of 2005. DX-88, a specific inhibitor of human plasma kallikrein, isbeing evaluated in Phase II trials for its potential to treat hereditaryangioedema (HAE), a rare and life-threatening inflammatory disease. The DX-88trials in HAE are being conducted by us in a joint venture with GenzymeCorporation. Independently, we are advancing DX-88 into Phase II trials incardiac surgery, initially for its potential to reduce blood loss and relatedcomplications during on-pump, open-heart surgery, specifically coronary arterybypass graft, or CABG, surgery. DX-890, a specific inhibitor of humanneutrophil elastase, is being evaluated in Phase II clinical trials for itspotential in the treatment of cystic fibrosis (CF). The CF clinical trials arebeing conducted by Debiopharm S.A., our collaborator for this program. BothDX-88 and DX-890 have received orphan drug designation in the UnitedStates of America (U.S.) and European Union, and DX-88 has been granted FastTrack designation by the U.S. Food and Drug Administration (FDA) for thetreatment of HAE.

DX-88 and DX-890 were identified using our patentedphage display technology, which rapidly selects antibodies, peptides and smallproteins that bind with high affinity and specificity to therapeutic targets.We are using this technology to build a pipeline of drug candidates that we mayadvance into clinical development on our own or in partnership with othercompanies. We also leverage phage display technology broadly throughcollaborations and licenses that are structured to generate revenues throughresearch funding, license fees, technical and clinical milestone payments, androyalties. Currently, over 75 companies and research institutions, includingAmgen Inc., Biogen Idec, Inc., Genzyme Corporation, ImClone Systems, Inc.,Human Genome Sciences, Inc., MedImmune, Inc. and Tanox, Inc.,have licenses to use our phage display technology and phage display derivedcompounds to research and develop therapeutic,**diagnostic and other products.

We continued to incurlosses in 2004 and expect to incur significant operating losses over at leastthe next several years as we continue our current and anticipated developmentprojects, particularly our clinical trial programs for DX-88, and as we developour discovery, research, marketing, sales and manufacturing capabilities.

**Clinical Development Programs**

***DX-88for HAE.  ***In collaboration with Genzyme, we aredeveloping DX-88 as a treatment for HAE. This collaboration is managed throughDyax–GenzymeLLC (formerly known as Kallikrein LLC), a jointly owned limited liabilitycompany. Currently, we are conducting an open-label, repeat dose Phase IIclinical trial known as EDEMA2. EDEMA2 is a multi-center trial withinvestigational sites in the U.S. and Canada. We also plan to initiate a PhaseIII clinical trial of DX-88 for the treatment of HAE, referred to as EDEMA3,during the first half of 2005. If the EDEMA3 trial is successful and completedon schedule, we, together with Genzyme, currently anticipate filing a BLA forDX-88 for the treatment of HAE in the United States and an equivalent MarketingAuthorization Application for DX-88 for the treatment of HAE in the EuropeanUnion in 2006. Based upon this timeline for the BLA filing, we estimate Dyax–GenzymeLLC’s total remaining costs to commercialization to be in the range of$44 million to $54 million. We will be responsible for funding onehalf of these costs, or $22 million to $27 million. These costs includecosts associated with the development of a subcutaneous formulation of DX-88 forat-home use.

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Thefollowing table illustrates the activity associated with DX-88 for HAE includedin our consolidated statements of operations and comprehensive loss:
| ** **                                                                                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                                        | ** ** | **(In thousands)**                     | ** ** |
| DX-88 for  HAE costs included within research and development expenses in the  consolidated statements of operations and comprehensive loss                       |       | $                                           | 10,440     |   | $ | 7,067 |   | $ | 4,444 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax–Genzyme LLC) per the  consolidated statements of operations and comprehensive loss |       | (10,408                                     | )          | (5,203 | ) | — |   |
| Net research and  development expenses for DX-88 for HAE                                                                                                          |       | 32                                          |       | 1,864 |   | 4,444 |   |
| Equity loss in  joint venture (Dyax–Genzyme  LLC) separately classified within the consolidated statements of operations  and comprehensive loss             |       | 5,988                                       |       | 2,243 |   | — |   |
| Net loss on DX-88  for HAE program                                                                                                                                |       | $                                           | 6,020      |   | $ | 4,107 |   | $ | 4,444 |   |

 

During 2004, our research and development expenses onthis program totaled $10.4 million compared with $7.1 million in 2003and $4.4 million in 2002. Research and development expenses increased year overyear principally due to increased activity in the areas of manufacturing andpreclinical pharmacology and toxicology studies. In addition, net research anddevelopment expenses increased from 2002 to 2003 due to the initiation of theEDEMA1 trial in 2003.

Dyax–Genyzme LLCis responsible for the reimbursement of all development expenses related to theHAE program incurred after the completion of the first Phase II clinicaltrial for HAE, which occurred in 2003. During 2004, Dyax–Genzyme LLC reimbursed us for$10.4 million of our expenses. This reimbursement is recorded as researchand development expenses reimbursed by joint venture (Dyax–GenzymeLLC) in our consolidated statements of operations and comprehensive loss. In2003, Dyax–GenzymeLLC reimbursed us $5.2 million for our expenses relating to the program. The$1.9 million of net research and development expenses in 2003 for DX-88 for HAErepresent costs incurred prior to the completion of the first Phase IIclinical trial for HAE, which therefore were not reimbursed.  All future costs will be reimbursed by Dyax–GenzymeLLC.

Dyax–GenzymeLLC had a net loss of approximately $12.0 million and $4.5 million for the yearsended December 31, 2004 and 2003. This loss represents the total researchand development expenses incurred by Dyax and Genzyme on DX-88 for HAE. Ourportion of the loss, accounted for under the equity method, was $6.0 millionand $2.2 million for the years ended December 31, 2004 and 2003 and isproportional to our 50.01% financial interest in the program and is separatelyclassified within the consolidated statements of operations and comprehensiveloss.

***DX-88for CABG.  ***Independent of our collaboration withGenzyme, we are developing DX-88 as a treatment for patients undergoingon-pump, open-heart surgery, specifically coronary artery bypass graft, orCABG, surgery. During the first quarter of 2003, we exercised an option topurchase from Genzyme full rights to DX-88 for this and other surgicalindications. The cost for exercising the option was $1.0 million and wasexpensed in the second quarter of 2003.

Expenses on this program totaled $3.1 million, $2.6million and $1.8 million for the years ended December 31,2004, 2003 and 2002, respectively. The increase in spending from 2003 to 2004is attributable to an increase in market research, preclinical studies andmanufacturing expenses in addition to an increase in headcount related costs. During2004 there was additional spending attributable to a $264,000 increase inmarket research costs, a $239,000 increase in personnel related costs and a$186,000 increase in other expenses all of which were associated with developingthe clinical plan and identifying a suitable 

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partner for the program. Preclinicalstudies and the associated manufacturing expenses increased $620,000 in 2004.  The total increase in expenses on this programfrom 2003 to 2004 was offset by the one time, $1.0 million payment made toGenzyme for its interest in the application of DX-88 for surgical indicationsin 2003. The increase in spending from 2002 to2003 is primarily attributableto the$1.0 million payment made to Genzyme in 2003.

Subject to the successful completion of ongoingnegotiations to partner this indication with another company, we are planningto conduct a Phase II trial in the United States to compare DX-88 to aprotinin,currently marketed by Bayer AG under the name Trasylol®, for reduction of blood loss in CABG patients. Thetrial, to be conducted in the United States, is currently planned to involve approximately100****patients. As currently designed, weexpect this trial to cost approximately $2.8 million to $3.2 million. Following an interimanalysis of the data generated from this comparative trial, we may expand itinto a larger clinical trial, which would entail significant additional costs.

***DX-890 for CysticFibrosis.  ***In collaboration with Debiopharm S.A.,DX-890 is being developed as a treatment for cystic fibrosis, a fatal geneticmutation that causes problems including progressive lung destruction andfrequent infections. Debiopharm has completed two Phase IIa clinical trialswith DX-890 in Europe, one in adult and one in pediatric cystic fibrosispatients, and has recently initiated a placebo-controlled Phase IIb clinicaltrial for cystic fibrosis. We are currently negotiating with Debiopharm toamend our collaboration agreement in order to provide Debiopharm worldwiderights to independently develop and commercialize DX-890 for cystic fibrosisand ARDS. Under the proposed amendment, we would receive milestones androyalties from Debiopharm in connection with its ongoing development of DX-890. We would also receive worldwide rightsto commercialize our independently developed, long-acting, pegylated form of DX-890 (known as PEG-DX-890). Currently,we are exploring the potential for advancing PEG-DX-890 into development forother pulmonary indications, which could include chronic obstructive pulmonarydisease (COPD) and alpha-1 antitrypsin deficiency.

During 2004, we incurred research, development andmanufacturing expenses on this program of $6.3 million compared with $5.4million in 2003. Research and development expenses on this program increasedfrom 2003 principally due to an increase in manufacturing costs. These costswere fully funded by Debiopharm and this funding is reflected in our productdevelopment revenues. Under our existing collaboration agreement, Debiopharm isresponsible 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 forDX-890 are fully funded by Debiopharm. This financial structure could bealtered if we were to amend our collaboration agreement with Debiopharm andallow them to independently assume responsibility for the clinical developmentof DX-890 for cystic fibrosis.

***Goals for Clinical Development Programs.  ***Ourgoal for each of our ongoing clinical development programs is to obtainmarketing approval from the FDA and analogous international regulatoryagencies. Because of uncertainties associated with our ongoing clinical trials,our ability to locate a development partner or obtain the additional fundingneeded to complete clinical trials in the CABG and DX-890 programs, thepreparation and filing of a BLA, the regulatory review process, and the risksassociated with the clinical approval process, including the risk that we mayhave to repeat, revise or expand the scope of trials or conduct additionalclinical trials not presently planned to secure marketing approvals, we areunable to accurately predict the costs to complete any of these programs, thecompletion dates, or whether these projects will be successfully completed atall. Material cash inflows for any of these programs other than milestonepayments will not commence until after marketing approvals are obtained, andthen only if the product candidate finds acceptance in the marketplace as atreatment for its disease indication. Because of the many risks anduncertainties relating to the completion of clinical trials, receipt ofmarketing approvals and acceptance in the marketplace, we cannot predict whenmaterial cash inflows from these programs will commence, if ever.

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**Discovery Programs**

Through internal discoveryactivities and through business relationships with academic institutions andprivate biotechnology and pharmaceutical companies, we use our proprietaryphage display technology to identify compounds with therapeutic and diagnosticpotential. We have a total of seven discovery and development programs underwayin oncology, three of which are in collaboration with other companies. Theseprograms are focused on the discovery and development of therapies that fightcancer primarily in three ways: inhibiting angiogenesis (the growth of bloodvessels), inhibiting proteases believed to be associated with tumor growth andproliferation, and targeting cell surface proteins believed to be overexpressed by certain tumors. We also have four discovery and developmentprograms focused on targets that are believed to be important mediators ofinflammation, one of which we are developing in collaboration with anothercompany. In addition, in collaboration with another company, we have adiscovery and development program focused on an infectious disease target.

**Licensingand Funded Research Activities**

Currently, over 75companies and research institutions have licenses to use our proprietary phagedisplay technology and phage display libraries. These licenses allow others toexploit our technology in therapeutic discovery and in non-core areas such asdiagnostic imaging, research reagents and separations. In addition, we performfunded research for collaborators within the biopharmaceutical industry. Webelieve that these programs provide support for our patent position in phagedisplay and for the usefulness of phage display as an enabling discoverytechnology. Additionally, these programs generate short-term and long-termvalue for us through licensing fees, milestones and royalties.

**Sale of 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. We received approximately$25.4 million in cash at closing and paid approximately $2.5 millionin transaction expenses. An additional $5.0 million was received in 2004that was being held in an indemnity escrow. For the year ended December 31,2003, we have recognized a $19.0 million gain on this sale. For the years endedDecember 31, 2003 and 2002, operations of Biotage are presented asdiscontinued operations in our financial statements. Prior period amounts havebeen reclassified to be consistent with the treatment of Biotage as adiscontinued operation.

**Results of Operations**

***Revenues.  ***Substantiallyall our revenues have come from licensing, funded research and developmentactivities, including milestone payments from our licensees and collaborators.These revenues fluctuate from year to year. Total revenues for 2004 were $16.6million, compared with $16.9 million in 2003 and $17.8 million in2002. The decrease from 2003 to 2004 was due to a $1.7 million decrease infunded research and development activities and a $1.4 million increase inlicensing activities.  Our decrease infunded research and development revenue was due to a $1.6 million decrease froma funded research agreement with Bracco Imaging S.P.A. and a $1.5 milliondecrease from a funded research agreement with Human Genome Sciences, Inc.(HGS)  The agreement with HGS was completedin June 2003. These decreases in funded research and developmentactivities were partially offset by a $1.7 million increase in revenue arisingfrom our DX-890 product collaboration with Debiopharm. On a period-to-periodbasis our DX-890 manufacturing revenue may vary substantially due to the timingof production activities. Our increase in licensing revenue was primarily dueto revenue recognized for new licenses of our proprietary phage displaylibraries and milestones under existing licenses. The decrease from 2002 to2003 was 

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primarily due to a $2.2million decrease from a funded research agreement with HGS. This decrease waspartially offset by a $377,000 increase in other licensing and funded researchagreements.

