DYAX CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the period ended June 30, 2002

or

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the transition period from to .

Commission File No. 000-24537

DYAX CORP.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 04-3053198
(State of Incorporation) (I.R.S. Employer Identification Number)

300 TECHNOLOGY SQUARE, CAMBRIDGE, MA 02139
(Address of Principal Executive Offices)

(617) 225-2500
(Registrant's Telephone Number, including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES /X/ NO / /

Number of shares outstanding of Dyax Corp.'s Common Stock, par value $0.01, as
of August 12, 2002: 19,702,323.

DYAX CORP.

TABLE OF CONTENTS

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PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

DYAX CORP.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.

3

DYAX CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.

4

DYAX CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS.

5

DYAX CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Dyax Corp. (Dyax or the Company) is a biopharmaceutical company
principally focused on the discovery, development and commercialization of
therapeutic products. The Company has two product candidates in clinical trials,
DX-890 and DX-88, and has collaborative agreements for the development of both
of these product candidates. The Company's collaborator for DX-890 recently
completed a Phase IIa trial for cystic fibrosis. The Company is currently
conducting a Phase II trial of DX-88 in hereditary angioedema (HAE) in Europe
and expects to initiate a second Phase II study of DX-88 in HAE and a Phase I/II
study of DX-88 in cardiopulmonary bypass in 2002.

The Company uses a proprietary, patented method, known as phage
display, to identify a broad range of compounds with the potential for the
treatment of various diseases. The Company is using phage display technology to
build a broad portfolio of product candidates that it plans to develop and
commercialize on its own or with others. On behalf of collaborators, the Company
also uses phage display technology to identify compounds that can be used in
therapeutics, diagnostic imaging, the development of research reagents, and in
purifying and manufacturing biopharmaceuticals. The Company is further
leveraging its phage display technology through collaborations and licenses that
are structured to generate revenues through research funding, license fees,
technical and clinical milestone payments, and royalties. The Company, through
its Biotage subsidiary, develops, manufactures and sells chromatography
separations systems and products and is a leading supplier of chromatography
separations systems that use disposable cartridges to separate and purify
pharmaceuticals being produced for research and clinical development.

The accompanying unaudited interim consolidated financial statements
have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to Form 10-Q. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany balances and transactions have been eliminated. Certain
amounts from prior years have been reclassified in the accompanying unaudited
consolidated financial statements in order to be consistent with current year
classifications.

The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect (i) the
reported amounts of assets and liabilities, (ii) disclosure of contingent assets
and liabilities at the dates of the financial statements and (iii) the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. The results of operations for the three and
six-month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.

It is management's opinion that the accompanying unaudited interim
consolidated financial statements reflect all adjustments (which are normal
and recurring) necessary for a fair presentation of the results for the
interim periods. The financial statements should be read in conjunction with
the consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.

2. INVENTORY

Inventories consist of the following:

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3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

4. NET LOSS PER SHARE

Net loss per share is computed under Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share. Basic net loss per
share is computed using the weighted average number of shares of common stock
outstanding. Diluted net loss per share does not differ from basic net loss
per share since potential common shares from the exercise of stock options
are antidilutive for all periods presented and therefore are excluded from
the calculation of diluted net loss per share. Stock options totaling
3,544,850 and 3,040,873 were outstanding at June 30, 2002 and 2001,
respectively.

5. COMPREHENSIVE LOSS

Accumulated other comprehensive income (loss) is calculated as follows:

6. BUSINESS SEGMENTS

The Company discloses business segments under SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. Segment data does not
include allocations of corporate administrative costs to each operating segment.
The Company evaluates the performance of its segments and allocates resources to
them based on losses before corporate administrative costs, interest and taxes.

The Company has two reportable segments: (i) Separations and
(ii) Biopharmaceuticals (In previous filings, the Biopharmaceuticals segment was
named Therapeutics/Diagnostics). The Separations segment develops, manufactures
and sells chromatography separations systems and products through the Company's
Biotage subsidiary. The Biopharmaceuticals segment is principally focused on the
discovery, development and commercialization of therapeutic products. It also
licenses its proprietary technology to third parties and licenses affinity
ligands developed using the Company's phage display technology to third parties
for separations applications.

