**UNITED STATESSECURITIES 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

**For the fiscal year ended December 31, 2006**

**OR**

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

**For the transition periodfrom  *               *to**

**Commission File Number 000-24537**

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**DYAX CORP.**

(Exact name ofregistrant as specified 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)

Registrant’stelephone number, including area code: **(617)225-2500**

**Securitiesregistered pursuant to Section 12(b) of the Act:**

| **Title of each class:**     |   | **Name of each exchange on which registered:**     |
|------------------------------|--------|----------------------------------------------------|
| Common Stock, $.01 Par Value |   | The NASDAQ Stock Market LLC (NASDAQ Global Market) |

**Securitiesregistered pursuant to Section 12(g) of the Act:**None

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

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

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

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

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

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the registrant’s commonstock held by nonaffiliates of the registrant as of the last business day ofthe registrant’s most recently completed fiscal second quarter, June 30,2006, based on the last reported sale price of the registrant’s common stock onThe NASDAQ Global Market as of the close of business on that day, was $2.94.The number of shares outstanding of the registrant’s Common Stock, $.01 ParValue, as of March 7, 2007, was 48,159,287.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of theregistrant’s Definitive Proxy Statement for its 2007 Annual Meeting ofShareholders to be held on May 17, 2007, which Definitive Proxy Statementwill be filed with the Securities and Exchange Commission not later than120 days after the registrant’s fiscal year-end of December 31, 2006,are incorporated by reference into Part III of this Form 10-K.

 

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

**NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

This Annual Report on Form 10-K containsforward-looking statements, including statements regarding our results ofoperations, financial resources, research and development programs,pre-clinical studies, clinical trials and collaborations. Statements that arenot historical facts are based on our current expectations, beliefs,assumptions, estimates, forecasts and projections for our business and theindustry and markets in which we compete. The statements contained in thisreport are not guarantees of future performance and involve certain risks,uncertainties and assumptions, which are difficult to predict. Therefore,actual outcomes and results may differ materially from what is expressed insuch forward-looking statements. Important factors which may affectfuture operating results, research and development programs, pre-clinicalstudies, clinical trials, and collaborations include, without limitation, thoseset forth in Item 1A of this report entitled “Risk Factors”. You should carefully review the risksdescribed herein and in other documents we file from time to time with theSecurities and Exchange Commission (“SEC”), including the Quarterly Reports on Form 10-Qto be filed in 2007.

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**ANNUALREPORT ON FORM 10-K**

**INDEX**

| Item No. | ** ** | ** **                                                                                                              | ** ** | **Page** |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
|          |       | PART I                                                                                                             |       |     |
| 1.            |       | Business                                                                                                                |       | 1        |
| 1A.           |       | Risk Factors                                                                                                            |       | 14       |
| 1B.           |       | Unresolved Staff Comments                                                                                               |       | 27       |
| 2.            |       | Properties                                                                                                              |       | 27       |
| 3.            |       | Legal Proceedings                                                                                                       |       | 27       |
| 4.            |       | Submission of Matters to a Vote of Security Holders                                                                     |       | 28       |
|          |       | PART II                                                                                                            |       |     |
| 5.            |       | Market for the Company’s Common Equity, Related  Security Holder Matters and Issuer Purchases of Equity Securities |       | 28       |
| 6.            |       | Selected Consolidated Financial Data                                                                                    |       | 29       |
| 7.            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                             |       | 30       |
| 7A.           |       | Quantitative and Qualitative Disclosures about Market  Risk                                                             |       | 45       |
| 8.            |       | Financial Statements and Supplementary Data                                                                             |       | 46       |
| 9.            |       | Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure                                   |       | 76       |
| 9A.           |       | Controls and Procedures                                                                                                 |       | 76       |
| 9B.           |       | Other  Information                                                                                                      |       | 76       |
|          |       | PART III                                                                                                           |       |     |
| 10.           |       | Directors, Executive Officers and Corporate Governance                                                                  |       | 77       |
| 11.           |       | Executive Compensation                                                                                                  |       | 77       |
| 12.           |       | Security Ownership of Certain Beneficial Owners and  Management and Related Shareholder Matters                         |       | 77       |
| 13.           |       | Certain Relationships and Related Transactions, and  Director Independence                                              |       | 78       |
| 14.           |       | Principal Accounting Fees and Services                                                                                  |       | 78       |
|          |       | PART IV                                                                                                            |       |     |
| 15.           |       | Exhibits, Financial Statement Schedules                                                                                 |       | 78       |
|          |       | Signatures                                                                                                              |       | 83       |

 

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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 oncology and inflammatory indications. Weuse our proprietary drug discovery technology, known as phage display, toidentify antibody, small protein and peptide compounds for clinicaldevelopment.

Our lead product candidate, DX-88 (ecallantide),is a recombinant form of a small protein that is currently in clinical trialsfor its therapeutic potential in two separate indications. The first suchindication involves the use of DX-88 in the treatment of hereditaryangioedema (HAE). In this indication, we have successfully completed threePhase II trials and, in November 2006, we treated our last patient in aPhase III trial, known as EDEMA3. Additionally, we plan to initiate aconfirmatory trial, known as EDEMA4, starting in the first quarter of 2007. DX-88has orphan drug designation in the U.S. and E.U., as well as Fast Trackdesignation in the U.S. for the treatment of acute attacks of HAE.

In the second indication for DX-88, we havesuccessfully completed a Phase I/II trial for the prevention of blood lossduring on-pump coronary artery bypass graft, or CABG surgery. Dyax has alsoinitiated a Phase II trial for further development of DX-88 in patientsundergoing what is more broadly defined as on-pump cardiothoracic surgery, oron-pump CTS,  which includes on-pump CABGsurgery and heart valve replacement and repair procedures.

In addition to our clinical stage programs, we have 14other product candidates in our discovery and development pipeline, two ofwhich are currently in preclinical development. The most advanced of theseproduct candidates is DX-2240, a fully human monoclonal antibody thattargets the Tie-1 receptor, a protein receptor that we believe isimportant in the process of blood vessel formation known as angiogenesis. DX-2240offers a novel mechanism of action for inhibiting tumor growth, which we believemay have potential application in the treatment of various types of cancer.

All of the compounds in our pipeline were discoveredusing our proprietary phage display technology which rapidly generates productcandidates that bind with high affinity and specificity to therapeutic targets.Although we use this technology primarily to advance our own internaldevelopment activities, we also leverage it broadly through licenses andcollaborations so that other biopharmaceutical and pharmaceutical companies canuse the technology to discover and develop biopharmaceutical leads. Throughthis program, which we refer to as our Licensing and Funded Research Program(LFRP), we maintain more than 70 revenue generating licenses andcollaborations. Under the LFRP, our licensees and collaborators have 13 productcandidates in clinical trials that were generated from our technology and weestimate that over 70 additional product candidates are in various stages ofdiscovery research. We are entitled to receive milestones and/or royalties fromour licensees and collaborators to the extent that any of these productcandidates advance in development and are ultimately commercialized. During2006, we monetized and sold a portion of the future revenues generated throughthe LFRP to an affiliate of Paul Capital Partners for $30 million in upfrontcash with an option for an additional $5 million if the LFRP achieves specifiedrevenue levels by the end of 2008.

Our business strategy is to build a broad portfolio ofbiotherapeutic products developed using our proprietary phage displaytechnology. In the near term, we expect to focus our efforts on completing theclinical development of DX-88 for the treatment of HAE. In addition, weare moving forward on the clinical development of DX-88 as a treatmentfor patients undergoing on-pump CTS, and will be in a position to advance oneother product candidate into the clinic in 2007. In the long term, we expectthat we, together with our licensees and collaborators, will continue to useour technology and expertise to develop and commercialize new therapeuticproduct candidates.

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We continued to incur losses in 2006 and expect toincur significant operating losses over at least the next several years. We donot expect to generate profits unless and until the therapeutic products fromour development portfolio reach the market, which can only occur after beingsubjected to the uncertainties of the regulatory approval process.

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

**Our ClinicalDevelopment Programs**

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

***What is DX-88?***   DX-88,also known generically as ecallantide, is a compound that we developed usingphage display and that we have shown *in vitro*to bea high affinity, high specificity inhibitor of human plasma kallikrein. Plasmakallikrein, an enzyme found in the liquid portion of blood, is believed to be akey component responsible for the regulation of the inflammation andcoagulation pathways. Excess plasma kallikrein activity is thought to play arole in a number of inflammatory and autoimmune diseases. We believe that DX-88may allow for fewer side effects and/or be more effective than other marketedinhibitors of kallikrein, which lack DX-88’s specificity and affinity forplasma kallikrein.

***DX-88 for theTreatment of HAE.***   Hereditary angioedema, or HAE, is a geneticdisease that can cause swelling of the larynx, gastrointestinal tract andextremities. In severe cases of HAE involving swelling of the larynx, HAE islife threatening and may require insertion of a breathing tube to preventasphyxiation. There is no approved therapy in the US for acute attacks of HAE. Thefrequency of attacks may be reduced with the chronic use of anabolic steroids. Whilethis can reduce the frequency of attacks in some people, steroids are ineffectivein treating an acute attack and are associated with many serious side effects.Published research indicates that plasma kallikrein is a primary mediator ofboth the pain and swelling in HAE. We believe that DX-88 has thepotential to decrease both the severity and duration of symptoms during acuteHAE attacks and, therefore, may provide an effective treatment for thisdisease.

HAE affects between 1 in 10,000 to 1 in 50,000 peoplearound the world. Despite the fact that 85% of sufferers experience symptomsbefore age 20, 68% of patients are not diagnosed until after age 20. There areestimated to be approximately 10,000 immediately addressable HAE patients inthe U.S. and Europe.

In February, 2007, we reached amutual agreement with Genzyme Corporation to terminate our collaborationto develop DX-88 as a treatment for HAE. As a result, we now own all ofthe rights to DX-88worldwide, including the rights to develop and commercialize DX-88 in HAE.In May 2004, we successfully completed a Phase II, 48 patient, doseescalating, placebo-controlled study, known as EDEMA1. In January 2006, wetreated the last patient in a large, open label, repeat dose Phase II trial,known as EDEMA2, and in November 2006, we treated the last patient in aplacebo-controlled, worldwide, multi-center Phase III trial, known as EDEMA3. Allof the clinical trials that we conducted in HAE during 2006 utilized a 30 mgsubcutaneous dose, which was a change from an earlier intravenous method. Weexpect to seek marketing approval using this dosing level and route ofadministration.

As a result of recent discussions with the FDA, we nowplan to complete a confirmatory placebo-controlled trial, known as EDEMA4,which we expect to start in the first quarter of 2007. This trial is intended tofurther support the validity of the patient reported outcome (PRO) methodologyused in the EDEMA3 trial and confirm the efficacy and safety of DX-88. Inaddition, an open label continuation study will be conducted to augment ourclinical data with respect to DX-88. In light of these trials and basedupon our recent discussions with the FDA, we are now estimating regulatoryapproval in the U.S. in late 2008, followed closely by approval in the EuropeanUnion.

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To date, our study results in patients exposed tomultiple doses suggest that DX-88 can provide repeated therapeuticbenefit to HAE patients for all types of HAE attacks, including potentiallyfatal laryngeal attacks. Furthermore, there is no apparent decrease in DX-88’stherapeutic effects on HAE attacks in these patients. To date, DX-88 hasbeen well tolerated in clinical trials.

***DX-88 forOn-Pump CTS.*****  **Worldwide,it is estimated that there are over one million procedures performed involvingon-pump cardiothoracic surgery (on-pump CTS) performed each year. CTSprocedures are performed for patients who have narrowings or blockages of thecoronary arteries and often involve use of a heart-lung machine, which iscommonly referred to as the “pump”. In these procedures, the heart is stoppedwith medications and the pump does the work of the heart and lungs duringsurgery. This allows the surgeon to position the heart as needed, to accuratelyidentify the arteries and perform the bypass while the heart is stationary.

The use of the pump during on-pump CTS procedureselicits an adverse systemic inflammatory response. Many patients undergoingon-pump CTS procedures experience significant intraoperative blood loss thatrequires transfusion. Kallikrein has been implicated in the body’s response toon-pump, heart surgery as a major contributor to the significant blood lossseen in on-pump CTS patients and to the pathologic inflammation that plays arole in the complications of on-pump CTS procedures. The only currentlyapproved and available inhibitor of plasma kallikrein is aprotinin, currentlymarketed by Bayer AG under the name of Trasylol®.

We are currently developingDX-88 as an alternative treatment for patients undergoing on-pump CTSprocedures. In December 2003, we completed the evaluation of DX-88in a Phase I/II trial in the United States for the prevention of blood loss inpatients undergoing on-pump CABG surgeries. Furthermore, we have initiated aPhase II study for further development of DX-88 in this on-pump CTSindication, including CABG and heart valve replacement and repair procedures.We believe that DX-88 may have benefits over aprotinin, as it is a recombinanthuman protein while aprotinin is animal-derived, which may make it appear lessforeign to the patient’s immune system. DX-88 has also been shown *in vitro* to be 1,000 times more potentthan aprotinin as an inhibitor of plasma kallikrein.

**Other BiopharmaceuticalDiscovery and Development Programs**

In addition to our lead product candidate, DX-88,we are also actively pursuing other biopharmaceutical discovery and developmentprograms, with an emphasis on oncology and inflammatory indications.  Through the use of our proprietary phagedisplay technology, we have been able to establish a broad discovery platformto identify compounds that interact with a wide array of targets that aremembrane proteins or circulating proteins, all of which have been shown to beinvolved in pathologic processes. Our discovery capabilities have been furtherenhanced through automation and as a result, we are now able to evaluate alarge number of molecules binding to each target. In this way we can rapidlyidentify and select a specific antibody, peptide or small protein with thedesired biochemical and biological characteristics. While our discoveryresearch efforts are focused primarily on monoclonal antibodies, we are alsotesting the *in vitro*and *in vivo* efficacy of several of our peptideand small protein compounds.

In addition to our clinical stage programs, wecurrently have 14 other product candidates in our discovery and developmentpipeline, two of which are currently in preclinical development. Our mostadvanced is DX-2240, the first fully human monoclonal antibody productcandidate that we developed using our phage libraries. It targets the Tie-1receptor on tumor blood vessels. This antibody inhibits tumor vasculardevelopment by a mechanism distinct from the ones targeting other pathways suchas the vascular endothelial growth factor, or VEGF, pathway. In animal modelsto date, DX-2240 has been shown to inhibit lung, colorectal, renal,pancreatic and prostate tumor growth and has shown significant inhibition activityin combination with other cancer therapies, such as Genentech’s Avastin® and Bayer’s Nexavar®. 

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Currently, we areconcluding preclinical studies on DX-2240 and will be in a position tofile an IND in the second half of 2007.

In December, 2005, werestructured our long-standing collaboration with Debiopharm S.A. withrespect to Dyax’s proprietary neutrophil elastase inhibitor, known as DX-890(depelestat). Under the new agreement, Debiopharm was granted exclusiveworldwide rights for the development, manufacture and commercialization of anative form of DX-890 in cystic fibrosis (CF) and acute respiratorydistress syndrome (ARDS). We will receive milestone payments and royalties fromDebiopharm to the extent that DX-890 advances in development and isultimately commercialized in these indications.

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

**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 that are currently employed to identify biopharmaceutical leads.

Over the past several years, we have brought on-linehigh-throughput automated capacity, developed state-of-the-art antibody phagedisplay libraries, and successfully implemented a strategy under which, as oftoday, we believe we have obtained freedom to operate in the antibody phagedisplay area through cross-licenses with Affimed Therapeutics AG, Affitech AS,Biosite Incorporated, Cambridge Antibody Technology Limited, Domantis Limited,Genentech, Inc. and XOMA Ireland Limited. As a result of these activities,we now have an industry-leading technology that allows us to identify fullyhuman antibodies with high specificity and high affinity and to move productcandidates rapidly into both *in vitro*testing and optimization.

Although we use this technology primarily to advanceour own internal development activities, we also leverage it broadly throughlicenses and collaborations so that other biopharmaceutical and pharmaceuticalcompanies can use it to discover and develop biopharmaceutical leads.

***Licensing and Funded Research Program.******  ***Under our Licensing andFunded Research Program (LFRP), we maintain more than 70 revenue generatinglicenses and collaborations with other biopharmaceutical and pharmaceuticalcompanies. Currently, the types of licenses and collaborations that we enterinto fall into one of three distinct structures:

·       *Patent Licenses*.   Under our patent license program, wegrant other biopharmaceutical and pharmaceutical companies non-exclusivelicenses to use our core phage display patents (known as the Ladner patents),to discover and develop biologic compounds for use in specified fields. Wegenerally grant licenses on a non-exclusive basis so that we may retain broadrights to practice our phage display technology in multiple fields. Our licenseagreements generally provide for up-front license fees, annual maintenancefees, milestone payments based on successful product development, and royaltiesbased on any future product sales. In addition, under the terms of our licenseagreements, most licensees have agreed not to sue us for using phage displayimprovement patents which they developed and some have granted us specificaccess to certain phage-display technologies which they have developed or whichthey control. We believe that these provisions allow us to practiceenhancements to phage display developed by our licensees. We currently havemore than 45 patent licensees worldwide.

·       *Library Licenses*.   Under our library license program,we grant our licensees rights to use our proprietary phage display libraries inconnection with their internal therapeutic development 

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programs. We also providethese licensees with related materials and training so that they may rapidlyidentify compounds that bind with high affinity to therapeutic targets. Inaddition, with respect to our antibody library license agreements, we includesublicenses to technology that we have cross licensed from AffimedTherapeutics, Affitech, Biosite, Cambridge Antibody Technology, Domantis,Genentech and XOMA. The period during which our licensees may use our librariesis typically limited to a 4 to 5 year term. Library license agreements containsignificant up-front license fees, annual maintenance fees, milestone paymentsbased on successful product development, and royalties based on any futureproduct sales. Our library licensees currently include Amgen, Biogen Idec,Genzyme, ICOS, ImClone Systems, Human Genome Sciences, Merck Serono, MedImmune,Tanox, Trubion, Zenyth Therapeutics and Zymogenetics.

·       *Funded Research.  *Under our funded research program, weperform funded research for various collaborators using our phage displaytechnology to identify, characterize and optimize antibodies that bind todisease targets provided by the collaborators. Our funded research collaboratorsinclude AstraZeneca, Baxter Healthcare, Biogen Idec, Merck Serono, MerrimackPharmaceuticals and Trubion.

While our licenses and collaborations primarily focuson therapeutic programs, the LFRP also encompasses the use of phage displaytechnology in a number of other ways. For example, often the binding compoundsthat we discover for biopharmaceutical targets can be used in diagnostic orimaging formats to assess therapeutic effectiveness and monitor diseaseprogression. In addition, other binding compounds we discover, known asligands, have a high affinity and high specificity, and can be used for thepurification of biopharmaceuticals. Binding compounds are also activecomponents of many research products used for drug discovery and development,specifically to detect and analyze proteins.

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

In the area of affinity separations, we have grantedlicenses to Wyeth and Human Genome Sciences to use ligands that we developedfor them. Wyeth is using a Dyax ligand for purification of its recombinantblood factor product, ReFacto AF, for treating hemophilia and Human GenomeSciences is using a Dyax ligand to purify its B-Lymphocyte StimulatorProtein.

Currently, 13 product candidates generated by ourlicensees or collaborators under the LFRP are in clinical trials. Furthermore,we estimate that our licensees and collaborators have over 70 additionalproduct candidates in various stages of research and preclinical development.We anticipate that we will receive milestones and royalties from our licenseesand collaborators to the extent that these product candidates advance indevelopment and are ultimately commercialized.

*PaulRoyalty Financing.**  *In August 2006,we entered into a Royalty Interest Assignment Agreement with Paul Royalty FundHoldings II, LP, an affiliate of Paul Capital Partners, under which wereceived an upfront payment of $30 million. In exchange for this payment, weassigned Paul Royalty a portion of milestones, royalties and other license feesto be received by us under the LFRP through 2017, with Paul Royalty retainingthe right to extend the term of this agreement for an additional two years ifcertain conditions are not met. We also have an option to receive an additional$5 million payment from Paul Royalty in the event that the LFRP receiptsachieve specified levels by the end of 2008, which would result in a pro rataincrease in our payments to them.

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Under the terms of the agreement, Paul Royalty wasassigned a portion of the annual net LFRP receipts. The portion assigned toPaul Royalty is tiered as follows:  70%of the first $15 million in annual receipts, 20% of the next $5 million, and 1%of any receipts above $20 million. These percentages will increase on a prorata basis if we are eligible to and elect to exercise our option for theadditional $5 million payment. The agreement also provides for annualguaranteed minimum payments to Paul Royalty, which start at $1.75 millionthrough 2007 and increase to $3.5 million in 2008 and 2009, $6 million foryears 2010 through 2013 and $7 million for years 2014 through 2017. Upontermination of the agreement, all rights to LFRP receipts will revert to us.

In the event of (i) a change of control of Dyax, (ii) abankruptcy of Dyax, (iii) a transfer of a majority of our assets that hasa material effect on either the net present value of the projected LFRPreceipts or our ability to pay the guaranteed minimum payments, (iv) atransfer by us of any part of our assets supporting the LFRP program other thanin the ordinary course of business, or (v) any breach of certain materialcovenants and representations in the agreement, Paul Royalty has the right torequire us to repurchase their royalty interest. Under such circumstances, therepurchase price would equal the greater of (a) two hundred percent of theamount paid by Paul Royalty to us less the cumulative payments previouslyreceived by Paul Royalty from the LFRP or (b) the amount which willprovide Paul Royalty, when taken together with the payments that theypreviously received from the LFRP, a specified rate of return of 25%.

In the event of breaches of certain otherrepresentations or covenants or the occurrence of certain other events thathave a material adverse effect on projected revenues under the LFRP, PaulRoyalty has the right to require us to repurchase their royalty interest atlower prices. If such an event occurs before the end of 2010, the price will bethe greater of (a) 110% of the cumulative payments made by Paul Royalty underthe agreement less the cumulative payments previously received by Paul Royaltyfrom the LFRP or (b) the amount which will provide Paul Royalty, whentaken together with the receipts previously paid over to Paul Royalty, a10% rate of return. If such an event occurs after 2010, the price will be thegreater of (a) 150% of the cumulative payments made by Paul Royalty underthe agreement less the cumulative payments previously received by Paul Royaltyfrom the LFRP or (b) the amount which will provide Paul Royalty, whentaken together with the receipts previously paid to Paul Royalty, a 15%rate of return. Alternatively, with respect to certain events, we can avoid therequirement to repurchase Paul Royalty’s entire interest in the LFRP by makingannual payments to Paul Royalty equal to the difference between actual receiptsand projected LFRP receipts. Our right to make these alternative paymentsexpires if (a) in any two consecutive calendar years (excluding 2007), thetotal alternative payments equal or exceed 50% of Paul Royalty’s percentageof  the projected LFRP receipts in each of those years, (b) in anythree consecutive calendar years (excluding 2007), the total alternativepayments equal or exceed 33% of Paul Royalty’s percentage of the projected LFRPreceipts in each of those years or (c) if there are certain other materialfailures in the LFRP.

In addition, we have the right, but not theobligation, to repurchase Paul Royalty’s royalty interest at a price in cashwhich will provide them, when taken together with the royalties previouslypaid, with the greater of (i) 175% of the payments made by Paul Royaltyunder the agreement until August 23, 2008 or 200% of the payments made byPaul Royalty under the agreement thereafter or (ii) an amount sufficientto provide a specified rate of return of 25%.

Pursuant to the terms of the Paul Royalty agreement,Dyax has entered into security and lock-box agreements granting Paul Royalty asecurity interest in and to substantially all assets related to the LFRP inorder to secure performance under the agreement and receipt of its agreed shareof LFRP receipts.

The scope of our agreement with Paul Royalty islimited to its specified portion of receipts generated under the LFRP. PaulRoyalty has no rights with respect to our internal or co-development programsand we will retain all rights and revenues relating to such programs.

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***Co-Development Program.******  ***In addition to the LFRP, wealso leverage our phage display technology through our co-development program. Underthis program, we collaborate with other biopharmaceutical companies to discoverand jointly develop therapeutic leads. Under the typical co-developmentcollaboration, we use our phage display libraries to identify antibody, peptideand small protein compounds that bind to disease targets provided by ourco-development collaborator. With our collaborator, we evaluate the leads thatwe generate during the research phase of our collaboration to determine if wewish to jointly develop and commercialize such leads as therapeutics. Ourco-development collaborators currently include CSIRO, Inhibitex and SyntonixPharmaceuticals, now a wholly owned subsidiary of Biogen Idec.

**Our Phage Display Technology and How it Works**

Molecular binding is thekey to the function of most biopharmaceutical products. The binding of amolecule to a target is the mechanism nature uses to modulate biochemical andphysiological processes such as cellular growth, differentiation, metabolismand death. Naturally occurring binding molecules typically distinguish betweenthe correct target and other closely related molecules (specificity), and bindmore tightly to the target than non-target molecules (affinity), underappropriate physiological conditions. Biopharmaceutical products bind totargets, including cellular receptors and enzymes, to achieve a desired effect,and those with higher affinity and specificity are thought to be preferable.Binding also plays a significant role in diagnostics, research reagents andseparations products.

Living organisms, such asviruses, have the ability to display a foreign gene product, or protein, ontheir surfaces. Based on this ability of organisms to display proteins, ourscientists in the late 1980s invented protein phage display, a novel method toindividually display up to tens of billions of human antibodies, peptides orsmall proteins on the surface of a small bacterial virus called abacteriophage, or phage. Using phage display, we are able to produce and searchthrough large collections, or libraries, of antibodies, small proteins orpeptides to rapidly identify those compounds that bind with high affinity and highspecificity to targets of interest.

Ourphage display process generally consists of the following steps:

·                    Generating aphage display library

·                    Screening thephage display library against a target of interest

·                    Evaluating theselected compounds that bind to the target of interest

***Generating a Phage Display Library.***   Thegeneration of a phage display library is based upon a single protein frameworkand contains tens of billions of variations of this protein. The first step ingenerating a library is the selection of the protein framework upon which thelibrary will be created. This selection is based on the desired productproperties, such as structure, size, stability, or lack of immunogenicity. Wethen determine which amino acids in the framework will be varied, but do notvary amino acids that contribute to the framework structure. We also controlthe exact numbers and types of different amino acids that are varied, so thatthe resulting phage display library consists of a diverse set of chemicalentities, each of which retains the desired physical and chemical properties ofthe original framework.