***Research and Development.  ***Our researchand development expenses for the years ended December 31, 2004, 2003 and2002, are summarized as follows:
| ** **                                                                                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                                    | ** ** | **(In thousands)**                    | ** ** |
| Research and  development per consolidated statements of operations and comprehensive loss                                                                    |       | $                                          | 39,432     |   | $ | 29,990 |   | $ | 28,713 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax–Genzyme LLC) per consolidated  statements of operations and comprehensive loss |       | (10,408                                    | )          | (5,203 | ) | — |   |
| Net, research and  development expenses per consolidated statements of operations and  comprehensive loss                                                |       | 29,024                                     |       | 24,787 |   | 28,713 |   |
| Equity loss in  joint venture (Dyax–Genzyme  LLC) separately classified within the consolidated statements of operations  and comprehensive loss    |       | 5,988                                      |       | 2,243 |   | — |   |
| Pro forma  research and development expenses                                                                                                                  |       | $                                          | 35,012     |   | $ | 27,030 |   | $ | 28,713 |   |

 

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, clinical trials, and tomanufacture drug compounds prior to FDA approval. Since mid-2003, the expenseswe incur on the DX-88 program for HAE are included in our overall research anddevelopment expenses, but then are reimbursed by the Dyax–GenzymeLLC joint venture and excluded from net research and development expenses. However,we jointly fund the losses of that program with Genzyme, so our line item forequity loss in joint venture represents our share of the expenses for thedevelopment of DX-88 for HAE, 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 pro forma research and development expenses increased $8.0million from 2003 to 2004 due to increases in both items. The $4.2 millionincrease in net research and development expenses was the result of anapproximately $3.0 million increase in headcount and associated personnel andoccupancy costs, primarily to support our discovery pipeline. Compared to 2003,manufacturing costs associated with our DX-890 for CF program increased $1.1million and manufacturing, and marketing and other external costs associatedwith our DX-88 for CABG program increased $1.1 million, exclusive of the costof exercising a $1.0 million option to purchase from Genzyme the rights toDX-88 for CABG and other surgical indications, which occurred in 2003. Equityloss in joint venture (Dyax–GenzymeLLC) 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.

Pro forma research and development expenses decreasedfrom 2002 to 2003 primarily due to reduced headcount at the end of 2002 and thereimbursement of HAE expenses by Dyax–GenzymeLLC effective April 2003.

Our management believes that the above presentation ofpro forma research and development expenses provides investors a betterunderstanding of how total research and development efforts affect ourconsolidated statements of operations and comprehensive loss. Our presentationof this measure, however, may not be comparable to similarly titled measuresused by other companies.

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***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 $14.5 million in 2004compared to $13.2 million in 2003 and $14.9 million for 2002. Theincrease of $1.3 million from 2003 to 2004 was primarily due to anincrease in professional fees, including approximately $900,000 in costsassociated with Sarbanes-Oxley compliance and internal headcount. The decreaseof $1.7 million from 2002 to 2003 was primarily due to a $1.1 milliondecrease in employment costs, partially attributable to the effects of lowerheadcount and a $699,000 decrease in legal costs. These decreases werepartially offset by increases in the cost of directors’ and officers’ insurance.

***Discontinued Operations.  ***Ouractivities from discontinued operations are the operations our wholly owned separations product subsidiaryknown as Biotage, which were sold on October 29, 2003 including thegain on the sale of Biotage. The gain was comprised of a $19.0 milliongain on sale and a loss of $1.9 million on Biotage’s operations for theyear-to-date period ended October 29, 2003, compared to a loss onoperations of $178,000 for 2002. The $1.7 million increase in loss onoperations from 2002 to the 2003 period were primarily due to a decrease inrevenues in non-core product lines, specifically Biotage’s Kiloprep® and Flex Systems.

**Liquidity and Capital Resources**

We require cash to fund our operating expenses, tomake capital expenditures, acquisitions and investments, and to pay debtservice. Through December 31, 2004, we have funded our operationsprincipally through the sale of equity securities, which have providedaggregate net cash proceeds since inception of approximately $188 million,including net proceeds of $44.7 million from our January 2004 underwrittenoffering, $8.3 million from our March 2003 registered directedoffering and $62.4 million from our August 2000 initial publicoffering. 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, 2004,we had cash and cash equivalents and short-term investments aggregating $57.1  million. Our excess funds arecurrently invested in short-term investments primarily consisting of U.S.Treasury notes and bills, obligations of U.S. government agencies and moneymarket funds backed by U.S. Treasury obligations.

Our operating activities usedcash of approximately $21.3 million in 2004, $14.9 million in 2003 and $22.0million in 2002. Our cash used in operating activities for 2004 consistedprimarily of our net loss from continuing operations 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 in joint venture (Dyax–GenzymeLLC) of $6.0 million, and a $1.0 million change in operating assets andliabilities. Our cash used in operating activities for 2003 consisted primarilyof our net loss from continuing operations of $24.5 million, an increasein accounts receivable of $1.6 million due to the timing of billings toDebiopharm under our collaboration agreement, and an increase in prepaidexpense and other assets of $1.3 million. These uses of cash werepartially offset by an increase in accounts payable and accrued expenses of$4.6 million due primarily to the timing of payments made to our contractmanufacturer and adjustments for non-cash items, including depreciation andamortization of fixed assets and intangibles totaling $3.8 million and equityloss in joint venture (Dyax–GenzymeLLC) of $2.2 million. The activities for 2002 consisted primarily of our netloss from continuing operations of $26.6 million, a decrease in deferredrevenue of $1.7 million due primarily to the timing of revenue recognitionon our collaboration with Debiopharm, and an increase in prepaid expense andother assets of $1.4 million. These decreases were partially offset byproceeds from incentives given to us by our landlord for enticement to enterour lease in Cambridge, Massachusetts and depreciation and amortization coststotaling $2.9 million.

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Our investing activities used cash totaling $53.2million in 2004, provided cash of $21.8 million in 2003 and used cash of$7.8 million in 2002. Our cash used in investing activities for the 2004included the purchase of $51.0 million of short-term investments,$5.4 million contributed to Dyax–GenzymeLLC and $2.3 million in fixed asset purchases. These uses were partially offsetby $5.0 received from the escrow relating to the sale of Biotage. Our investingactivities for 2003 included the $25.4 million received on the sale ofBiotage, repayments on employee notes receivable of $1.3 million,including approximately $1.2 million received from our Chief ExecutiveOfficer as full payment on the related note which were partially offset by$3.1 million paid to Dyax–GenzymeLLC and payment of $2.0 million for licensed technology purchased in 2002.Our investing activities for 2002 included the purchases of fixed assetsrelating to our move to a new corporate and research facility in Cambridgetotaling $5.2 million, $1.5 million spent on a purchase of licensed technologyand a $1.2 million increase in restricted cash to secure long-termobligations.

Thefollowing table summarizes our 2004 cash contributions to and investment in ourjoint venture, Dyax–GenzymeLLC:
| ** **                                                                                                                                            | ** ** | **(In thousands)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| Balance at  December 31, 2003 per the consolidated balance sheets                                                                                |       |                    | $          | 817 |   |   |
| Investment in  joint venture (Dyax–Genzyme  LLC) per the consolidated statement of cash flows                                                    |       |                    | 5,425      |   |   |
| Equity loss in  joint venture (Dyax–Genzyme  LLC) separately classified within the consolidated statements of operations  and comprehensive loss |       |                    | (5,988     | ) |   |
| Balance at  December 31, 2004 per the consolidated balance sheets                                                                                |       |                    | $          | 254 |   |   |

 

Our financing activities provided cash of $44.9million, $6.0 million and $7.8 million in 2004, 2003 and 2002,respectively. Our financing activities for 2004 included net proceeds of $46.8million from the sale of our common stock, including $44.7 million from our January 2004offering and $1.4 million in new long-term obligations. These increases in cashwere partially offset by the repayments of long-term obligations of $3.3million. Our financing activities for 2003 included net proceeds of$8.3 million from the registered directed offering completed in March 2003.These proceeds were partly offset by repayments of long-term obligations of$3.4 million. Our financing activities for 2002 included a$7.0 million loan from Genzyme under the terms of our collaboration agreement,as well as proceeds of $2.4 million from our Cambridge landlord forleasehold improvements. These proceeds were partially offset by$2.2 million in repayments of long-term obligations.

We have financed fixed asset purchases through capitalleases and debt. Capital lease obligations are collateralized by the assetsunder lease.

In conjunction with our collaboration agreement withGenzyme for the development of DX-88, Genzyme loaned us $7.0 millionpursuant to a senior secured promissory note and security agreement, and wegranted Genzyme a continuing security interest in certain tangible andintangible personal property arising out of the DX-88 program. Inaddition, the security agreement, as amended contains certain financialcovenants 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. The principal and allunpaid interest is due on the maturity date of May 31, 2005. We may extendthe maturity date to May 31, 2007 if the amended collaboration agreementis in effect, no default or event of default exists and we satisfy thefinancial covenants as of May 31, 2005. As of December 31, 2004, wesatisfied the criteria for extending the maturity date of the note to May 31,2007 and intend to extend the maturity date. Accordingly, the note isclassified as a long-term liability in the consolidated balance sheet. 

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We have borrowed the full$7.0 million available under the note, the terms of which are discussed inNote 14 to the consolidated financial statements.

We believe that existing cash and cash equivalents andshort-term investments plus anticipated cash flow from product development,license fees and collaborations will be sufficient to support our currentoperating plans into 2006. We expect to use approximately $33 million incash during 2005. For the foreseeable future, we expect to continue to fund anydeficit from our operations through the sale of additional equity or debtsecurities. The sale of any equity or debt securities may result in additionaldilution to our stockholders, and we cannot be certain that additionalfinancing will be available in amounts or on terms acceptable to us, if at all.If we are unable to obtain any required additional financing, we may berequired 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.

**Contractual Obligations**

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 31,2004, 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                               |       | $                                         | 8,309      |   |   | $ | 590 |   |   | $ | 7,719 |   | $ | — |   |   | $ | — |   |   |
| Capital leases                                             |       | 3,783                                     |       |   | 1,842 |   |   | 1,863 |   | 78 |   |   | — |   |   |
| Leasehold  improvement arrangements                        |       | 2,991                                     |       |   | 413 |   |   | 825 |   | 825 |   |   | 928 |   |   |
| Operating lease  obligations                               |       | 35,563                                    |       |   | 3,997 |   |   | 9,329 |   | 10,788 |   |   | 11,449 |   |   |
| Patent and  product license obligations(1)                 |       | 3,238                                     |       |   | 272 |   |   | 544 |   | 540 |   |   | 1,882 |   |   |
| Obligation for research,  development and manufacturing(2) |       | 12,117                                    |       |   | 11,996 |   |   | 81 |   | 40 |   |   | — |   |   |
| Total contractual  obligations                             |       | $                                         | 66,001     |   |   | $ | 19,110 |   |   | $ | 20,361 |   | $ | 12,271 |   |   | $ | 14,259 |   |   |
|                                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          These amounts excludeany royalties and milestones that we may owe in connection with the developmentor commercialization of any of our product candidates. Since the prospect ofdevelopment and commercialization of any particular product candidate isuncertain, we believe the timing and amounts of any potential royalties andother milestones are not currently calculable in any manner that would fairlypresent purchase obligations.

(2)          These amounts representthe cash commitment due on research, development and manufacturing contracts. Wewill not owe any royalties or milestones in connection 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, we have received $1.1 million under this grant.

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**Critical Accounting Estimates**

Our discussion and analysis of our results ofoperations and liquidity and capital resources are based on our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Onan ongoing basis, we evaluate our estimates and judgments, including thoserelated to revenue recognition, receivable collectibles, useful lives withrespect to long-lived and intangible assets and valuation of common stock,related stock options, and deferred tax assets. We base our estimates on historicaland anticipated results and trends and on various other assumptions that webelieve are reasonable under the circumstances, including assumptions as tofuture events. These estimates form the basis for making judgments about thecarrying 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 to the following significant accountingpolicies are most critical to the accounting estimates used in the preparationof our consolidated financial statements.

***Revenue Recognition.  ***Wemake significant assumptions and estimates relating to  revenue recognition, which include theexpected term of the agreement and total expected cost. Our assumptions andestimates may prove to be inaccurate. Therefore, although we make every effortto ensure the accuracy of our estimates, any significant unanticipated changesin our estimates could have a material impact on revenues and our results ofoperations.

Our revenue recognition policies are in accordancewith the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 101,*Revenue Recognition in Financial Statements*,as amended by SEC Staff Accounting Bulletin No. 104, *RevenueRecognition,* and Emerging Issues Task Force Issue No. 00-21,*Revenue Arrangements with Multiple Deliverables*.We enter into biopharmaceutical product development agreements withcollaborators for the research and development of therapeutic, diagnostic andother products. The terms of the agreements may include non-refundable signingand licensing fees, funding for research and development, milestone paymentsand royalties on any product sales derived from the collaborations.Non-refundable signing and licensing fees are recognized as services areperformed over the expected term of the collaboration. Funding for research anddevelopment, where the amounts recorded are non-refundable, is recognized asthe related expenses are incurred. We evaluate all collaborative agreements ona quarterly basis to determine the appropriate revenue recognition for that period.The evaluation includes all of the potential revenue components from eachspecific collaborative agreement. Upon achievement of milestones, a portion ofthe milestone payment equal to the percentage of the collaboration completedthrough that date is recognized. The remainder is recognized as services areperformed over the remaining term of the collaboration. Royalties arerecognized when earned.

We generally license our patent rights covering phagedisplay as well as our proprietary phage display libraries on a non-exclusivebasis to third parties for use in connection with the research and developmentof therapeutic, diagnostic, and other products. Standard terms of the licensepatent rights agreements, for which we have no future obligations, generallyinclude non-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. Perpetual patent licenses are recognized immediately if we have nofuture obligations. Standard terms of the proprietary phage display librariesagreements 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, which is normally between 3 and 5years, but have been determined to be up to 14 years. Upon the achievement of milestonesunder non-exclusive phage display patent licenses and phage display libraries aportion of the milestone equal payment to the percentage of the licenseagreement that has elapsed is recognized as 

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revenue. Milestonepayments under these license arrangements are recognized when the milestone isachieved if the Company has no future obligations under the license, androyalties are recognized when they are earned.