The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technologies and marketing strategies.

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The following table presents certain segment financial information and
the reconciliation of segment loss from operations to consolidated totals.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, The Financial Accounting Standards Board (FASB) issued
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. The provisions of SFAS 142 are effective
for fiscal years beginning after December 15, 2001. Pursuant to SFAS 142, the
Company ceased amortizing goodwill on January 1, 2002 and completed a test
for goodwill impairment as of June 30, 2002. No impairment charge was
required. The Company's goodwill amortization expense was approximately
$217,000 for the quarter ended June 30, 2001 and $434,000 for the six months
ended June 30, 2001. Adjusted net loss excluding goodwill amortization
expense for the quarter ended June 30, 2001 was $3.6 million and was $6.8
million for the six months ended June 30, 2001. Adjusted basic and diluted
net loss per share for the quarter ended June 30, 2001 was $0.19 and for the
six months ended June 30, 2001 was $0.35. Intangible assets other than
goodwill continue to be amortized over their remaining estimated useful
lives. Patents are amortized on a straight-line basis over a period of 15
years. The covenant not to compete is amortized on a straight-line basis over
five years. Amortization expense is not expected to be material to the
Company's financial position or operating results in future periods.

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Goodwill and other intangible assets consist of the following:

Capitalized software development costs were $275,000 and $141,000 at
June 30, 2002 and December 31, 2001, respectively. These costs are amortized
over the estimated useful lives of the related software products, currently
five years. Accumulated amortization of these assets totaled $57,000 and
$10,000 as of June 30, 2002 and December 31, 2001, respectively. The
unamortized portion of these costs is included in other assets on the
Company's consolidated balance sheets.

8. RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2001, the FASB issued SFAS No. 143, Accounting for
Obligations Associated with the Retirement of Long-Lived Assets. The provisions
of SFAS 143 apply to all entities that incur obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years
beginning after June 15, 2002 and will be adopted by the Company in fiscal year
2003. The Company does not expect the adoption of SFAS 143 to have a material
impact on its financial position or operating results.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and provides a single accounting model for long-lived assets to
be disposed of. SFAS 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted SFAS 144 on January 1, 2002. The adoption of this
statement did not have any effect on the Company's financial position or
operating results.

9. COMMITMENTS AND CONTINGENCIES

On May 31, 2002, the Company and Genzyme Corporation amended their
collaboration agreement for the development and commercialization of DX-88
(the Amended Collaboration Agreement). The Company and Genzyme also executed
a senior secured promissory note and security agreement under which Genzyme
agreed to loan the Company up to $7.0 million and the Company pledged certain
tangible and intangible personal property of or arising out of the DX-88
program. The security agreement provides for additional collateral should the
Company, under the Amended Collaboration Agreement, exercise its option to
purchase Genzyme's interest in the application of DX-88 in cardiopulmonary
bypass and other surgery, or should the Company fail to meet certain
financial covenants. The financial covenants state that the Company must
maintain at least $20.0 million in cash or cash equivalents based on the
Company's quarterly consolidated financial statements and that the Company
maintains at least one continued listing standard for the Nasdaq National
Market.

Advances under the promissory note may be made once each calendar
quarter, beginning on May 31, 2002 and ending upon completion of the first Phase
II clinical trial for the treatment of HAE, and may not exceed $4.0 million
during the second quarter of 2002 and $1.5 million during any subsequent
calendar quarter. The loan bears interest at a rate of prime plus two percent,
6.75% at June 30, 2002. Interest is payable quarterly. The principal and all
unpaid interest are due on May 31, 2005 (the Maturity Date). The Company may
extend the Maturity Date to May 31, 2007 if the Amended Collaboration Agreement
is in effect, no default or event of default exists and the Company satisfies
the financial covenants as of the Maturity Date. As of June 30, 2002, the
Company had received $4.0 million under this note, which is included in
long-term obligations on the Company's balance sheet. The Company anticipates
receiving the remaining $3.0 million prior to the end of 2002.