The next step is thecreation of a collection of genes that encode the designed variations of theframework protein. We can easily generate diverse collections of up to hundredsof millions of different synthetic DNA sequences. Each new DNA sequence, orgene, encodes a single protein sequence that will be displayed on the surfaceof the individual phage that contains this gene. The scientists combine the newDNA sequences with phage genome DNA and certain enzymes so that the new DNA isinserted into a specific location of the phage genome. The result is that thenew protein is displayed on the phage surface fused to one of the naturallyoccurring phage proteins. The phage acts as a physical link between thedisplayed protein and its gene.

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In addition to fusedsynthetic DNA sequences, we can also use naturally occurring genes, such ascDNA, which are sequences that represent all of the expressed genes in a cellor organism, to create a library. We have also inserted genes from antibodyexpressing human cells into the phage genome. Using these genes, we haveconstructed phage display libraries that express tens of billions of differenthuman antibodies on the phage surface. From one of these libraries, individualantibody fragments can be selected and used to build highly specific humanmonoclonal antibodies.

The new phage genome isthen transferred into laboratory bacteria, where the phage genome directs thebacterial cells to produce thousands of copies of each new phage. The collectionof phage displaying multiple antibodies, peptides or small proteins is referredto as a phage display library. Because we can reproduce the phage displaylibrary by infecting a new culture of laboratory bacteria to produce millionsof additional copies of each phage, we can use each library for a potentiallyunlimited number of screenings.

***Screening the Phage Display Library Against a Targetof Interest.***   We can then select bindingcompounds with high affinity and high specificity by exposing the library to aspecified target of interest and isolating the various phage that displaycompounds that bind to the target. Each individual phage contains the gene encodingone potential binding compound, and when its displayed protein is selected inthe screening procedure, it can be retrieved and amplified by growth inlaboratory bacteria.

To screen a phage displaylibrary, we expose the library to the target under desired binding conditions.The target is normally attached to a fixed surface, such as the bottom of atube, or a bead, allowing removal of phage that do not express bindingcompounds that recognize the target. Once these unbound phage are washed away,the phage containing the selected binding compounds can be released from thetarget. Since the phage are still viable, they can be amplified rapidly byagain infecting bacteria. The capacity of the phage to replicate itself is animportant feature that makes it particularly well suited for rapid discovery ofspecific binding compounds. We can amplify a single phage by injecting it intobacteria and producing millions of identical phage in one day.

If the binding affinity ofthe compounds identified in an initial screening for a target is not consideredsufficiently high, information derived from the binding compounds identified inthe initial screening can be used to design a new focused library. The design,construction and screening of a second generation library, known as affinitymaturation, can lead to increases of 10- to 100-fold in theaffinity of the binding compounds for the target.

***Evaluating the Selected Compounds That Bind to theTarget of Interest.***   Screening phage displaylibraries generally results in the identification of one or more groups ofrelated binding compounds such as antibodies, peptides or small proteins. Thesegroups of 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 additionalphage display libraries based on these key components and repeating thisprocess. We can complete the entire selection process in several weeks. We canproduce small amounts of the binding compound by growing and purifying thephage. For production of larger amounts, we can remove the gene from the phageDNA and place it into a standard recombinant protein expression system.Alternatively, if the identified binding compound is sufficiently small, it canbe chemically synthesized. These binding compounds can be evaluated for desiredproperties including affinity, specificity and stability under conditions thatwill be encountered during its intended use. From each group of compounds,scientists can identify, develop and test a compound with the desiredproperties for utility as a biopharmaceutical, diagnostic, research reagent oraffinity separations product.

The entire phage displayprocess for identifying compounds that bind to targets of interest is nearlyidentical whether the ultimate product is to be used for biopharmaceuticals,diagnostics, research reagents 

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orseparations, which allows for an efficient use of scientific resources across abroad array of commercial applications.

***Advantages of Phage Display Technology in TherapeuticDrug Discovery.***   We believe our phage displaytechnology has the following advantages over other drug 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. The size and diversity of our libraries significantlyincrease the likelihood of identifying binding compounds with high affinity andhigh specificity for the target. Once we generate libraries, we can reproducethem rapidly in phage and use them for an unlimited number of screenings.

·                    *Speed and cost effectiveness.  *We can construct phagedisplay libraries in a few months and rapidly select binding compounds forcharacterization in screening assays. Conventional or combinatorial chemistryapproaches require between several months and several years to complete this process.Similarly, mouse and human-mouse technologies generally require four to sixmonths to identify 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 between10- and 1000-fold improvement in binding affinity withsecond-generation phage display libraries. Optimization of humanized mouse orhuman-mouse antibodies can be more difficult and may not progress as rapidly.

**Competition**

We compete in industriescharacterized by intense competition and rapid technological change. Newdevelopments occur and are expected to continue to occur at a rapid pace.Discoveries or commercial developments by our competitors may render some orall of our technologies, products or potential products obsolete ornon-competitive.

Our principal focus is onthe development of therapeutic products. We will conduct research anddevelopment programs to develop and test product candidates and demonstrate toappropriate regulatory agencies that these products are safe and effective fortherapeutic use in particular indications. Therefore our principal competitiongoing forward, as further described below, will be companies who either arealready marketing products in those indications or are developing new productsfor those indications. Many of our competitors have greater financial resourcesand experience than we do.

For DX-88 as atreatment for HAE, our principal competitors include Jerini AG, Pharming GroupN.V., Lev Pharmaceuticals, Inc and CSL Behring. CSL Behring currently marketsBerinert®, aplasma-derived C1 esterase inhibitor that is approved for the treatment of HAEin several European countries. CSL Behring received an orphan drug designationfrom the FDA for its plasma-derived C1 esterase inhibitor and has initiated aPhase III clinical trial in the United States. Jerini has received orphan drug 

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designationsfrom both the FDA and EMEA for its bradykinin receptor antagonist, known asIcatibant, which is delivered by subcutaneous injection. Jerini has completedPhase III clinical trials with Icatibant in the United States and Europe.Pharming has received orphan drug designations from both the FDA and EMEA, aswell as a fast track designation from the FDA for its recombinant C1 esteraseinhibitor. Pharming has initiated Phase III clinical trials in both the US andEurope and in July 2006 announced the submission of a MarketingAuthorization Application to the EMEA. Lev Pharmaceuticals has received bothfast track and orphan drug designations from the FDA for its plasma-derived C1esterase inhibitor and has completed a Phase III clinical trial in the UnitedStates. Other competitors include companies that market or are developingcorticosteroid drugs or other anti-inflammatory compounds.

For DX-88 as atreatment for reducing blood loss in cardiothoracic surgery procedures, ourprincipal competitors are Bayer AG and Xanodyne Pharmaceuticals, Inc.Bayer currently markets Trasylol® (aprotinin) and  Xanodyne currently markets Amicar® (aminocaproic acid), both of which are usedfor the reduction of blood loss during on-pump CTS procedures. A number ofother organizations, including Novo Nordisk A/S and Vanderbilt University, aredeveloping other products for this indication.

For our potential oncologyproduct candidates, including DX-2240, our potential competitors includenumerous pharmaceutical and biotechnology companies, most of which havesubstantially greater financial resources and experience than we do.

In addition, most largepharmaceutical companies seek to develop orally available small moleculecompounds against many of the targets for which others and we are seeking todevelop antibody, peptide and/or small protein products.

Our phage displaytechnology is one of several technologies available to generate libraries ofcompounds that can be used to discover and develop new antibody, peptide and/orsmall protein products. The primary competing technology platforms thatpharmaceutical, diagnostics and biotechnology companies use to identifyantibodies that bind to a desired target are transgenic mouse technology andthe humanization of murine antibodies derived from hybridomas. Amgen Inc.(as a result of its acquisition of Abgenix Inc.), Medarex Inc., Genmab A/S, andProtein Design Labs, Inc. are leaders in these technologies. Further, welicense our phage display patents and libraries to other parties in the fieldsof therapeutics and diagnostic products on a non-exclusive basis. Ourlicensees may compete with us in the development of specific therapeutic anddiagnostic products. In particular, BioInvent International AB, CambridgeAntibody Technology Group plc (CAT), Domantis Limited, Morphosys AG, and XOMAIreland Limited, all of which have licenses to our base technology, competewith us, both to develop therapeutics and to offer research services to largerpharmaceutical and biotechnology companies. Biosite Incorporated, which is alsoa patent licensee of ours, has partnered with Medarex, Inc. to combinephage display technology with transgenic mouse technology to create antibodylibraries derived from the RNA of immunized mice. In addition, companies arealso attempting to develop new antibody engineering technology. These includeCAT, now a wholly owned subsidiary of AstraZeneca, which is developingribosomal display technology and antibody mimics, Diversa Corp., which isdeveloping combinatorial arrays for large-scale screening of antibodies,Domantis, which makes single domain antibody libraries, and Novagen, Inc.,which is developing cDNA display technology.

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

**Patents and Proprietary Rights**

Our success issignificantly dependent upon our ability to obtain patent protection for ourproducts and technologies, to defend and enforce our issued patents, includingpatents related to phage display, and to avoid the infringement of patentsissued to others. Our policy generally is to file for patent protection on 

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methodsand technology useful for the display of binding molecules and on biopharmaceutical,diagnostic and separation product candidates.

Our proprietary positionin the field of phage display is based upon patent rights, technology,proprietary information, trade secrets and know-how. Our patents and patentapplications for phage display, known as the Ladner patents, include U.S.Patent Nos. 5,837,500, which expires June 29, 2010, 5,571,698, whichexpires June 29, 2010, 5,403,484, which expires April 4, 2012,5,223,409, which expires June 29, 2010, 6,979,538, which expires June 29,2010, 7,118,759, which expires July 27, 2009, and issued patents inCanada, Israel, and Japan, as well as pending patent applications in the UnitedStates and other countries. These phage display patent rights contain claimscovering inventions in the field of the surface display of proteins and certainother peptides, including surface display on bacteriophage.

For our therapeuticproduct candidates, we file for patent protection on groups of antibodies,peptides and small proteins that we identify using phage display. These patentrights now include 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, as well as issued patents in Canada andJapan, claiming sequences of peptides that have human kallikrein inhibitoryactivity, including the sequence for DX-88, and polynucleotide sequencesencoding these peptides.

There are no legalchallenges to our phage display patent rights or our other patent rights nowpending in the United States. However, we cannot assure that a challenge willnot be brought in the future. We plan to protect our patent rights in a mannerconsistent with our product development and business strategies. If we bringlegal action against an alleged infringer of any of our patents, we expect thealleged infringer to claim that our patent is invalid, not infringed, or notenforceable for one or more reasons, thus subjecting that patent to a judicialdetermination of infringement, validity and enforceability. In addition, incertain situations, an alleged infringer could seek a declaratory judgment ofnon-infringement, invalidity or unenforceability of one or more of our patents.We cannot be sure that we will have sufficient resources to enforce or defendour patents against any such challenges or that a challenge will not result inan adverse judgment against us or the loss of one or more of our patents.Uncertainties resulting from the initiation and continuation of any patent orrelated litigation, including those involving our patent rights, could have amaterial adverse effect on our ability to maintain and expand our licensingprogram and collaborations, and to compete in the marketplace.

Our first phage displaypatent in Europe, European Patent No. 436,597, known as the 597 Patent wasultimately revoked in 2002 in a proceeding in the European Patent Office. Wehave one divisional patent application of the 597 Patent pending in theEuropean Patent Office. We will not be able to prevent other parties from usingour phage display technology in Europe if the European Patent Office does notgrant us another patent. We cannot be assured that we will prevail in theprosecution of either of these patent applications.

Our phage display patentrights are central to our non-exclusive patent licensing program and ourperformance under our related agreement with Paul Royalty. We offernon-exclusive licenses under our phage display patent rights to companies andnon-profit institutions in the fields of therapeutics, diagnostics and otherselect fields. In jurisdictions where we have not applied for, obtained, ormaintained patent rights, we will be unable to prevent others from developingor selling products or technologies derived using phage display. In addition,in jurisdictions where we have phage display patent rights, we cannot assurethat we will be able to prevent others from selling or importing products ortechnologies derived using phage display.

We are aware that otherparties have patents and pending applications to various products and processesrelating to phage display technology. Through licensing our phage displaypatent rights, we have secured a limited ability to practice under some of thethird party patent rights relating to phage display 

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technology.These rights are a result of our standard license agreement, which contains acovenant by the licensee that it will not sue us under the licensee’s phagedisplay improvement patents. In addition, we have sought and obtainedaffirmative rights of license or ownership under certain patent rights relatingto phage display technology owned by other parties. For example, in addition toour amended license agreement with CAT, we have entered into licensingagreements with Affimed Therapeutics AG, Affitech AS, Biosite Incorporated,Domantis and Genentech, Inc. under which we granted each of thosecompanies rights to practice our phage display patents and in return receivedrights to practice under their phage display related patents. These types ofagreements in which each party licenses technology to the other are referred toas cross-licensing agreements. We have also entered into a cross-licensingagreement with XOMA Ireland Limited under which we received a license to useXOMA’s antibody expression technology to develop antibody products forourselves and our collaborators. We also received a license from XOMA toproduce antibodies. In exchange we agreed to pay XOMA a license fee and aroyalty in connection with the sale of any of our antibody products. We alsogranted XOMA a license to our phage display patents and agreed to provide themwith limited quantities of our antibody phage display libraries.

**Government Regulation**

The production andmarketing of any of our future biopharmaceutical or diagnostic products will besubject to numerous governmental laws and regulations on safety, effectivenessand quality, both in the United States and in other countries where we intendto sell the products. In addition, our research and development activities inthe United States are subject to various health and safety, employment andother laws and regulations.

***United States FDA Approval.***   Inthe United States, the U.S. Food & Drug Administration (FDA)rigorously regulates products intended for diagnostic or therapeutic use inhumans.

Thesteps required before a new pharmaceutical can be sold in the United Statesinclude:

·                    preclinicaltests;

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

·                    human clinicaltrials, which are frequently time consuming and costly to establish safety andeffectiveness of the product that normally occur in three phases each monitoredby the FDA;

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

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

The requirements fortesting and approval for *in vitro*diagnostic products, which are usually regulated as medical devices, can besomewhat less onerous than for pharmaceutical products, but similar steps areusually required. All our internal product candidates, including our plasma kallikreininhibitor, DX-88, and the pharmaceutical and diagnostic products of ourcollaborators and licensees, will need to complete successfully theFDA-required testing and approvals before they can be marketed. There is noassurance that we or our collaborators can gain the necessary approvals.Failure to do so would have a material adverse effect on our ability to achieveour business goals and implement our business strategy. In addition, followingapproval, manufacturers must continue to report all adverse events of whichthey become aware to the FDA. On occasion such events may be sufficientlyserious to warrant changes in the approved uses of products, or in especiallyserious cases, removal from the market. This, should it occur, could alsoproduce material adverse effects on our business.

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***Foreign Regulatory Approval.***   Inmany countries outside the United States, especially within the European Union(EU), governmental regulatory authorities similar to the FDA must approve theinvestigational program and/or marketing application for pharmaceutical anddiagnostic products. New legislation for investigative medicinal products wasimplemented by all EU member states on May 1, 2004. Despite attempts toharmonize regulations in all member states, differences continue to exist whichmay result in delays in the initiation of clinical trials. Following theconclusion of the clinical evaluation of a medicinal product, a marketingauthorization is prepared and submitted. The format of the requireddocumentation has been harmonized to some extent in the United States, theEuropean Union, and Japan. In addition, the national laws governingmanufacturing requirements, advertising and promotion, and pricing andreimbursement may vary widely. Therefore, the time to market can vary widelyamong different regions and countries. In addition, the export to foreigncountries for investigation and /or marketing of medicinal products that havebeen manufactured in the US but not approved for marketing by the FDA issubject to US law as well as the laws of the importing country and may requireone or more regulatory authorizations. There is no assurance that we will beable to gain the necessary authorizations in a timely fashion or at all.Failure to do so would have a material adverse effect on our ability to achieveour 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 and 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 oncontract manufacturers for the production of DX-88 for preclinical andclinical studies, including the manufacture of both the bulk drug substance andthe final pharmaceutical product. The testing of the resultant products is ourresponsibility or the responsibility of the contract manufacturer 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 tosupport clinical trials, or that the required quality standards can beachieved. To date, we have identified only a few facilities that are capable ofperforming these activities and willing to contract their services. There is noassurance that contractors will have the capacity to manufacture or test ourproducts at the required scale and within the required time frame. There is noassurance that the supply of clinical materials can be maintained during theclinical development of our product candidates.

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

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**Sales and Marketing**

***Therapeutic Products.***   Wedo not currently have any therapeutic products approved for sale. For anyproducts that are approved in the future for diseases where patients aretreated primarily by limited numbers of physicians, we intend in some cases toconduct sales and marketing activities ourselves in North America and,possibly, in Europe. For any product that we intend to market and sellourselves, we do not expect to establish direct sales capability until shortlybefore the products are approved for commercial sale, but we will begin productmanagement and market education activities earlier during clinical trials. Formarkets outside of North America, including possibly European markets, we willseek to establish arrangements where our products are sold by pharmaceutical companiesthat are already well established in these regions. For products that areindicated for conditions where patients may be treated by large numbers ofinternists, general surgeons, or family practitioners, we will seek toestablish arrangements under which our products will be sold and marketed bylarge pharmaceutical organizations with established sales forces. We expectthat these arrangements will generally be worldwide on a product-by-productbasis.

***Other Product Areas.***   Forareas other 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 13 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 31,2006, we had 161 employees worldwide, including 36 with Ph.D.s and/or M.D.s.Approximately 115 of our employees are in research and development, 3 inbusiness development and 43 in administration. Our workforce isnon-unionized, and we believe that our relations with employees are good.

**Additional Information**

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

**ITEM1A.**        RISK FACTORS

This Annual Report on Form 10-Kcontains forward-looking statements, including statements about our growth andfuture operating results, discovery and development of products, strategicalliances and intellectual property. Any statement that is not a statement ofhistorical fact should be considered a forward-looking statement. We often usethe words or phrases of expectation or uncertainty like “believe,” “anticipate,”“plan,” “expect,” “intend,” “project,” “future,” “may,” “will,” “could,” “would”and similar words to help identify forward-looking statements.

Statements that are nothistorical facts are based on our current expectations and beliefs includingour assumptions, estimates, forecasts and projections for our business and theindustry and markets in which we compete. These statements are not guaranteesof future performance and involve certain risks, 

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uncertaintiesand assumptions, which are difficult to predict. We cannot assure investorsthat our expectations and beliefs will prove to have been correct. Importantfactors could cause our actual results to differ materially from thoseindicated or implied by forward-looking statements. Factors that could cause orcontribute to such differences include the factors discussed below. We cautionyou not to place undue reliance on these forward looking statements, whichspeak only as of the date on which they are made. We undertake no intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

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

Wehave incurred operating losses since our inception in 1989. As of December 31,2006, we had an accumulated deficit of approximately $232.6 million. We expectto incur substantial additional operating losses over the next several years asour research, development, pre-clinical testing and clinical trial activitiesincrease, particularly with respect to our current lead product candidate, DX-88.We have not generated any revenue from product sales to date, and it ispossible that we will never have significant, if any, product sales revenue.

Currently,we generate revenue from collaborators through research and development fundingand through license and maintenance fees that we receive in connection with thelicensing of our phage display technology. In August 2006, we sold aportion of the receipts from these fees to Paul Royalty for an upfront paymentof $30 million.

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

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

Weexpect that existing cash, cash equivalents, and short-term investments plusanticipated cash flow from product development, collaborations and license fees(as reduced by payments under our agreement with Paul Royalty) will besufficient to support our current operating plans into 2008. We may, however,need or choose to raise additional funds before then. We will need additionalfunds if our cash requirements exceed our current expectations or if wegenerate less revenue than we expect.

Our future capital requirements will depend on manyfactors, including:

·                    theprogress of our drug discovery and development programs;

·                    ourability to develop and commercialize our product candidates;

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

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

·                    ourdecision to manufacture materials used in our product candidates;

·                    competingtechnological and market developments;

·                    costsof defending our patents and other intellectual property rights; and

·                    theamount and timing of additional capital equipment purchases.

Wealso may seek additional funding through collaborative arrangements and publicor private financings. We may not be able to obtain financing on acceptableterms or at all or we may not be able to 

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enter into additional collaborative arrangements. Inaddition, the terms of any financing may adversely affect the holdings or therights of our stockholders. If we are unable to obtain funding on a timelybasis, we may be required to curtail significantly one or more of our researchor development programs. We also could be required to seek funds througharrangements with collaborators or others that may require us to relinquishrights to some of our technologies, product candidates or products that wewould otherwise pursue on our own.

***Ourbiopharmaceutical or diagnostic product candidates must undergo rigorousclinical trials and regulatory approvals, which could substantially delay orprevent their development or marketing.***

Anybiopharmaceutical or diagnostic product that we develop will be subject torigorous clinical trials and an extensive regulatory approval processimplemented by the FDA and analogous foreign regulatory agencies. This approvalprocess is typically lengthy and expensive, and approval is never certain.Positive results from pre-clinical studies and early clinical trials do notensure positive results in late stage clinical trials designed to permitapplication for regulatory approval. We do not know when, or if, our ongoingclinical trials will be completed. We also cannot accurately predict when otherplanned clinical trials will begin or be completed. Many factors affect patientenrollment, including the size of the patient population, the proximity ofpatients to clinical sites, the eligibility criteria for the trial, alternativetherapies, competing clinical trials and new drugs approved for the conditionsthat we are investigating. For example, four other companies are conductingclinical trials of treatments for HAE and have announced plans for trials thatare seeking or likely to seek patients with HAE. In addition, competition forpatients in cardiovascular disease trials is particularly intense because ofthe limited number of leading cardiologists and the geographic concentration ofmajor clinical centers. As a result of all of these factors, our trials maytake longer to enroll patients than we anticipate. Such delays may increase ourcosts and slow down our product development and the regulatory approvalprocess. Our product development costs will also increase if we need to performmore or larger clinical trials than planned. The occurrence of any ofthese events will delay our ability to generate revenue from product sales andimpair our ability to become profitable, which may cause us to haveinsufficient capital resources to support our operations.

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

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

·                    wehave limited experience in conducting the clinical trials necessary to obtainregulatory approval; and

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

Regulatory authorities maydelay, suspend or terminate clinical trials at any time if they believe thatthe patients participating in trials are being exposed to unacceptable healthrisks or if they find deficiencies in the clinical trial procedures. OurInvestigational New Drug Applications for our recombinant protein DX-88,for example, were placed on clinical hold by the FDA in May 2004,following the FDA’s evaluation of certain animal test data submitted by us.Although that study was allowed to continue, we were required by the FDA toconduct additional testing at additional expense. There is no guarantee that wewill be able to resolve similar issues in the future, either as quickly, or atall. In addition, our or our collaborators’ 

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failureto comply with applicable regulatory requirements may result in criminalprosecution, civil penalties and other actions that could impair our ability toconduct our business.

In November, 2006, wetreated our last patient in a Phase III clinical trial of DX-88 for thetreatment of HAE and we plan to initiate a confirmatory trial starting in thefirst quarter of 2007. Before filing a Biologic License Application (BLA) formarketing approval of this product in this indication, we will need to completethis confirmatory trial. HAE is an indication with a particularly small patientpopulation, and this trial may, for this or any of the other reasons describedabove, take longer than anticipated to initiate and/or to complete.

***We lack experiencein conducting clinical trials, handling regulatory processes, and conductingsales and marketing activities, any or all of which may adversely affect ourability to commercialize any biopharmaceuticals that we may develop.***

We have hired experiencedclinical development, regulatory, and marketing staff to develop and superviseour clinical trials, regulatory processes, and sales and marketing activities.However, we will remain dependent upon third party contract researchorganizations to carry out some of our clinical and pre-clinical research studiesfor the foreseeable future. As a result, we have had and will continue to haveless control over the conduct of the clinical trials, the timing and completionof the trials, the required reporting of adverse events and the management ofdata developed through the trials than would be the case if we were relyingentirely upon our own staff. Communicating with outside parties can also bechallenging, potentially leading to mistakes as well as difficulties incoordinating activities. Outside parties may have staffing difficulties, mayundergo changes in priorities or may become financially distressed, adverselyaffecting their willingness or ability to conduct our trials. We may alsoexperience unexpected cost increases that are beyond our control. Problems withthe timeliness or quality of the work of a contract research organization maylead us to seek to terminate the relationship and use an alternative serviceprovider. However, changing our service provider may be costly and may delayour trials, and contractual restrictions may make such a change difficult orimpossible. Additionally, it may be impossible to find a replacementorganization that can conduct our trials in an acceptable manner and at anacceptable cost.

Similarly, we may beunable to enter into third party arrangements for the marketing and sale ofbiopharmaceuticals on acceptable terms. For certain products, we may incursubstantial expenses to develop our own marketing and sales force in order tocommercialize our biopharmaceuticals and our efforts may not be successful orthe product may not be approved.

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

***Because wecurrently lack the resources, capability and experience necessary tomanufacture biopharmaceuticals, we will depend on third parties to perform thisfunction, which may adversely affect our ability to commercialize anybiopharmaceuticals we may develop.***

We do not currentlyoperate manufacturing facilities for the clinical or commercial production ofbiopharmaceuticals. We also lack the resources, capability and experiencenecessary to manufacture biopharmaceuticals. As a result, we will depend oncollaborators, partners, licensees and other third parties to manufactureclinical and commercial scale quantities of our biopharmaceutical candidates.If we enter into these types of third party arrangements, then we will bedependent on the efforts of others, which if not successful could result in decreasedrevenue to us.

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

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theclinical development of our biopharmaceutical candidates. We will also bedependent on contract manufacturers to produce and test any biopharmaceuticalsthat are approved for market.

***Paul Royalty isentitled to a significant portion of our LFRP revenues, which may limit ourability to fund some of our operations.***

Under the terms of ourRoyalty Interest Assignment Agreement with Paul Royalty, Paul Royalty isentitled to receive a percentage of net revenues, including all royalties,milestones, and license fees receivable by Dyax under its phage displayLicensing and Funded Research Program (LFRP).

The exact amount of net revenues due to Paul Royalty isbased on a specified percentage of net revenues and is subject to a guaranteedminimum. These percentages range from 70% to 1% on different tiers of theannual net LFRP receipts. These percentages will increase on a pro rata basisif Dyax is eligible for and exercises its option to require an additional $5million investment by Paul Royalty. Annual guaranteed minimum payments to PaulRoyalty start at $1.75 million through 2007 and increase to $3.5 millionin 2008 and 2009, $6.0 million for years 2010 through 2013 and $7.0 million foryears 2014 through 2017. Paul Royalty’s rights to receive these paymentscontinues for the 10-year term of the agreement, which includes an optionunder which Paul Royalty can extend this term for two additional yearsdepending upon the financial performance of the LFRP. Upon termination of theagreement, all rights to LFRP receipts will revert to Dyax.