Payments received that have not met the appropriatecriteria for revenue recognition are recorded as deferred revenue. At December 31,2004 and 2003, our deferred revenue related to product development agreementswas $9.8 million and $7.7 million, respectively. Of the $9.8 milliondeferred at December 31, 2004, $5.3 million, $1.5 million and $573,000 isexpected to be recognized as revenue in 2005, 2006 and 2007 respectively, andthe remaining is expected to be recognized over the next 14 years.

***Allowance forDoubtful Accounts.  ***We estimate the uncollectibilityof our accounts receivable. When evaluating the adequacy of our allowance fordoubtful accounts, we analyze our accounts receivable aging, historical baddebts, customer concentrations, customer credit-worthiness and currenteconomic trends. If the financial condition of our customers were todeteriorate, 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 $3.1 million and $4.7 million atDecember 31, 2004 and 2003, respectively. At December 31, 2004 and2003 the provision for doubtful accounts was $75,000.

***Valuation of Long-Lived and Intangible Assets.  ***Wereview long-lived assets, including capitalized license rights, for impairmentwhenever events or changes in business circumstances indicate that the carryingamount of assets may not be fully recoverable or that the useful lives of theseassets are no longer appropriate. Factors considered important which couldtrigger an impairment 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 is basedon a comparison of the undiscounted cash flow to the recorded value of theasset. 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 2004 consisted of licenses for antibody technology from thirdparties. The balance of our other intangible assets net of accumulatedamortization was $2.4 million and $2.9 million at December 31,2004 and 2003, respectively. No impairment losses have been recognized in anyof the periods presented in our consolidated financial statements.

**Related Party Transactions**

Our Chairman, President and Chief Executive Officeralso serves as an outside director of Genzyme Corporation and was a consultantto Genzyme until 2001. One of our other directors is a member of Genzyme’sdirectors and another was a senior advisor to the Chief Executive Officer ofGenzyme and a former officer.

We have a collaboration agreement with Genzyme for thedevelopment and commercialization of DX-88. Under this agreement, whichwas amended on May 31, 2002, and again effective as of September 30,2003, we were initially responsible for all expenses incurred in connectionwith the development of DX-88 for the treatment of HAE through thecompletion of the first Phase II clinical trial for HAE, which occurred in thesecond quarter of 2003. In June 2003, Genzyme exercised its option underthe collaboration agreement to join us in the development and commercializationof DX-88 for HAE. Through the creation of Dyax–Genzyme LLC (formerlyknown as Kallikrein LLC), Dyax and Genzyme now jointly own the rights to DX-88for the treatment of HAE. Dyax and Genzyme are each responsible for 50% ofongoing costs incurred in connection with the development and commercializationof DX-88 

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for HAE and each will beentitled to receive approximately 50% of any profits realized as a result. Inaddition, we are entitled to receive potential milestone payments from Genzymein connection with the development of DX-88. The first such milestonepayment, approximately $3.0 million, is due upon dosing the first patientin a pivotal clinical trial of DX-88 for HAE, which we anticipate willoccur during 2005. In addition, we will be entitled to receive potentialmilestone payments of $10.0 million for the first FDA-approvedproduct derived from DX-88, and up to $15.0 million for additionaltherapeutic indications developed under the collaboration.

Under this collaboration agreement, we had the optionto purchase Genzyme’s interest in the application of DX-88 for theprevention of blood loss and other systemic inflammatory responses in on-pump,open-heart surgery and other surgical indications for $1.0 million. Weexercised this option in the first quarter of 2003.

When the Company and Genzyme first amended thecollaboration agreement in May 2002, the Company and Genzyme also executeda senior secured promissory note under which Genzyme agreed to loan us up to$7.0 million. Under a security agreement associated with this note, weagreed to grant Genzyme a continuing security interest in certain tangible andintangible personal property arising out of the DX-88 program, includingall intellectual property rights related to DX-88 for non-surgicalapplications. Under an amendment to the security agreement executed on October 15,2003, Genzyme was granted a continuing security interest in our rights torevenues from licenses of our fundamental phage display patent portfolio. Thesecurity agreement, as amended, contains certain financial covenants, underwhich we must (i) maintain at 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.

On October 18, 2002, we received the$7.0 million under this Genzyme note. The note bears interest at the primerate (5.25% at December 31,2004) plus 2%. Interest is payable quarterly. The principal and all unpaidinterest will be due on the maturity date of May 31, 2005. We may extendthe maturity date to May 31, 2007 if the amended collaboration agreementis in effect, no default or event of default exists and we satisfy thefinancial covenants as of May 31, 2005. As of December 31, 2004, wesatisfy the criteria for extending the maturity date of the note to May 31,2007 and intend to extend the maturity date. Accordingly, we have presented thenote as a long-term liability as an obligation to related party on ourconsolidated balance sheet. At December 31, 2004 and 2003, there was$7.0 million outstanding under the loan. At December 31, 2004 and2003, we owed $82,000 and $488,000, respectively, of interest on this note,which is included in accounts payable and accrued expenses due to currentnature of this liability.

All research and development expenses incurred by eachparty related to the HAE program are billed to and reimbursed by Dyax–GenzymeLLC. Both Genzyme and we are each required to fund 50% of the actual monthlyexpenses of Dyax–Genzyme LLC, as needed. We have accounted for our interest inDyax–Genzyme LLC using the equity method of accounting. Under this method, thereimbursement of expenses to us is recorded as a reduction to research anddevelopment expenses because it includes funding that we provided to Dyax–GenzymeLLC. Our 50.01% share of Dyax–Genzyme LLC loss is recorded as an Equity Loss inJoint Venture (Dyax–Genzyme LLC) in the consolidated statements of operationsand comprehensive loss. At December 31, 2004 and  2003, our investment in the joint venture was$254,000 and $817,000, respectively, which is recorded as an Investment inJoint Venture (Dyax–Genzyme LLC) in the consolidated balance sheets.

We have evaluated this agreement to determine if therelated joint venture qualifies as a variable interest entity under FinancialAccounting Standards Board (FASB) Interpretation No. 46R, *Consolidation of Variable Interest Entities* (FIN 46R). Bothwe and Genzyme fund the operations of Dyax–Genzyme LLC on a monthly basis andtherefore under Paragraph 5a of FIN 46R, the joint venture qualifies as avariable interest entity because its total equity investment at risk is notsufficient to finance its activities without 

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additional subordinatedfinancial support. We have a financial interest in Dyax–Genzyme LLC. However,based on our analysis of the agreement, we believe that our exposure to theexpected losses of Dyax–Genzyme LLC are less than Genzyme’s and therefore weare not the primary beneficiary of Dyax–Genzyme LLC under Paragraph 17 of FIN46R. Accordingly, we have not consolidated Dyax–Genzyme LLC.

During 1996, we signed two patent license agreementswith Genzyme under our standard license terms. We recorded license revenues of$50,000, for each year ended December 31, 2004, 2003 and 2002, inconnection with the maintenance fees on these two agreements. As of December 31,2004 and 2003, there were no outstanding accounts receivable due from Genzymerelated 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 and recorded license revenues of$275,000, for the year ended December 31, 2004, in connection with thetechnology access fees on this agreement. Of the $1.3 million received underthis agreement, approximately $1.0 million has not been recognized as revenueand is included in deferred revenue on the consolidated balance sheet. Thisamount will be recognized ratably over the next 52 months. As of December 31,2004, there was no accounts receivable balance related to the library licenseagreement

**Tax Loss Carryforwards**

As of December 31,2004, we had federal net operating loss (NOL) and research and experimentationcredit carryforwards of approximately $112.8 million and$11.0 million, respectively, which may be available to offset futurefederal income tax liabilities and expire at various dates from 2005 through2024. We have recorded a deferred tax asset of approximately $2.3 millionreflecting the benefit of deductions from the exercise of stock options. Thisdeferred asset has been fully reserved until it is more likely than not thatthe benefit from the exercise of stock options will be realized. The benefitfrom this $2.3 million deferred tax asset will be recorded as a credit toadditional paid-in capital when realized. As required by SFAS No. 109, ourmanagement has evaluated the positive and negative evidence bearing upon therealizability of its deferred tax assets, which are comprised principally ofNOL and research and experimentation credit carryforwards. Management hasdetermined at this time that it is more likely than not that we will notrecognize the benefits of federal and state deferred tax assets and, as aresult, a valuation allowance of approximately $59.8 million has beenestablished at December 31, 2004.

**Recent Pronouncements**

In March 2004, the FASB approved the consensusreached on the Emerging Issues Task Force (EITF) Issue No. 03-01, *The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments.*EITF 03-01 provides guidance ondetermining when an investment is considered impaired, whether that impairmentis other than temporary and the measure of the impairment loss. EITF 03-01also provides new disclosure requirements for other-than-temporary impairmentson debt and equity investments. In September 2004, the FASB delayed untilfurther notice the effective date of the measurement and recognition guidancecontained in EITF 03-01, however the disclosure requirements arecurrently effective. The adoption of EITF 03-01 is not expected to have amaterial impact on our financial position or results of operations.

In March 2004, the EITF reached a final consensuson EITF Issue No. 03-06, *Participating Securitiesand the Two-Class Method under FASB 128, Earnings Per Share*. EITFNo. 03-06 addresses a number of questions regarding the computationof earnings per share (EPS) by companies that have issued securities other thancommon stock that contractually entitle the holder to participate in dividendsand earnings of the company when, and if, it declares dividends on its commonstock. The issue also provides further guidance in applying the two-classmethod of calculating EPS. It clarifies what constitutes a participating 

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security and how to applythe two-class method of computing EPS once it is determined that a security isparticipating, including how to allocate undistributed earnings to such asecurity. The consensuses reached on EITF No. 03-06 is effective forfiscal periods beginning after March 31, 2004. The adoption of EITF No. 03-06had no effect on the Company’s financial position, results of operations orcash flows.

In December 2004, theFASB, issued a revision to SFAS 123 *Share-Based Payment,* also known as SFAS 123R, thatamends existing 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’s effective date would be applicable forawards that are granted, modified, become vested, or settled in cash in interimor annual periods beginning after June 15, 2005. SFAS 123R includes threetransition methods: one that provides for prospective application and two thatprovide for retrospective application. We intend to adopt SFAS 123Rprospectively commencing in the third quarter of the fiscal year ending December 31,2005; it is expected that the adoption of SFAS 123R will cause us to record, asexpense each quarter, a non-cash accounting charge approximating the fair valueof such share based compensation meeting the criteria outlined in theprovisions of SFAS 123R; as of December 31, 2004, we have approximately1,823,084 stock options outstanding which had not yet become vested.

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

This Annual Report on Form 10-K containsforward-looking statements. These forward-looking statements appearprincipally in the sections entitled “Business” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations.” Forward-lookingstatements may appear in other sections of this report as well. Forward-lookingstatements may appear in other sections of this report as well. Generally, theforward-looking statements in this report use words like “expect,” “believe,” “continue,”“anticipate,” “estimate,” “may,” “will,” “could,” “opportunity,” “future,” “project,”and similar expressions.

The forward-lookingstatements include statements about our:

·       expectedfuture revenues, operations and expenditures;

·       researchand development programs;

·       resultsof clinical trials and projected timetables for the preclinical and clinicaldevelopment of, regulatory submissions and approvals for, and marketintroduction of, our product candidates;

·       incometax benefits;

·       projectedcash needs;

·       assessmentsof competitors and potential competitors;

·       creditfacilities; and

·       collaborations.

Statements that are not historical facts are based on ourcurrent expectations, beliefs, assumptions, estimates, forecasts andprojections for our business and the industry and markets in which we compete.The forward-looking statements contained in this report are not guarantees offuture performance and involve certain risks, uncertainties and assumptionsthat are difficult to predict. Therefore, actual outcomes and results maydiffer materially from what is expressed in such forward-looking statements. Wecaution investors not to place undue reliance on the forward-looking statementscontained in this report. These 

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statements speak only asof the date of this report, and we do not undertake any obligation to update orrevise them, except as required by law.

The followingfactors, among others, create risks and uncertainties that could affect ourfuture or other performance:

·       ourhistory of operating losses and our expectation that we will incur significantadditional operating losses;

·       anyinability to raise the capital that we will need to sustain our operations;

·       anyinability to successfully and expeditiously complete the rigorous clinicaltrials and regulatory approvals processes that any biopharmaceutical productcandidates that we develop must undergo, which could substantially delay orprevent their development or marketing;

·       ourdependence on third parties to manufacture biopharmaceuticals, which mayadversely affect our ability to commercialize any biopharmaceuticals we maydevelop;

·       ourlimited experience in conducting clinical trials, regulatory processes, andsales and marketing activities, any or all of which may adversely impact ourability to commercialize any biopharmaceuticals we may develop;

·       ourdependence on our collaborator to successfully and timely complete clinicaltrials for our DX-890 product candidate;

·       anyinability to establish and maintain successful license and collaborativerelationships could adversely affect our ability to generate revenues;

·       anyfailure by us or our collaborators to gain market acceptance of biopharmaceuticalswe own or develop;

·       competitionand technological change that may make our product candidates and technologiesless attractive or obsolete;

·       anyinability to obtain and maintain intellectual property protection for ourproduct candidates and technologies;

·       timeconsuming and expensive proceedings to obtain, enforce or defend patents and todefend against charges of infringement that may result in unfavorable outcomesand could limit our patent rights and our activities;

·       thescope, validity and enforceability of patents and other proprietary rights heldby third parties and their impact on our ability to commercialize our productcandidates and technology;

·       significantfluctuations in our revenues and operating results, which have occurred in thepast and which we expect to continue to fluctuate in the future;

·       anyloss or inability to hire and retain qualified personnel;

·       ourhandling, storage or disposal of hazardous materials used and generated in ourbusiness may be time-consuming and expensive;

·       ourexposure to product liability;

·       risksassociated with international operations and collaborations;

·       anyfailure to maintain an effective system of internal controls in the futurecould adversely affect our ability to accurate report financial results orprevent fraud;

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·       compliancewith changing regulation of corporate governance and public disclosure mayresult in additional expenses;

·       anyfailure to acquire useful technology and /or integrate complimentarybusinesses;

·       anyinability to obtain continued funding of clinical development productcandidates by our development partners;

·       ourcommon stock may continue to have a volatile public trading price and lowtrading volume; and

·       anti-takeoverprovisions in our governing documents and under Delaware law and ourshareholder rights plan that may make an acquisition of us more difficult.