In connection with the construction of Biotage's new facility in
Charlottesville, Virginia, Biotage executed a loan agreement for approximately
$4.3 million from a commercial bank on April 24, 2002. Under the terms of the
loan agreement, interest is payable monthly on the amount outstanding until
completion of construction, limited to a maximum of 16 months. On the earlier of
completion of

9

construction or 16 months, the loan will convert to a term loan and will be
repaid over 20 years with interest at between 5.83% and 7.00%. Interest will be
fixed at 5.83% for the first five years and will be adjusted once every five
years thereafter, but may be adjusted earlier if Biotage fails to maintain an
average non-interest bearing compensating balance of $750,000 at the lending
bank. The Company expects construction to be completed by the fourth quarter of
2002. As of June 30, 2002, there was $1.6 million outstanding under the loan,
which is included in long-term obligations on the Company's balance sheet.

During 2001, the Company signed a capital lease and debt agreement
for the purchase of qualified fixed assets. In the first half of 2002, the
Company sold to and leased back from the lender $2.0 million of laboratory,
production and office equipment. Interest pursuant to this agreement ranges
between 10.01% and 10.14%. Principal and interest are payable over 36 months
or 42 months based on the underlying fixed assets. Capital lease obligations
are collateralized by the assets under lease. Other debt obligations are
collateralized by a stand-by letter of credit for the amount financed. If at
the end of any quarter the Company's unrestricted cash is less than the
greater of $25.0 million or the Company's annualized cash needs, the Company
must provide an irrevocable letter of credit in the amount equal to the
amount of debt financed, which was $2.9 million at June 30, 2002. Annualized
cash needs are determined by multiplying cash used in operations for the most
recently ended quarter by four. The lender has no obligation to fund any
further amounts.

In June 2001, the Company entered into an agreement to lease
approximately 67,000 square feet of laboratory and office space in Cambridge,
Massachusetts. The lease term commenced in the first quarter of 2002 and has an
initial term of ten years, expiring at the end of February 2012. Under the terms
of the agreement, the Company is obligated to lease an additional 24,122 square
feet of space by August 2007 and has the option to extend the entire lease for
two additional five-year terms. The Company was required to provide a
cash-collateralized letter of credit in the amount of $4.3 million, which may be
reduced after the fifth year of the lease term. The cash collateral is included
in restricted cash on the Company's balance sheet. Under the terms of the
agreement, the landlord loaned the Company approximately $2.4 million to be used
towards the cost of leasehold improvements, which is included in long-term
obligations on the Company's balance sheet. The loan bears interest at a rate of
12.00% and is payable in 116 equal monthly installments through February 2012.

10. COLLABORATIVE AGREEMENTS

On May 31, 2002, the Company and Genzyme Corporation amended their
collaboration agreement for the development and commercialization of DX-88
(the Amended Collaboration Agreement). Under the Amended Collaboration
Agreement, the Company is responsible for funding the development of DX-88
for the treatment of HAE until the later of incurring $8.0 million of
development costs or completion of the first Phase II clinical trial for HAE
(the Initial Program). Genzyme has an option to acquire a 50 percent interest
in the DX-88 program upon the Company's completion of the first Phase II
clinical trial in HAE, and will have a period of 60 days after review of the
data to exercise its option. If Genzyme exercises its option, it will be
responsible for 50% of the development costs incurred subsequent to
completion of the Initial Program, and upon dosing the first patient in a
pivotal clinical trial of DX-88 for HAE, Genzyme will be obligated to pay the
Company one-half of the development costs in excess of $6.0 million that were
incurred by the Company through completion of the Initial Program. As of June
30, 2002, the Company had incurred approximately $8.3 million of costs under
this program. Under the Amended Collaboration Agreement, the Company has an
option until March 31, 2003 to purchase Genzyme's interest in the application
of DX-88 for the prevention of blood loss and other systemic inflammatory
responses in cardiopulmonary bypass and other surgery.