The revenues from the LFRP have historically been used tofund our ongoing operations. We cannot guarantee that the upfront payment thatwe received for these revenues will be sufficient to replace these revenuesover the term of the agreement with Paul Royalty. In addition, if   the LFRP fails to generatesufficient revenue to fund the annual guaranteed minimum payments to PaulRoyalty, we will be required to fund such obligations out of operating cash,further decreasing the funds available to operate its business.  These and other obligations to Paul Royaltymay hinder or prevent our ability to achieve our financial or operatingobjectives.

***Under certaincircumstances, Paul Royalty can require us to repurchase its royalty interestat substantial prices, the payment of which may significantly deplete our cashresources, limit our ability to enter into significant business transactions ormay make us a less attractive acquisition candidate.***

Under the terms of ourRoyalty Interest Assignment Agreement with Paul Royalty, Paul Royalty isentitled to require us to repurchase its royalty interest under the followingcircumstances: (i) a change in control of Dyax, (ii) a bankruptcyevent, (iii) a transfer by us of a majority of our assets that has amaterial effect on either the net present value of the projected LFRP receiptsor our ability to pay the minimum guaranteed payments, (iv) a transfer byus of any part of the assets supporting the LFRP program other than in theordinary course of business, or (v) any breach of certain material covenantsand representations in the agreement.

Under these circumstancesPaul Royalty can require us to repurchase its royalty interest, at a repurchaseprice equal to the greater of (a) 200% of the cumulative payments made byPaul Royalty under the agreement less the cumulative payments previouslyreceived by Paul Royalty from the LFRP or (b) the amount which willprovide Paul Royalty, when taken together with the royalties previously paid, aspecified rate of return of 25%.

In addition, in the event of breaches of certain otherrepresentations or covenants or the happening of certain other events that havea material adverse effect on projected revenues under the LFRP, Paul Royaltyhas the right to require us to repurchase from Paul Royalty its royalty interestat lower but still significant prices. If Paul Royalty requires us torepurchase its royalty interest, it is likely to have a material adverse effecton our ability to fund our operations and could cause us to become insolvent.Since certain events related to but prior to a formal bankruptcy filing couldtrigger a repurchase event, the exercise of 

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the repurchase option by PaulRoyalty in such circumstances may increase the likelihood that we will need tofile for bankruptcy protection.

Additionally, because Paul Royalty is entitled to exerciseits repurchase right upon a change of control, or upon the sale of the LFRPprogram or its assets, we may not be able to effect an otherwise attractivebusiness transaction that would have one of these results and it will make itmore difficult for a third party to acquire us, even if the acquisition attemptwas at a premium over the market value of our common stock at that time.

***Product liabilityand other claims against us may reduce demand for our product candidates orresult in substantial damages.***

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

Thesetypes of product liability claims may result in:

·                    decreaseddemand for our product candidates;

·                    injuryto our reputation;

·                    withdrawalof clinical trial volunteers;

·                    relatedlitigation costs; and

·                    substantialmonetary awards to plaintiffs.

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

Our business strategyincludes leveraging some of our product candidates, as well as our proprietaryphage display technology, through collaborations and licenses that arestructured to generate revenues through license fees, technical and clinicalmilestone payments, and royalties. For us to continue to receive anysignificant payments from our licenses and collaborations and generatesufficient revenues to meet the minimum required payments under our agreementwith Paul Royalty, the relevant product candidates must advance throughclinical trials, establish safety and efficacy, and achieve regulatoryapprovals and market acceptance. In general, however, under our existinglicense and collaboration agreements, our licensees and collaborators:

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

·                    maypursue alternative technologies or develop competing products;

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

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

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

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

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

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

·                    theirclinical efficacy and safety;

·                    theircost-effectiveness;

·                    theirpotential advantage over alternative treatment methods;

·                    theirmarketing and distribution support;

·                    reimbursementpolicies of government and third-party payors; and

·                    marketpenetration and pricing strategies of competing and future products.

If our products do not achieve significant marketacceptance, our revenues could be adversely affected.

***We have pledged our assets related to the LFRP to PaulRoyalty; therefore, we may not be free to utilize those assets at ourdiscretion.***

Paul Royalty has been granted a security interest inthe intellectual property and other assets related to the LFRP. As a result ofthe security interest granted to Paul Royalty, we may not sell our rights topart or all of those assets, or take certain other actions, without firstobtaining the permission of Paul Royalty. This requirement could delay, hinderor condition our ability to enter into corporate partnerships or strategicalliances with respect to these assets.

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

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

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

For DX-88 as a treatment for HAE, our principalcompetitors include Jerini AG, Pharming Group N.V., Lev Pharmaceuticals, Incand CSL Behring. CSL Behring currently markets Berinert®, a plasma-derived C1 esteraseinhibitor that is approved for the treatment of HAE in several Europeancountries. 

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CSL Behring received anorphan drug designation from the FDA for its plasma-derived C1 esteraseinhibitor and has initiated a Phase III clinical trial in the United States.Jerini has received orphan drug designations from both the FDA and EMEA for itsbradykinin receptor antagonist, known as icatibant, which is delivered bysubcutaneous injection. Jerini has completed Phase III clinical trials withicatibant in the United States and Europe. Pharming has received orphan drugdesignations from both the FDA and EMEA, as well as a fast track designationfrom the FDA for its recombinant C1 esterase inhibitor. Pharming has initiatedPhase III clinical trials in both the US and Europe and in July 2006announced the submission of a Marketing Authorization Application to the EMEA.Lev Pharmaceuticals has received both fast track and orphan drug designationsfrom the FDA for its plasma-derived C1 esterase inhibitor and has completed aPhase III clinical trial in the United States. Other competitors includecompanies that market or are developing corticosteroid drugs or otheranti-inflammatory compounds.

For DX-88 as a treatment for reducing blood lossin cardiothoracic surgery procedures, our principal competitors are Bayer AGand Xanodyne Pharmaecuticals, Inc. Bayer currently markets Trasylol® (aprotinin) and  Xanodyne currently markets Amicar® (aminocaproic acid), both of which are usedfor the reduction of blood loss during on-pump CTS procedures. A number of otherorganizations, including Novo Nordisk A/S and Vanderbilt University, aredeveloping other products for this indication.

For our potential oncology product candidates,including DX-2240, our potential competitors include numerouspharmaceutical and biotechnology companies, most of which have substantiallygreater financial resources and experience than we do.

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 murine antibodiesderived from hybridomas. Amgen Inc. (as a result of its acquisition of AbgenixInc.), Medarex Inc., Genmab A/S, and Protein Design Labs, Inc. are leadersin these technologies. Further, we license our phage display patents andlibraries to other parties in the fields of therapeutics and diagnosticproducts on a non-exclusive basis. Our licensees may compete with us in thedevelopment of specific therapeutic and diagnostic products. In particular,BioInvent International AB, Cambridge Antibody Technology Group plc (CAT),Morphosys AG and XOMA Ireland Limited, all of which have licenses to our basetechnology, compete with us, both to develop therapeutics and to offer researchservices to larger pharmaceutical and biotechnology companies. Biosite Incorporated,which is also a patent licensee of ours, has partnered with Medarex, Inc.to combine phage display technology with transgenic mouse technology to createantibody libraries derived from the RNA of immunized mice. Other companies areattempting to develop new antibody engineering technology. These include CAT, awholly owned subsidiary of AstraZeneca, which is developing ribosomal displaytechnology and antibody mimics, Diversa Corp., which is developingcombinatorial arrays for large-scale screening of antibodies, Domantis Limited,which makes single domain antibody libraries, and Novagen, Inc., which isdeveloping cDNA display technology.

In addition, we may experience competition fromcompanies that have acquired or may acquire technology from universities andother research institutions. As these companies develop their technologies,they may develop proprietary positions that may prevent us from successfullycommercializing our products.

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

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

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

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

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

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

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

Before we and our collaborators can market some of ourprocesses or products, we and our collaborators may need to obtain licensesfrom other parties who have patent or other intellectual property rightscovering those processes or products. Third parties have patent rights relatedto phage display, particularly in the area of antibodies. While we have gainedaccess to key patents in the antibody area through the cross licenses withAffimed Therapeutics AG, Affitech AS, Biosite Incorporated, Cambridge AntibodyTechnology Limited, Domantis Limited, Genentech, Inc. and XOMA IrelandLimited, other third party patent owners may contend that we need a license orother rights under their patents in order for us to commercialize a process orproduct. In addition, we may choose to license patent rights from other thirdparties. In order for us to commercialize a process or product, we may need to licensethe patent rights of other parties. If a third party does not offer us a neededlicense or offers us a license only on terms that are unacceptable, we may beunable to commercialize one or more of our products. If a third party does notoffer a needed license to our collaborators and as a result our collaboratorsstop work under their agreement with us, we might lose future milestonepayments and royalties, which would adversely affect us and our ability to meetour obligation to Paul Royalty. If we decide not to seek a license, or iflicenses are not available on reasonable terms, we may become subject toinfringement claims or other legal proceedings, which could result insubstantial legal expenses. If we are unsuccessful in these actions, adverse decisionsmay prevent us from commercializing the affected process or products.

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We seek affirmative rights of license or ownershipunder existing patent rights relating to phage display technology of others.For example, through our patent licensing program, we have secured a limitedfreedom to practice some of these patent rights pursuant to our standardlicense agreement, which contains a covenant by the licensee that it will notsue us under certain of the licensee’s phage display improvement patents. We cannotguarantee, however, that we will be successful in enforcing any agreements fromour licensees, including agreements not to sue under their phage displayimprovement patents, or in acquiring similar agreements in the future, or thatwe will be able to obtain commercially satisfactory licenses to the technologyand patents of others. If we cannot obtain and maintain these licenses andenforce these agreements, this could have a negative effect on our business.

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

Obtaining, protecting and defending against patent andproprietary rights can be expensive. For example, if a competitor files apatent application claiming technology also invented by us, we may have toparticipate in an expensive and time-consuming interference proceeding beforethe U.S. Patent and Trademark Office to address who was first to invent thesubject matter of the claim and whether that subject matter was patentable.Moreover, an unfavorable outcome in an interference proceeding could require usto cease using the technology or to attempt to license rights to it from theprevailing party. Our business would be harmed if a prevailing third party doesnot offer us a license on terms that are acceptable to us.

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

The issues relating to the validity, enforceabilityand possible infringement of our patents present complex factual and legalissues that we periodically reevaluate. Third parties have patent rightsrelated to phage display, particularly in the area of antibodies. While we havegained access to key patents in the antibody area through our cross-licensingagreement with Affimed, Affitech, Biosite, Domantis, Genentech, XOMA and CAT,other third party patent owners may contend that we need a license or otherrights under their patents in order for us to commercialize a process orproduct. In addition, we may choose to license patent rights from thirdparties. While we believe that we will be able to obtain any needed licenses,we cannot assure that these licenses, or licenses to other patent rights thatwe identify as necessary in the future, will be available on reasonable terms,if at all. If we decide not to seek a license, or if licenses are not availableon reasonable terms, we may become subject to infringement claims or otherlegal proceedings, which could result in substantial legal expenses. If we areunsuccessful in these actions, adverse decisions may prevent us fromcommercializing the affected process or products. Moreover, if we are unable tomaintain the covenants with regard to phage display improvements that we obtainfrom our licensees through our patent licensing program and the licenses thatwe have obtained to third party phage display patent rights it could have amaterial adverse effect on our business.

We would expect to incur substantial costs inconnection with any other litigation or patent proceeding. In addition, ourmanagement’s efforts would be diverted, regardless of the results of thelitigation. An unfavorable result could subject us to significant liabilitiesto third parties, require us to cease manufacturing or selling the affectedproducts or using the affected processes, require us to license the disputedrights from third parties or result in awards of substantial damages againstus. Our business will 

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be harmed if we cannotobtain a license, can obtain a license only on terms we consider to beunacceptable or if we are unable to redesign our products or processes to avoidinfringement.

In all of our activities, we substantially rely onproprietary materials and information, trade secrets and know-how to conductresearch and development activities and to attract and retain collaborativepartners, licensees and customers. Although we take steps to protect thesematerials and information, including the use of confidentiality and otheragreements with our employees and consultants in both academic and commercialrelationships, we cannot assure you that these steps will be adequate, thatthese agreements will not be violated, or that there will be an available orsufficient remedy for any such violation, or that others will not also developsimilar proprietary information.

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

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

·                    thetiming of our increased research and development expenses;

·                    theestablishment of new collaborative and licensing arrangements;

·                    theeffect of the reduction in receipts that we will receive from our licensing andfunded research program as a result of our agreement with Paul Royalty;

·                    thetiming and results of clinical trials;

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

·                    thecompletion of certain milestones.

If the revenues we receive are less than the revenueswe expect for a given fiscal period, then we may be unable to reduce ourexpenses quickly enough to compensate for the shortfall. Our revenues in anyperiod are not a reliable indicator of our future performance. In addition, ourfluctuating revenues and operating results may fail to meet the expectations ofsecurities analysts or investors. Our failure to meet these expectations maycause the price of our common stock to decline.

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

We are highly dependent on qualified scientific andmanagement personnel, and we face intense competition from other companies andresearch and academic institutions for qualified personnel. If we lose anexecutive officer, a manager of one of our principal business units or researchprograms, or a significant number of any of our staff or are unable to hire andretain qualified personnel, then our ability to develop and commercialize ourproducts and processes may be delayed or prevented.

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

Our phage display research and development involvesthe controlled storage, use and disposal of chemicals and solvents, as well asbiological and radioactive materials. We are subject to foreign, federal, stateand local laws and regulations governing the use, manufacture and storage andthe handling and disposal of materials and waste products. Although we believethat our safety procedures for handling and disposing of these hazardousmaterials comply with the standards prescribed by laws and regulations, wecannot completely eliminate the risk of contamination or injury from hazardousmaterials. If an accident occurs, an injured party could seek to hold us liablefor any damages that result and any liability could exceed the limits or falloutside the coverage of our insurance. We may not be able to maintain insurance

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on acceptable terms, or atall. We may incur significant costs to comply with current or futureenvironmental laws and regulations.

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

We face exposure to product liability and other claimsif products or processes are alleged to have caused harm. These risks areinherent in the testing, manufacturing and marketing of human therapeuticproducts. Although we currently maintain product liability insurance, we maynot have sufficient insurance coverage, and we may not be able to obtainsufficient coverage at a reasonable cost. Our inability to obtain productliability insurance at an acceptable cost or to otherwise protect againstpotential product liability claims could prevent or inhibit thecommercialization of any products that we or our collaborators develop. If weare sued for any injury caused by our products or processes, then our liabilitycould exceed our product liability insurance coverage and our total assets.

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

We receive productdevelopment and license fees from international collaborations. For the yearended December 31, 2006, we earned revenue of approximately$6.9 million from non-US based companies. All of our revenue contracts arepaid in US dollars. We expect that international product development andlicense fees will continue to account for a significant percentage of ourrevenues for the foreseeable future. In addition, we have direct investments insubsidiaries located in the European Union. Our operations could be limited ordisrupted, and the value of our direct investments may be diminished, by any ofthe following:

·                    fluctuationsin currency exchange rates;

·                    theimposition of governmental controls;

·                    lessfavorable intellectual property or other applicable laws;

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

·                    importand export license requirements;

·                    politicalinstability;

·                    terroristactivities; and

·                    difficultiesin staffing and managing international operations.

A portion of our business is conducted in currenciesother than our reporting currency, the U.S. dollar. We recognize foreigncurrency gains or losses arising from our operations in the period in which weincur those gains or losses. As a result, currency fluctuations among the U.S.dollar and the currencies in which we do business have caused foreign currencytransaction gains and losses in the past and will likely do so in the future.Because of the variability of currency exposures and the potential volatilityof currency exchange rates, we may suffer significant foreign currency transactionlosses in the future due to the effect of exchange rate fluctuations on ourfuture operating results.

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

Keeping abreast of, and in compliance with, changinglaws, regulations, and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, andNASDAQ Global Market rules, have required an increased amount of managementattention and external resources. We intend to invest all reasonably necessaryresources to comply with evolving corporate governance and public disclosurestandards, and this investment may result in increased 

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general and administrativeexpenses and a diversion of management time and attention fromrevenue-generating activities to compliance activities.

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

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

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

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

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

·                    theassumption of significant liabilities of acquired businesses.

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

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

The market price of our common stock has been highlyvolatile. Since our initial public offering in August 2000 through February 28,2007, the price of our common stock on the NASDAQ Global Market has rangedbetween $54.12 and $1.05. The market has experienced significant price andvolume fluctuations for many reasons, some of which may be unrelated to ouroperating performance.

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

·                    publicannouncements by us, our competitors or others;

·                    developmentsconcerning proprietary rights, including patents and litigation matters;

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

·                    regulatorydevelopments in both the United States and abroad;

·                    publicconcern about the safety or efficacy of new technologies;

·                    generalmarket conditions and comments by securities analysts; and

·     quarterly fluctuations in our revenues andfinancial results.

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

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

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

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

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

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

In June of 2001, wesigned a ten-year lease with the Massachusetts Institute of Technology (MIT)for office space in the building known as 300 Technology Square in Cambridge,Massachusetts. This building, which was sold by MIT to ARE-Tech Square, LLC in June of2006, serves as our corporate headquarters and main research facility. Currently,we lease approximately 67,000 square feet. We are obligated to leaseapproximately 24,000 square feet of additional space on November 1, 2007,which we expect to sublease to the two tenants currently occupying such space.Under the terms being finalized with these tenants, both subleases will expireon October 31, 2009. We have the option to extend our lease for twoadditional five-year terms. We have provided the lessor with a Letter of Creditin the amount of $4.3 million, which may be reduced after the fifth yearof the lease term. Through our subsidiary, Dyax S.A., we maintain 10,000 squarefeet of leased laboratory and office space in Liege, Belgium to support ourresearch efforts.

**ITEM 3.**                LEGALPROCEEDINGS

We are not a party to any material legal proceedings.

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

During the quarter ended December 31,2006, no matters were submitted to a vote of security holders through thesolicitation of proxies or otherwise.

**PART II**

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

Our common stock is traded on The NASDAQ Global Marketunder the symbol DYAX. As of March 7, 2007, there were 48,159,287 sharesof our common stock outstanding, which were held by approximately 218 commonstockholders of record.

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

| ** **                                 | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal year ended  December 31, 2006: |       |     |       |    |       |
| First Quarter                              |       | $        | 6.38       |    | $          | 4.82 |   |
| Second Quarter                             |       | $        | 5.87       |    | $          | 2.63 |   |
| Third Quarter                              |       | $        | 3.63       |    | $          | 2.63 |   |
| Fourth Quarter                             |       | $        | 3.65       |    | $          | 2.85 |   |

 

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

 

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.**                SELECTEDCONSOLIDATED FINANCIAL DATA

Thefollowing table summarizes certain selected consolidated financial data, whichshould be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our consolidated financialstatements and related notes included elsewhere in this Form 10-K.The selected consolidated financial data at December 31, 2006 and 2005,and for the years ended December 31, 2006, 2005 and 2004 have been preparedfrom our audited financial statements and the selected consolidated financialdata at December 31, 2004 and 2003 and for the years ended December 31,2003 and 2002 have been prepared from our audited financial statements notincluded in this Annual Report on Form 10-K. The selectedconsolidated financial data at December 31, 2002 has been prepared fromour accounting records. On October 29, 2003, we completed the sale of ourwholly owned separations product subsidiary known as Biotage. The following dataincludes all activities of Biotage presented as discontinued operations.

| ** **                                                                                  | ** ** | **December 31,**                                                                  | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2006**                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands, except share and per share data)** | ** ** |
| **Consolidated Statement of  Operations Data:**                                             | ** ** | ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product development and  license fee revenues                                               |       | $                                                                                      | 12,776     |   | $ | 19,859 |   | $ | 16,590 |   | $ | 16,853 |   | $ | 17,750 |   |
| Research and  development:                                                                  |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Research and  development expenses                                                          |       | 53,637                                                                                 |       | 47,376 |   | 39,432 |   | 29,990 |   | 28,713 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax-Genzyme LLC) |       | (16,100                                                                                | )          | (20,688 | ) | (10,408 | ) | (5,203 | ) | — |   |
| Net research and  development                                                               |       | 37,537                                                                                 |       | 26,688 |   | 29,024 |   | 24,787 |   | 28,713 |   |
| Equity loss in  joint venture (Dyax-  Genzyme LLC)                                          |       | 10,352                                                                                 |       | 11,952 |   | 5,988 |   | 2,243 |   | — |   |
| General and  administrative expenses                                                        |       | 14,658                                                                                 |       | 12,784 |   | 14,451 |   | 13,205 |   | 14,882 |   |
| Total operating expenses                                                                    |       | 62,547                                                                                 |       | 51,424 |   | 49,463 |   | 40,235 |   | 43,595 |   |
| Loss from operations                                                                        |       | (49,771                                                                                | )          | (31,565 | ) | (32,873 | ) | (23,382 | ) | (25,845 | ) |
| Other (expense) income,  net                                                                |       | (552                                                                                   | )          | 621 |   | (241 | ) | (1,112 | ) | (795 | ) |
| Loss from continuing  operations                                                            |       | (50,323                                                                                | )          | (30,944 | ) | (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                                                                                    |       | $                                                                                      | (50,323    | ) | $ | (30,944 | ) | $ | (33,114 | ) | $ | (7,415 | ) | $ | (26,818 | ) |
| Basic and diluted loss  per share:                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Loss from  continuing operations                                                            |       | $                                                                                      | (1.18      | ) | $ | (0.87 | ) | $ | (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                                                                                    |       | $                                                                                      | (1.18      | ) | $ | (0.87 | ) | $ | (1.06 | ) | $ | (0.31 | ) | $ | (1.36 | ) |
| Shares used in computing basic and diluted net loss  per share                              |       | 42,532,466                                                                             |       | 35,455,782 |   | 31,207,218 |   | 23,546,524 |   | 19,652,474 |   |

 

| ** **                                   | ** ** | **December 31,**   | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| **Consolidated Balance Sheet  Data:**        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                    |       | $                       | 11,295     |   | $ | 8,640 |   | $ | 6,978 |   | $ | 36,508 |   | $ | 28,199 |   |
| Short-term investments                       |       | 47,169                  |       | 42,024 |   | 50,163 |   | — |   | — |   |
| Long-term investments                        |       | 1,992                   |       | — |   | — |   | — |   | — |   |
| Working capital                              |       | 46,369                  |       | 41,756 |   | 46,832 |   | 27,219 |   | 14,095 |   |
| Total assets                                 |       | 88,173                  |       | 75,917 |   | 82,760 |   | 71,187 |   | 76,042 |   |
| Long-term  obligations, less current portion |       | 40,210                  |       | 9,819 |   | 10,645 |   | 10,648 |   | 13,809 |   |
| Accumulated deficit                          |       | (232,623                | )          | (182,300 | ) | (151,356 | ) | (118,242 | ) | (110,827 | ) |
| Total stockholders’  equity             |       | 23,461                  |       | 40,938 |   | 47,831 |   | 33,945 |   | 30,843 |   |
|                                              |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 oncology and inflammatory indications. Weuse our proprietary drug discovery technology, known as phage display, toidentify antibody, small protein and peptide compounds for clinicaldevelopment.

Our lead product candidate, DX-88 (ecallantide),is a recombinant form of a small protein that is currently in clinical trialsfor its therapeutic potential in two separate indications. The first suchindication involves the use of DX-88 in the treatment of hereditaryangioedema (HAE). In this indication, we have successfully completed threePhase II trials and, in November 2006, we treated our last patient in aPhase III trial, known as EDEMA3. Additionally, we plan to initiate aconfirmatory trial, known as EDEMA4, starting in the first quarter of 2007. DX-88has orphan drug designation in the U.S. and E.U., as well as Fast Trackdesignation in the U.S. for the treatment of acute attacks of HAE.

In the second indication for DX-88, we havesuccessfully completed a Phase I/II trial for the prevention of blood lossduring on-pump coronary artery bypass graft, or CABG surgery. Dyax has alsoinitiated a Phase II trial for further development of DX-88 in patientsundergoing what is more broadly defined as on-pump cardiothoracic surgery, oron-pump CTS,  which includes on-pump CABGsurgery and heart valve replacement and repair procedures.

In addition to our clinical stage programs, we have 14other product candidates in our discovery and development pipeline, two ofwhich are currently in preclinical development. The most advanced of theseproduct candidates is DX-2240, a fully human monoclonal antibody thattargets the Tie-1 receptor, a protein receptor that we believe isimportant in the process of blood vessel formation known as angiogenesis. DX-2240offers a novel mechanism of action for inhibiting tumor growth, which webelieve may have potential application in the treatment of various types ofcancer.

All of the compounds in our pipeline were discoveredusing our proprietary phage display technology which rapidly generates productcandidates that bind with high affinity and specificity to therapeutic targets.Although we use this technology primarily to advance our own internaldevelopment activities, we also leverage it broadly through licenses and collaborationsso that other biopharmaceutical and pharmaceutical companies can use thetechnology to discover and develop biopharmaceutical leads. Through thisprogram, which we refer to as our Licensing and Funded Research Program (LFRP),we maintain more than 70 revenue generating licenses and collaborations. Underthe LFRP, our licensees and collaborators have 13 product candidates inclinical trials that were generated from our technology and we estimate thatover 70 additional product candidates are in various stages of discoveryresearch. We are entitled to receive milestones and/or royalties from ourlicensees and collaborators to the extent that any of these product candidatesadvance in development and are ultimately commercialized. During 2006, wemonetized and sold a portion of the future revenues generated through the LFRPto an affiliate of Paul Capital Partners for $30 million in upfront cash withan option for an additional $5 million if the LFRP achieves specified revenuelevels by the end of 2008.

Our business strategy is to build a broad portfolio ofbiotherapeutic products developed using our proprietary phage displaytechnology. In the near term, we expect to focus our efforts on completing theclinical development of DX-88 for the treatment of HAE. In addition, weare moving forward on the clinical development of DX-88 as a treatmentfor patients undergoing on-pump CTS, and will be in a position to advance oneother product candidate into the clinic in 2007. In the long term, we expectthat we, together with our licensees and collaborators, will continue to useour technology and expertise to develop and commercialize new therapeuticproduct candidates.

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We continued to incurlosses in 2006 and expect to incur significant operating losses over at leastthe next several years. We do not expect to generate profits unless and untilthe therapeutic products from our development portfolio reach the market, whichcan only occur after being subjected to the uncertainties of the regulatoryapproval process.