As a result of theforegoing and other factors, we may experience material fluctuations in ourfuture operating results, which could materially affect our business, financialposition, and stock price. These risks and uncertainties are discussed in moredetail in Exhibit 99.1 “Important Factors That May Affect FutureOperations and Results” to this Form 10-K, which is incorporatedinto this item by this reference.

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**ITEM7A.**   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,and obligations of U.S. government agencies, which we believe are subject tolimited credit risk. We currently do not hedge interest rate exposure. As of December 31,2004, we had cash and cash equivalents, and short-term investments of$57.1 million, consisting of cash and short-term investments. Ourshort-term investments will decline by an immaterial amount if market interestrates increase, and therefore, our exposure to interest rate changes isimmaterial. Declines of interest rates over time will, however, reduce ourinterest income from our short-term investments.

As of December 31, 2004, we had$12.5 million outstanding under long-term obligations. Interest rates on$5.5 million of these obligations are fixed and therefore are not subjectto interest rate fluctuations. The interest rate on the remaining$7 million under the Genzyme promissory note is variable based on theprime interest rate and is therefore subject to interest rate fluctuations. A2% increase in the prime rate would result in an additional $140,000 inannual 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.

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**ITEM8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**Indexto Consolidated Financial Statements**
|                                                                                                                                  | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent  Registered Public Accounting Firm                                                                         |       | 36       |
| Consolidated Balance Sheets as of  December 31, 2004 and 2003                                                               |       | 38       |
| Consolidated Statements of  Operations and Comprehensive Loss for the years ended December 31, 2004,  2003 and 2002    |       | 39       |
| Consolidated Statements of  Changes in Stockholders’ Equity for the years ended  December 31, 2004, 2003 and 2002 |       | 40       |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2004, 2003 and 2002                            |       | 41       |
| Notes to Consolidated Financial Statements                                                                                       |       | 42       |
| Financial  Statement Schedule                                                                                                    |       | 65       |

 

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**Report of Independent Registered Public AccountingFirm**

To****theBoard of Directors and Stockholders of Dyax Corp.:

We have completed anintegrated audit of Dyax Corp.’s 2004 consolidated financial statements and ofits internal control over financial reporting as of December 31, 2004 andaudits of its 2003 and 2002 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, 2004 and2003, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2004 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, 2004 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 31,2004, 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.

36

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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 externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.
| /s/ PricewaterhouseCoopers LLP |
|--------------------------------|
| Boston, Massachusetts          |
| March 1, 2005             |

 

37

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**Dyax Corp. and SubsidiariesConsolidated Balance Sheets**
| ** **                                                                                                                                                                                                                                | ** ** | **  December 31,    2004**       | ** ** | **  December 31,    2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **(In thousands, except share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                |       |
| Current assets:                                                                                                                                                                                                                           |       |                                                      |       |                                                |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                |       |                                                      | $          | 6,978                                               |       |   |   | $ | 36,508 |   |   |
| Short-term investments                                                                                                                                                                                                                    |       |                                                      | 50,163     |                                                |       |   | — |   |   |
| Accounts receivable, net  of allowances for doubtful accounts of $75 at December 31, 2004 and 2003                                                                                                                                   |       |                                                      | 3,089      |                                                |       |   | 4,683 |   |   |
| Cash in escrow                                                                                                                                                                                                                            |       |                                                      | —     |                                                |       |   | 5,000 |   |   |
| Prepaid research and  development                                                                                                                                                                                                         |       |                                                      | 1,955      |                                                |       |   | 2,568 |   |   |
| Other current assets                                                                                                                                                                                                                      |       |                                                      | 1,375      |                                                |       |   | 586 |   |   |
| Total current assets                                                                                                                                                                                                                      |       |                                                      | 63,560     |                                                |       |   | 49,345 |   |   |
| Fixed assets, net                                                                                                                                                                                                                         |       |                                                      | 11,867     |                                                |       |   | 12,694 |   |   |
| Intangibles, net                                                                                                                                                                                                                          |       |                                                      | 2,437      |                                                |       |   | 2,917 |   |   |
| Restricted cash                                                                                                                                                                                                                           |       |                                                      | 4,642      |                                                |       |   | 5,213 |   |   |
| Investment in joint  venture (Dyax–Genzyme LLC)                                                                                                                                                                                      |       |                                                      | 254        |                                                |       |   | 817 |   |   |
| Other assets                                                                                                                                                                                                                              |       |                                                      | —     |                                                |       |   | 201 |   |   |
| Total assets                                                                                                                                                                                                                              |       |                                                      | $          | 82,760                                              |       |   |   | $ | 71,187 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |       |
| Current liabilities:                                                                                                                                                                                                                      |       |                                                      |       |                                                |       |   |   |   |   |
| Accounts payable and  accrued expenses                                                                                                                                                                                                    |       |                                                      | $          | 9,611                                               |       |   |   | $ | 12,564 |   |   |
| Current portion of  deferred revenue                                                                                                                                                                                                      |       |                                                      | 5,280      |                                                |       |   | 6,149 |   |   |
| Current portion of long-term  obligations                                                                                                                                                                                                 |       |                                                      | 1,837      |                                                |       |   | 3,413 |   |   |
| Total current  liabilities                                                                                                                                                                                                                |       |                                                      | 16,728     |                                                |       |   | 22,126 |   |   |
| Deferred revenue                                                                                                                                                                                                                          |       |                                                      | 4,485      |                                                |       |   | 1,524 |   |   |
| Obligation to related  party                                                                                                                                                                                                              |       |                                                      | 7,000      |                                                |       |   | 7,000 |   |   |
| Long-term  obligations                                                                                                                                                                                                                    |       |                                                      | 3,645      |                                                |       |   | 3,648 |   |   |
| Deferred rent                                                                                                                                                                                                                             |       |                                                      | 1,914      |                                                |       |   | 1,666 |   |   |
| Other long-term  liabilities                                                                                                                                                                                                              |       |                                                      | 1,157      |                                                |       |   | 1,278 |   |   |
| Total liabilities                                                                                                                                                                                                                         |       |                                                      | 34,929     |                                                |       |   | 37,242 |   |   |
| 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, 2004 and 2003; 0  shares issued and outstanding at December 31, 2004 and 2003                                                                    |       |                                                      | —     |                                                |       |   | — |   |   |
| Common stock, $0.01 par  value; 125,000,000 and 50,000,000 shares authorized at December 31, 2004  and 2003, respectively; 31,547,627 and 24,887,757 shares issued and  outstanding at December 31, 2004 and 2003, respectively |       |                                                      | 315        |                                                |       |   | 249 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                               |       |                                                      | 198,446    |                                                |       |   | 151,445 |   |   |
| Accumulated deficit                                                                                                                                                                                                                       |       |                                                      | (151,356   | )                                                   |       |   | (118,242 | ) |   |
| Deferred compensation                                                                                                                                                                                                                     |       |                                                      | —     |                                                |       |   | (47 | ) |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                   |       |                                                      | 426        |                                                |       |   | 540 |   |   |
| Total stockholders’  equity                                                                                                                                                                                                          |       |                                                      | 47,831     |                                                |       |   | 33,945 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                           |       |                                                      | $          | 82,760                                              |       |   |   | $ | 71,187 |   |   |

 

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

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**Dyax Corp. and SubsidiariesConsolidated Statements ofOperations and Comprehensive Loss**
| ** **                                                                                       | ** ** | **Years Ended December 31,**                        | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                       | ** ** | **(In thousands, except per share data)** | ** ** |
| Product  development and license fee revenues                                                    |       | $                                                                  | 16,590     |   | $ | 16,853 |   | $ | 17,750 |   |
| Research and  development:                                                                       |       |                                                               |       |   |   |   |   |
| Research and development                                                                         |       | 39,432                                                             |       | 29,990 |   | 28,713 |   |
| Less research and development expenses reimbursed by joint  venture (Dyax–Genzyme LLC) |       | (10,408                                                            | )          | (5,203 | ) | — |   |
| Net research and development                                                                     |       | 29,024                                                             |       | 24,787 |   | 28,713 |   |
| Equity loss in joint venture (Dyax–Genzyme LLC)                                             |       | 5,988                                                              |       | 2,243 |   | — |   |
| General and administrative                                                                       |       | 14,451                                                             |       | 13,205 |   | 14,882 |   |
| Total operating  expenses                                                                        |       | 49,463                                                             |       | 40,235 |   | 43,595 |   |
| Loss from  operations                                                                            |       | (32,873                                                            | )          | (23,382 | ) | (25,845 | ) |
| Other income  (expense):                                                                         |       |                                                               |       |   |   |   |   |
| Interest income                                                                                  |       | 786                                                                |       | 208 |   | 457 |   |
| Interest expense                                                                                 |       | (1,027                                                             | )          | (1,320 | ) | (1,252 | ) |
| Total other expense                                                                              |       | (241                                                               | )          | (1,112 | ) | (795 | ) |
| Loss from  continuing operations                                                                 |       | (33,114                                                            | )          | (24,494 | ) | (26,640 | ) |
| Gain on sale of  Biotage, net of tax                                                             |       | —                                                             |       | 18,959 |   | — |   |
| Loss from  discontinued operations of Biotage, net of tax                                        |       | —                                                             |       | (1,880 | ) | (178 | ) |
| Net loss                                                                                         |       | (33,114                                                            | )          | (7,415 | ) | (26,818 | ) |
| Other  comprehensive (loss) income:                                                              |       |                                                               |       |   |   |   |   |
| Foreign currency translation adjustments                                                         |       | (27                                                                | )          | 36 |   | 410 |   |
| Unrealized loss on short-term investments                                                        |       | (87                                                                | )          | — |   | — |   |
| Comprehensive  loss                                                                              |       | $                                                                  | (33,228    | ) | $ | (7,379 | ) | $ | (26,408 | ) |
| Basic and diluted  loss per share:                                                               |       |                                                               |       |   |   |   |   |
| Loss from continuing operations                                                                  |       | $                                                                  | (1.06      | ) | $ | (1.04 | ) | $ | (1.35 | ) |
| Gain on sale of Biotage                                                                          |       | —                                                             |       | 0.81 |   | — |   |
| Loss from discontinued operations of Biotage                                                     |       | —                                                             |       | (0.08 | ) | (0.01 | ) |
| Net loss                                                                                         |       | $                                                                  | (1.06      | ) | $ | (0.31 | ) | $ | (1.36 | ) |
| Shares used in computing  basic and diluted net loss per share                                   |       | 31,207,218                                                         |       | 23,546,524 |   | 19,652,474 |   |

 

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

39

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**Dyax Corp. and SubsidiariesConsolidated Statements ofChanges in Stockholders’ EquityFor the years ended December 31, 2004, 2003 and 2002(In thousands, except share data)**
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **           | ** ** | ** **               | ** ** | **Accumulated  Other**     | ** ** | ** **                            | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|----------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **Shares**            | ** ** | **Par  Value** | ** ** | **Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Deferred  Compensation** | ** ** | **Comprehensive  Income (Loss)** | ** ** | **Total** | ** ** |
| Balance at December 31, 2001                          |       | 19,433,928            |       | $              | 194        |                 | $          | 141,384                  |       |                       | $          | (84,009                               | )          |   |   | $ | (2,199 | ) |   |   | $ | 94 |   |   | $ | 55,464 |   |
| Exercise of stock options                                  |       | 224,222               |       | 2              |       | 395                  |       |                     | —     |                       |       |                                  | —     |   |   |   | — |   |   | 397 |   |
| Issuance of common stock for employee stock purchase  plan |       | 46,890                |       | 1              |       | 249                  |       |                     | —     |                       |       |                                  | —     |   |   |   | — |   |   | 250 |   |
| Deferred compensation                                      |       | —                |       | —         |       | (391                 | )          |                     | —     |                       |       |                                  | 1,531      |   |   |   | — |   |   | 1,140 |   |
| Foreign currency translation                               |       | —                |       | —         |       | —               |       |                     | —     |                       |       |                                  | —     |   |   |   | 410 |   |   | 410 |   |
| Net Loss                                                   |       | —                |       | —         |       | —               |       |                     | (26,818    | )                          |       |                                  | —     |   |   |   | — |   |   | (26,818 | ) |
| 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 |   |

 

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

40

 