11. LITIGATION

The Company reported in its Annual Report on Form 10-K for the year
ended December 31, 2001 that the Company's first phage display patent in Europe,
Patent

10

436,597 (the 597 Patent) was opposed by two parties in late 1997. The
oppositions primarily related to whether the written description of the
inventions in the Company's European patent was sufficient under European patent
law. A hearing on these oppositions was held on April 6, 2000 and the patent was
revoked. The Company appealed this decision to the Technical Board of Appeals of
the European Patent Office (the Technical Board).

In July 2002, the Company announced that at a hearing on July 2, 2002,
the Technical Board affirmed the April 6, 2000 revocation of the Company's 597
Patent ruling that the patent was not valid on the grounds that it failed to
provide verification of the claimed display of a proteinaceous binding domain.
The decision of the Technical Board is final and cannot be appealed.

The Company has two divisional patent applications of the 597 Patent
pending in the European Patent Office. The Company will not be able to prevent
other parties from using its phage display technology in Europe if the European
Patent Office does not grant it another patent. The Company cannot assure that
it will prevail in the prosecution of these patent applications. The Company
believes that the outcome of these proceedings will not have a material adverse
effect on its financial position and operating results.

Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The discussion in this item and elsewhere in this report contains
forward-looking statements involving risks and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. These risks and uncertainties include those described under
"Important Factors That May Affect Future Operations and Results" below.

OVERVIEW

We are a biopharmaceutical company principally focused on the
discovery, development and commercialization of therapeutic products. We have
two product candidates in clinical trials, DX-890 and DX-88, and have
collaborative agreements for the development of both of these product
candidates. Our collaborator for DX-890 recently completed a Phase IIa trial for
cystic fibrosis. We are currently conducting a Phase II trial of DX-88 in
hereditary angioedema (HAE) in Europe and expect to initiate a second Phase II
study of DX-88 in HAE and a Phase I/II study of DX-88 in cardiopulmonary bypass
in 2002.

We use a proprietary, patented method, known as phage display, to
identify a broad range of compounds with the potential for the treatment of
various diseases. We are using phage display technology to build a broad
portfolio of product candidates that we plan to develop and commercialize on our
own or with others. On behalf of collaborators, we also use phage display
technology to identify compounds that can be used in therapeutics, diagnostic
imaging, the development of research reagents, and in purifying and
manufacturing biopharmaceuticals. We are further leveraging our phage display
technology through collaborations and licenses that are structured to generate
revenues through research funding, license fees, technical and clinical
milestone payments, and royalties. We, through our Biotage subsidiary, develop,
manufacture and sell chromatography separations systems and products and are a
leading supplier of chromatography separations systems that use disposable
cartridges to separate and purify pharmaceuticals being produced for research
and clinical development.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 AND 2001

Total revenues for the three month period ended June 30, 2002 (the 2002
Quarter) were $10.6 million, compared with $8.2 million for the three month
period ended June 30, 2001 (the 2001 Quarter), an increase of $2.4 million or
29%. Product revenues and product development and license fee revenues accounted
for 55% and 45%,

11

respectively, of our total revenues in the 2002 Quarter, as compared with 56%
and 44% in the 2001 Quarter. Product revenues increased to $5.8 million in the
2002 Quarter from $4.6 million in the 2001 Quarter, an increase of $1.2 million
or 26%. The increase in product revenues was primarily due to increased unit
sales in Biotage's drug discovery purification consumables business, significant
sales of the Horizon product that was launched last year and increased shipments
of large production scale equipment.

Product development and license fee revenues increased to $4.8 million
for the 2002 Quarter from $3.6 million for the 2001 Quarter, an increase of $1.2
million or 33%. This increase was primarily due to higher revenue from
Debiopharm S.A. under our DX-890 collaboration representing reimbursement of our
costs of drug manufacture, and higher revenue under a funded research agreement.
These increases were partly offset by the absence in 2002 of government-funded
programs, which were completed in 2001.