**ClinicalDevelopment Programs**

***DX-88 forHAE.***   We are developing DX-88 as atreatment for HAE. Through February 20, 2007, all development activitieswere conducted in collaboration with Genzyme Corporation and managed throughDyax-Genzyme LLC, a jointly owned limited liability company. On February 20,2007, we reached a mutual agreement with Genzyme to terminate our collaboration.See Footnote 12 “Investment in Joint Venture (Dyax-Genzyme LLC) and OtherRelated Party Transactions” for additional information regarding thisagreement. As a result, we now own all of the rights to DX-88 worldwide, and will be solely responsible for thefuture development of DX-88 for HAE.

In May 2004, we successfully completed a PhaseII, 48 patient, dose-escalating placebo-controlled study, known as EDEMA1. In January 2006,we treated our last patient in a third Phase II trial, known as EDEMA2, and wecommenced a placebo-controlled, worldwide, multi-center Phase III trial, knownas EDEMA3, at the end of 2005. In November 2006 we treated the lastpatient in the EDEMA3 trial. In connection with the commencement of this trialin December 2005, we received a $3.0 million milestone payment fromGenzyme. All of the clinical trials that we conducted in HAE during 2006utilized a 30 mg subcutaneous dose, which was changed from an earlierintravenous method. We expect to seek marketing approval using this dosinglevel and route of administration.

As a result of recent discussions with the FDA, weplan to complete a confirmatory placebo-controlled trial, known as EDEMA4,which we expect to start in the first quarter of 2007. This trial is intendedto further support the validity of the patient reported outcome (PRO)methodology used in the EDEMA3 trial and confirm the efficacy and safety of DX-88.In addition, an open label continuation study will be conducted to augment ourclinical data with respect to DX-88. In light of these trials and basedupon our recent discussions with the FDA, we are now estimating regulatoryapproval in the U.S. in late 2008, followed by approval in the European Union. Weestimate the total remaining costs to commercialization to be in the range of$70 million to $80 million. As a result of the termination of our collaborationwith Genzyme, we will be responsible for funding all of these costs.  Under the terms of the termination agreement,we received all of the assets of Dyax-Genzyme LLC, including $17.0 million ofcash from a payment made by Genzyme to the LLC in connection with thetermination, which will be used to partially offset these costs.

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

| ** **                                                                                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                   | ** ** | **(In thousands)**                     | ** ** |
| DX-88 for HAE costs  included within research and development expenses in the consolidated  statements of operations and comprehensive loss                  |       | $                                           | 15,808     |   | $ | 20,537 |   | $ | 10,440 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax-Genzyme LLC) per the  consolidated statements of operations and comprehensive loss |       | (16,100                                     | )          | (20,688 | ) | (10,408 | ) |
| Net research and  development expenses for DX-88 for HAE                                                                                                     |       | (292                                        | )          | (151 | ) | 32 |   |
| Equity loss in joint  venture (Dyax-Genzyme LLC) separately classified within the consolidated  statements of operations and comprehensive loss         |       | 10,352                                      |       | 11,952 |   | 5,988 |   |
| Net loss on DX-88 for HAE program                                                                                                                            |       | $                                           | 10,060     |   | $ | 11,801 |   | $ | 6,020 |   |

 

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Pursuant to an agreement reached with Genzyme in August 2006,we assumed responsibility for the first $14.5 million of manufacturing costsfor a series of consecutive manufacturing batches, known as the validationcampaign, which will validate the manufacturing process of DX-88 forregulatory purposes and provide material for further clinical studies. Thisarrangement was designed to ensure us an adequate supply of DX-88 drugsubstance for programs outside of the Dyax-Genzyme LLC, specifically for ourindependently conducted program to develop DX-88 for on-pump CTSprocedures. Since these costs were not solely related to the use of DX-88for HAE, they were not captured in research and development expenses for the DX-88for HAE program, nor were they reimbursable by the joint venture when theyoccurred. Instead, under the terms of this arrangement,  we agreed to supply the DX-88 drugsubstance to the Dyax-Genzyme LLC upon request, at which point the cost of suchproduct would become a research and development expense on the DX-88 forHAE program and reimbursable by the joint venture. This arrangement ended inconnection with the termination of the collaboration on February 20, 2007.

During 2006, our research and development expenses onthe DX-88 for HAE program totaled $15.8 million compared with $20.5million in 2005 and $10.4 million in 2004. These expenses decreased $4.7 millionin 2006 over 2005 because expenses related to the manufacture of DX-88were not included as DX-88 for HAE costs in 2006. In 2005,approximately $8.0 million of expenses were incurred to manufacture DX-88specifically for the HAE program. The decrease related to manufacturing wasoffset by an aggregate increase of $3.3 million in clinical trial and internalcosts over the same period.

Research and development expenses increased in 2005over 2004 principally due to increased activity in the areas of manufacturingand clinical trial costs.

Dyax-Genzyme LLC became responsible for thereimbursement of all development expenses related to the HAE program incurredafter the 2003 completion of the first Phase II clinical trial for HAE. During2006, Dyax-Genzyme LLC reimbursed us for $16.1 million of our research anddevelopment expenses. This reimbursement is recorded as research anddevelopment expenses reimbursed by joint venture (Dyax-Genzyme LLC) in ourconsolidated statements of operations and comprehensive loss. During 2007 wewill be reimbursed by Genzyme for its share of expenses for the HAE programthat were incurred before the termination of the joint venture on February 20,2007. This reimbursement will be in addition to the $17.0 million forfuture costs that Genzyme paid to the Dyax-Genzyme LLC in connection with thetermination of the joint venture.

Dyax-Genzyme LLC had net losses of approximately $20.7million, $23.9 million and $12.2 million for the years ended December 31,2006, 2005 and 2004, respectively. These losses represent the total researchand development expenses incurred by Dyax and Genzyme on DX-88 for HAE.Our portion of the losses, accounted for under the equity method, were $10.4million, $12.0 million and $6.0 million for the years ended December 31,2006, 2005 and 2004, respectively and were proportional to our 50.01% financialinterest in the program before the termination of the joint venture. Ourportions of the losses, referred to as our equity loss in joint venture, isseparately classified within our consolidated statements of operations andcomprehensive loss.

See Footnote 12 “Investment in Joint Venture (Dyax-GenzymeLLC) and Other Related Party Transactions” of Item 8 “Financial Statements andSupplementary Data” for summary financial information and other disclosuresregarding Dyax-Genzyme LLC, and for adetailed explanation of the termination of our collaboration with Genzyme. SeparateFinancial Information for Dyax-Genzyme LLC is also included in Exhibit 99.1to this Form 10-K.

***DX-88 forOn-Pump CTS.***   We are developing DX-88as a treatment for patients undergoing on-pump cardiothoracic surgery (on-pumpCTS), specifically coronary and valve procedures.

Expenses on this program totaled $1.4 million, $858,000and $3.1 million for the years ended December 31, 2006, 2005 and 2004,respectively. The increase in spending from 2005 to 2006 is attributable 

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to increased internal andclinical trial costs related to our initiation of a Phase II study to continuedevelopment for this indication. We estimate the total cost of this Phase IItrial to be approximately $7 million to $9 million. The proceeds from our March 2006underwritten public offering provided us the resources necessary to continuedevelopment for this indication.

***Goals for Clinical Development Programs.***   Ourgoal for both of our ongoing clinical development programs is to obtainmarketing approval from the FDA and analogous international regulatoryagencies. Because of the risks and uncertainties associated with these programswe are unable to accurately predict the costs to complete the development of DX-88in the on-pump CTS indication, or whether this program will be successfullycompleted at all. These uncertainties include our ongoing clinical trials, ourneed to locate a development partner or obtain the additional funding needed tocomplete clinical trials in the on-pump CTS program, the preparation and filingof a BLA, the regulatory review process and the risk that we may have torepeat, revise or expand the scope of trials or conduct additional clinicaltrials not presently planned to secure marketing approvals. Material cashinflows for either of these programs other than milestone payments will notcommence until after marketing approvals are obtained, and then only if theproduct candidate finds acceptance in the marketplace as a treatment for itsdisease indication. Because of the many risks and uncertainties related to thecompletion of clinical trials, receipt of marketing approvals and acceptance inthe marketplace, we cannot predict when material cash inflows from theseprograms will commence, if ever.

**Discovery Programs**

Through internal discoveryactivities and business relationships with academic institutions andbiotechnology and pharmaceutical companies, we use our proprietary phagedisplay technology in our research programs to identify compounds withtherapeutic and diagnostic potential. In addition to our clinical stageprograms, we have 14 other product candidates in our discovery and developmentpipeline, two of which are currently in preclinical development. These programsrepresented approximately $36.4 million of our research and developmentexpenses in 2006. We have a total of seven discovery and development programsunderway in oncology, one of which is in collaboration with anotherorganization. These programs are focused on the discovery and development oftherapies that fight cancer primarily in three ways: inhibiting angiogenesis(the growth of blood vessels), inhibiting proteases believed to be associatedwith tumor growth and proliferation, and targeting cell surface and solubleproteins believed to be over expressed by certain tumors. We also have sixdiscovery and development programs focused on targets that are believed to beimportant mediators of inflammation, one of which we are developing incollaboration with another company. In addition, in collaboration with anothercompany, we have one discovery and development program focused on an infectiousdisease target.

**Licensing andFunded Research Program**

Although our proprietaryphage display technology is used primarily to advance our own internaldevelopment activities, we also leverage this technology broadly through ourlicensing and funded research program, with more than 70 revenue generatinglicenses and collaborations. These licenses and collaborations allow others togain access to our technology in therapeutic discovery and in non-core areassuch as diagnostic imaging, research reagents and separations. Currently, ourlicensees have 13 product candidates in clinical trials that were generatedfrom our technology and we estimate that over 70 additional productcandidates are in various stages of discovery research. These licenses andcollaborations generate revenues for us in the form of license fees, milestonesand/or royalties, which we receive from our licensees and collaborators to theextent that product candidates advance in development and are ultimatelycommercialized. During 2006, we sold a portion of the revenues generatedthrough the LFRP through at least 2017 to an affiliate of Paul Capital Partnersfor an upfront cash payment of 

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$30 millionwith an option for an additional $5 million if the LFRP achieves specifiedrevenue levels by the end of 2008.

**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 due to the nature of our agreements.Total revenues for 2006 were $12.8 million, compared with $19.9 million in 2005and $16.6 million in 2004.

The decrease of $7.1million from 2005 to 2006 was related to a $4.7 million decrease in revenuesassociated with our former product collaboration with Debiopharm, therecognition of a $3.0 million milestone received in December 2005 fromGenzyme for initiating the EDEMA3 trial of DX-88 for HAE and a $1.8million decrease in licensing activities due to the fact that our 2005 licensefees included the recognition of a fully paid $1.5 million patent licenseoption fee. Under our amended agreement with Debiopharm, signed in December 2005,we are no longer responsible for manufacturing DX-890 for Debiopharm.However, during 2006, we were reimbursed for the completion of our activitiesand the transfer of technology to Debiopharm. The decreases from 2005 to 2006 werepartially offset by a $1.5 million milestone payment received fromDebiopharm in December 2005 which was recognized as revenue in June 2006,and an additional $1.5 million milestone payment received from Debiopharm andrecognized as revenue in July 2006. On July 9, 2006, Debiopharmreached a clinical development milestone by treating its first patient in aPhase II trial of DX-890 for the treatment of acute respiratory distresssyndrome. The receipt and recognition of clinical milestones received from ourcollaborators and licensees may vary substantially from quarter-to-quarter dueto the timing of their clinical activities.

The increase in revenuesfrom 2004 to 2005 was due to the recognition of a $3.0 million milestonereceived in December 2005 from Genzyme for dosing the first patient in theEDEMA3 trial of DX-88 for HAE and a $1.2 million increase in licensingactivities. These increases were partially offset by a $908,000 decrease inother funded research and development activities. The net increase in licensingactivities in 2005 was due to the receipt of $1.5 million under the fully paidpatent license which was partially offset by a decrease of $293,000 in otherlicensing activities. The fully paid license fee was immediately recognized asrevenue because we have no future obligations to the licensee. The $908,000decrease in other funded research and development activities was due to a$718,000 decrease in revenue arising from our DX-890 productcollaboration with Debiopharm and a $190,000 decrease in funded researchrevenue under existing and continuing relationships.

***Research and Development.******  ***Our researchand development expenses for the years ended December 31, 2006, 2005 and2004, are summarized as follows:

| ** **                                                                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                               | ** ** | **(In thousands)**                    | ** ** |
| Research and development  per consolidated statements of operations and comprehensive loss                                                          |       | $                                          | 53,637     |   | $ | 47,376 |   | $ | 39,432 |   |
| Less research and  development expenses reimbursed by joint venture (Dyax-Genzyme LLC) per  consolidated statements of operations and comprehensive loss |       | (16,100                                    | )          | (20,688 | ) | (10,408 | ) |
| Net research and development  expenses per consolidated statements of operations and comprehensive loss                                                  |       | 37,537                                     |       | 26,688 |   | 29,024 |   |
| Equity loss in joint  venture (Dyax-Genzyme LLC) separately classified within the consolidated  statements of operations and comprehensive loss          |       | 10,352                                     |       | 11,952 |   | 5,988 |   |
| Research and development expenses adjusted to  include equity loss in joint venture                                                                 |       | $                                          | 47,889     |   | $ | 38,640 |   | $ | 35,012 |   |

 

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Our research anddevelopment expenses arise primarily from compensation and other related costs,including personnel dedicated to research and development activities and fromthe fees paid and costs reimbursed to outside professionals to conduct researchand clinical trials and to manufacture drug compounds prior to FDA approval.The expenses we incurred during 2004, 2005 and 2006 on the DX-88 programfor HAE are included in our overall research and development expenses, but thenwere reimbursed by the Dyax-Genzyme LLC joint venture and excluded from netresearch and development expenses. However, under the terms of thecollaboration agreement with Genzyme, we jointly funded the losses of thatprogram with Genzyme, so our line item for equity loss in joint venturerepresents our share of all expenses for the development of DX-88 forHAE, including any incurred by Genzyme. In addition, pursuant to an agreemententered into with Genzyme in 2006, we incurred $9.8 million of DX-88manufacturing expenses that are included in our research and developmentexpenses but were not reimbursable by the joint venture. Instead we agreed tosupply the DX-88 compound to the Dyax-Genzyme LLC upon request for use inthe HAE program prior to the termination of our collaboration on February 20,2007.

Combining our net researchand development expenses and our equity loss in joint venture to show our totalexpenses for research and development, our adjusted net research anddevelopment expenses increased $9.2 million from 2005 to 2006 primarily due toa $10.9 million increases in net research and development expenses, offset by a$1.6 million decrease in our equity loss in joint venture. The $1.6 milliondecrease in our equity loss in joint venture is primarily driven by the timingof manufacturing activities. The $10.9 million increase in our net research anddevelopment expenses is primarily attributable to the DX-88 manufacturingvalidation campaign and increased preclinical and small scale manufacturingcosts associated with advancing the formal development of DX-2240. Additionallyduring the first quarter of 2006 we adopted Statement of Financial AccountingStandards No. 123 (revised 2004), “Accounting for Stock-Based Compensation”and recorded stock-based compensation expense for 2006 of $2.3 million of which$1.3 million is included in research and development expenses.

Compared to 2004, the $6.0million increase in 2005 in our equity loss in joint venture was a result ofincrease in manufacturing expenses, preclinical and clinical costs for thedevelopment of DX-88 for HAE. The $2.3 million decrease in net researchand development expenses is a result of reduced program costs associated withthe deferral of DX-88 for on-pump CTS activities and an $862,000 decreasein program costs associated with DX-890 product collaboration withDebiopharm, consisting primarily of decreases in internal resource costs,partially offset by increased manufacturing costs.

Our management believesthat the above presentation of adjusted net research and development expenses,although a non-GAAP measure, providesinvestors a better understanding of how total research and development effortsaffect our consolidated statements of operations and comprehensive loss. Ourpresentation of this measure, however, may not be comparable to similarlytitled measures used by other companies.

***General and Administrative.******  ***Our generaland administrative expenses consist primarily of the costs of our managementand administrative staff, as well as expenses related to business development,protecting our intellectual property, administrative occupancy, professionalfees, market research activities and the reporting requirements of a publiccompany. Total general and administrative expenses were $14.7 million in 2006compared to $12.8 million in 2005 and $14.5 million for 2004. Theincrease of $1.9 million from 2005 to 2006 was due to increases inpersonnel costs, including $1.0 million of stock-based compensation expensefollowing the adoption of  SFAS 123 (Revised 2004) “Share-Based Payments”(SFAS 123R), which we adopted effective January 1, 2006.

The decrease of$1.7 million from 2004 to 2005 was due to reductions in other professionalfees and marketing expenses. The reductions in other professional fees isattributable to reduced auditing and consulting fees as a result of gainingefficiencies from year three of our Sarbanes-Oxley 404 compliance efforts. Thedecrease in marketing expenses is related to our decision to defer furthermarket research activities with respect to our DX-88 CABG program at thattime.

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***Interest Expense.******  ***Interestexpense increased $2.7 million, from $1.1 million in 2005 to $3.8 million in2006. This increase is primarily due to interest from our agreement with PaulRoyalty. Interest on this agreement is calculated using the effective interestmethod based on our expected future payments to Paul Royalty. See Footnote 6“Long-term Obligations” of Item 8 “Financial Statements and Supplementary Data”for additional information regarding this agreement.

**Liquidity andCapital Resources**

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

| ** **                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **(In thousands)**                     | ** ** |
| Net loss                                                              |       | $                                           | (50,323    | ) | $ | (30,944 | ) | $ | (33,114 | ) |
| Depreciation and  amortization                                        |       | 3,455                                       |       | 3,579 |   | 3,976 |   |
| Interest expense  on Paul Royalty agreement                           |       | 2,682                                       |       | — |   | — |   |
| Compensation  expenses associated with stock-based compensation plans |       | 2,282                                       |       | 24 |   | 311 |   |
| Equity loss in  joint venture (Dyax-Genzyme LLC)                      |       | 10,352                                      |       | 11,952 |   | 5,988 |   |
| Change in  accounts receivable                                        |       | (418                                        | )          | 1,382 |   | 1,594 |   |
| Change in accounts  payable and accrued expenses                      |       | 2,222                                       |       | (2,356 | ) | (3,014 | ) |
| Prepaid research  and development, and other assets                   |       | 2,099                                       |       | (781 | ) | 296 |   |
| Due from joint  venture (Dyax-Genzyme LLC)                            |       | 1,029                                       |       | (2,202 | ) | (255 | ) |
| Due to joint  venture (Dyax-Genzyme LLC)                              |       | (1,703                                      | )          | 950 |   | — |   |
| Deferred revenue                                                      |       | (970                                        | )          | 1,110 |   | 2,092 |   |
| Other changes in  operating activities                                |       | (1,847                                      | )          | (1,007 | ) | 866 |   |
| Net cash used in  operating activities                                |       | (31,140                                     | )          | (18,293 | ) | (21,260 | ) |
| Net cash used in  investing activities                                |       | (23,401                                     | )          | (3,062 | ) | (53,157 | ) |
| Net cash provided  by financing activities                            |       | 57,238                                      |       | 23,084 |   | 44,907 |   |
| Effect of foreign  currency translation on cash balances              |       | (42                                         | )          | (67 | ) | (20 | ) |
| Net increase (decrease)  in cash and cash equivalents                 |       | $                                           | 2,655      |   | $ | 1,662 |   | $ | (29,530 | ) |

 

We require cash to fund our operating expenses, tomake capital expenditures, acquisitions and investments, and to pay debtservice. Through December 31, 2006, we have funded our operationsprincipally through the sale of equity securities, which have providedaggregate net cash proceeds since inception of approximately $243 million,including net proceeds of $30.2 million from our March 2006 underwrittenoffering, $23.5 million from our May 2005 registered direct offering,$44.7 million from our January 2004 underwritten offering,$8.3 million from our March 2003 registered directed offering and$62.4 million from our August 2000 initial public offering. We alsogenerate funds from biopharmaceutical product development and license feerevenues, long-term obligations and other sources, such as the transaction withPaul Royalty that provided us with a $29.5 million net cash payment in exchangefor granting Paul Royalty the right to receive a specific percentage of the netroyalties, including milestone fees and other payments, receivable by us underour Licensing and Funded Research Program (LFRP). As of December 31,2006, we had cash, cash equivalents and short-term and long-term investmentsaggregating $60.5 million. Our excess funds are currently invested in short andlong-term investments primarily consisting of U.S. Treasury notes and bills andmoney market funds backed by U.S. Treasury obligations.

Operating activities used cash of approximately $31.1million in 2006, $18.3 million in 2005 and $21.3 million in 2004. Theincrease of $12.8 million from 2005 to 2006 is driven by an increase in our NetLoss caused by a decrease in revenue from non-recurring milestone payments andan increase in development expenses.  Development expenses increasedprincipally because Dyax assumed $9.8 million 

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of DX-88manufacturing costs outside of Dyax-Genzyme LLC and also increased ourinvestment in preclinical development of DX-2240 and other discovery anddevelopment programs. The decrease of $3 million from 2004 to 2005 isprimarily due to the receipt of non-recurring milestone payments.

Our cash used in operating activities for 2006consisted primarily of our net loss of $50.3 million, partially offset byadjustments for non-cash items, including equity loss in joint venture (Dyax-GenzymeLLC) of $10.4 million, depreciation and amortization of fixed assets andintangibles totaling $3.5 million, interest expense related to the Paul Royaltyagreement of $2.7 million, compensationexpense associated with stock-based compensation plans totaling $2.3 million,and a net $2.3 million change in operating assets and liabilities. Our compensation expense associated withstock-based compensation plans is due to the adoption of Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Accounting forStock-Based Compensation” in the first quarter of 2006. The change in operatingassets and liabilities includes an increase in accounts payable and accruedexpenses of $2.2 million, a $2.1 million decrease in prepaid research anddevelopment and other assets, an amount due to (Dyax-Genzyme LLC) totaling$1.7 million, which is our contribution payable to the LLC to fund aportion of its costs incurred in the 2006, a $1.0 million decrease in deferredrevenue, a reimbursement due from the joint venture (Dyax-Genzyme LLC) totaling$1.0 million, which is our costs incurred on the DX-88 for HAE programduring 2006 that have not been reimbursed as of December 31, 2006, and anincrease in accounts receivable of $418,000.

Our cash used in operating activities for 2005consisted primarily of our net loss of $30.9 million and a $2.0 million changein operating assets and liabilities, partially offset by adjustments fornon-cash items, including depreciation and amortization of fixed assets andintangibles totaling $3.6 million and equity loss in joint venture (Dyax-GenzymeLLC) of $12.0 million. The change in operating assets and liabilities includesa reimbursement due from joint venture (Dyax-Genzyme LLC) totaling $2.2 millionwhich represents costs that we incurred in the DX-88 for HAE programduring 2005 that have not been reimbursed as of December 31, 2005, anamount due to joint venture (Dyax-Genzyme LLC) totaling $950,000, which is ourcontribution payable to the joint venture to fund a portion of its costs incurredin 2005, a decrease in accounts payable and accrued expenses of $2.4 milliondue primarily to a decrease in accounts payable of $1.9 million from timing ofpayments and a decrease in accruals. Additionally, there was a decrease inaccounts receivable of $1.4 million primarily due to a decrease in accountsreceivable from Debiopharm of $1.2 million due to the timing of manufacturingactivities, and an increase in deferred revenue of $1.1 million.

Our cash used in operating activities for 2004consisted primarily of our net loss of $33.1 million, partially offset byadjustments for non-cash items, including depreciation and amortization offixed assets and intangibles totaling $4.0 million and equity loss in jointventure (Dyax-Genzyme LLC) of $6.0 million, and a $1.0 million change inoperating assets and liabilities. The change in operating assets andliabilities includes a decrease in accounts payable and accrued expenses of$3.0 million, a decrease in accounts receivable of $1.6 million and an increasein deferred revenue of $2.1 million.

Investing activities used cash totaling approximately$23.4 million in 2006, $3.1 million in 2005, and $53.2 million in 2004. Ourchanges in investing activity from year to year are primarily due to the timingof the purchase and maturity of our investments. While these changes arereflected in our statement of cash flows, we do not consider changes betweencash and our investments to be material to our business or financial position. Ourinvesting activities for 2006 also consisted of an increase in restricted cashof $7.1 million, primarily due to the posting of a $7.2 million letter ofcredit to securitize our amended and restated senior secured promissory notewith Genzyme. Additionally in 2006, there was a $9.8 million investment injoint venture, and fixed asset purchases of $1.1 million. In 2005 wecontributed $10.8 million to Dyax-Genzyme LLC and purchased $1.4 million infixed assets. In 2004 we made our initial purchase of short-terminvestments of $51.0 million, we contributed $5.4 million to Dyax-GenzymeLLC and purchased 

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$2.3 million in fixedassets. Also in 2004 we received $5.0 million of cash released from escrowrelating to the sale of Biotage in 2003.

Financing activities provided cash of approximately$57.2 million in 2006, $23.1 million in 2005 and $44.9 million in 2004. In 2006we received net proceeds of $30.2 million from an underwritten public offering,and $29.5 million from Paul Royalty under our Royalty Interest AssignmentAgreement, partially offset by the repayment of long-term obligations of $3.5million. These funds have allowed us to proceed with a Phase II trial inon-pump CTS surgery as well as move forward our other clinical leads. In 2005we received net proceeds of $23.5 million from a registered offering of commonstock. We also made repayments totaling $1.9 million on long-term obligations.In 2004 we received net proceeds of $44.7 million from a registeredoffering of common stock. Proceeds from the issuance of common stock under theemployee stock option plan and exercise of stock options totaled $2.1 million.We also collected proceeds from long-term obligations of $1.4 million and maderepayments of long-term obligations of $3.3 million.

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. On August 22,2006, the senior secured promissory note was amended and restated to extend theterm of the note from May 2007 to May 2010. In connection with thisamendment, the financial covenants under the senior secured promissory notewere eliminated and all of the existing collateral for the senior securedpromissory note was released and replaced with a $7.2 million letter of credit.

On August 23, 2006, we entered into a RoyaltyInterest Assignment Agreement with Paul Royalty Fund Holdings II, LP (PaulRoyalty), an affiliate of Paul Capital Partners, pursuant to which wereceived a $30.0 million upfront cash payment in exchange for granting PaulRoyalty the right to receive a specified percentage of the net royalties, includingall milestones fees and other payments, receivable by us under our phagedisplay LFRP. We also have an option to receive an additional $5.0 millionpayment from Paul Royalty in the event that the LFRP receipts achieve specifiedlevels by the end of 2008. In conjunction with this transaction, we reimbursedPaul Royalty $500,000 for its costs.