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**Dyax Corp. and SubsidiariesConsolidated Statements ofCash Flows**
| ** **                                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands)**                     | ** ** |
| **Cash flows from operating activities:**                                                                     |       |                                        |       |   |   |   |   |
| Loss from  continuing operations                                                                              |       | $                                           | (33,114    | ) | $ | (24,494 | ) | $ | (26,640 | ) |
| Adjustments to reconcile  net loss from continuing operations to net cash used in operating activities:       |       |                                        |       |   |   |   |   |
| Amortization of  purchased premium/discount                                                                   |       | 754                                         |       | — |   | — |   |
| Depreciation and  amortization of fixed assets                                                                |       | 3,476                                       |       | 3,277 |   | 3,046 |   |
| Amortization of  intangibles                                                                                  |       | 500                                         |       | 500 |   | 83 |   |
| Amortization of  deferred rent                                                                                |       | (235                                        | )          | (235 | ) | (216 | ) |
| Loss on disposal  of fixed assets                                                                             |       | 24                                          |       | 24 |   | — |   |
| Compensation  expenses associated with stock options                                                          |       | 311                                         |       | 1,267 |   | 1,140 |   |
| Equity loss in  joint venture (Dyax–Genzyme LLC)                                                         |       | 5,988                                       |       | 2,243 |   | — |   |
| Changes in operating  assets and liabilities, net  of divestiture:                                       |       |                                        |       |   |   |   |   |
| Accounts  receivable                                                                                          |       | 1,594                                       |       | (1,611 | ) | 169 |   |
| Prepaid research  and development, and other assets                                                           |       | 41                                          |       | (1,342 | ) | (1,370 | ) |
| Accounts payable  and accrued expenses                                                                        |       | (3,014                                      | )          | 4,567 |   | 591 |   |
| Deferred revenue                                                                                              |       | 2,092                                       |       | 506 |   | (1,694 | ) |
| Other long-term  liabilities                                                                                  |       | 323                                         |       | 378 |   | 553 |   |
| Proceeds from  landlord incentives                                                                            |       | —                                      |       | — |   | 2,352 |   |
| Net cash used in  operating activities                                                                        |       | (21,260                                     | )          | (14,920 | ) | (21,986 | ) |
| **Cash flows from investing activities:**                                                                     |       |                                        |       |   |   |   |   |
| Purchase of  short-term investments                                                                           |       | (51,004                                     | )          | — |   | — |   |
| Purchase of fixed  assets                                                                                     |       | (2,305                                      | )          | (444 | ) | (5,241 | ) |
| Cash received for  sale of Biotage                                                                            |       | 5,000                                       |       | 25,427 |   | — |   |
| Restricted cash                                                                                               |       | 597                                         |       | 507 |   | (1,220 | ) |
| Notes receivable,  employees                                                                                  |       | —                                      |       | 1,320 |   | 182 |   |
| Licensed patent  technology                                                                                   |       | (20                                         | )          | (2,000 | ) | (1,500 | ) |
| Investment in  joint venture (Dyax–Genzyme LLC)                                                          |       | (5,425                                      | )          | (3,060 | ) | — |   |
| Net cash provided  by (used in) investing activities                                                          |       | (53,157                                     | )          | 21,750 |   | (7,779 | ) |
| **Cash flows from financing activities:**                                                                     |       |                                        |       |   |   |   |   |
| Proceeds from the  issuance of common stock under employee stock purchase plan and exercise of  stock options |       | 2,054                                       |       | 953 |   | 647 |   |
| Net proceeds from  common stock offerings                                                                     |       | 44,749                                      |       | 8,261 |   | — |   |
| Proceeds from  landlord for leasehold improvements                                                            |       | —                                      |       | — |   | 2,352 |   |
| Proceeds from long-term  obligations                                                                          |       | 1,408                                       |       | 171 |   | 7,000 |   |
| Repayment of long-term  obligations                                                                           |       | (3,304                                      | )          | (3,431 | ) | (2,212 | ) |
| Net cash provided  by financing activities                                                                    |       | 44,907                                      |       | 5,954 |   | 7,787 |   |
| Effect of foreign  currency translation on cash balances                                                      |       | (20                                         | )          | 30 |   | 65 |   |
| Net cash used in  discontinued operations                                                                     |       | —                                      |       | (4,505 | ) | (922 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                         |       | (29,530                                     | )          | 8,309 |   | (22,835 | ) |
| Cash and cash  equivalents at beginning of the period                                                         |       | 36,508                                      |       | 28,199 |   | 51,034 |   |
| Cash and cash  equivalents at end of the period                                                               |       | $                                           | 6,978      |   | $ | 36,508 |   | $ | 28,199 |   |
| **Supplemental  disclosure of cash flow information:**                                                        |       |                                        |       |   |   |   |   |
| Interest paid                                                                                                 |       | $                                           | 1,432      |   | $ | 1,104 |   | $ | 981 |   |
| **Supplemental  disclosure of non cash investing and financing activities:**                                  |       |                                        |       |   |   |   |   |
| Acquisition of  property and equipment under long-term obligations                                            |       | $                                           | 212        |   | $ | 306 |   | $ | 3,581 |   |
| Fair value of  license patent technology                                                                      |       |                                        |       |   |   | $ | 3,500 |   |
| Less: license fee  obligation                                                                                 |       |                                        |       |   |   | (2,000 | ) |
| Cash paid for  licensed patent technology                                                                     |       | $                                           | 20         |   | $ | 2,000 |   | $ | 1,500 |   |

 

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

41

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

**1.   Nature ofBusiness**

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. Dyax currently has two productcandidates in or entering into Phase II clinical trials for three indications,and the Company is planning to initiate a Phase III trial of its lead productcandidate in the first half of 2005. DX-88, a specific inhibitor of humanplasma kallikrein, is being evaluated in Phase II trials for its potential totreat hereditary angioedema (HAE), a rare and life-threateninginflammatory disease. Two Phase II trials in this indication have beensuccessfully completed and one Phase II trial is ongoing. The DX-88 trials inHAE are being conducted by Dyax in a joint venture with Genzyme Corporation. Dyaxis also evaluating DX-88 for its potential to reduce blood loss and relatedcomplications during on-pump, open-heart surgery, specifically coronary arterybypass graft, or CABG, surgery. A Phase I/II trial in this indication has beensuccessfully completed by Dyax, and the Company is seeking a partner with whomto advance the CABG program into Phase II development. DX-890, a specificinhibitor of human neutrophil elastase, is being evaluated in Phase II clinicaltrials in Europe by Debiopharm S.A., Dyax’s collaborator, for its potential inthe treatment of cystic fibrosis (CF). Both DX-88 and DX-890 have receivedorphan drug designation in the United States of America (U.S.) and EuropeanUnion for angioedema and CF, respectively. In addition, DX-88 has been grantedFast Track designation by the U.S. Food and Drug Administration for thetreatment of HAE.

The Company identified DX-88 and DX-890 using itspatented phage display technology, which rapidly selects antibodies, peptidesand small proteins that bind with high affinity and specificity to therapeutictargets. The Company is using this technology to build a pipeline of drugcandidates that may be advanced into clinical development on its own or inpartnership with other companies. The Company is also leveraging phage displaytechnology broadly through collaborations and licenses that are structured togenerate revenues through research funding, license fees, technical andclinical milestone payments, and royalties. Currently, over 75 companies andresearch institutions, including Amgen, Inc., Biogen-Idec, Inc.,Genzyme Corporation, ImClone Systems, Inc., Human Genome Sciences, Inc.,MedImmune, Inc. and Tanox, Inc., have licenses to use the Company’sphage display technology and  phagederived compounds to research and develop therapeutic, diagnostic and otherproducts.

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 and for the years ended December 31,2002 are presented as discontinued operations in the consolidated statements ofoperations 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, dependence on collaborative arrangements, development by theCompany or its competitors of new technological innovations, dependence on keypersonnel, protection of proprietary technology, and compliance with FDA andother governmental regulations and approval requirements.

**2.   AccountingPolicies**

*Basis of Consolidation:  *Theaccompanying consolidated financial statements include the accounts of theCompany and its European research subsidiaries Dyax S.A. and Dyax BV (formerlyknown as TargetQuest BV), and through October 29, 2003, the date ofdisposal, Biotage and its foreign sales subsidiaries. All inter-companyaccounts and transactions have been eliminated.

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

**2.**   AccountingPolicies (Continued)

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

*Use of Estimates:  *Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makecertain estimates and assumptions that affect the amounts of assets andliabilities reported and disclosure of contingent assets and liabilities at thedates of the financial statements and the reported amounts of revenue andexpenses during the reporting periods. The significant estimates andassumptions in these financial statements include revenue recognition,receivable collectibility, useful lives with respect to long lived assets,valuation of stock options, accrued expenses and tax valuation reserves. Actualresults could differ from those estimates.

*Concentration of Credit Risk:  *Financialinstruments that potentially subject the Company to concentrations of creditrisk consist principally of cash, cash equivalents, short-tem investments andtrade accounts receivable. At December 31, 2004, approximately 93% of theCompany’s cash, cash equivalents and short-term-investments were invested inmoney market funds backed by U.S. Treasury obligations, U.S. Treasury notes andbills, and obligations of U.S. government agencies held by one financialinstitution. The Company maintains balances in various operating accounts inexcess 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 write offs in 2004, 2003 and 2002 were nominal. Onecustomer accounted for approximately 51% and 60% of the Company’s accountsreceivable balance at December 31, 2004 and 2003. Another customeraccounted for approximately 21% and 13% of the Company’s accounts receivablebalance at December 31, 2004 and 2003. One other customer accountedfor approximately 10% of the Company’s accounts receivable balance at December 31,2004.

*Cash and Cash Equivalents:  *Allhighly liquid investments purchased with an original maturity of three monthsor less are considered to be cash equivalents. Cash and cash equivalentsconsist principally of cash and U.S. Treasury funds. The Company currentlyinvests its excess cash in U.S. Treasury funds.

*Short-term Investments:  *Short-terminvestments consist primarily of investments with original maturities greaterthan ninety days and less than one year when purchased. The Company considersits investment portfolio of short-term investments available-for-sale asdefined by Statement of 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, 2004,the Company’s short-term investments consist of U.S. Treasury notes and bills,and obligations of U.S. government agencies with an amortized cost of $50.3million, estimated fair value of $50.2 million and had an unrealized loss of$87,000, which is recorded in other comprehensive income on the accompanyingconsolidated balance sheets. All short-term investments mature in one year orless. The Company held no short-term investments at December 31, 2003.

*Fixed Assets:  *Propertyand equipment are recorded at cost and depreciated over the estimated usefullives of the related assets using the straight-line method. Laboratory andproduction equipment, and furniture and office equipment are depreciated over athree to seven year period. Leasehold improvements 

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

**2.**   AccountingPolicies (Continued)

are stated at cost and areamortized over the lesser of the non-cancelable term of the related lease ortheir estimated useful lives. Leased equipment is amortized over the lesser ofthe life of the lease or their estimated useful lives. Maintenance and repairsare charged to expense as incurred. When assets are retired or otherwisedisposed of, the cost of these assets and related accumulated depreciation andamortization are eliminated from the balance sheet and any resulting gains orlosses are included in operations in the period of disposal.

*Goodwill and Other Intangibles:  *Priorto January 1, 2002, the Company amortized goodwill on a straight linebasis over its useful life, periods not exceeding 15 years. Goodwill hadpreviously been tested for impairment under the provisions of SFAS No. 121,*Accounting for the Impairment of Long-lived Assetsand Long-lived Assets to be Disposed of*. Effective January 1,2002, the Company adopted SFAS No. 142, *Goodwill andOther Intangible Assets*. SFAS No. 142 requires cessation ofgoodwill amortization and a fair value approach to testing the impairment ofgoodwill and other intangibles. After the disposition of the Biotageoperations, the Company has no goodwill requiring assessment for impairment at December 31, 2004and 2003.

*Impairment of Long-Lived Assets:  *TheCompany reviews its long-lived assets for impairment whenever events or changesin business circumstances indicate that the carrying amount of assets may notbe fully recoverable or that the useful lives of these assets are no longerappropriate. Each impairment test is based on a comparison of the undiscountedcash flow to the recorded value of the asset. If an impairment is indicated,the asset is written down to its estimated fair value on a discounted cash flowbasis.

*Revenue Recognition:  *TheCompany’s revenue recognition policies are in accordance with the Securitiesand Exchange Commission’s (SEC) Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements*, as amended bySEC Staff Accounting Bulletin No. 104, *Revenue Recognition,*and Emerging Issues Task Force Issue No. 00-21, *RevenueArrangements with Multiple Deliverables*. The Company enters intobiopharmaceutical product development agreements with collaborative partnersfor the research and development of therapeutic, diagnostic and separationsproducts. The terms of the agreements may include non-refundable signing andlicensing fees, funding for research and development, milestone payments androyalties on any product sales derived from collaborations. Non-refundablesigning and licensing fees are recognized as services are performed over theexpected term of the collaboration. Funding for research and development, wherethe amounts recorded are non-refundable is recognized as revenue as the relatedexpenses are incurred. The Company evaluates all collaborative agreements on aquarterly basis to determine the appropriate revenue recognition for thatperiod. The evaluation includes all of the potential revenue components fromeach specific collaborative agreement. Upon achievement of milestones, aportion of the milestone payment equal to the percentage of the collaborationcompleted through that date is recognized. The remainder is recognized asservices are performed over the remaining term of the collaboration. Royaltiesare recognized when earned. Costs of revenues related to product developmentand license fees are classified as research and development in the consolidatedstatements of operations and comprehensive loss. Debiopharm S.A. accounted forapproximately 36%, 25% and 23% of product development and license fee revenuesin 2004, 2003 and 2002, respectively. Bracco Imaging S.p.A accounted forapproximately 11%, 21% and 20% of product development and license fee revenuesin 2004, 2003 and 2002, respectively. Human Genome Sciences, Inc. 

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

**2.**   AccountingPolicies (Continued)

accounted for no productdevelopment and license fee revenues in 2004 and approximately 9% and 21% ofproduct development and license fee revenues in 2003 and 2002, 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.

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 and2003, the Company had received approximately $1.1 million and $770,000,respectively under this grant. The Company will recognize the grant as thecriteria are met.

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

*Guarantees:*   In November 2002,the Financial Accounting Standards Board (FASB) issued FIN No. 45 *Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others*. 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, 2004 and 2003.

*Investment in Joint Venture (Dyax–GenzymeLLC):  *In September 2003, Genzyme and Dyax formed ajoint venture, Dyax–Genzyme LLC (the LLC), formerly known as Kallikrein LLC, tomanage the DX-88 

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

**2.**   Accounting Policies (Continued)

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).

*Research and Development:  *Researchand development costs include all direct costs, including salaries and benefitsfor research and development personnel, outside consultants, costs of clinicaltrials, sponsored research, clinical trials insurance, other outside costs,depreciation and facility costs related to the development of drug candidates.These costs are partially offset by the reimbursement of expenses by the LLC.These costs have been charged to research and development expense as incurred.Prepaid research and development on the consolidated balance sheets representsexternal drug manufacturing costs, and research and development service coststhat have been paid for in absence of the related product being received or theservices being performed.