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 2008. Currently, we expect to use approximately $45million in cash during 2007. This includes the additional costs of funding 100%of the DX-88 HAE program from the February 20, 2007 termination ofour collaboration agreement with Genzyme, offset by the $17 million paymentfrom Genzyme to the Dyax-Genzyme LLC pursuant to the termination agreement. Forthe foreseeable future, we expect to continue to fund any deficit from ouroperations through the sale of additional equity or debt securities. The saleof any equity or debt securities may result in additional dilution to ourstockholders, and we cannot be certain that additional financing will beavailable in amounts or on terms acceptable to us, if at all. If we are unableto obtain any required additional financing, we may be required to reduce thescope of our planned research, development and commercialization activities,which could harm our financial condition and operating results.

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

**ContractualObligations**

Contractualobligations represent future cash commitments and liabilities under agreementswith third parties, and exclude contingent liabilities which we cannotreasonably predict future payment. The 

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following chart represents our total contractualobligations, including principal and interest, at December 31, 2006,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 under  royalty interest assignment agreement(1)  |       | $                                         | 111,413    |   |   | $ | 5,260 |   |   | $ | 12,470 |   | $ | 21,991 |   |   | $ | 71,692 |   |   |
| Obligation to  related party                                |       | 9,388                                     |       |   | 717 |   |   | 1,435 |   | 7,236 |   |   | — |   |   |
| Capital leases                                              |       | 2,735                                     |       |   | 1,521 |   |   | 1,214 |   | — |   |   | — |   |   |
| Leasehold  improvement arrangements                         |       | 2,166                                     |       |   | 447 |   |   | 825 |   | 825 |   |   | 69 |   |   |
| Operating lease  obligations(2)                             |       | 29,438                                    |       |   | 4,244 |   |   | 8,874 |   | 10,932 |   |   | 5,388 |   |   |
| Patent and  product license obligations(3)                  |       | 4,223                                     |       |   | 327 |   |   | 1,650 |   | 605 |   |   | 1,641 |   |   |
| Obligations for  research, development and manufacturing(4) |       | 13,439                                    |       |   | 13,325 |   |   | 54 |   | 44 |   |   | 16 |   |   |
| Total contractual  obligations                              |       | $                                         | 172,802    |   |   | $ | 25,841 |   |   | $ | 26,522 |   | $ | 41,633 |   |   | $ | 78,806 |   |   |
|                                                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          These amounts representprojected future payments to Paul Royalty based on our current LFRPprojections, with interest calculated using the effective interest method. SeeFootnote 6 “Long-term Obligations” of Item 8 “Financial Statements andSupplementary Data”.

(2)          These amounts are net ofcontractually committed sublease income.

(3)          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.

(4)          These amounts representthe cash commitment due on research, development and manufacturing contracts.We will 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. In the first half of 2007 these criteria will be reviewed bythe grantor to determine if they have been successfully met. If we have not metthe criteria, we will be required to refund all or a portion of amountsreceived under this grant. As of December 31, 2004, the Company hadreceived the entire grant amount of €825,000. This amounttranslates to $1.1 million and $977,000 at December 31, 2006 and 2005,respectively.

**Critical AccountingEstimates**

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, royalty interestobligations, useful lives with respect to long-lived and intangible assets andvaluation of common stock, related stock options, and deferred tax assets. Webase our estimates on historical and anticipated results and trends and onvarious other assumptions that we believe are reasonable under thecircumstances, including assumptions as to future events. These estimates formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. By their nature,estimates are subject to an inherent degree of uncertainty. Actual results maydiffer from our estimates. We believe that our judgment 

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and assumptions with respectto the following significant accounting policies are most critical to theaccounting estimates used in the preparation of our consolidated financialstatements.

***Royalty InterestObligation.******  ***Underour Royalty Interest Assignment Agreement with Paul Royalty, we recorded theupfront cash payment of $30.0 million, less the $500,000 in cost reimbursementspaid to Paul Royalty as a debt instrument. Based upon our best estimate offuture royalty interest obligation payments, interest expense was calculatedusing the effective interest method. Our best estimate of future royaltyinterest obligation payments was based upon returning to Paul Royalty aninternal rate of return of 25% through future net LFRP receipts.

***Share-BasedCompensation.***   Effective January 1, 2006, we adopted the provisionsof Statement of Financial Accounting Standards (SFAS) 123R which requiredus to recognize the expense related to the fair value of stock-basedcompensation awards in our consolidated statement of operations. We elected tofollow the modified prospective transition method allowed by SFAS 123R,and therefore, only applied the provisions of SFAS 123R to awards modifiedor granted after January 1, 2006. In addition, for awards that wereunvested as of January 1, 2006 we will recognize compensation expense inour consolidated statement of operations over the remaining vesting period.Prior to January 1, 2006, we accounted for stock-based compensation usingthe intrinsic value method prescribed in APB No. 25, “Accounting for StockIssued to Employees.”

SFAS 123R requires companies to estimate the fairvalue of stock-based awards on the date of grant using an option-pricing model.We use the Black-Scholes option pricing model. A number of assumptions are usedby the Black-Scholes option-pricing model to compute the grant date fair value,including expected price volatility, option term, risk-free interest rate, anddividend yield. Expected volatilities are based on historical volatilities ofour stock. The expected option term is derived from historical data on exercisebehavior. The dividend yield is based on historical dividend payments. Therisk-free rate for periods within the contractual life of the option is basedon the U.S. treasury yield curve in effect at the time of grant. The value ofthe portion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in our consolidated statement ofoperations. Our stock options primarily have a graded-vesting schedule. Werecognize expense on a straight-line basis over the requisite service periodfor each separately vesting portion of the award as if the award was,in-substance, multiple awards. The equity-based compensation expense recordedin future income statements could fluctuate based on the terms of the awards,the assumptions used in the valuation model, or the status of those employeesreceiving awards.

***RevenueRecognition.******  ***We make significant assumptions andestimates relating to revenue recognition, which include the expected term ofthe agreement and total expected cost. Our assumptions and estimates may proveto be inaccurate. Therefore, although we make every effort to ensure theaccuracy of our estimates, any significant unanticipated changes in ourestimates 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 BulletinNo. 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*.

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We enter into biopharmaceutical product developmentagreements with collaborators for the research and development of therapeutic,diagnostic and other products. The terms of the agreements may includenon-refundable signing and licensing fees, funding for research anddevelopment, milestone payments and royalties on any product sales derived fromthe collaborations. Non-refundable signing and licensing fees are recognized asservices are performed over the expected term of the collaboration. Funding forresearch and development, where the amounts recorded are non-refundable, isrecognized as the related expenses are incurred. Milestones that are based ondesignated achievement points and that are considered at risk and substantiveat the inception of the collaboration are recognized as earned when thecorresponding payment is considered reasonably assured. We evaluate whethermilestones are at risk and substantive based on the contingent nature of themilestone, specifically reviewing factors such as the technological andcommercial risk that must be overcome and the level of the investment required.Milestones that are not considered at risk and substantive are recognized, whenachieved, in proportion to the percentage of the collaboration completed throughthe date of achievement. The remainder is recognized as services are performedover the remaining term of the collaboration. Royalties are recognized whenearned. We evaluate all collaboration agreements on a quarterly basis todetermine the appropriate revenue recognition for that period. The evaluationincludes all of the potential revenue components from each specificcollaboration agreement.

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, 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. 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 specific contract terms may extend this period up to 14 years. Uponthe achievement of milestones under non-exclusive phage display patent licensesand phage display libraries a portion of the milestone equal payment to thepercentage of the license agreement that has elapsed is recognized as revenue.Milestone payments under these license arrangements are recognized when themilestone is achieved if the Company has no future obligations under thelicense, and royalties are recognized when they are earned.

Payments received that have not met the appropriatecriteria for revenue recognition are recorded as deferred revenue. At December 31,2006 and 2005, our deferred revenue related to product development agreementswas $9.9 million and $10.9 million, respectively. Of the $9.9 milliondeferred at December 31, 2006, $4.4 million, $1.6 million and $602,000 isexpected to be recognized as revenue in 2007, 2008 and 2009, respectively, andthe remaining is expected to be recognized over the next 12 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 $2.1 million and $1.7 million at December 31,2006 and 2005, respectively. At December 31, 2006 and 2005 the provisionfor doubtful accounts was $80,000 and $105,000, respectively.

***Valuation of Long-Lived and Intangible Assets.******  ***We reviewlong-lived assets, including capitalized license rights, for impairmentwhenever events or changes in business circumstances indicate that the 

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carrying amount ofassets may not be fully recoverable or that the useful lives of these assetsare no longer appropriate. Factors considered important which could trigger animpairment review include the following:

·                    Significantchange relative to historical or projected future operating results;

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

·                    Significantindustry or economic trends and developments.

Each impairment test isbased on a comparison of the undiscounted cash flow to the recorded value ofthe asset. When it is determined that the carrying value of intangibles andlong-lived assets may not be recoverable based upon the existence of one ormore of the above indicators of impairment, the asset is written down to itsestimated fair value on a discounted cash flow basis. Our intangible assets atthe end of 2006 consisted of licenses for antibody technology from thirdparties. The balance of our other intangible assets net of accumulatedamortization was $1.4 million and $1.9 million at December 31, 2006and 2005, respectively. No impairment losses have been recognized in any of theperiods presented in our consolidated financial statements.

**Related PartyTransactions**

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

Through February 20, 2007 we had a collaborationagreement with Genzyme for the development and commercialization of DX-88for HAE. Under this collaboration, Dyax and Genzyme formed a joint venture,known as Dyax-Genzyme LLC, through which we jointly owned the rights to DX-88for the treatment of HAE. Dyax and Genzyme were each responsible forapproximately 50% of ongoing costs incurred in connection with the developmentand commercialization of DX-88 for HAE and each would be entitled toreceive approximately 50% of any profits realized from it. In addition, we wereentitled to receive potential milestone payments from Genzyme in connectionwith the development of DX-88.

On February 20, 2007, we reached a mutualagreement with Genzyme to terminate this collaboration. Pursuant to thetermination agreement, Genzyme made a $17.0 million cash payment to theDyax-Genzyme LLC. Furthermore Genzyme assigned to Dyax all of its interests inthe LLC thereby transferring all the rights to the LLC’s assets to Dyax,including the $17.0 million cash payment. As a result Dyax now owns all of therights to DX-88 worldwide including the right to develop and commercializeDX-88 in HAE. In exchange, Dyax issued to Genzyme 4.4 million shares ofits common stock. Genzyme also agreed to provide us with transition servicesfor a period following the termination of our agreements.

Genzyme has previously loaned us $7.0 million under asenior promissory note which remains outstanding after the termination of thecollaboration. In August, 2006, this note was amended and restated to extendthe term of the note from May 2007 to May 2010. In connection withthis amendment, the financial covenants under the note were eliminated and allof the existing collateral for the note was released and replaced with a $7.2million letter of credit. The collateral released pursuant to this amendmentincluded a certain tangible and intangible personal property arising out of theDX-88 program and the Company’s rights to revenues from licenses of itsfundamental phage display patent portfolio. As of December 31, 2006, theCompany had posted the $7.2 million letter of credit, the cash collateral for whichis included in restricted cash on our consolidated balance sheet. We payinterest on the Genzyme note at the prime rate, (8.25% at December 31,2006) plus 2%. At December 31, 2006 and 2005, we owed $61,000 and $54,000,respectively, of interest on this note. The termination of Dyax’s collaborationwith Genzyme did not constitute an event of default under the note, whichremains outstanding in accordance with its terms.

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All research and development expenses incurred by eachparty related to the HAE program are billed to and reimbursed by Dyax-GenzymeLLC. Dyax and Genzyme are each required to fund 50% of the forecasted 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, 2006 and 2005, our investment inthe joint venture was $258,000 and $782,000, respectively, which is recorded asan investment in joint venture (Dyax-Genzyme LLC) in the consolidatedbalance sheets.

Before our collaboration agreement with Genzymeterminated on February 20, 2007, we had evaluated the agreement todetermine if the related joint venture qualifies as a variable interest entityunder Financial Accounting Standards Board (FASB) Interpretation No. 46R, *Consolidation of Variable Interest Entities* (FIN 46R). Bothwe and Genzyme had funded the operations of Dyax-Genzyme LLC on a monthly basisand therefore under Paragraph 5a of FIN 46R, the joint venture qualified as avariable interest entity because its total equity investment at risk is notsufficient to finance its activities without additional subordinated financialsupport. We have always had 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 before termination were less than Genzyme’sand therefore we were not the primary beneficiary of Dyax-Genzyme LLC under Paragraph17 of FIN 46R. Accordingly, during 2006 we had not consolidated Dyax-Genzyme LLC.

During 1996, we signed two patent license agreementswith Genzyme consistent with our standard license terms. During 2006, Genzymeterminated one of its patent license agreements with Dyax. We recorded $4,000of revenue for the year ended December 31, 2006 and $25,000 for each ofthe years ended December 31, 2005 and 2004 in connection with themaintenance fees on the terminated agreement. We recorded license revenues of$25,000, for each year ended December 31, 2006, 2005 and 2004, inconnection with the maintenance fee on the ongoing agreement. As of December 31,2006 and 2005, there were $25,000 and $0, respectively, of outstanding accountsreceivable due from Genzyme related to the patent license agreement.

During 2004, we signed alibrary license agreement with Genzyme consistent with our standard licenseterms. We received $1.3 million from Genzyme in 2004 and recorded licenserevenues of $225,000 for the years ended December 31, 2006 and 2005 and$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 $525,000 has not been recognized as revenue andis included in deferred revenue on the consolidated balance sheet. This amountwill be recognized ratably over the next 28 months. As of December 31,2006 and 2005, there were no outstanding accounts receivable due from Genzymerelated to the library license agreement.

**Tax LossCarryforwards**

As of December 31,2006, we had federal net operating loss (NOL) and research and experimentationcredit carryforwards of approximately $179.1 million and $23.3 million,respectively, which may be available to offset future federal income taxliabilities and which begin to expire in 2007. We have recorded a deferred taxasset of approximately $2.1 million reflecting the benefit of deductionsfrom the exercise of stock options. This deferred asset has been fully reserveduntil it is more likely than not that the benefit from the exercise of stockoptions will be realized. The benefit from this $2.1 million deferred tax assetwill be recorded as a credit to additional paid-in capital when realized. Asrequired by SFAS No. 109, our management has evaluated the positive andnegative evidence bearing upon the realizability of its deferred tax assets,which are comprised principally of NOL and research and experimentation creditcarryforwards. 

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Managementhas determined 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 $100.5 million has beenestablished at December 31, 2006.

**RecentPronouncements**

In March 2005, the Financial Accounting StandardsBoard (FASB) issued FASB Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations,” which is an interpretation of FASBStatement No. 143, “Accounting for Asset Retirement Obligations.” Theinterpretation requires that a liability for the fair value of a conditionalasset retirement obligation be recognized if the fair value of the liabilitycan be reasonably estimated. The interpretation is effective for years endingafter December 15, 2005. The interpretation did not have a material impacton the Company’s results of operations, financial position or cash flows.

In May 2005, the FASB issued FASB Statement No. 154,“Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20“Accounting Changes” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements” (FAS 154). FAS 154 provides guidanceon the accounting for and reporting of accounting changes and errorcorrections. It established, unless impracticable, retrospective application asthe required method for reporting a change in accounting principle in theabsence of explicit transition requirements specific to the newly adoptedaccounting principle. FAS 154 also provides guidance for determining whetherretrospective application of a change in accounting principle is impracticableand for reporting a change when retrospective application is impracticable. Theprovisions of this Statement are effective for accounting changes and correctionsof errors made in fiscal periods beginning after December 15, 2005.

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes”, an interpretation ofFASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting foruncertainties in income taxes recognized in an enterprise’s financialstatements. The Interpretation requires that we determine whether it is morelikely than not that a tax position will be sustained upon examination by theappropriate taxing authority. If a tax position meets the more likely than notrecognition criteria, FIN 48 requires the tax position be measured at thelargest amount of benefit greater than 50 percent likely of being realized uponultimate settlement. This accounting standard is effective for the Company forthe fiscal periods beginning January 1, 2007. The effect, if any, ofadopting FIN 48 on the Company’s financial position and results of operationshas not been finalized, but it will not have a material impact on the Company’sfinancial position or results of operations.

In September 2006, the SEC issued StaffAccounting Bulletin No. 108 (SAB 108) “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements”. SAB 108 addresses how the effects of prior year uncorrectedmisstatements should be considered when quantifying misstatements in currentyear financial statements. SAB 108 requires companies to quantify misstatementsusing a balance sheet and income statement approach and to evaluate whethereither approach results in quantifying an error that is material in light ofrelevant quantitative and qualitative factors. When the effect of initialadoption is material, companies will record the effect as a cumulative effectadjustment to beginning of year retained earnings. The provisions of SAB 108are effective for annual statements covering the fiscal year after November 15,2006. The adoption of SAB 108 did not have a material impact on the Company’sfinancial position or results of operations.

In September 2006,the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157,Fair Value Measurements. This statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. This statement appliesunder other accounting pronouncements that permit or require fair valuemeasurements. The provisions of SFAS No. 157 become effective for fiscalyears beginning after 

44

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November 15,2007. The effect, if any, on the Company’s financial position and results ofoperations has not been finalized.

**Important FactorsThat 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. Generally, theforward-looking statements in this report use words like “believe,” “anticipate,”“plan,” “expect,” “intend,” “project,” “future,” “may,” “will,” “could,” “would”and similar expressions.

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

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk consists primarily of ourcash and cash equivalents, and short-term and long-term investments. We placeour investments in high-quality financial instruments, primarily U.S. Treasurynotes and bills, which we believe are subject to limited credit risk. Wecurrently do not hedge interest rate exposure. As of December 31, 2006, wehad cash, cash equivalents, and short-term and long-term investments ofapproximately $60.5 million. Our investments will decline by an immaterialamount if market interest rates increase, and therefore, our exposure tointerest rate changes is immaterial. Declines of interest rates over time will,however, reduce our interest income from our investments.

As of December 31, 2006, we had $41.8 millionoutstanding under short-term and long-term obligations. Interest rates on $4.1million of these obligations are fixed and therefore are not subject tointerest rate fluctuations. The assumed interest rate on the $30.7 millionoutstanding to Paul Royalty under our Royalty Interest Assignment Agreement iscalculated using the effective interest method based upon estimated futureroyalty interest obligation payments and therefore is not subject to interestrate fluctuations. Interest on the $7.0 million Genzyme note is variable basedon the prime interest rate and is therefore subject to interest ratefluctuations. For example, a 2% increase in the prime rate would result in anadditional $140,000 in annual interest expense.

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

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**Indexto Consolidated Financial Statements**

|                                                                                                                                 | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                        |       |     | 47         |   |   |
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                                              |       |     | 49         |   |   |
| Consolidated Statements of Operations and  Comprehensive Loss for the years ended December 31, 2006, 2005 and 2004         |       |     | 50         |   |   |
| Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2006, 2005 and 2004 |       |     | 51         |   |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004                           |       |     | 52         |   |   |
| Notes to Consolidated Financial Statements                                                                                      |       |     | 53         |   |   |
| Financial Statement Schedule                                                                                                    |       |     | 78         |   |   |

 

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**Report ofIndependent Registered Public Accounting Firm**

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

We have completedintegrated audits of Dyax Corp.’s consolidated financial statements and of itsinternal control over financial reporting as of December 31, 2006, inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Our opinions, based onour audits, are presented below.

*Consolidated financial statements and financial statement schedule*

In our opinion, theconsolidated financial statements listed in the accompanying index present fairly, in all material respects,the financial position of Dyax Corp. and its subsidiaries****atDecember 31, 2006 and 2005, and the results of their operations and theircash flows for each of the three years in the period ended December 31,2006 in conformity with accounting principles generally accepted in the UnitedStates of America. In addition, in ouropinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financial statements. Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’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 materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

As discussed in Note 9 tothe consolidated financial statements, the Company changed the manner in whichit accounts for share-based payment as of January 1, 2006.

*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, 2006 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 31,2006, 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 whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

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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, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (ii) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial 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, MassachusettsMarch 13, 2007

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**DyaxCorp. and Subsidiaries**

**ConsolidatedBalance Sheets**

| ** **                                                                                                                                                                                                        | ** ** | **December 31,  2006**                               | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **(In thousands, except share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                        |       |                                                      |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                   |       |                                                      |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                        |       |                                                      | $          | 11,295                      |       |   |   | $ | 8,640 |   |   |
| Short-term investments                                                                                                                                                                                            |       |                                                      | 47,169     |                        |       |   | 42,024 |   |   |
| Accounts receivable, net  of allowances for doubtful accounts of $80 and $105 at December 31, 2006  and 2005, respectively                                                                                   |       |                                                      | 2,120      |                        |       |   | 1,677 |   |   |
| Prepaid research and  development                                                                                                                                                                                 |       |                                                      | 833        |                        |       |   | 2,159 |   |   |
| Due from joint venture  (Dyax-Genzyme LLC)                                                                                                                                                                        |       |                                                      | 1,428      |                        |       |   | 2,457 |   |   |
| Other current assets                                                                                                                                                                                              |       |                                                      | 920        |                        |       |   | 1,675 |   |   |
| Total current assets                                                                                                                                                                                              |       |                                                      | 63,765     |                        |       |   | 58,632 |   |   |
| Fixed assets, net                                                                                                                                                                                                 |       |                                                      | 8,960      |                        |       |   | 10,160 |   |   |
| Intangibles, net                                                                                                                                                                                                  |       |                                                      | 1,432      |                        |       |   | 1,935 |   |   |
| Restricted cash                                                                                                                                                                                                   |       |                                                      | 11,517     |                        |       |   | 4,408 |   |   |
| Long-term investments                                                                                                                                                                                             |       |                                                      | 1,992      |                        |       |   | — |   |   |
| Other assets                                                                                                                                                                                                      |       |                                                      | 249        |                        |       |   | — |   |   |
| Investment in joint  venture (Dyax-Genzyme LLC)                                                                                                                                                                   |       |                                                      | 258        |                        |       |   | 782 |   |   |
| Total assets                                                                                                                                                                                                      |       |                                                      | $          | 88,173                      |       |   |   | $ | 75,917 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                    |       |                                                      |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                              |       |                                                      |       |                        |       |   |   |   |   |
| Accounts payable and  accrued expenses                                                                                                                                                                            |       |                                                      | $          | 9,288                       |       |   |   | $ | 6,986 |   |   |
| Current portion of  deferred revenue                                                                                                                                                                              |       |                                                      | 4,432      |                        |       |   | 5,450 |   |   |
| Due to joint venture  (Dyax-Genzyme LLC)                                                                                                                                                                          |       |                                                      | 967        |                        |       |   | 2,670 |   |   |
| Current portion of long-term  obligations                                                                                                                                                                         |       |                                                      | 1,618      |                        |       |   | 1,770 |   |   |
| Other current  liabilities                                                                                                                                                                                        |       |                                                      | 1,091      |                        |       |   | — |   |   |
| Total current liabilities                                                                                                                                                                                         |       |                                                      | 17,396     |                        |       |   | 16,876 |   |   |
| Deferred revenue                                                                                                                                                                                                  |       |                                                      | 5,474      |                        |       |   | 5,425 |   |   |
| Obligation to related  party                                                                                                                                                                                      |       |                                                      | 7,000      |                        |       |   | 7,000 |   |   |
| Long-term  obligations                                                                                                                                                                                            |       |                                                      | 33,210     |                        |       |   | 2,819 |   |   |
| Deferred rent                                                                                                                                                                                                     |       |                                                      | 1,632      |                        |       |   | 1,847 |   |   |
| Other long-term  liabilities                                                                                                                                                                                      |       |                                                      | —     |                        |       |   | 1,012 |   |   |
| Total liabilities                                                                                                                                                                                                 |       |                                                      | 64,712     |                        |       |   | 34,979 |   |   |
| Commitments and Contingencies (Notes 6, 7, 8,  10, 15)                                                                                                                                                       |       |                                                      |       |                        |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                        |       |                                                      |       |                        |       |   |   |   |   |
| Preferred stock, $0.01  par value; 1,000,000 shares authorized at December 31, 2006 and 2005; 0  shares issued and outstanding at December 31, 2006 and 2005                                            |       |                                                      | —     |                        |       |   | — |   |   |
| Common stock, $0.01 par  value; 125,000,000 shares authorized at December 31, 2006 and 2005;  43,700,101 and 38,028,363 shares issued and outstanding at  December 31, 2006 and 2005, respectively |       |                                                      | 437        |                        |       |   | 380 |   |   |
| Additional paid-in  capital                                                                                                                                                                                       |       |                                                      | 255,242    |                        |       |   | 222,437 |   |   |
| Accumulated deficit                                                                                                                                                                                               |       |                                                      | (232,623   | )                           |       |   | (182,300 | ) |   |
| Accumulated other  comprehensive income                                                                                                                                                                           |       |                                                      | 405        |                        |       |   | 421 |   |   |
| Total stockholders’  equity                                                                                                                                                                                  |       |                                                      | 23,461     |                        |       |   | 40,938 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                   |       |                                                      | $          | 88,173                      |       |   |   | $ | 75,917 |   |   |

 

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

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**DyaxCorp. and Subsidiaries**

**ConsolidatedStatements of Operations and Comprehensive Loss**

| ** **                                                                                  | ** ** | **Years Ended December 31,**                                            | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2006**                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands, except share and per share data)** | ** ** |
| Product  development and license fee revenues                                               |       | $                                                                                      | 12,776     |   | $ | 19,859 |   | $ | 16,590 |   |
| Research and  development:                                                                  |       |                                                                                   |       |   |   |   |   |
| Research and development expenses                                                           |       | 53,637                                                                                 |       | 47,376 |   | 39,432 |   |
| Less research and development expenses reimbursed  by joint venture (Dyax-Genzyme LLC) |       | (16,100                                                                                | )          | (20,688 | ) | (10,408 | ) |
| Net research and development                                                                |       | 37,537                                                                                 |       | 26,688 |   | 29,024 |   |
| Equity loss in joint venture (Dyax-Genzyme LLC)                                             |       | 10,352                                                                                 |       | 11,952 |   | 5,988 |   |
| General and administrative expenses                                                         |       | 14,658                                                                                 |       | 12,784 |   | 14,451 |   |
| Total operating  expenses                                                                   |       | 62,547                                                                                 |       | 51,424 |   | 49,463 |   |
| Loss from  operations                                                                       |       | (49,771                                                                                | )          | (31,565 | ) | (32,873 | ) |
| Other income (expense):                                                                     |       |                                                                                   |       |   |   |   |   |
| Interest income                                                                             |       | 3,246                                                                                  |       | 1,671 |   | 786 |   |
| Interest expense                                                                            |       | (3,798                                                                                 | )          | (1,050 | ) | (1,027 | ) |
| Total other income (expense), net                                                           |       | (552                                                                                   | )          | 621 |   | (241 | ) |
| Net loss                                                                                    |       | (50,323                                                                                | )          | (30,944 | ) | (33,114 | ) |
| Other comprehensive  (loss) income:                                                         |       |                                                                                   |       |   |   |   |   |
| Foreign currency translation adjustments                                                    |       | (66                                                                                    | )          | (50 | ) | (27 | ) |
| Unrealized gain (loss) on investments                                                       |       | 50                                                                                     |       | 45 |   | (87 | ) |
| Comprehensive  loss                                                                         |       | (50,339                                                                                | )          | $ | (30,949 | ) | $ | (33,228 | ) |
| Basic and diluted loss  per share:                                                          |       |                                                                                   |       |   |   |   |   |
| Net loss                                                                                    |       | $                                                                                      | (1.18      | ) | $ | (0.87 | ) | $ | (1.06 | ) |
| Shares used in computing  basic and diluted net loss per share                              |       | 42,532,466                                                                             |       | 35,455,782 |   | 31,207,218 |   |