*Income Taxes:  *TheCompany utilizes the asset and liability method of accounting for income taxesas set forth in SFAS No. 109, *Accountingfor Income Taxes* (SFAS No. 109). Under this method, deferredtax assets and liabilities are recognized for the expected future tax consequencesof temporary differences between the carrying amounts and the tax basis ofassets and liabilities using the current statutory tax rates.

*Translation of Foreign Currencies:  *Assetsand liabilities of the Company’s foreign subsidiaries are translated at periodend exchange rates. Amounts included in the statements of operations aretranslated at the average exchange rate for the period. The resulting currencytranslation adjustments are made directly to a separate component ofstockholders’ equity in the consolidated balance sheets. For the year ending December 31,2004 losses from transactions in foreign currencies were $27,000 and for theyears ending December 31, 2003 and 2002 gains from transactions in foreigncurrencies were $36,000 and $410,000 are included in the consolidatedstatements of operations and comprehensive loss.

*StockOptions:  *At December 31, 2004, the Company hasstock-based employee compensation plans, which are described more fullyin Note 11. The Company uses the intrinsic value method prescribed underthe 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 underlyingcommon stock on the date of grant. The following table illustrates the effecton net loss and loss per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*(SFAS No. 123), to stock-based employee 

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

**2.**   AccountingPolicies (Continued)

compensation. The fair value of each stock option grantedis estimated under the Black-Scholes option pricing model on the grant date.
| ** **                                                                                                      | ** ** | **Year Ended December 31,**                         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| Net loss as  reported                                                                                           |       | $                                                                  | (33,114    | ) | $ | (7,415 | ) | $ | (26,818 | ) |
| Stock-based  employee compensation included in net loss as reported                                             |       | 312                                                                |       | 1,267 |   | 1,140 |   |
| Less: Total stock-based  employee compensation expense determined under fair value based method for  all awards |       | (10,890                                                            | )          | (10,178 | ) | (9,409 | ) |
| Pro forma net  loss                                                                                             |       | $                                                                  | (43,692    | ) | $ | (16,326 | ) | $ | (35,087 | ) |
| Basic and diluted  net loss per share as reported                                                               |       | $                                                                  | (1.06      | ) | $ | (0.31 | ) | $ | (1.36 | ) |
| Pro forma basic and  diluted net loss per share                                                                 |       | $                                                                  | (1.40      | ) | $ | (0.69 | ) | $ | (1.79 | ) |

 

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.

*Net Loss Per Share:  *TheCompany accounts for and discloses 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 3,845,785,3,711,114 and 4,306,313 were outstanding at December 31, 2004, 2003 and2002, respectively.

*Comprehensive Income (Loss):  *TheCompany accounts for comprehensive 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.

*Business Segments:  *TheCompany discloses business segments under SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information* (SFAS No. 131). The statement establishedstandards for reporting information about operating segments in annualfinancial statements of public enterprises and in interim financial reportsissued to shareholders. It also established standards for related disclosuresabout products and services, geographic areas and major customers. The Companyoperates as one business segment in two geographic areas.

*RecentPronouncements:  *In March 2004, the FASB approvedthe consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-01,*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments.*EITF 03-01 provides guidanceon determining when an investment is considered impaired, whether thatimpairment is other than temporary and the measure of the impairment loss. EITF03-01 also provides new disclosure requirements for other-than-temporaryimpairments on debt and equity investments. In September 2004, the FASBdelayed until further notice the effective date of the 

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

**2.**   AccountingPolicies (Continued)

measurement andrecognition guidance contained in EITF 03-01, however the disclosurerequirements are currently effective. The adoption of EITF 03-01 is notexpected to have a material impact on the Company’s financial position, resultsof operations or cash flows.

In March 2004, the EITF reached a final consensuson EITF Issue No. 03-06, *Participating Securitiesand the Two-Class Method under FASB 128, Earnings Per Share*. EITF03-06 addresses a number of questions regarding the computation of earnings pershare (EPS) by companies that have issued securities other than common stockthat contractually entitle the holder to participate in dividends and earningsof the company when, and if, it declares dividends on its common stock. Theissue also provides further guidance in applying the two-class method ofcalculating EPS. It clarifies what constitutes a participating security and howto apply the two-class method of computing EPS once it is determined that asecurity is participating, including how to allocate undistributed earnings tosuch a security. The consensuses reached on EITF 03-06 is effective for fiscalperiods beginning after March 31, 2004. The adoption of EITF 03-06 had noeffect on the Company’s financial position, results of operations or cashflows.

In December 2004, theFASB, issued a revision to SFAS 123*,*also known as SFAS 123R, that amends existing accounting pronouncements forshare-based payment transactions in which an enterprise receives employee andcertain non-employee services in exchange for (a) equity instruments ofthe enterprise or (b) liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments. SFAS 123R eliminates the ability to account for share-basedcompensation transactions using APB 25 and generally requires such transactionsbe accounted for using a fair-value-based method. SFAS 123R’s effective datewould be applicable for awards that are granted, modified, become vested, orsettled in cash in interim or annual periods beginning after June 15, 2005.SFAS 123R includes three transition methods: one that provides for prospectiveapplication and two that provide for retrospective application. The Company intendsto adopt SFAS 123R prospectively commencing in the third quarter of the fiscalyear ending December 31, 2005. It is expected that theadoption of SFAS 123R will cause the Company to record, as expense eachquarter, a non-cash accounting charge approximating the fair value of suchshare based compensation meeting the criteria outlined in the provisions ofSFAS 123R. As of December 31, 2004, the Company has approximately1,823,084 stock options outstanding which had not yet become vested.

**3.   DiscontinuedOperations of Biotage**

On October 29, 2003,the Company sold its wholly owned subsidiary known as Biotage. The purchaseprice was $35.0 million before transaction expenses of approximately$3.0 million, including non-cash expenses of $519,000, and a reduction ofapproximately $4.6 million of Biotage debt. Dyax received$25.4 million in cash at closing and paid approximately $2.5 millionin transaction expenses. An additional $5.0 million was received in 2004that was being held in an indemnity escrow. For the year ended December 31,2003, the Company recognized a $19.0 million gain on this sale in theconsolidated statements of operations and comprehensive loss. Prior periodamounts have been reclassified to be consistent with the treatment of Biotageas a discontinued operation.

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

**3.**   DiscontinuedOperations of Biotage (Continued)

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

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

*Other Intangibles:  *Biotagecapitalizes software development costs for software products in accordance withSFAS No. 86, *Accounting for the Costs of ComputerSoftware to Be Sold, Leased or Otherwise Marketed.* Capitalizedsoftware costs are amortized to cost of sales over the estimated useful livesof the related software products, which was 5 years

*Revenue Recognition:  *Biotagehas utilized the guidance of Staff Accounting Bulletin 104, *Revenue Recognition*, for all periods presented in thesefinancial statements. Product revenue is derived from sales of chromatographyseparations systems and cartridges. Revenue was generally recognized on productsales arrangements based on product shipment if no installation obligationsexist. For product sale arrangements that required installation services thatare not considered essential to the functionality of the product, revenue wasrecognized upon shipment and a portion of revenue equal to the fair value ofthe installation service is deferred and recognized upon the completion of theinstallation. For product sale arrangements that required significantinstallation services and contain customer acceptance criteria, all revenue wasrecognized upon the completion of the installation and satisfaction of thecustomer acceptance criteria.

*Shipping and Handling:  *Shippingand handling costs were included within cost of products sold, with the relatedsales value included within product revenues.

*Product Warranty:  *Biotageprovided customers with a twelve-month warranty on its chromatographysystems from the date of shipment. Estimated warranty obligations, which wereincluded in the results of operations as cost of products sold, were evaluatedand provided for at the time 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, and the year ended December 31,2002 were $396,000 and $556,000, respectively.

Thefollowing table presents operating results for the discontinued operations ofBiotage for the period ended October 29, 2003, and the years ended December 31,2002:
| ** **                          | ** ** | **Period Ended  October 29, 2003** | ** ** | **Year Ended  December 31, 2002** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **(In thousands)**                           | ** ** |
| Separations  product revenues       |       |                                              | $          | 16,527                                           |       |   |   | $ | 23,158 |   |   |
| Costs and expenses:                 |       |                                              |       |                                             |       |   |   |   |   |
| Cost of products sold               |       |                                              | 7,468      |                                             |       |   | 10,038 |   |   |
| Research and development            |       |                                              | 2,251      |                                             |       |   | 3,088 |   |   |
| Selling, general and administrative |       |                                              | 8,701      |                                             |       |   | 10,252 |   |   |
| Total costs and  expenses           |       |                                              | 18,420     |                                             |       |   | 23,378 |   |   |
| Loss from  operations               |       |                                              | (1,893     | )                                                |       |   | (220 | ) |   |
| Other income  (expense), net        |       |                                              | 13         |                                             |       |   | 42 |   |   |
| Loss from discontinued  operations  |       |                                              | $          | (1,880                                           | )          |   |   | $ | (178 | ) |   |

** **

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

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

Thefollowing table reconciles the purchase price to the gain on sale of Biotage aspresented in the 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,**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2004**                | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| Laboratory  equipment                            |       | $                       | 9,011      |   | $ | 7,233 |   |
| Furniture and  office equipment                  |       | 1,334                   |       | 984 |   |
| Software and  computers                          |       | 2,821                   |       | 2,130 |   |
| Leasehold  improvements                          |       | 10,108                  |       | 10,119 |   |
| Total                                            |       | 23,274                  |       | 20,466 |   |
| Less: accumulated  depreciation and amortization |       | (11,407                 | )          | (7,772 | ) |
|                                             |       | $                       | 11,867     |   | $ | 12,694 |   |

 

There was $8,596,000 and$8,255,000 of assets under capital leases, which includes laboratory and officeequipment, with related accumulated amortization of $5,246,000 and $4,748,000,at December 31, 2004 and 2003, respectively. Amortization of assetsunder capital leases is included in depreciation and amortization of fixedassets 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 $1,300,000 to its President andChief Executive Officer, who is also Chairman of the Company’s Board ofDirectors, to purchase a residence within commuting distance of the Company’sheadquarters. Payments in the amount of $8,220 were due monthly to the Company.During June 2003, the Company’s Chief Executive Officer paid the Companythe remaining balance on his mortgage loan agreement, totaling $1,198,000.

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

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**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 expensed 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, 2004 and 2003, the grosscarrying amount of the intangible assets, consisting of the licensed patenttechnology, was $3.5 million and the related accumulated amortization was$1.1 million and $583,000, respectively.

Estimatedfive year future amortization expense for other intangible assets as of December 31,2004 are as follows:

| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2005       |       |                    | $          | 502 |   |   |
| 2006       |       |                    | 502        |   |   |
| 2007       |       |                    | 502        |   |   |
| 2008       |       |                    | 502        |   |   |
| 2009       |       |                    | 419        |   |   |

 

**7.**   Accounts Payable and Accrued Expenses

Accountspayable and accrued expenses consist of the following:
| ** **                                                            | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | **2004**                | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | **(In thousands)** | ** ** |
| Accounts payable                                                      |       | $                       | 2,599      |   | $ | 5,426 |   |
| Accrued employee  compensation and related taxes                      |       | 2,220                   |       | 1,855 |   |
| Accrued external  research and development and contract manufacturing |       | 1,682                   |       | 861 |   |
| Advance from  joint venture                                           |       | —                  |       | 1,437 |   |
| Other accrued  liabilities                                            |       | 3,110                   |       | 2,985 |   |
|                                                                  |       | $                       | 9,611      |   | $ | 12,564 |   |

 

51

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

**8.**   Long-termObligations

Long-termobligations consist of the following:
| ** **                                           | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **2004**                | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(In thousands)** | ** ** |
| Obligations under  capital lease arrangements        |       | $                       | 3,490      |   | $ | 3,849 |   |
| Obligation under  leasehold improvement arrangements |       | 1,992                   |       | 2,142 |   |
| Obligations under  promissory notes                  |       | —                  |       | 1,070 |   |
| Total long-term  obligations                         |       | 5,482                   |       | 7,061 |   |
| Less: current  portion                               |       | (1,837                  | )          | (3,413 | ) |
| Long-term  obligations                               |       | $                       | 3,645      |   | $ | 3,648 |   |

 

*Obligations undercapital lease arrangements and promissory notes:*

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, 2004, 2003 and2002, Dyax S.A. sold to and leased back from the lender a total of$431,000, $176,000 and $1.7 million, 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 $342,000 and $441,000 at December 31,2004 and 2003, which is included in restricted cash on the Company’sconsolidated balance sheets. As of December 31, 2004 and 2003, there was$1.3 million and $1.4 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 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, 2004, 2003 and 2002, theCompany sold to and leased back from the lender $1.1 million, $306,000 and $2.0million, 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, 2004 and 2003,there was $2.1 million(included in obligations under capital lease arrangements) outstanding relatedto capital leases. During 2004, the Company paid off its debt relating toleasehold improvements, as of December 31, 2004 and 2003 there was $0 and$1.1 million (included in obligations under promissory notes) outstandingrelated to the leasehold improvements debt agreement, totaling $2.1 million and$3.2 million outstanding under the loan, which is included in long-termobligations on the Company’s consolidated balance sheets.

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 tothis agreement ranges between 10.42% and 14.02%. Principal and interest arepayable monthly over 60 months. The capital lease obligations arecollateralized by the assets under the lease. As of December 31, 2004 and2003, there was $26,000 and $288,000 (included in obligations under capitallease arrangements) outstanding under the loan, which is included in long-termobligations on the Company’s consolidated balance sheets.

52

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

**8.**   Long-termObligations (Continued)

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, 2004 and 2003, there was $27,000 and$100,000 (included in obligations under capital lease arrangements) outstandingunder the 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, 2004, and 2003, there was $2.0 million and$2.1 million outstanding under the loan, which is included in long-termobligations on the Company’s consolidated balance sheets.