 

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

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**DyaxCorp. and Subsidiaries**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

**Forthe years ended December 31, 2006, 2005 and 2004**

**(Inthousands, except share data)**

| ** **                                                 | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | ** **       | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|-----------------|------------|------------------|------------|------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **      | ** ** | **Other**        | ** ** | ** **             | ** ** |
| ** **                                                 | ** ** | ** **            | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Deferred**     | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Shares**            | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Deficit**     | ** ** | **Compensation** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance at December 31, 2003                          |       | 24,887,757            |       |           | $          | 249         |       |            |       | $                | 151,445    |                   |       |       | $          | (118,242 | ) |   |   | $ | (47 | ) |   |   | $ | 540 |   |   | $ | 33,945 |   |
| Exercise of stock options                                  |       | 632,414               |       |           | 6          |        |       |            | 1,924      |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 1,930 |   |
| Issuance of common stock for employee stock purchase  plan |       | 27,456                |       |           | —     |        |       |            | 124        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 124 |   |
| Sale of common stock, net of expenses of $215              |       | 6,000,000             |       |           | 60         |        |       |            | 44,689     |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 44,749 |   |
| Deferred compensation                                      |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | 47 |   |   |   | — |   |   | 47 |   |
| Compensation expense associated with stock options         |       | —                |       |           | —     |        |       |            | 264        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 264 |   |
| Unrealized loss on short-term investments                  |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | (87 | ) |   | (87 | ) |
| Foreign currency translation                               |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | (27 | ) |   | (27 | ) |
| Net Loss                                                   |       | —                |       |           | —     |        |       |            | —     |             |       |                   | (33,114    | )          |       |   | — |   |   |   | — |   |   | (33,114 | ) |
| Balance at December 31, 2004                          |       | 31,547,627            |       |           | 315        |        |       |            | 198,446    |             |       |                   | (151,356   | )          |       |   | — |   |   |   | 426 |   |   | 47,831 |   |
| Exercise of stock options                                  |       | 118,947               |       |           | 2          |        |       |            | 264        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 266 |   |
| Issuance of common stock for employee stock purchase  plan |       | 46,789                |       |           |       |        |       |            | 222        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 222 |   |
| Sale of common stock, net of expenses of $200              |       | 6,315,000             |       |           | 63         |        |       |            | 23,481     |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 23,544 |   |
| Compensation expense associated with stock options         |       | —                |       |           | —     |        |       |            | 24         |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 24 |   |
| Unrealized gain (loss) on short-term investments           |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | 45 |   |   | 45 |   |
| Foreign currency translation                               |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | (50 | ) |   | (50 | ) |
| Net Loss                                                   |       | —                |       |           | —     |        |       |            | —     |             |       |                   | (30,944    | )          |       |   | — |   |   |   | — |   |   | (30,944 | ) |
| Balance at December 31, 2005                          |       | 38,028,363            |       |           | 380        |        |       |            | 222,437    |             |       |                   | (182,300   | )          |       |   | — |   |   |   | 421 |   |   | 40,938 |   |
| Exercise of stock options                                  |       | 73,117                |       |           | 1          |        |       |            | 114        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 115 |   |
| Issuance of common stock for employee stock purchase  plan |       | 98,621                |       |           | 1          |        |       |            | 300        |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 301 |   |
| Sale of common stock, net of expenses of $86               |       | 5,500,000             |       |           | 55         |        |       |            | 30,109     |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 30,164 |   |
| Compensation expense associated with stock options         |       | —                |       |           | —     |        |       |            | 2,282      |             |       |                   | —     |       |       |   | — |   |   |   | — |   |   | 2,282 |   |
| Unrealized gain (loss) on short-term investments           |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | 50 |   |   | 50 |   |
| Foreign currency translation                               |       | —                |       |           | —     |        |       |            | —     |             |       |                   | —     |       |       |   | — |   |   |   | (66 | ) |   | (66 | ) |
| Net Loss                                                   |       | —                |       |           | —     |        |       |            | —     |             |       |                   | (50,323    | )          |       |   | — |   |   |   | — |   |   | (50,323 | ) |
| Balance at  December 31, 2006                         |       | 43,700,101            |       |           | $          | 437         |       |            |       | $                | 255,242    |                   |       |       | $          | (232,623 | ) |   |   | $ | — |   |   |   | $ | 405 |   |   | $ | 23,461 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

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**DyaxCorp. and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

| ** **                                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands)**                     | ** ** |
| **Cash flows from operating activities:**                                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                                      |       | $                                           | (50,323    | ) | $ | (30,944 | ) | $ | (33,114 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                                  |       |                                        |       |   |   |   |   |
| Amortization of  purchased premium/discount                                                                   |       | (1,670                                      | )          | (733 | ) | 754 |   |
| Depreciation and  amortization of fixed assets                                                                |       | 2,944                                       |       | 3,077 |   | 3,476 |   |
| Amortization of  intangibles                                                                                  |       | 511                                         |       | 502 |   | 500 |   |
| Interest expense  on Paul Royalty agreement                                                                   |       | 2,682                                       |       | — |   | — |   |
| Amortization of  deferred rent                                                                                |       | (215                                        | )          | (235 | ) | (235 | ) |
| Loss on disposal  of fixed assets                                                                             |       | —                                      |       | 19 |   | 24 |   |
| Compensation  expenses associated with stock-based compensation plans                                         |       | 2,282                                       |       | 24 |   | 311 |   |
| Equity loss in  joint venture (Dyax-Genzyme LLC)                                                              |       | 10,352                                      |       | 11,952 |   | 5,988 |   |
| Provision for  doubtful accounts                                                                              |       | (25                                         | )          | 30 |   | — |   |
| Changes in operating  assets and liabilities                                                                  |       |                                        |       |   |   |   |   |
| Accounts  receivable                                                                                          |       | (418                                        | )          | 1,382 |   | 1,594 |   |
| Due from joint  venture (Dyax-Genzyme LLC)                                                                    |       | 1,029                                       |       | (2,202 | ) | (255 | ) |
| Prepaid research  and development, and other assets                                                           |       | 2,099                                       |       | (781 | ) | 296 |   |
| Accounts payable  and accrued expenses                                                                        |       | 2,222                                       |       | (2,356 | ) | (3,014 | ) |
| Due to joint  venture (Dyax-Genzyme LLC)                                                                      |       | (1,703                                      | )          | 950 |   | — |   |
| Deferred revenue                                                                                              |       | (970                                        | )          | 1,110 |   | 2,092 |   |
| Other long-term  liabilities                                                                                  |       | 63                                          |       | (88 | ) | 323 |   |
| Net cash used in  operating activities                                                                        |       | (31,140                                     | )          | (18,293 | ) | (21,260 | ) |
| **Cash flows from investing activities:**                                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of  investments                                                                                      |       | (108,067                                    | )          | (106,867 | ) | (51,004 | ) |
| Proceeds from  maturity of investments                                                                        |       | 102,650                                     |       | 115,784 |   | — |   |
| Purchase of fixed  assets                                                                                     |       | (1,057                                      | )          | (1,440 | ) | (2,305 | ) |
| Proceeds from sale  of fixed assets                                                                           |       | —                                      |       | 22 |   | — |   |
| Cash received for  sale of Biotage                                                                            |       | —                                      |       | — |   | 5,000 |   |
| Restricted cash                                                                                               |       | (7,099                                      | )          | 199 |   | 597 |   |
| Licensed patent  technology                                                                                   |       | —                                      |       | — |   | (20 | ) |
| Investment in  joint venture (Dyax-Genzyme LLC)                                                               |       | (9,828                                      | )          | (10,760 | ) | (5,425 | ) |
| Net cash used in  investing activities                                                                        |       | (23,401                                     | )          | (3,062 | ) | (53,157 | ) |
| **Cash flows from financing activities:**                                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from the  issuance of common stock under employee stock purchase plan and exercise of  stock options |       | 416                                         |       | 488 |   | 2,054 |   |
| Net proceeds from  common stock offerings                                                                     |       | 30,164                                      |       | 23,544 |   | 44,749 |   |
| Proceeds from long-term  obligations, net of fees                                                             |       | 30,379                                      |       | 941 |   | 1,408 |   |
| Debt acquisition  costs                                                                                       |       | (257                                        | )          | — |   | — |   |
| Repayment of long-term  obligations                                                                           |       | (3,464                                      | )          | (1,889 | ) | (3,304 | ) |
| Net cash provided  by financing activities                                                                    |       | 57,238                                      |       | 23,084 |   | 44,907 |   |
| Effect of foreign  currency translation on cash balances                                                      |       | (42                                         | )          | (67 | ) | (20 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                         |       | 2,655                                       |       | 1,662 |   | (29,530 | ) |
| Cash and cash  equivalents at beginning of the period                                                         |       | 8,640                                       |       | 6,978 |   | 36,508 |   |
| Cash and cash  equivalents at end of the period                                                               |       | $                                           | 11,295     |   | $ | 8,640 |   | $ | 6,978 |   |
| **Supplemental  disclosure of cash flow information:**                                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                                                                                 |       | 1,108                                       |       | $ | 1,077 |   | $ | 1,432 |   |
| **Supplemental  disclosure of non cash investing and financing activities:**                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Acquisition of  property and equipment under long-term obligations                                            |       | 584                                         |       | $ | 204 |   | $ | 212 |   |
| Cash paid for  licensed patent technology                                                                     |       | $                                           | —     |   | $ | — |   | $ | 20 |   |

 

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

52

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

**1.**   Natureof Business

Dyax Corp. (Dyax or the Company) is abiopharmaceutical company focused on the discovery, development andcommercialization of novel biotherapeutics for unmet medical needs, with anemphasis on cancer and inflammatory indications. To help achieve this goal,Dyax has developed a proprietary drug discovery technology to identifyantibody, small protein and peptide compounds for clinical development. Dyaxalso leverages this technology through collaborations and licenses designed togenerate revenues through funded research, license fees, milestone payments androyalties.

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

**2.**   AccountingPolicies

*Basisof Consolidation:*   The accompanying consolidatedfinancial statements include the accounts of the Company and its Europeanresearch subsidiaries Dyax S.A. and Dyax BV (formerly known as TargetQuest BV).All inter-company accounts and transactions have been eliminated.

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

*Concentrationof Credit Risk:*   Financial instruments thatpotentially subject the Company to concentrations of credit risk consistprincipally of cash, cash equivalents, short-tem investments and trade accountsreceivable. At December 31, 2006 and 2005, approximately 93% and 83% ofthe Company’s cash, cash equivalents and short-term-investments were investedin money market funds backed by U.S. Treasury obligations, U.S. Treasury notesand bills, 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. Concentrationsof credit risk with respect to trade receivable balances are limited due to thediverse number of customers comprising the Company’s customer base. Receivablewrite offs in 2006, 2005 and 2004 were nominal. One customer accounted forapproximately 15% and 18% of the Company’s accounts receivable balance at December 31,2006 and 2005, respectively. Three other customers accounted for 34%, 11% and11% of the accounts receivable balance as of December 31, 2006. Two othercustomers accounted for 24% and 22% of the accounts receivable balance as of December 31,2005.

53

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

**2.**   Accounting Policies (Continued)

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

*Investments:*   Short-terminvestments consist of investments with original maturities greater than ninetydays and less than one year when purchased. Long-term investments consist ofinvestments with original maturities of greater than one year when purchased.The Company considers its investment portfolio of investmentsavailable-for-sale as defined by SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.Accordingly, these investments are recorded at fair value, which is based onquoted market prices. As of December 31, 2006, the Company’s short-terminvestments consist of U.S. Treasury notes and bills with an amortized cost andestimated fair value of $47.2 million and had an unrealized gain of $11,000,which is recorded in other comprehensive income on the accompanyingconsolidated balance sheets. All short-term investments mature in one year orless. As of December 31, 2006, the Company had a long-term investment withan amortized cost and estimated fair value of $2.0 million. As of December 31,2005, the Company’s short-term investments consist of U.S. Treasury notes andbills with an amortized cost and estimated fair value of $42.0 million and hadan unrealized loss of $42,000, which is recorded in other comprehensive incomeon the accompanying consolidated balance sheets.

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

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

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

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

The Company enters into biopharmaceutical productdevelopment agreements with collaborative partners for the research anddevelopment of therapeutic, diagnostic and separations products. The terms ofthe agreements may include non-refundable signing and licensing fees, fundingfor research and development, milestone payments and royalties on any productsales derived from collaborations. Non-

54

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

**2.**   Accounting Policies (Continued)

refundable signing andlicensing fees are recognized as services are performed over the expected termof the collaboration. Funding for research and development, where the amountsrecorded are non-refundable is recognized as revenue as the related expensesare incurred. Milestones that are based on designated achievements points andthat are considered at risk and substantive at the inception of thecollaboration are recognized as earned when the corresponding payment is consideredreasonably assured. The Company evaluates whether milestones are at risk andsubstantive based on the contingent nature of the milestone, specificallyreviewing factors such as the technological and commercial risk that must beovercome and the level of the investment required. Milestones that are notconsidered at risk and substantive are recognized, when achieved, in proportionto the percentage of the collaboration completed through the date ofachievement. The remainder is recognized as services are performed over theremaining term of the collaboration. Royalties are recognized when earned.Costs of revenues related to product development and license fees areclassified as research and development in the consolidated statements ofoperations and comprehensive loss. The Company evaluates all collaborativeagreements on a quarterly basis to determine the appropriate revenuerecognition for that period. The evaluation includes all of the potentialrevenue components from each specific collaborative agreement.

Debiopharm S.A. accounted for approximately 29%, 31%and 36% of product development and license fee revenues in 2006, 2005 and 2004,respectively. Bracco Imaging S.p.A accounted for approximately 13%, 11% and 11%of product development and license fee revenues in 2006, 2005 and 2004,respectively.

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

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

The Company has received a grant from the Walloon regionof Belgium, which is included in short-term liabilities on theconsolidated balance sheet. This grant includes specific criteria regardingemployment and corporate investment that need to be met through 2006. In thefirst half of 2007 these criteria will be reviewed by the grantor to determineif they have been successfully met. If the Company has not met the criteria, itwill be required to refund all or a portion of amounts received under thisgrant. As 

55

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

**2.**   Accounting Policies (Continued)

of December 31, 2004,the Company had received the entire grant amount of €825,000.This amount translates to $1.1 million and $977,000 at December 31, 2006and 2005, respectively.

*Guarantees:*   InNovember 2002, the Financial Accounting Standards Board (FASB) issued FIN No. 45Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers. The following is a summary of our agreements that the Companyhas determined are within 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, 2006 and 2005.

*Investmentin Joint Venture (Dyax-Genzyme LLC):*   In September 2003,Genzyme and Dyax formed a joint venture, Dyax-Genzyme LLC (the LLC), to managethe DX-88 program for HAE. Dyax and Genzyme hold a 50.01% and 49.99%interest in the LLC, respectively. Research and development expenses incurredby each party related to the HAE program are billed to and reimbursed by theLLC. The Company presents this reimbursement as a reduction in research and developmentexpenses because it includes funding that the Company provided to the LLC. TheCompany has evaluated this agreement to determine if the related joint venturequalifies as a variable interest entity under FASB Interpretation No. 46R,*Consolidation of Variable Interest Entities*(FIN 46R). Genzyme and Dyax fund the operations of the LLC on a monthly basisand therefore 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 additional subordinated financialsupport. The Company has a financial interest in the LLC. However, based on itsanalysis of the agreement, the Company believes that its exposure to theexpected losses of the LLC are slightly less than Genzyme’s and therefore isnot the primary beneficiary of the LLC under Paragraph 17 of FIN 46R.Accordingly, the Company has not consolidated the LLC. The Company hasaccounted for its interest in the LLC using the equity method of accounting.Dyax’s 50.01% share of the joint venture’s loss is recorded as an Equity Lossin Joint Venture (Dyax-Genzyme LLC).

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

*IncomeTaxes:*   The Company utilizes the asset andliability method of accounting for income taxes as set forth in SFAS No. 109, *Accounting for Income Taxes* (SFAS No. 109).Under this method, deferred tax 

56

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

**2.**   Accounting Policies (Continued)

assets and liabilities arerecognized for the expected future tax consequences of temporary differencesbetween the carrying amounts and the tax basis of assets and liabilities usingthe current statutory tax rates.

*Translationof Foreign Currencies:*   Assets and liabilities ofthe Company’s foreign subsidiaries are translated at period end exchange rates.Amounts included in the statements of operations are translated at the averageexchange rate for the period. The resulting currency translation adjustmentsare made directly to a separate component of stockholders’ equity in theconsolidated balance sheets. For the year ending December 31, 2006, 2005and 2004 losses from transactions in foreign currencies were $66,000, $50,000and $27,000, respectively, which are included in the consolidated statements ofoperations and comprehensive loss.

*Share-BasedCompensation:***  **EffectiveJanuary 1, 2006, the Company adopted the provisions of SFAS 123(Revised 2004) “Share-Based Payments” (SFAS 123R) which required it torecognize the expense related to the fair value of stock-based compensationawards in the consolidated statement of operations. The Company elected tofollow the modified prospective transition method allowed by SFAS 123R,and therefore, only applied the provisions of SFAS 123R to awards modifiedor granted after January 1, 2006. In addition, for awards which wereunvested as of January 1, 2006 it will recognize compensation expense inthe consolidated statement of operations over the remaining vesting period.Prior to January 1, 2006, the Company accounted for stock-basedcompensation using the intrinsic value method prescribed in APB No. 25, “Accountingfor Stock Issued to Employees.”  TheCompany has elected to adopt the alternative transition method provided in FASBissued Staff Position No. FAS 123R-3, “Transition Election Relatedto Accounting for the Tax Effects of Share-Based Payment Awards”. The alternativetransition method includes simplified methods to establish the beginningbalance of the additional paid-in capital pool (“APIC pool”) related to the taxeffects of stock-based compensation, and for determining the impact on the APICpool and consolidated  statements of cashflows of the tax effects of stock-based compensation that are outstanding uponadoption of FAS 123R.

*Net LossPer Share:*   The Company accounts for anddiscloses earnings per share (EPS) under SFAS No. 128, *Earnings per Share* (SFAS No. 128).Under SFAS No. 128, the Company is required to present two EPS amounts,basic and diluted. Basic net loss per share is computed using the weightedaverage number of shares of common stock outstanding. Diluted net loss pershare does not differ from basic net loss per share since potential commonshares from the exercise of stock options are anti-dilutive for all periodspresented and, therefore, are excluded from the calculation of diluted net lossper share. Stock options, which are potentially dilutive, totaling 5,860,432,4,949,927 and 3,845,785, were outstanding at December 31, 2006, 2005 and2004, respectively.

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

*BusinessSegments:*   The Company discloses businesssegments under SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information* (SFAS No. 131).The statement established standards for reporting information about operatingsegments in annual financial statements of public enterprises and in interim financialreports issued to shareholders. It also established standards for related 

57

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

**2.**   Accounting Policies (Continued)

disclosures about productsand services, geographic areas and major customers. The Company operates as onebusiness segment in two geographic areas.

*RecentPronouncements:  *In March 2005, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations,” which is aninterpretation of FASB Statement No. 143, “Accounting for Asset RetirementObligations.” The interpretation requires that a liability for the fair valueof a conditional asset retirement obligation be recognized if the fair value ofthe liability can be reasonably estimated. The interpretation is effective foryears ending after December 15, 2005. The interpretation did not have amaterial impact on the Company’s results of operations, financial position orcash flows.

In May 2005, the FASB issued FASB Statement No. 154,“Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20“Accounting Changes” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements” (FAS 154). FAS 154 provides guidanceon the accounting for and reporting of accounting changes and errorcorrections. It established, unless impracticable, retrospective application asthe required method for reporting a change in accounting principle in theabsence of explicit transition requirements specific to the newly adoptedaccounting principle. FAS 154 also provides guidance for determining whetherretrospective application of a change in accounting principle is impracticableand for reporting a change when retrospective application is impracticable. Theprovisions of this Statement are effective for accounting changes andcorrections of errors made in fiscal periods beginning after December 15,2005.

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes”, an interpretation ofFASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting foruncertainties in income taxes recognized in an enterprise’s financialstatements. The Interpretation requires that we determine whether it is morelikely than not that a tax position will be sustained upon examination by theappropriate taxing authority. If a tax position meets the more likely than notrecognition criteria, FIN 48 requires the tax position be measured at thelargest amount of benefit greater than 50 percent likely of being realized uponultimate settlement. This accounting standard is effective for the Company thefiscal periods beginning January 1, 2007. The Company is currentlyevaluating the impact, if any, that FIN 48 will have on its financialstatements.

In September 2006, the SEC issued StaffAccounting Bulletin No. 108 (SAB 108) “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements”. SAB 108 addresses how the effects of prior year uncorrectedmisstatements should be considered when quantifying misstatements in currentyear financial statements. SAB 108 requires companies to quantify misstatementsusing a balance sheet and income statement approach and to evaluate whethereither approach results in quantifying an error that is material in light ofrelevant quantitative and qualitative factors. When the effect of initialadoption is material, companies will record the effect as a cumulative effectadjustment to beginning of year retained earnings. The provisions of SAB 108are effective for annual statements covering the first fiscal year after November 15,2006. The adoption of SAB 108 did not have a material impact on the Company’sfinancial position or results of operations.

58

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

**2.**   Accounting Policies (Continued)

In September 2006,the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157,Fair Value Measurements. This statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. This statement appliesunder other accounting pronouncements that permit or require fair valuemeasurements. The provisions of SFAS No. 157 become effective for fiscalyears beginning after November 15, 2007. The effect, if any, on theCompany’s financial position and results of operations has not been finalized.

**3.**   FixedAssets

Fixedassets consist of the following:

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(In thousands)**    | ** ** |
| Laboratory  equipment                            |       | $                     | 10,284     |   | $ | 9,497 |   |
| Furniture and  office equipment                  |       | 1,160                 |       | 1,235 |   |
| Software and  computers                          |       | 3,838                 |       | 3,167 |   |
| Leasehold  improvements                          |       | 10,407                |       | 10,380 |   |
| Total                                            |       | 25,689                |       | 24,279 |   |
| Less: accumulated  depreciation and amortization |       | (16,729               | )          | (14,119 | ) |
|                                             |       | $                     | 8,960      |   | $ | 10,160 |   |

 

There was $7.0 million and$8.9 million of assets under capital leases, which includes laboratory andoffice equipment, with related accumulated amortization of $4.1 million and$6.2 million, at December 31, 2006 and 2005, respectively. Amortization ofassets under capital leases is included in depreciation and amortization offixed assets on the consolidated statements of cash flow.

**4.**   IntangibleAssets

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

As of December 31, 2006 and 2005, the grosscarrying amount of the intangible assets, consisting of the licensed patenttechnology, was $3.5 million and the related accumulated amortization was$2.1 million and $1.6 million, respectively.

59

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

**4.   Intangible Assets(Continued)**

Estimatedfour year future amortization expense for other intangible assets as of December 31,2006 are as follows:

| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2007       |       |                    | $          | 502 |   |   |
| 2008       |       |                    | 502        |   |   |
| 2009       |       |                    | 419        |   |   |
| 2010       |       |                    | 2          |   |   |

 

**5.**   AccountsPayable and Accrued Expenses

Accountspayable and accrued expenses consist of the following:

| ** **                                                            | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                            | ** ** | **(In thousands)** | ** ** |
| Accounts payable                                                      |       | $                       | 1,094      |   | $ | 698 |   |
| Accrued external  research and development and contract manufacturing |       | 3,237                   |       | 1,597 |   |
| Accrued employee  compensation and related taxes                      |       | 2,845                   |       | 2,509 |   |
| Other accrued  liabilities                                            |       | 1,639                   |       | 1,473 |   |
| Accrued legal                                                         |       | 473                     |       | 709 |   |
|                                                                  |       | $                       | 9,288      |   | $ | 6,986 |   |

 

**6.**   Long-termObligations

Long-termobligations consist of the following:

| ** **                                               | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                               | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(In thousands)** | ** ** |
| Obligations under  royalty interest assignment agreement |       | $                       | 30,727     |   | $ | — |   |
| Obligations under  capital lease arrangements            |       | 2,500                   |       | 2,797 |   |
| Obligation under  leasehold improvement arrangements     |       | 1,601                   |       | 1,792 |   |
| Total long-term  obligations                             |       | 34,828                  |       | 4,589 |   |
| Less: current  portion                                   |       | (1,618                  | )          | (1,770 | ) |
| Long-term obligations                                    |       | $                       | 33,210     |   | $ | 2,819 |   |

 

*Obligations underroyalty interest assignment agreement:*

On August 23, 2006, the Company entered into aRoyalty Interest Assignment Agreement with Paul Royalty Fund Holdings II, LP(Paul Royalty), an affiliate of Paul Capital Partners, pursuant to whichDyax received a $30.0 million upfront cash payment in exchange for grantingPaul Royalty the right to receive a specified percentage of the net milestones,royalties and other license fees receivable by Dyax under its phage displayLicensing and Funded Research Program, (LFRP). Dyax also has an option to receivean additional $5.0 million payment from Paul Royalty in the event that the LFRPreceipts achieve specified levels by the end of 2008. In conjunction with thistransaction, Dyax reimbursed Paul Royalty $500,000 for its costs.