Minimum future paymentsunder the Company’s long-term obligations as of December 31, 2004 are asfollows:
| ** **                                | ** ** | **(In thousands)** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| 2005                                      |       |                    | $          | 2,254 |   |   |
| 2006                                      |       |                    | 1,749      |   |   |
| 2007                                      |       |                    | 939        |   |   |
| 2008                                      |       |                    | 478        |   |   |
| 2009                                      |       |                    | 425        |   |   |
| Thereafter                                |       |                    | 929        |   |   |
| Total future  minimum payments            |       |                    | 6,774      |   |   |
| Less: amount  representing interest       |       |                    | (1,292     | ) |   |
| Present value of  future minimum payments |       |                    | 5,482      |   |   |
| Less: current  portion                    |       |                    | (1,837     | ) |   |
| Long-term  obligations                    |       |                    | $          | 3,645 |   |   |

 

**9.**   OperatingLeases

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 companies under subleases, both of which are due toexpire, unless extended, on October 31, 2005. The lease commenced in thefirst quarter of 2002 and has an initial term of ten years, expiring February 2012.As part of the lease agreement, the Company received a $2.3 million leaseholdimprovement incentive in 2002. The leasehold improvement incentive was recordedas deferred rent and is being amortized as a reduction to rent expense over thelease term. Also, as part of the lease agreement, the Company was required toprovide a cash-collateralized letter of credit in the amount of$4.3 million, which may be reduced after the fifth year of the lease term.The cash collateral is included in restricted cash on the 

53

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

**9.**   Operating Leases(Continued)

Company’s consolidatedbalance sheets. Under the terms of the lease agreement, the Company isobligated to lease an additional 24,122 square feet of space on November 1,2007 and has the option to extend the entire lease for two additional five-yearterms.

Minimumfuture lease payments under the Company’s non-cancelable operating leases as ofDecember 31, 2004 are as follows:
| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2005       |       |                    | $          | 3,997 |   |   |
| 2006       |       |                    | 3,975      |   |   |
| 2007       |       |                    | 5,354      |   |   |
| 2008       |       |                    | 5,400      |   |   |
| 2009       |       |                    | 5,388      |   |   |
| Thereafter |       |                    | 11,449     |   |   |

 

In addition, the Company subleases a portion of itsCambridge facility, for which minimum future receipts under the non-cancelablesubleasing agreement as of December 31, 2004 are $308,000 which will allbe received in 2005.

Rent expense for the yearsended December 31, 2004, 2003 and 2002 was approximately $3,636,000,$2,907,000 and $2,560,000, respectively. Rent expense for December 31,2004, 2003 and 2002 was net of sublease payments of $1,191,000, $1,565,000 and$719,000 respectively.

**10.**   Litigation

As of December 31,2004, 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 31,2004, there were no reserves for litigation settlements.

**11.**   Stockholders’Equity

*Preferred Stock:  *Asof December 31, 2004 and 2003, there were 950,000 shares of $0.01 parvalue preferred stock authorized but undesignated and 50,000 shares ofpreviously undesignated preferred stock designated as Series A Junior ParticipatingPreferred Stock.

*Common Stock:  *OnMarch 19, 2003, the Company completed the sale of 4,721,625 shares ofcommon stock at a price of $1.85 per share in a registered directed offeringcovered by our shelf registration on Form S-3, which resulted in proceedsof $8.3 million, net of expenses of $521,000.

54

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

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

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 of authorizedshares of our common stock by 75,000,000 shares from 50,000,000 to 125,000,000shares.

*Stock Options:  *TheCompany’s 1995 Equity Incentive Plan (the “Plan”) is an equity plan under whichequity awards, including awards of restricted stock and incentive andnonqualified stock options to purchase shares of common stock to employees andconsultants of the Company, may be granted by action of the CompensationCommittee of the Board of Directors. Although in certain circumstances optionawards may be granted below fair market value, options are generally granted atthe current fair market value on the date of grant, generally vest ratably overa 48 month period, and expire within ten years from date of grant. At the May 16,2002 Annual Meeting of Shareholders the Plan was amended by a shareholder voteto increase the number of shares reserved for issuance under the plan from4.5 million to 6.5 million shares and to provide for automatic annualincreases up to an aggregate amount of not more than 10.25 million shares.At December 31, 2004, there were 6,324,938 shares of common stock reservedfor issuance under the Plan of which 2,479,153 shares remained available forfuture grant. Since the Plan’s inception, 2,625,630 shares have been issuedunder the Plan.

Stockoption activity for the 1995 Equity Incentive Plan is summarized as follows:
| ** **                             | ** ** | **Option Shares** | ** ** | **Weighted-Avg.    Exercise Price  ** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------------------------------------------------|------------|
| Outstanding at  December 31, 2001 |       |                   | 3,677,630  |                                                           |       |   | $ | 9.08 |   |   |
| Granted at fair  market value          |       |                   | 1,366,506  |                                                           |       |   | 2.42 |   |   |
| Exercised                              |       |                   | (224,222   | )                                                              |       |   | 1.77 |   |   |
| Canceled                               |       |                   | (513,601   | )                                                              |       |   | 12.38 |   |   |
| 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 |   |   |

 

55

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

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

Summarized informationabout stock options outstanding at December 31, 2004 is as follows:
| ** **                                  | ** ** | **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                                       |       | 19,041                       |       |                         | 1.17       |   |   |   | 0.30 |   |   | 19,041 |   |   | 0.30 |   |   |
| $1.21 to $1.36                              |       | 404,348                      |       |                         | 7.56       |   |   |   | 1.36 |   |   | 195,039 |   |   | 1.36 |   |   |
| $1.49 to $1.99                              |       | 272,232                      |       |                         | 6.52       |   |   |   | 1.78 |   |   | 162,132 |   |   | 1.73 |   |   |
| $2.00                                       |       | 421,933                      |       |                         | 4.36       |   |   |   | 2.00 |   |   | 421,933 |   |   | 2.00 |   |   |
| $2.30 to $3.80                              |       | 476,570                      |       |                         | 7.55       |   |   |   | 3.38 |   |   | 203,529 |   |   | 3.93 |   |   |
| $3.90 to $9.62                              |       | 431,786                      |       |                         | 8.03       |   |   |   | 7.18 |   |   | 177,519 |   |   | 7.61 |   |   |
| $9.70 to $10.40                             |       | 411,585                      |       |                         | 7.04       |   |   |   | 10.29 |   |   | 302,936 |   |   | 10.30 |   |   |
| $10.49 to $10.97                            |       | 20,200                       |       |                         | 7.21       |   |   |   | 10.92 |   |   | 15,042 |   |   | 10.96 |   |   |
| $11.41                                      |       | 930,156                      |       |                         | 9.31       |   |   |   | 11.41 |   |   | 133,345 |   |   | 11.41 |   |   |
| $11.50 to $48.69                            |       | 457,934                      |       |                         | 6.50       |   |   |   | 16.40 |   |   | 392,185 |   |   | 16.93 |   |   |
|                                        |       | 3,845,785                    |       |                         | 7.39       |   |   |   | 7.58 |   |   | 2,022,701 |   |   | 7.36 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average fair value of options grantedunder the Plan during 2004, 2003 and 2002, as determined under the Black-Scholesoption pricing model was $10.91, $3.36 and $2.19, respectively. Total optionsexercisable at December 31, 2004, 2003 and 2002 were 2,022,701, 2,179,588and 1,860,791 respectively.

Thefair value of each stock option granted is estimated on the grant date usingthe minimum value method with the following weighted average assumptions:
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Expected option  term    |       | 6.0                                        |       | 6.0 |   | 6.0 |   |
| Risk-free  interest rate |       | 3.79                                       | %          | 3.35 | % | 4.23 | % |
| Expected dividend  yield |       | None                                       |       | None |   | None |   |
| Volatility factor        |       | 217                                        | %          | 208 | % | 140 | % |

 

In 2004, 2003, and 2002, 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 

56

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

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

employees, is included ingeneral and administrative expenses in the consolidated statements ofoperations and comprehensive loss.

*EmployeeStock Purchase Plan:  *The Company’s 1998 Employee StockPurchase Plan (the “Purchase Plan”), as amended in May 2002, allowsemployees to purchase shares of common stock at a discount from fair marketvalue. As of December 31, 2004, there were 209,240 shares of common stockreserved for issuance under the amended Purchase Plan. Rights to purchasecommon stock under the Purchase Plan are granted at the discretion of theCompensation Committee, which determines the frequency and duration ofindividual offerings under the Purchase Plan and the dates when stock may bepurchased. Eligible employees participate voluntarily and may withdraw from anyoffering before the stock is purchased. The purchase price per share of commonstock in an offering is 85% of the lesser of its fair market value at thebeginning of the offering period or on the applicable exercise date and may bepaid through payroll deductions. At the May 16, 2002 Annual Meeting ofShareholders the Purchase Plan was amended by a shareholder vote to increasethe number of shares reserved for issuance under the plan from 200,000 to 400,000shares. For the years ended December 31, 2004, 2003 and 2002, 27,456,109,389 and 46,890 shares, respectively, had been issued under the PurchasePlan.

**12.**   EmployeeSavings and 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%vested in company matching contributions immediately. For the years ended December 31,2004, 2003 and 2002, the Company’s contributions amounted to $232,000, $339,000and $363,000, respectively.

**13.**   IncomeTaxes

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:
| ** **                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal  income taxes                                       |       | 34.00    | %          | 34.00    | %          | 34.00    | %          |
| State income  taxes, net of federal benefit                           |       | 6.71     | %          | 5.44     | %          | 6.55     | %          |
| Research and  development tax credits                                 |       | 13.49    | %          | 13.18    | %          | 6.70     | %          |
| Other                                                                 |       | (2.20    | )%         | (5.04    | )%         | (4.19    | )%         |
| True up for  reduction in NOL and Research Credit carryforwards  |       | (4.74    | )%         | (71.15   | )%         | (0.16    | )%         |
| Valuation  allowance                                                  |       | (47.27   | )%         | 23.57    | %          | (42.91   | )%         |
| Effective income tax  rate                                            |       | —   | %          | —   | %          | —   | %          |

 

57

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

**13.**   Income Taxes(Continued)

The principle componentsof the Company’s deferred tax assets and liabilities at December 31, 2004and 2003, respectively are as follows:
| ** **                        | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|
| Deferred Tax  Asset:              |       |        |       |        |       |
| Allowance for  doubtful accounts  |       | $           | 30,000     |        | $          | 30,000 |   |
| Depreciation and  amortization    |       | 1,215,000   |       | 294,000     |       |
| Accrued expenses                  |       | 121,000     |       | 168,000     |       |
| Other                             |       | 37,000      |       | 71,000      |       |
| Deferred revenue                  |       | 2,808,000   |       | 442,000     |       |
| Research credit  carryforwards    |       | 12,282,000  |       | 5,664,000   |       |
| Net operating  loss carryforwards |       | 43,327,000  |       | 36,750,000  |       |
| Total gross  deferred tax asset   |       | 59,820,000  |       | 43,419,000  |       |
| Valuation  allowance              |       | (59,820,000 | )          | (43,419,000 | )          |
| Net deferred tax asset            |       | $           | —     |        | $          | — |   |

 

As of December 31, 2004, the Company had federalnet operating loss (NOL) and research and experimentation credit carryforwardsof approximately $112.8 million and $11.0 million, respectively,which may be available to offset future federal income tax liabilities andexpire at various dates from 2005 through 2024. The Company has recorded a deferredtax asset of approximately $2.3 million and $1.6 million at December 31,2004 and 2003, respectively, reflecting the benefit of deductions from theexercise of stock options. This deferred asset has been fully reserved until itis more likely than not that the benefit from the exercise of stock optionswill be realized. The benefit from the December 31, 2004 $2.3 milliondeferred tax asset will be recorded as a credit to additional paid-in capitalwhen realized. As required by SFAS No. 109, management of the Company hasevaluated the positive and negative evidence bearing upon the realizability ofits deferred tax assets, which are comprised principally of NOL and researchand experimentation 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 $59.8 million and $43.4 million has been establishedat December 31, 2004 and 2003, respectively.

The American Jobs Creation Act of 2004 (the Act)was signed into law on October 22, 2004. The Act contains numerousamendments and additions to the U.S. corporate income tax rules. None of thesechanges, either individually or in the aggregate, is expected to have asignificant effect on theCompany’s income tax liability.

Ownership changes, as defined in the Internal RevenueCode, may have limited the amount of NOL carryforwards that can be utilizedannually to offset future taxable income. Subsequent ownership changes couldfurther affect the limitation in future years.

58

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

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

The Company has a collaboration agreement with Genzymefor the development and commercialization of DX-88. Under this agreement, whichwas amended on May 31, 2002, and again effective as of September 30,2003, the Company was initially responsible for all expenses incurred inconnection with the development of DX-88 for the treatment of HAE through thecompletion of the first Phase II clinical trial for HAE, which occurred in thesecond quarter of 2003. In June 2003, Genzyme exercised its option underthe collaboration agreement to join Dyax in the development andcommercialization of DX-88 for HAE. Through the creation of Dyax–Genzyme LLC(formerly known as Kallikrein LLC), Dyax and Genzyme now jointly own the rightsto DX-88 for the treatment of HAE and are each responsible for 50% of all costsincurred in connection with the development of DX-88 for HAE after completionof the first Phase II clinical trial. Upon dosing the first patient in apivotal clinical trial of DX-88 for HAE, Genzyme will also be obligated to paythe Company a milestone payment of approximately $3.0 million. Inaddition, the Company will be entitled to receive approximately 50% of theprofits realized by Dyax–Genzyme LLC and potential milestone payments of$10.0 million for the first FDA-approved product derived from DX-88, andup to $15.0 million for additional therapeutic indications developed underthe collaboration.

Under the collaboration agreement, as amended, theCompany had the option to purchase Genzyme’s interest in the application ofDX-88 for all surgical indications, including the prevention of blood loss andother systemic inflammatory responses in on-pump, open-heart surgery. The Companyexercised this option in the first quarter of 2003 for $1.0 million.