60

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

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

Under the terms of the agreement, Paul Royalty isentitled to 70% of the first $15.0 million of annual net LFRP receipts, 20% ofthe next $5.0 million of annual net LFRP receipts and 1% of annual net LFRPreceipts above $20.0 million. These percentages will increase on a pro ratabasis if Dyax is eligible to and exercises its option for the additional $5.0million payment. The agreement also provides for annual guaranteed minimumpayments to Paul Royalty, which start at $1.75 million through 2007, increasingto $3.5 million in 2008 and 2009, $6.0 million for years 2010 through 2013 and$7.0 million for years 2014 through 2017. Paul Royalty’s rights to receive aportion of LFRP receipts will continue for up to 12 years, depending upon theperformance of the LFRP. Upon termination of the agreement, all rights to LFRPreceipts will revert to Dyax.

In the event of (i) a change of control of Dyax, (ii) abankruptcy of Dyax, (iii) a transfer by Dyax of a majority of its assetsthat has a material effect on either the net present value of the projectedLFRP receipts or Dyax’s ability to pay the guarantees minimum payments, (iv) atransfer by Dyax of any part of the assets supporting the LFRP program otherthan in the ordinary course of business, or (v) any breach of certainmaterial covenants and representations in the agreement, Paul Royalty has theright to require Dyax to repurchase from Paul Royalty its royalty interest at aprice in cash which equals the greater of (a) two hundred percent of thecumulative payments made by Paul Royalty under the agreement less thecumulative payments previously received by Paul Royalty from the LFRP or (b) theamount which will provide Paul Royalty, when taken together with the royaltiespreviously paid, a specified rate of return of 25%.

In the event of breaches of certain otherrepresentations or covenants or the occurrence of certain other events thathave a material adverse effect on projected revenues under the LFRP, PaulRoyalty has the right to require Dyax to repurchase from Paul Royalty itsroyalty interest at lower prices. If such an event occurs before the end of2010, the price will be the greater of (a) 110% of the cumulative paymentsmade by Paul Royalty under the agreement less the cumulative paymentspreviously received by Paul Royalty from the LFRP or (b) the amount whichwill provide Paul Royalty, when taken together with the receipts previouslypaid over to Paul Royalty, a 10% rate of return. If such an event occursafter 2010, the price will be the greater of (a) 150% of the cumulativepayments made by Paul Royalty under the agreement less the cumulative paymentspreviously received by Paul Royalty from the LFRP or (b) the amount whichwill provide Paul Royalty, when taken together with the receipts previouslypaid to Paul Royalty, a 15% rate of return. Alternatively with respect toevents that have a material adverse effect, Dyax can avoid the requirement ofrepurchasing Paul Royalty’s entire interest in the LFRP by making annual paymentsto Paul Royalty equal to the difference between the actual receipts and theprojected LFRP receipts. Dyax’s right to make these alternative paymentsexpires if (a) in any two consecutive calendar years (excluding 2007), thetotal alternative payments equal or exceed 50% of Paul Royalty’s percentageof  the projected LFRP receipts in each of those years, (b) in anythree consecutive calendar years (excluding 2007), the total alternativepayments equal or exceed 33% of Paul Royalty’s percentage of the projected LFRPreceipts in each of those years or (c) if there are certain other materialfailures in the LFRP.

In addition, Dyax has the right, but not theobligation, to repurchase the Paul Royalty royalty interest at a price in cashwhich will provide Paul Royalty, when taken together with the royaltiespreviously paid, with the greater of (i) 175% of the payments made by PaulRoyalty under the agreement until August 23, 2008 or 200% of the paymentsmade by Paul Royalty under the agreement thereafter or (ii) an amount 

61

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

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

sufficient to provide aspecified rate of return of 25%. The agreement also contains certain customaryrepresentations, warranties and indemnities.

Pursuant to the terms of the agreement, Dyax hasentered into security and lock-box agreements granting Paul Royalty a securityinterest in and to substantially all assets related to the LFRP in order tosecure performance under the agreement and receipt of its agreed share of LFRPreceipts.

The upfront cash payment of $30.0 million, less the$500,000 in cost reimbursements paid to Paul Royalty was recorded as a debtinstrument in long-term obligations on the Company’s Consolidated Balance Sheet.Based upon estimated future payments expected under this agreement, the Companydetermined the interest expense by using the effective interest method. Thebest estimate of future payments was based upon returning to Paul Royalty aninternal rate of return of 25% through net LFRP receipts, which approximates$113.4 million in total payments to Paul Royalty. During the twelve monthsended December 31, 2006, the Company made payments totaling $1.5 millionrelated to this obligation to Paul Royalty. Due to the application of theeffective interest method and the total expected payments, the Company recordedinterest expense of $2.7 million of which no amount was allocated to theprincipal amount. The debt balance at December 31, 2006 was $30.7 million.

The Company capitalized$257,000 of debt issuance costs related to the agreement which are beingamortized over the term of the related debt using the effective interest method.At December 31, 2006, the unamortized debt issuance costs were $249,000and are included in other assets on the Company’s consolidated balance sheet.

*Obligations under capitallease arrangement:*

During 2001, Dyax S.A., the Company’s researchsubsidiary located in Belgium, signed a capital lease for the purchase ofqualified fixed assets. During the years ended December 31, 2006, 2005 and2004, Dyax S.A. sold to and leased back from the lender a total of$61,000, $25,000, and $431,000, respectively, of laboratory and officeequipment. No gain or loss was recorded as part of these transactions. Interestpursuant to this capital lease ranges between 4.38% and 11.18%. Principal andinterest are payable quarterly over 60 months. Dyax S.A. was required toprovide cash collateral totaling $66,000 and $108,000 at December 31, 2006and 2005, which is included in restricted cash on the Company’s consolidatedbalance sheets. As of December 31, 2006 and 2005, there was $343,000 and$621,000 (included in obligations under capital lease arrangements) outstandingunder the loan, which is included in long-term obligations on the Company’sconsolidated 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% and10.76%. Principal and interest are payable ratably over 24 months to 42 months.Capital lease obligations are collateralized by the assets under lease. Duringthe years ended December 31, 2006, 2005, and 2004, the Company sold to andleased back from the lender $1.1 million, of leasehold improvements,laboratory, production and office equipment. During August 2003, theCompany refinanced $1.3 million of the outstanding capital leases under theagreement. No gain or loss was recorded as part of these transactions. As of December 31,2006 and 2005, there was $1.9 million and $2.2 million (included in obligationsunder capital lease arrangements) outstanding related to capital leases, whichis included in long-term obligations on the Company’s consolidated balancesheets. During 2004, the Company paid off its debt relating to 

62

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

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

leasehold improvements andas of December 31, 2006 and 2005 there was $0 (included in obligationsunder promissory notes) outstanding related to the leasehold improvements debtagreement.

During 2005, Dyax S.A. signed a capital lease for thepurchase of qualified fixed assets. During the year ended December 31,2005 Dyax S.A. sold to and leased back from the lender a total of $31,000 oflaboratory and office equipment. No gain or loss was recorded as part of thistransaction. Interest pursuant to this capital lease is 7.17%. Principle andinterest are payable quarterly over 36 months. As of December 31, 2006 and2005 there was $17,000 and $24,000, respectively, (included in obligationsunder capital lease arrangements) outstanding under the loan, which is includedin long-term obligations on the Company’s consolidated balance sheets.

During 2006, the Companysigned a capital lease for the purchase of a fixed asset for a total of$340,000. Interest pursuant to this lease is 0%. As of December 31, 2006,there was $217,000 outstanding related to the capital leases, which is includedin long-term obligations on the Company’s consolidated 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, 2006, and 2005, there was $1.6 million and$1.8 million outstanding under the loan, which is included in long-termobligations on the Company’s consolidated balance sheets.

Minimum future payments under the Company’s long-termobligations as of December 31, 2006 are as follows:

| ** **                                | ** ** | **(In thousands)** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| 2007                                      |       |                    | $          | 7,228 |   |   |
| 2008                                      |       |                    | 8,266      |   |   |
| 2009                                      |       |                    | 6,243      |   |   |
| 2010                                      |       |                    | 11,232     |   |   |
| 2011                                      |       |                    | 11,584     |   |   |
| Thereafter                                |       |                    | 71,761     |   |   |
| Total future  minimum payments            |       |                    | 116,314    |   |   |
| Less: amount  representing interest       |       |                    | 81,486     |   |   |
| Present value of  future minimum payments |       |                    | 34,828     |   |   |
| Less: current  portion                    |       |                    | (1,618     | ) |   |
| Long-term  obligations                    |       |                    | $          | 33,210 |   |   |

 

63

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

**7.**   OperatingLeases

In June of 2001, the Company signed a ten-yearlease with the Massachusetts Institute of Technology (MIT) for office space inthe building known as 300 Technology Square in Cambridge, Massachusetts.This building, which was sold by MIT to ARE-Tech Square, LLC inJune of 2006,****serves ascorporate headquarters and main research facility. As part of the lease agreement,the Company received a $2.3 million leasehold improvement incentive in2002. The leasehold improvement incentive was recorded as deferred rent and isbeing amortized as a reduction to rent expense over the lease term.  The Company currently leases approximately67,000 square feet and is obligated to lease approximately 24,000 square feetof additional space on November 1, 2007, which we expect to sublease tothe two tenants currently occupying such space. Under the terms being finalizedwith these tenants, both subleases will be due to expire on October 31,2009. The Company has the option to extend the lease for two additionalfive-year terms. The Company has provided the lessor with a Letter of Credit inthe amount of $4.3 million, which may be reduced after the fifth year ofthe lease term. The cash collateral is included in restricted cash on theconsolidated balance sheets.  Dyax S.A.maintains 10,000 square feet of leased laboratory and office space in Liege,Belgium to support research efforts.

Minimumfuture lease payments under the Company’s non-cancelable operating leases as ofDecember 31, 2006 are as follows:

| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2007       |       |                    | $          | 4,432 |   |   |
| 2008       |       |                    | 5,473      |   |   |
| 2009       |       |                    | 5,466      |   |   |
| 2010       |       |                    | 5,466      |   |   |
| 2011       |       |                    | 5,466      |   |   |
| Thereafter |       |                    | 5,388      |   |   |
| Total      |       |                    | $          | 31,691 |   |   |

 

Rent expense for the yearsended December 31, 2006, 2005, and 2004 was approximately $4.6 million,$3.8 million and $3.6 million, respectively. Rent expense for December 31,2006, 2005 and 2004 was net of sublease payments of $614,000, $806,000 and $1.2million respectively.

**8.**   Litigation

As of December 31,2006, 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 claims wherethere is a range of loss and the loss is considered probable. As additionalinformation becomes available, the Company assesses the potential liabilityrelated to its pending claims and revises its estimates. Future revisions inthe estimates of the potential liability could materially impact the results ofoperations and financial position. The Company maintains insurance coveragethat limits the exposure for any single claim as well as total amounts incurredper policy year, and it believes that its insurance coverage is adequate. TheCompany makes every effort to use the best information available in determiningthe level of liability reserves.

64

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

**9.**   Stockholders’Equity

*PreferredStock:*   As of December 31, 2006 and 2005,there were a total of 1,000,000 shares of $0.01 par value preferred stockauthorized with 950,000 undesignated and 50,000 shares of previouslyundesignated preferred stock designated as Series A Junior ParticipatingPreferred Stock.

*CommonStock:*   In January 2004, the Company sold6,000,000 shares of common stock (including 780,000 shares pursuant to theexercise by the underwriters of their over-allotment option), at a price of$7.93 per share in a registered underwritten public offering, which resulted inaggregate proceeds of approximately $47.6 million, not includingunderwriter discount of $2.6 million and expenses of approximately$215,000.

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

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

In March 2006, theCompany sold 5,500,000 shares of its common stock at a price of $5.65 per sharein an underwritten public offering, which resulted in net proceeds to theCompany of approximately $30.1 million.

*Effect of Adoptionof SFAS 123R, Share-Based Payment*

Prior to December 31, 2005, the Company’semployee stock compensation plans were accounted for in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB 25) and related interpretations. Under this method, nocompensation expense was recognized as long as the exercise price equaled orexceeded the market price of the underlying stock on the date of the grant. TheCompany elected the disclosure-only alternative permitted under Statement ofFinancial Accounting Standards (SFAS) No. 123, “Accounting for Stock-BasedCompensation” (SFAS 123) as amended by SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure and Amendment to FASBStatement No. 123”.

On December 28, 2005, the Company approved anamendment to accelerate the vesting of approximately 714,000 unvested, “out-of-the-money”stock options granted to current employees of the Company including executiveofficers. Only those stock options which had an exercise price greater than$6.00 per share were accelerated under this amendment. The closing price ofDyax’s common stock on December 27, 2005, the day before the date theCompany approved the acceleration of vesting of out-of-the-money options, was$4.92. The purpose of the acceleration was to enable the Company to avoid recognizingcompensation expense associated with these options in its consolidatedstatements of operations for future periods following the adoption ofSFAS 123R, which Dyax adopted effective January 1, 2006. Theunaudited, pre-tax charge, estimated by Dyax to be avoided as a result of theacceleration was approximately $7.2 million over the course of the originalvesting periods, which on average covered approximately 2.5 years from theeffective date of the acceleration. The unaudited amount of the pre-tax chargethat was avoided is estimated to be $2.4 million in 2006, $2.4 million in 2007,$2.3 million in 2008 and $100,000 in 2009.

65

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

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

As of January 1, 2006, the Company adopted SFAS123R using the modified prospective method, which requires measurement ofcompensation cost for all stock awards at fair value on date of grant andrecognition of compensation over the service period for awards expected tovest. The fair value of stock options was determined using the Black-Scholesvaluation model, which is consistent with the valuation techniques previouslyutilized by the Company for options in footnote disclosures required under SFAS123. Such value is recognized as expense over the service period, net ofestimated forfeitures and adjusted for actual forfeitures. The estimation ofstock options that will ultimately vest requires significant judgment. The Companyconsiders many factors when estimating expected forfeitures, includinghistorical experience. Actual results and future changes in estimates maydiffer substantially from the Company’s current estimates. Prior periods havenot been restated to incorporate the stock-based compensation charge. Theeffect of adopting SFAS 123R on January 1,2006 caused our net loss for the year ended December 31, 2006 to be $2.3million greater than had we continued to account for stock-based employeecompensation under APB 25. Basic and diluted net loss per share for the yearended December 31, 2006 would have been $1.13 had we not adopted SFAS123R, compared to reported basic and diluted net loss per share of $1.18. Theadoption of SFAS 123R had no impact on cash flows from operations or financing.No tax benefits were assumeddue to the valuation allowances established against the deferred tax assets.(See Footnote 11 “Income Taxes”).

Thefollowing table reflects compensation expense recorded during the year ended December 31,2006 in accordance with SFAS 123R (in thousands):

| ** **                                                                                                                   | ** ** | **Year Ended**             | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                   | ** ** | **December 31, 2006** | ** ** |
| Stock options                                                                                                                |       |                            | $          | 2,168 |   |   |
| Employee stock  purchase plan                                                                                                |       |                            | 114        |   |   |
|                                                                                                                         |       |                            | $          | 2,282 |   |   |
| Amount included  in research and development expenses in the consolidated statements of  operations and comprehensive loss   |       |                            | $          | 1,249 |   |   |
| Amount included in  general and administrative expenses in the consolidated statements of  operations and comprehensive loss |       |                            | $          | 1,033 |   |   |

 

*ValuationAssumptions for Stock Options and Employee Stock Purchase Plans*

Forthe years ended December 31, 2006, 2005 and 2004, 1,436,575, 2,351,750,and 1,252,753 stock options were granted, respectively. The fair value of eachoption was estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions:

| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected Option  Term (in years) |       | 6                                          |       | 6 |   | 6 |   |
| Risk-free  interest rate         |       | 4.76                                       | %          | 4.04 | % | 3.75 | % |
| Expected dividend  yield         |       | 0                                          |       | 0 |   | 0 |   |
| Volatility factor                |       | 88.48                                      | %          | 174.94 | % | 108.67 | % |

 

66

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

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

The fair value of sharesissued under the employee stock purchase plan was estimated on the commencementdate of each offering period using the Black-Scholes option-pricing model withthe following assumptions:

| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected Option  Term (in years) |       | 0.5                                        |       | 0.5 |   | 0.5 |   |
| Risk-free  interest rate         |       | 3.67                                       | %          | 3.37 | % | 1.36 | % |
| Expected dividend  yield         |       | 0                                          |       | 0 |   | 0 |   |
| Volatility factor                |       | 90.20                                      | %          | 143.31 | % | 121.41 | % |

 

Expected volatilities arebased on historical volatilities of our common stock; the expected liferepresents the weighted average period of time that options granted areexpected to be outstanding giving consideration to vesting schedules and ourhistorical exercise patterns; and the risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant for periods correspondingwith the expected life of the option.

*Fair ValueDisclosures—Prior to SFAS 123R Adoption*

Thefollowing table provides supplemental information for the years ended December 31,2005 and 2004 as if stock-based compensation had been computed under SFAS 123(in thousands, except per share data):

| ** **                                                                                                        | ** ** | **Year Ended  December 31,** | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2005**                               | ** ** | **2004**                               | ** ** |
| Net loss as  reported                                                                                             |       |                                   | $          | (30,944                                | )          |   |   | $ | (33,114 | ) |   |
| Non-cash  stock-based employee compensation included in net loss as reported                                      |       |                                   | 24         |                                   |       |   | 312 |   |   |
| Less: Total  stock-based employee compensation expense determined using a fair value-based  method for all awards |       |                                   | (8,563     | )                                      |       |   | (10,890 | ) |   |
| Pro forma net loss                                                                                                |       |                                   | $          | (39,483                                | )          |   |   | $ | (43,692 | ) |   |
| Basic and diluted net loss per share as reported                                                                  |       |                                   | $          | (0.87                                  | )          |   |   | $ | (1.06 | ) |   |
| Pro forma basic and  diluted net loss per share                                                                   |       |                                   | $          | (1.11                                  | )          |   |   | $ | (1.40 | ) |   |

 

No tax benefits wereprovided in the above table due to the valuation allowances established againstthe deferred tax assets. (See Footnote 11 “Income Taxes”).

*Equity IncentivePlan*

The Company’s 1995 EquityIncentive Plan (the “Plan”), as amended to date, 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 

67

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

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

date ofgrant. The Plan is intended to attract and retain employees and to provide anincentive for them to assist the Company to achieve long-range performancegoals and to enable them to participate in the long-term growth of the Company.At December 31, 2006, a total of 7,432,306 shares were reserved under thisplan.

*Stock OptionActivity*

Thefollowing table summarizes stock option activity for the year ended December 31,2006:

| ** **                                | ** ** | **Number of  Options** | ** ** | **Weighted-Avg.  Exercise Price** | ** ** | **Weighted-Avg.  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value (in  thousands)** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding as of  December 31, 2005 |       | 4,958,927                   |       |                                   | $          | 6.70                                            |       |                                                 |       | 7.38 |   |   |   |   |   |   |
| Granted at fair  market value             |       | 1,436,575                   |       |                                   | 3.12       |                                            |       |                                                 |       |   |   |   |   |   |   |
| Exercised                                 |       | (73,117                     | )          |                                   | 1.57       |                                            |       |                                                 |       |   |   |   |   |   |   |
| Forfeited                                 |       | (185,743                    | )          |                                   | 3.98       |                                            |       |                                                 |       |   |   |   |   |   |   |
| Expired                                   |       | (276,210                    | )          |                                   | 9.13       |                                            |       |                                                 |       |   |   |   |   |   |   |
| Outstanding as of  December 31, 2006 |       | 5,860,432                   |       |                                   | 5.86       |                                            |       |                                                 | 7.07       |   |   |   | $ | 1,310 |   |   |
| Exercisable as of  December 31, 2006 |       | 3,759,715                   |       |                                   | $          | 7.08                                            |       |                                                 |       | 5.99 |   |   |   | $ | 1,214 |   |   |

 

The aggregate intrinsic value in the table above representsthe total intrinsic value, based on the Company’s common stock closing price of$3.03 as of December 31, 2006, which would have been received by theoption holders had all option holders exercised their options and sold theunderlying common stock as of that date. The total number of in-the-moneyoptions exercisable as of December 31, 2006 was 1,116,580.

The weighted average grant date fair value of options,as determined under SFAS 123R and SFAS 123, granted during the years ended December 31,2006, 2005 and 2004 was $2.37, $3.48 and $11.03 per share, respectively. Thetotal intrinsic value of options exercised during years ended December 31,2006, 2005 and 2004 was approximately $137,000, $325,000 and $4.8 million,respectively. The total cash received from employees as a result of employeestock option exercises during the years ended December 31, 2006, 2005 and2004 was approximately $115,000, $266,000 and $1.9 million, respectively.

As of December 31, 2006 future compensation costrelated to non-vested stock options is approximately $6.0 million and will berecognized over an estimated weighted average period of approximately1.51 years.

68

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

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

The following tablesummarizes non-vested stock option activity for the year ended December 31,2006:

| ** **                                    | ** ** | **Non-vested  Number of  Options** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| Non-vested  balance at December 31, 2005 |       | 1,564,002                               |       |
| Granted at fair  market value                 |       | 1,436,575                               |       |
| Vested                                        |       | (714,117                                | )          |
| Forfeited                                     |       | (185,743                                | )          |
| Non-vested balance at  December 31, 2006 |       | 2,100,717                               |       |

 

The total fair value of shares vested during the yearended December 31, 2006 was $2.2 million.

The Company settlesemployee stock option exercises with newly issued shares of common stock.

*Employee StockPurchase Plan*

The Company’s 1998Employee Stock Purchase Plan (the “Purchase Plan”), as amended in May 2002,allows employees to purchase shares of the Company’s common stock at a discountfrom fair market value. Under this plan, eligible employees may purchase sharesduring six-month offering periods commencing on January 1 and July 1of each year at a price per share of 85% of the lower of the fair market valueprice per share on the first or last day of each six-month offering period.Participating employees may elect to have up to 10% of their base pay withheldand applied toward the purchase of such shares. The rights of participatingemployees under this plan terminate upon voluntary withdrawal from the plan atany time or upon termination of employment. The compensation expense inconnection with the plan for the year ended December 31, 2006 wasapproximately $15,000. There were 98,621 and 46,789 shares purchased under theemployee stock purchase plan during the years ended December 31, 2006 and2005, respectively. At December 31, 2006, a total of 63,830 shares werereserved and available for issuance under this plan.

**10.**   EmployeeSavings and Retirement Plans

The Company has anemployee savings and retirement plan (the “Retirement Plan”), qualified under Section 401(k) ofthe Internal Revenue Code, covering substantially all of the Company’s U.S.employees. Employees may elect to contribute a portion of their pretaxcompensation to the Retirement Plan up to the annual maximum allowed under theRetirement Plan. In 2001, the Company began matching 50% of employeecontributions up to 6% of eligible pay. Employees are 100% vested in companymatching contributions immediately. For the years ended December 31, 2006,2005 and 2004, the Company’s contributions amounted to $332,000, $276,000 and$232,000, respectively.

**11.**   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.

69

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

**11.**   Income Taxes (Continued)

The provision for incometaxes for continuing operations was at rates different from the U.S. federalstatutory income tax rate for the following reasons: 

| ** **                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal  income taxes                                 |       | 34.00    | %          | 34.00    | %          | 34.00    | %          |
| State income  taxes, net of federal benefit                     |       | 5.67     | %          | 5.67     | %          | 6.71     | %          |
| Research and  development tax credits                           |       | 8.72     | %          | 15.04    | %          | 13.49    | %          |
| Other                                                           |       | 0.16     | %          | 0.18     | %          | (2.19    | )%         |
| True up for  reduction in NOL and Research Credit carryforwards |       | (7.76    | )%         | 9.87     | %          | (4.74    | )%         |
| Valuation  allowance                                            |       | (40.79   | )%         | (64.76   | )%         | (47.27   | )%         |
| Effective income tax  rate                                      |       | —   | %          | —   | %          | —   | %          |

 

Theprincipal components of the Company’s deferred tax assets and liabilities at December 31,2006 and 2005, respectively are as follows:

| ** **                        | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                        | ** ** | **(in Thousands)** | ** ** |
| Deferred Tax Asset:               |       |                    |       |     |       |
| Allowance for  doubtful accounts  |       | $                       | 32         |     | $          | 42 |   |
| Depreciation and  amortization    |       | 1,794                   |       | 1,533    |       |
| Accrued expenses                  |       | 148                     |       | 140      |       |
| Other                             |       | (190                    | )          | 25       |       |
| Stock based  compensation         |       | 912                     |       | —   |       |
| Deferred revenue                  |       | 2,929                   |       | 4,048    |       |
| Research credit  carryforwards    |       | 25,618                  |       | 19,731   |       |
| Net operating  loss carryforwards |       | 69,215                  |       | 54,375   |       |
| Total gross  deferred tax asset   |       | 100,458                 |       | 79,894   |       |
| Valuation  allowance              |       | (100,458                | )          | (79,894  | )          |
| Net deferred tax asset            |       | $                       | —     |     | $          | — |   |

 

As of December 31, 2006, the Company had federalnet operating loss (NOL) and research and experimentation credit carryforwardsof approximately $179.1 million and $23.3 million, respectively,which may be available to offset future federal income tax liabilities whichbegin to expire in 2007. The Company has recorded a deferred tax asset ofapproximately $2.1 million and $2.2 million at December 31, 2006 and 2005,respectively, reflecting the benefit of deductions from the exercise of stockoptions. This deferred asset has been fully reserved until it is more likelythan not that the benefit from the exercise of stock options will be realized.The benefit from the $2.1 million deferred tax asset at December 31, 2006will be recorded as a credit to additional paid-in capital when realized. Asrequired by SFAS No. 109, management of the Company has evaluated thepositive and negative evidence bearing upon the realizability of its deferredtax assets, which are comprised principally of NOL and research andexperimentation credit carryforwards.

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

 

**11.**   IncomeTaxes (Continued)

Management has determined at this time that it is morelikely than not that the Company will not recognize the benefits of federal andstate deferred tax assets and, as a result, a valuation allowance ofapproximately $100.5 million and $79.9 million has been established at December 31,2006 and 2005, respectively.

Under the provisions of the Internal Revenue Code,ownership changes may have limited the amount of net operating losscarryforwards and research and development credit carryforwards which may beutilized annually to offset future taxable income and taxes payable. Subsequentownership changes could further affect the limitation in future years.