When the Company and Genzyme first amended thecollaboration agreement in May 2002, the Company and Genzyme also executeda senior secured promissory note under which Genzyme agreed to loan the Companyup to $7.0 million. Under a security agreement associated with this note,the Company agreed to grant Genzyme a continuing security interest in certaintangible and intangible personal property arising out of the DX-88 program,including all intellectual property rights related to DX-88 for non-surgicalapplications. Under an amendment to the security agreement executed on October 15,2003, Genzyme was granted a continuing security interest in the Company’srights to revenues from licenses of its fundamental phage display patentportfolio. The security agreement, as amended, contains certain financialcovenants, under which the Company 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.

On October 18, 2002, the Company received the$7.0 million under this Genzyme note. The note bears interest at the primerate (5.25% at December 31,2004) plus 2%. Interest is payable quarterly. The principal and all unpaidinterest will be due on the maturity date of May 31, 2005. The Company mayextend the maturity date to May 31, 2007 if the amended collaborationagreement is in effect, no default or event of default exists and the Companysatisfies the financial covenants as of May 31, 2005. As of December 31,2004, the Company satisfies the criteria for extending the maturity date of thenote to May 31, 2007 and intends to extend the maturity date. Accordingly,the note is presented as a long-term liability as an obligation to relatedparty on the Company’s consolidated balance sheet. At December 31, 2004and 2003, there was $7.0 million outstanding under the loan. At December 31,2004 and 2003, the Company owed $82,000 and $488,000, respectively, of intereston this note, which is included in accounts payable and accrued expenses due tocurrent nature of this liability.

59

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

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

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 forecastedmonthly expenses of Dyax–Genzyme LLC, as needed. The Company has accounted forits interest in Dyax–Genzyme LLC using the equity method of accounting. Underthis method, the reimbursement of expenses to Dyax is recorded as a reductionto research and development expenses because it includes funding that theCompany provided to Dyax–Genzyme LLC. Dyax’s 50.01% share of Dyax–Genzyme LLCloss is recorded as an Equity Loss in Joint Venture (Dyax–Genzyme LLC) in theconsolidated statements of operations and comprehensive loss. At December 31,  2004 and 2003, the Company’s investment in the joint venture was $254,000 and$817,000, respectively, which is recorded as an Investment in Joint Venture(Dyax–Genzyme LLC) 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.

As ofDecember 31, 2004 and 2003, the Company had approximately $254,000 and$817,000, respectively, in its investment account, that represents theCompany’s portion of the contributions to Dyax-Genzyme LLC offset by theCompany’s portion of the LLC’s losses. Summary financial information forDyax-Genzyme LLC was as follows:
| ** **                                                                             | ** ** | **Years Ended December 31,**                                      | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                                                                             | ** ** | **(In thousands)**                                                          | ** ** |
| Research and  development                                                              |       |                                                                             | $          | 11,779 |   |   |   | $ | 4,284 |   |   |
| Selling and  marketing                                                                 |       |                                                                             | 226        |   |   |   | 202 |   |   |
| Net loss                                                                               |       |                                                                             | 11,996     |   |   |   | 4,486 |   |   |
| Equity loss in  joint venture (Dyax–Genzyme LLC)                                  |       |                                                                             | 5,988      |   |   |   | 2,243 |   |   |
| Current assets                                                                         |       |                                                                             | $          | 54 |   |   |   | $ | 1,633 |   |   |
| Non-current assets                                                                     |       |                                                                             | 708        |   |   |   | — |   |   |
| Current  liabilities                                                                   |       |                                                                             | (255       | ) |   |   | — |   |   |
| Non-current  liabilities                                                               |       |                                                                             | —     |   |   |   | — |   |   |
| Net assets                                                                             |       |                                                                             | $          | 507 |   |   |   | $ | 1,633 |   |   |
| Investment in joint venture (Dyax–Genzyme LLC)                                    |       |                                                                             | $          | 254 |   |   |   | $ | 817 |   |   |
| Amount due to Dyax from  Dyax–Genzyme LLC (included in current liabilities above) |       |                                                                             | $          | 255 |   |   |   | $ | — |   |   |

 

The Company’s Chairman, President and Chief ExecutiveOfficer also serves as an outside director of Genzyme Corporation and was aconsultant to Genzyme until 2001. One of our other directors is a 

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

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

director of Genzyme andanother was a senior advisor to the Chief Executive Officer of Genzyme and aformer officer.

At December 31, 2004 and 2003, Genzyme ownedapproximately 1.8% and 2.2%, 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 31,2004, 2003 and 2002, in connection with the maintenance fees on these twoagreements. As of December 31, 2004 and 2003, there was no accountsreceivable balance 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 $275,000, for the year ended December 31, 2004, inconnection with the technology access fees on this agreement. As of December 31,2004, there was no accounts receivable balance related to the library licenseagreement.

**15.**   BusinessSegments

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 and prior period segment information hasbeen restated to reflect this change. As of December 31, 2004 and 2003,the Company had approximately $2.0 million and $1.9 million, respectively,of long-lived assets located in Europe, with the remainder held in the UnitedStates. For the years ended December 31, 2004, 2003 and 2002, the Companydid not have any external revenues outside the United States.

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

**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, 2001 |       |                                                          | $          | —                                             |       |                                              |       | $ | 94 |   |   |   | $ | 94 |   |   |
| Change for 2002                    |       |                                                          | —     |                                               |       |                                              | 410        |   |   |   | 410 |   |   |
| 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 |   |   |

 

**17.**   LicenseAgreements

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.

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

**18.**   UnauditedQuarterly Operating Results

Thefollowing is a summary of unaudited quarterly results of operations for theyears ended December 31, 2004 and 2003:
| **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 loss                                             |       | $                                                        | (7,435     | )                  | $          | (8,176              | )          | $                  | (7,963     | )                   | $          | (9,540 | ) |
| **Basic and diluted net loss per  share:**           |       |                                                     |       |               |       |                |       |               |       |
| Net loss                                             |       | $                                                        | (0.24      | )                  | $          | (0.26               | )          | $                  | (0.25      | )                   | $          | (0.31 | ) |

 

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

**18.**   Unaudited Quarterly Operating Results (Continued)
| **Year ended December 31, 2003** | ** ** | ** **                                               | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                           | ** ** | **(in thousands, except per share)** | ** ** |
| Revenue                                              |       | $                                                        | 3,856      |               | $          | 3,348               |       | $                  | 5,927      |                | $          | 3,722 |   |
| Loss from  continuing operations                     |       | $                                                        | (5,795     | )                  | $          | (5,643              | )          | $                  | (6,044     | )                   | $          | (7,012 | ) |
| Net income (loss)                                    |       | $                                                        | (6,379     | )                  | $          | (6,069              | )          | $                  | (6,166     | )                   | $          | 11,199 |   |
| **Basic and diluted net income  (loss) per share:**  |       |                                                     |       |               |       |                |       |               |       |
| Net income (loss)                                    |       | $                                                        | (0.31      | )                  | $          | (0.25               | )          | $                  | (0.25      | )                   | $          | 0.45 |   |

 

**ITEM 9.     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS 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, 2004. Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2004 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

**ITEM 9B.   OTHER INFORMATION**

None.

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**PART III**

**ITEM10.   DIRECTORS AND 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 2005 Annual Meeting of Stockholders (the “2005 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.   EXECUTIVE COMPENSATION**

The response to this itemis incorporated herein by reference from the discussion responsive theretounder the following captions in the 2005 Proxy Statement: “Election ofDirectors—Director Compensation,” “Executive Compensation” and “Election ofDirectors—Compensation Committee Interlocks and Insider Participation.”

**ITEM12.   SECURITY OWNERSHIP 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 2005 Proxy Statement.

The following tableprovides information about the securities authorized for issuance under theCompany’s equity compensation plans as of December 31, 2004:

**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) |       |       | 3,845,785  |                                                                                                                                             |       |                                                                                                              | $          | 7.39                                                                                                                                                                                                             |       |   |   | 3,954,658 |   |   |
| Equity  compensation plans not approved by security holders:    |       |       | —     |                                                                                                                                             |       |                                                                                                              | —     |                                                                                                                                                                                                             |       |   | — |   |   |
| **Totals:**                                                     |       |       | 3,845,785  | (2)                                                                                                                                              |       |                                                                                                              | $          | 7.39                                                                                                                                                                                                             |       |   |   | 3,954,658 | (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 30,2005.

(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, 2005. The remaining shares consist of 3,745,418 under the1995 Amended and Restated Equity Incentive Plan, 

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which amountreflects the automatic increase of 1,250,000 shares that occurred on January 1,2005 under the terms of the Plan. Under the 1995 Amended and Restated EquityIncentive Plan, the number of shares issuable is automatically increased every January 1by an amount equal to the lesser of (i) 1,250,000 shares, (ii) 5% ofthe fully diluted outstanding shares of Common Stock of the Company on suchdate or (iii) such lesser amount as may be determined by resolution of theboard of directors at any date before or within 90 days after January 1of the respective year; provided, however, that the maximum aggregate number ofshares received since inception under the plan shall not exceed 10,250,000shares. No incentive stock options may be granted under the plan more than tenyears after the plan’s July 13, 1995 effective date. The plan may beamended, suspended, or terminated by the Compensation Committee of the Board ofDirectors at any time, subject to any required stockholder approval.

**ITEM13.   CERTAIN RELATIONSHIPS 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 2005 Proxy Statement.

**ITEM14.   PRINCIPAL ACCOUNTANT 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 2005 Proxy Statement.

**PART IV**

**ITEM 15.   EXHIBITS AND FINANCIAL STATEMENTSCHEDULE**

**(a) 1.   FINANCIALSTATEMENTS**

Thefinancial statements are included under Part II, Item 8 of this Report.

**2. FINANCIAL STATEMENTS SCHEDULE**

**SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

**For the years ended December 2004, 2003 and 2002**

**(In Thousands)**
| ** ** | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | ** Balance at   End of  Period** | ** ** |
|------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------------------------|------------|
| 2004       |       |                                           | $          | 75            |       |           |       | $                                                    | —     |   |   |   | $ | — |   |   |   | $ | 75 |   |   |
| 2003       |       |                                           | $          | 75            |       |           |       | $                                                    | 25         |   |   |   | $ | 25 |   |   |   | $ | 75 |   |   |
| 2002       |       |                                           | $          | 75            |       |           |       | $                                                    | 20         |   |   |   | $ | 20 |   |   |   | $ | 75 |   |   |

 
| ** **                               | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | ** Balance at   End of  Period** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------------------------|------------|
| Deferred Tax Asset  Valuation Allowance: |       |                                           |       |          |       |           |       |                                                 |       |   |   |   |   |   |   |
| 2004                                     |       |                                           | $          | 43,419        |       |           | $          | 18,257                                               |       |   | $ | 1,856 |   |   |   | $ | 59,820 |   |   |
| 2003                                     |       |                                           | $          | 45,066        |       |           | $          | 975                                                  |       |   | $ | 2,622 |   |   |   | $ | 43,419 |   |   |
| 2002                                     |       |                                           | $          | 33,522        |       |           | $          | 11,544                                               |       |   | — |   |   |   | $ | 45,066 |   |   |

 

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**3.     EXHIBITS**

The exhibits are listedbelow under Part IV, Item 15(c) 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              |       | 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  September 30, 2000 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.                                                                                            |
| 3.4              |       | Certificate of  Correction to the Restated Certificate of Incorporation of the Company. Filed  as Exhibit 3.4 to the Company’s Amended Annual Report on Form 10-K/A  (File No. 000-24537) for the year ended December 31, 2001 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 on February 7, 2002. Filed  as Appendix B to the Company’s Definitive Proxy Statement on Schedule 14A  (File No. 000-24537) filed with the Commission on April 22, 2002 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 Lynn G. Baird, Ph.D., Clive R.  Wood, Ph.D. and Ivana Magovcevic, 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.                                                                 |

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| 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. |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                                                  |

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| 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.                                                                                                    |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 herewith.                                                                                                                                                                                                                  |
| 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.                                                                                                                                                                                                                        |
| 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        |   | Important Factors That  May Affect Future Operations and Results. Filed herewith.                                                                                                                                                                                                                                                                                                      |

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*                    Indicates acontract with 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.

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**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 first day of March, 2005.
|        | DYAX CORP. |
|--------|------------|
|   | By:        | /s/ Henry E. Blair |
|   |       | Henry E.  Blair |
|   |       | *President  and 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                 |     | President, Chief  Executive Officer, and                                   |       |               |
| Henry E.  Blair                    |     | Chairman of the Board of  Directors  (Principal Executive Officer)         |       | March 1, 2005 |
| /s/ Stephen S. Galliker            |     | Executive Vice  President, Finance and                                     |       |               |
| Stephen S.  Galliker               |     | Administration and Chief  Financial Officer  (Principal Financial Officer) |       | March 1, 2005 |
| /s/ Constantine E. Anagnostopoulos |     |                                                                       |       |               |
| Constantine E.  Anagnostopoulos    |     | Director                                                                   |       | March 1, 2005 |
| /s/ Susan B. Bayh                       |     |                                                                       |       |               |
| Susan B. Bayh                           |     | Director                                                                   |       | March 1, 2005 |
| /s/ James W. Fordyce               |     |                                                                       |       |               |
| James W.  Fordyce                  |     | Director                                                                   |       | March 1, 2005 |
| /s/ Thomas L. Kempner              |     |                                                                       |       |               |
| Thomas L.  Kempner                 |     | Director                                                                   |       | March 1, 2005 |
| /s/ Henry R. Lewis                 |     |                                                                       |       |               |
| Henry R.  Lewis                    |     | Director                                                                   |       | March 1, 2005 |
| /s/ David J. McLachlan             |     |                                                                       |       |               |
| David J.  McLachlan                |     | Director                                                                   |       | March 1, 2005 |
| /s/ Mary Ann Gray                       |     |                                                                       |       |               |
| Mary Ann Gray                           |     | Director                                                                   |       | March 1, 2005 |

 

 

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