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

**12.**   Investmentin Joint Venture (Dyax-Genzyme LLC) and Other Related Party Transactions

The Company had a collaboration agreement with Genzymefor the development and commercialization of DX-88 for hereditaryangioedema (HAE). Under this collaboration, the Company and Genzyme formed ajoint venture, known as Dyax-Genzyme LLC, through which they jointly owned therights to DX-88 for the treatment of HAE. Dyax and Genzyme were eachresponsible for approximately 50% of ongoing costs incurred in connection withthe development and commercialization of DX-88 for HAE and each wouldhave been entitled to receive approximately 50% of any profits realized as aresult. In addition, the Company was entitled to receive potential milestonepayments from Genzyme in connection with the development of DX-88. TheCompany received a $3.0 million milestone for dosing the first patient in theEDEMA3 trial for HAE in December 2005. The Company recognized the$3.0 million milestone as revenue in the fourth quarter of 2005 given thatthe milestone was considered to be at risk and substantive.

On February 20, 2007, the Company and Genzymereached a mutual agreement to terminate this collaboration for the developmentand commercialization of DX-88 for the treatment of HAE. Pursuant to thetermination agreement, Genzyme made a $17.0 million cash payment to theDyax-Genzyme LLC. Furthermore, Genzyme assigned to Dyax all of its interests inthe LLC, thereby transferring all the rights to the LLC’s assets to Dyax, includingthe $17.0 million cash payment. As a result Dyax now owns all of the rights toDX-88 worldwide including the right to develop and commercialize DX-88in HAE. In exchange, Dyax issued to Genzyme 4.4 million shares of its commonstock. Genzyme also agreed to provide us with transition services for a periodfollowing the termination of our agreement. This transaction will be accountedfor as a purchase by Dyax of the remaining 49.99% portion of the LLC inexchange for 4.4 million shares of the Company’s common stock.

In May 2002, the Company and Genzyme executed asenior secured promissory note under which Genzyme agreed to loan the Companyup to $7.0 million. This note was secured by a continuing securityinterest in certain tangible and intangible personal property arising out ofthe DX-88 program and the Company’s rights to revenues from licenses ofits fundamental phage display patent portfolio. The note was also subject tocertain financial covenants, under which the Company was required to maintainat least $20.0 million in cash, cash equivalents or short-term investmentsbased on the Company’s quarterly consolidated financial statements and at leastone continued listing standard for the NASDAQ National Market. In October 2002,the Company received the $7.0 million under this Genzyme note, which bears

71

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

**12.**   Investment in Joint Venture (Dyax-Genzyme LLC) and OtherRelated Party Transactions (Continued)

interestat the prime rate (8.25% at December 31, 2006) plus 2%. Interest ispayable quarterly. The principal and all unpaid interest were due on thematurity date of May 31, 2007.

On August 22, 2006,the Company and Genzyme amended and restated the senior secured promissorynote, extending the term of the note from May 2007 to May 2010. Inconnection with this amendment, the financial covenants under the note wereeliminated and all of the existing collateral for the note was released andreplaced with a $7.2 million letter of credit. The collateral released pursuantto this amendment included a certain tangible and intangible personal propertyarising out of the DX-88 program and the Company’s rights to revenuesfrom licenses of its fundamental phage display patent portfolio. As of December 31,2006, the Company had posted the $7.2 million letter of credit and it isincluded in restricted cash on the Company’s Consolidated Balance Sheet. At December 31,2006 and December 31, 2005, there was $7.0 million outstanding underthe note. At December 31, 2006 and December 31, 2005, the Companyowed $61,000 and $54,000, respectively, of interest on this note, which isincluded in accounts payable and accrued expenses on the Company’s ConsolidatedBalance Sheets due to the current nature of this liability.

Before termination of thecollaboration on February 20, 2007, research and development expensesincurred by each party related to the HAE program were billed to and reimbursedby Dyax-Genzyme LLC. The Company and Genzyme are each required to fund 50% ofthe monthly expenses of Dyax-Genzyme LLC, except as set forth in the AgreementRegarding Validation Campaign described below. 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) inthe consolidated statements of operations and comprehensive loss. At December 31,2006 and 2005, the Company’s investment in the joint venture was $258,000 and$782,000, respectively, which is recorded as an Investment in Joint Venture(Dyax-Genzyme LLC) in the consolidated balance sheets.

In August 2006, Dyax,Genzyme and Dyax-Genzyme LLC entered into an Agreement Regarding ValidationCampaign, effective as of July 1, 2006. The agreement provided that Dyaxwould assume responsibility for the first $14.5 million of manufacturing costs for a series of consecutive manufacturingbatches, known as the validation campaign, which would validate themanufacturing process of DX-88 for regulatory purposes and be used forfurther clinical studies. This arrangement ensured us an adequate supplyof DX-88 drug substance for programs outside of the Dyax-Genzyme LLC,specifically for our program developing DX-88 for on-pump CTS procedures.The validation campaign began in the fourth quarter of 2006. This arrangementended in connection with the termination of the collaboration on February 20,2007.

The Company has evaluatedits collaboration to determine if the related joint venture qualified as avariable interest entity under Financial Accounting Standards BoardInterpretation No. 46R, *Consolidationof Variable Interest Entities* (FIN 46R). Genzyme and Dyax fund theoperations of Dyax-Genzyme LLC on a monthly basis and therefore under Paragraph5a of FIN 46R, the joint venture qualifies as a variable interest entitybecause its total equity investment at risk is not sufficient to finance itsactivities without additional subordinated financial support. The Company has afinancial interest in Dyax-Genzyme LLC. However, based on its analysis of theagreement, the Company believes that its exposure to the expected 

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

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

losses of Dyax-Genzyme LLCwere less than Genzyme’s and therefore Dyax was not the primary beneficiary ofDyax-Genzyme LLC under Paragraph 17 of FIN 46R. Accordingly, the Company hasnot consolidated Dyax-Genzyme LLC.

Summaryfinancial information for Dyax-Genzyme LLC is as follows:

| ** **                                                                             | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(In thousands)**                     | ** ** |
| Research and  development                                                              |       | $                                           | 19,328     |   | $ | 23,111 |   |
| Selling and  marketing                                                                 |       | 1,110                                       |       | 624 |   |
| General and  administrative                                                            |       | 266                                         |       | 167 |   |
| Interest income                                                                        |       | (4                                          | )          | (2 | ) |
| Net loss                                                                               |       | $                                           | 20,700     |   | $ | 23,900 |   |
| Current assets                                                                         |       | $                                           | 1,967      |   | $ | 3,442 |   |
| Non-current  assets                                                                    |       | 514                                         |       | 615 |   |
| Current  liabilities                                                                   |       | (1,965                                      | )          | (2,493 | ) |
| Non-current  liabilities                                                               |       | —                                      |       | — |   |
| Net assets                                                                             |       | $                                           | 516        |   | $ | 1,564 |   |
| Amount due to  Dyax from Dyax-Genzyme LLC (included in current liabilities above) |       | $                                           | 1,428      |   | $ | 1,508 |   |
| Amount due from Dyax to  Dyax-Genzyme LLC (included in current assets above)      |       | $                                           | 966        |   | $ | 1,721 |   |

 

The Company’s Chairman and Chief Executive Officeralso serves as an outside director of Genzyme Corporation and was a consultantto Genzyme until 2001. Two of our other directors are former directors ofGenzyme and another was an officer of Genzyme and then senior advisor to Genzyme’sChief Executive Officer.

At December 31, 2006 and 2005, Genzyme ownedapproximately 1.3% and 1.5%, respectively of the Company’s common stockoutstanding.

On February 23, 2007, in connection with thetermination, Dyax issued Genzyme 4.4 million shares of the Company’s commonstock, which brings Genzyme’s aggregate ownership to 10.3%.

During 1996, the Company signed two patent licenseagreements with Genzyme consistent with our standard license terms. During2006, Genzyme terminated one of its patent license agreements with Dyax. Thecompany recorded $4,000 for the year ended December 31, 2006 and $25,000for each of the years ended December 31, 2005 and 2004 in connection withthe maintenance fee on the terminated agreement. The Company recorded licenserevenues of $25,000, for each year ended December 31, 2006, 2005 and 2004,in connection with the maintenance fee on the ongoing agreement. As of December 31,2006 and 2005, there were $25,000 and $0 respectively, of outstanding accountsreceivable due from Genzyme related to the patent license agreement.

During 2004, the Companysigned a library license agreement with Genzyme consistent with its standardlicense terms. The Company received $1.3 million from Genzyme and recordedlicense revenues 

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

**12.**   Investment in Joint Venture (Dyax-Genzyme LLC) and OtherRelated Party Transactions (Continued)

of$225,000 for the years ended December 31, 2006 and 2005 and $275,000 forthe year ended December 31, 2004 in connection with the technology accessfees on this agreement. As of December 31, 2006 and 2005, there were nooutstanding accounts receivable due from Genzyme related to the library licenseagreement.

**13.**   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. The Companyhas reevaluated its business activities that are regularly reviewed by theChief Executive Officer for which discrete financial information is available.As a result of this evaluation, the Company determined that it has one segmentwith operations in two geographic locations. As of December 31, 2006, 2005and 2004, the Company had approximately $663,000, $1.2 million and $2.0million, respectively, of long-lived assets located in Europe, with theremainder held in the United States. For the years ended December 31,2006, 2005 and 2004, the Company did not have any external revenues outside theUnited States.

**14.**   ComprehensiveIncome (Loss)

Accumulatedother comprehensive income (loss) is calculated as follows:

| ** **                         | ** ** | **Unrealized  Gain (Loss) on  Investments** | ** ** | **Foreign Currency  Translation  Adjustment** | ** ** | **Accumulated Other  Comprehensive  Income** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **(In thousands)**                               | ** ** |
| Balance at December 31,  2003 |       |                                                  | $          | —                                             |       |                                              |       | $ | 540 |   |   |   | $ | 540 |   |   |
| Change for 2004                    |       |                                                  | (87        | )                                                  |       |                                              | (27        | ) |   |   | (114 | ) |   |
| Balance at  December 31, 2004 |       |                                                  | (87        | )                                                  |       |                                              | 513        |   |   |   | 426 |   |   |
| Change for 2005                    |       |                                                  | 45         |                                               |       |                                              | (50        | ) |   |   | (5 | ) |   |
| Balance at  December 31, 2005 |       |                                                  | (42        | )                                                  |       |                                              | 463        |   |   |   | 421 |   |   |
| Change for 2006                    |       |                                                  | 50         |                                               |       |                                              | (66        | ) |   |   | (16 | ) |   |
| Balance at  December 31, 2006 |       |                                                  | $          | 8                                                  |       |                                              |       | $ | 397 |   |   |   | $ | 405 |   |   |

 

**15.**   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. Thiscross-licensing arrangement was further amended and expanded by two separateamendment agreements executed by and between the Company and CAT on January 3,2003 and September 18, 2003, respectively, and then fully amended andrestated on June 21, 2006. Under the terms of the amended and restatedagreement, CAT has granted the Company worldwide licenses for research andcertain other purposes under all of CAT’s antibody phage display patents (theCAT patents). The Company has also received options for licenses to developtherapeutic and 

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

**15.**   License Agreements (Continued)

diagnostic antibodyproducts under the CAT patents. CAT will receive milestone and royalty paymentsin connection with antibody products advanced into clinical trials by theCompany, its collaborators or its customers, which will be recorded as cost ofrevenues within research and development expenses when incurred. CAT also hasrights to share the Company’s revenues from certain other applications ofantibody phage display technology. Additionally, CAT is not required to pay theCompany royalties related to the Company’s Ladner patents on antibody productsdeveloped by CAT.

See also Footnote 12 “Investmentin Joint Venture (Dyax-Genzyme LLC) and Other Related Party Transactions”.

**16.**   UnauditedQuarterly Operating Results

Thefollowing is a summary of unaudited quarterly results of operations for theyears ended December 31, 2006 and 2005:

| **Year ended Dcember 31, 2006** | ** ** | ** **                                               | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                          | ** ** | **(in thousands, except per share)** | ** ** |
| Revenue                                             |       | $                                                        | 2,674      |               | $          | 3,424               |       | $                  | 3,514      |                | $          | 3,164 |   |
| Loss from  operations                               |       | $                                                        | (10,310    | )                  | $          | (9,170              | )          | $                  | (11,298    | )                   | $          | (18,993 | ) |
| Net loss                                            |       | $                                                        | (9,997     | )                  | $          | (8,658              | )          | $                  | (11,482    | )                   | $          | (20,186 | ) |
| **Basic and diluted net loss per  share:**          |       |                                                     |       |               |       |                |       |               |       |
| Net loss                                            |       | $                                                        | (0.26      | )                  | $          | (0.20               | )          | $                  | (0.26      | )                   | $          | (0.46 | ) |

 

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

 

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**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’s Reporton 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, 2006. Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

**ITEM 9B.**       OTHERINFORMATION

None.

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**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS OF THE COMPANYAND CORPORATE GOVERNANCE

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 “Election ofDirectors—Board and Committee Matters” in the Company’s Definitive ProxyStatement relating to the 2007 Annual Meeting of Stockholders (the “2007 ProxyStatement”).

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

**ITEM 11.**         EXECUTIVECOMPENSATION

The response to this itemis incorporated herein by reference from the discussion responsive theretounder the following captions in the 2007 Proxy Statement: “Election ofDirectors—Director Compensation,” “Executive Compensation” and “Election ofDirectors—Compensation Committee Interlocks and Insider Participation.”

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

The response to this item is incorporated herein byreference in part from the discussion responsive thereto under the caption “ShareOwnership” in the 2007 Proxy Statement.

The following table providesinformation about the securities authorized for issuance under the Company’sequity compensation plans as of December 31, 2006:

**Equity CompensationPlan 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) |       |       | 5,860,432  |                                                                                                                                             |       |                                                                                                        | $          | 5.86                                                                                                                                                                                                             |       |   |   | 1,585,681 |   |   |
| Equity compensation  plans not approved by security holders:    |       |       | —     |                                                                                                                                             |       |                                                                                                        | —     |                                                                                                                                                                                                             |       |   | — |   |   |
| **Totals:**                                                     |       |       | 5,860,432  | (2)                                                                                                                                              |       |                                                                                                        | $          | 5.86                                                                                                                                                                                                             |       |   |   | 1,585,681 | (3) |   |

----

(1)          Consistsof the Amended and Restated 1995 Equity Incentive Plan and the 1998 EmployeeStock Purchase Plan.

(2)          Doesnot include purchase rights currently accruing under the 1998 Employee StockPurchase Plan, because the purchase price (and therefore the number of shares tobe purchased) will not be determined until the end of the purchase period,which is June 30, 2007.

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(3)          Includes 209,240 sharesissuable under the 1998 Employee Stock Purchase Plan, of which up to 13,859 areissuable in connection with the current offering period which ends on June 30,2007. The remaining shares consist of 1,571,822 under the 1995 Amended andRestated Equity Incentive Plan. The plan may be amended, suspended, orterminated by the Compensation Committee of the Board of Directors at any time,subject to any required stockholder approval.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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 2007 Proxy Statement.

**ITEM 14.**         PRINCIPALACCOUNTING 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 Independent Registered Public Accounting Firm” in the 2007 ProxyStatement.

**PART IV**

**ITEM 15.**         EXHIBITS,FINANCIAL STATEMENT SCHEDULES

**(a) 1.**   FINANCIALSTATEMENTS

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

**2.   FINANCIAL STATEMENTS SCHEDULE**

**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS**

**For the years endedDecember 2006, 2005 and 2004**

**(Inthousands)**

| ** **                        | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------------|------------|
| Allowance for  Doubtful Accounts: |       |                                           |       |          |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| 2006                              |       |                                           | $          | 105           |       |           |       | $                                        | —     |   |   |   | $ | 25 |   |   |   | $ | 80 |   |   |
| 2005                              |       |                                           | $          | 75            |       |           |       | $                                        | 30         |   |   |   | $ | — |   |   |   | $ | 105 |   |   |
| 2004                              |       |                                           | $          | 75            |       |           |       | $                                        | —     |   |   |   | $ | — |   |   |   | $ | 75 |   |   |
|                                   |            |                                                |            |               |            |                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                               | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------------|------------|
| Deferred Tax Asset  Valuation Allowance: |       |                                           |       |          |       |           |       |                                     |       |   |   |   |   |   |   |
| 2006                                     |       |                                           | $          | 79,894        |       |           |       | $                                        | 25,653     |   |   |   | $ | 5,089 |   |   | $ | 100,458 |   |
| 2005                                     |       |                                           | $          | 59,820        |       |           |       | $                                        | 20,783     |   |   |   | $ | 709 |   |   | $ | 79,894 |   |
| 2004                                     |       |                                           | $          | 43,419        |       |           |       | $                                        | 18,257     |   |   |   | $ | 1,856 |   |   | $ | 59,820 |   |

 

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**3.   EXHIBITS**

**Theexhibits are listed below under Part IV, Item 15(b) of this Report.**

**(b)**   EXHIBITS
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Purchase Agreement dated October 13, 2003 by  and among Pyrosequencing AB, Dyax Corp. and Biotage, LLC. Filed as  Exhibit 2.1 to the Company’s Current Report on Form 8-K  (File No. 000-24537) filed on November 7, 2003 and  incorporated herein by reference.                                                                                                                     |
| 3.1              |       | Amended and Restated  Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the  Company’s Quarterly Report on Form 10-Q (File No. 000-24537)  for the quarter ended June 30, 2004 and incorporated herein by  reference.                                                                                                                                                       |
| 3.2              |       | Amended and Restated  By-laws of the Company. Filed as Exhibit 3.2 to the Company’s Quarterly  Report on Form 10-Q (File No. 000-24537) for the  quarter ended September 30, 2000 and incorporated herein by reference.                                                                                                                                                                        |
| 3.3              |       | Certificate of  Designations Designating the Series A Junior Participating Preferred  Stock of the Company. Filed as Exhibit 3.1 to the Company’s Current  Report on Form 8-K (File No. 000-24537) filed on  June 27, 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  as of 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)  filed on June 27, 2001 and incorporated herein by reference.                                                                                            |
| 10.1(a)          |       | Amended and Restated  1995 Equity Incentive Plan, as amended through May 19, 2005. Filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  (File No. 000-24537) for the quarter ended June 30, 2005  and incorporated herein by reference.                                                                                                                       |
| 10.1(b)          |       | 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. |
| 10.1(c)          |       | 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.        |
| 10.1(d)          |       | 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.                                   |
| 10.2             |       | 1998 Employee Stock  Purchase Plan. Filed as Appendix B to the Company’s Definitive Proxy  Statement on Form DEF 14A (File No. 000-24537)  filed on April 15, 2003 and incorporated herein by reference.                                                                                                                                                                                  |

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| 10.3*                |   | Form of Change of  Control Agreement between the Company and Clive R. Wood, Ph.D. and Ivana  Magovcevic-Liebisch, Ph.D., J.D. Filed as Exhibit 10.3 to the Company’s  Annual Report on Form 10-K (File No. 000-24537) for the  year ended December 31, 2003 and incorporated herein by reference.                                             |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4*                |   | Employment Letter  Agreement, dated as of 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*                |   | Employment Letter  Agreement dated as of June 27, 2003 between Clive R. Wood, Ph.D. and the  Company. Filed as Exhibit 10.3 to the Company’s Quarterly Report on  Form 10-Q (File No. 000-24537) for the quarter ended  March 31, 2004 and incorporated herein by reference.                                                                  |
| 10.6*                |   | Employment Letter  Agreement between Dyax Corp. and Thomas R. Beck, M.D., effective as of  June 1, 2005. Filed as Exhibit 10.1 to the Company’s Current Report  on Form 8-K (File No. 000-24537) filed on June 6,  2005 and incorporated herein by reference.                                                                                 |
| 10.7*                |   | Form of  Indemnification Agreement by and between certain directors and executive  officers of the Company and the Company. Filed as Exhibit 10.32 to  the Company’s Registration Statement on Form S-1 (File  No. 333-37394) and incorporated herein by reference.                                                                           |
| 10.8*                |   | Severance Letter  Agreement between Dyax Corp. and Ivana Magovcevic-Liebisch, Ph.D. J.D. dated  as of November 16, 2006. Filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K (File No. 000-24537) filed  on November 17, 2006 and incorporated herein by reference.                                                            |
| 10.9                 |   | 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  (File No. 000-24537) for the year ended December 31, 2000 and  incorporated herein by reference. |
| 10.10                |   | Lease, dated as of  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  †        |   | License Agreement, dated  as of 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  (File No. 000-24537) for the year ended December 31,  2000 and incorporated herein by reference.                                                                         |
| 10.13(a) † |   | Collaboration and  License Agreement, dated as of 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.                 |
| 10.13(b) † |   | 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.                  |

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| 10.13(c)             |   | Second Amendment to the  Collaboration and License Agreement, by and between Bracco Imaging S.p.A. and  the Company, effective as of January 3, 2005. Filed as  Exhibit 10.23 to the Company’s Annual Report on Form 10-K  (File No. 000-24537) for the year ended December 31, 2004 and  incorporated herein by reference.                   |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14(a)             |   | Amended and Restated  Collaboration Agreement between Genzyme Corporation and the Company dated as  of 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.                                                    |
| 10.14(b)             |   | 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.                     |
| 10.14(c)             |   | Amendment No. 2 to  Amended and Restated Collaboration Agreement between Genzyme Corporation and  the Company, executed by Dyax on September 29, 2005. Filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q  (File No. 000-24537) for the quarter ended September 30, 2005  and incorporated herein by reference.       |
| 10.15(a)             |   | Senior Secured  Promissory Note between Genzyme Corporation and the Company dated as of  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.                                                                  |
| 10.15(b)             |   | Amended and Restated  Senior Secured Promissory Note between Genzyme Corporation and the Company  dated as of August 23, 2006. Filed herewith.                                                                                                                                                                                                                         |
| 10.16(a)             |   | Security Agreement  between Genzyme Corporation and the Company dated as of 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.                                                                         |
| 10.16(b)             |   | 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.                                                        |
| 10.16(c)             |   | Agreement Regarding  Senior Secured Promissory Note dated as of August 23, 2006. Filed  herewith.                                                                                                                                                                                                                                                                      |
| 10.17  †        |   | Agreement Regarding  Validation Campaign by and between Dyax Corp., Genzyme Corporation and  Dyax-Genzyme LLC, effective as of July 1, 2006 (executed on  August 23, 2006). Filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K (File No. 000-24537) filed on  August 25, 2006 and incorporated herein by reference. |
| 10.18(a) † |   | License Agreement  between XOMA Ireland Limited and the Company dated as of October 16,  2002. Filed as Exhibit 10.22 to the Company’s Annual Report on  Form 10-K (File No. 000-24537) for the year ended  December 31, 2002 and incorporated herein by reference.                                                                           |
| 10.18(b) † |   | Amended and Restated  License Agreement between XOMA Ireland Limited and the Company dated as of  October 27, 2006. Filed herewith.                                                                                                                                                                                                                                    |

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| 10.19(a) † |   | Amendment Agreement  between Cambridge Antibody Technology Limited and the Company dated as of  January 6, 2003. Filed as Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q (File No. 000-24537) for the  quarter ended March 31, 2003 and incorporated herein by reference.                  |
|----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19(b) † |   | Second Amendment  Agreement between Cambridge Antibody Technology Limited and the Company dated  as of 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.                     |
| 10.19(c) † |   | Amended and Restated  License Agreement between the Company and Cambridge Antibody Technology  Limited dated as of June 21, 2006. 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, 2006 and incorporated herein by  reference. |
| 10.20  †        |   | Royalty Interest  Assignment Agreement by and among Dyax Corp. and Paul Royalty Fund Holdings  II dated as of August 23, 2006. Filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K (File No. 000-24537)  filed on August 29, 2006 and incorporated herein by reference.                   |
| 10.21(a)             |   | Non-Employee Director  Compensation. Filed as Exhibit 10.1 to the Company’s Quarterly Report on  Form 10-Q (File No. 000-24537) for the quarter ended  March 31, 2005 and incorporated herein by reference.                                                                                                   |
| 10.21(b)             |   | Information regarding  modification of director compensation, incorporated by reference from Item  1.01 of the Company’s Form 8-K (File No. 000-24537)  filed on May 23, 2006.                                                                                                                                     |
| 10.22*               |   | Executive Compensation  Summary. Filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K (File No. 000-24537) filed on February 21,  2007 and incorporated herein by reference.                                                                                                                    |
| 14.1                 |   | Code of Business Conduct  and Ethics of the Company. Filed as Exhibit 14.1 to the Company’s Annual  Report on Form 10-K (File No. 000-24537) for the year  ended December 31, 2004 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                 |   | Dyax-Genzyme LLC  Financial Statements. Filed herewith.                                                                                                                                                                                                                                                                                |

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*                    Indicatesa contract with management.

†                    ThisExhibit has been filed separately with the Commission pursuant to anapplication for confidential 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 thirteenth day of March,2007.

| ** ** | **DYAX  CORP.** |
|------------|-----------------|
| ** ** | **By:**         | **/s/  Henry E. Blair** |
| ** ** | ** **      | **Henry E. Blair** |
| ** ** | ** **      | ***Chief Executive  Officer*** |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Company in thecapacities and on the dates indicated.

|                                         | **Name** | ** **                                 | ** **          | ** ** | **Title** | ** ** | ** ** | **Date** | ** ** |
|-----------------------------------------|----------|--------------------------------------------|---------------------|------------|-----------|------------|------------|----------|------------|
| /s/  Henry E. Blair                |     | Chief Executive Officer,  and              |                |
| Henry E.  Blair                    |     | Chairman of the Board of Directors         | March 13, 2007 |
|                                    |     | (Principal Executive Officer)              |                |
| /s/ Stephen S. Galliker            |     | Executive Vice  President, Finance and     |                |
| Stephen S.  Galliker               |     | Administration and Chief Financial Officer | March 13, 2007 |
|                                    |     | (Principal Financial Officer and Principal |                |
|                                    |     | Accounting Officer)                        |                |
| /s/ Constantine E. Anagnostopoulos |     |                                       |                |
| Constantine E.  Anagnostopoulos    |     | Director                                   | March 13, 2007 |
| /s/ Susan B. Bayh                       |     |                                       |                |
| Susan  B. Bayh                          |     | Director                                   | March 13, 2007 |
| /s/ James W. Fordyce               |     |                                       |                |
| James W.  Fordyce                  |     | Director                                   | March 13, 2007 |
| /s/ Thomas L. Kempner              |     |                                       |                |
| Thomas L.  Kempner                 |     | Director                                   | March 13, 2007 |
| /s/ Henry R. Lewis                 |     |                                       |                |
| Henry R.  Lewis                    |     | Director                                   | March 13, 2007 |
| /s/ David J. McLachlan             |     |                                       |                |
| David J.  McLachlan                |     | Director                                   | March 13, 2007 |
| /s/ Mary Ann Gray                       |     |                                       |                |
| Mary Ann Gray                           |     | Director                                   | March 13, 2007 |

 

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