Cost of products sold for the 2002 Quarter was $2.6 million compared to
$2.1 million for the 2001 Quarter, an increase of $529,000 or 25%, which was
consistent with the increase in product revenues. The gross margin on product
revenues for the 2002 Quarter was 55.4% compared to 55.1% for the 2001 Quarter.

Research and development expenses for the 2002 Quarter were $8.1
million, compared with $5.3 million for the 2001 Quarter, an increase of $2.9
million or 55%. The increase resulted primarily from higher external
manufacture and development costs associated with our DX-890 and DX-88
product candidates, higher facility and depreciation costs related to our new
premises in Cambridge and increased headcount. Research and development
expense for the 2002 Quarter was approximately $740,000 less than the amount
that was reported in our press release on July 30, 2002, due to a corrective
reclassification that also resulted in a corresponding increase in Selling,
General and Administrative expense in the 2002 Quarter. The reclassification
did not change our previously announced net loss for the six months ended
June 30, 2002.

Selling, general and administrative expenses increased to $7.5 million
for the 2002 Quarter compared to $5.3 million for the 2001 Quarter, an increase
of $2.3 million or 43%. The increase was primarily due to higher costs in the
following areas: professional fees related to expanding and protecting our
intellectual property, sales and marketing expenses as we expand our
chromatography product sales capabilities and facility costs related to our new
premises in Cambridge.

Other expense/income was a net expense of $45,000 for the 2002 Quarter
compared to income of $609,000 for the 2001 Quarter. Interest income decreased
due to lower cash and cash equivalent balances and lower interest rates.
Interest expense increased due to additional long-term debt obligations.

Our net loss for the 2002 Quarter was $7.7 million compared to $3.8
million for the 2001 Quarter.

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Total revenues for the six month period ended June 30, 2002 (the 2002
Period) were $19.5 million, compared with $15.3 million for the six month period
ended June 30, 2001 (the 2001 Period), an increase of $4.2 million or 28%.
Product revenues and product development and license fee revenues accounted for
56% and 44%, respectively, of our total revenues in the 2002 Period, as compared
with 55% and 45% in the 2001 Period. Product revenues increased to $10.8 million
in the 2002 Period from $8.5 million in the 2001 Period, an increase of $2.4
million or 28%. The increase in product revenues was primarily due to increased
unit sales in Biotage's drug discovery purification consumables business,
significant sales of the Horizon product that was launched last year and
increased shipments of large production scale equipment.

Product development and license fee revenues increased to $8.7 million
for the 2002 Period from $6.8 million for the 2001 Period, an increase of $1.9
million or 28%. This increase was primarily due to higher revenue from
Debiopharm S.A. under our DX-890 collaboration representing reimbursements of
our costs of drug manufacture, and higher revenue under a funded research
collaboration. These

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increases were partly offset by an absence of government-funded programs, which
were completed in 2001.

Deferred revenue as of June 30, 2002 decreased by $986,000 from
December 31, 2001. This decrease was primarily due to revenue recognized on
research collaborations and patent and other license fee agreements partly
offset by cash received under a funded research agreement. Deferred revenue
is recognized as revenue over future periods and in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."

Cost of products sold for the 2002 Period was $4.8 million compared to
$3.8 million for the 2001 Period, an increase of $933,000 or 24%. The gross
margin on product revenues for the 2002 Period was 55.9% compared to 54.6% for
the 2001 Period. This was mainly due to a favorable product mix in the 2002
Period compared with the 2001 Period, operating efficiencies and spreading
relatively fixed manufacturing overhead costs over an increased revenue base.

Research and development expenses for the 2002 Period were $15.7
million, compared with $9.4 million for the 2001 Period, an increase of $6.3
million or 68%. The increase resulted primarily from higher external
manufacture and development costs associated with our DX-890 and DX-88
product candidates, higher facility and depreciation costs related to our new
premises in Cambridge and higher headcount.

Selling, general and administrative expenses increased to $13.7 million
for the 2002 Period compared to $10.7 million for the 2001 Period, an increase
of $2.9 million or 27%. The increase was primarily due to higher costs in the
following areas: professional fees related to expanding and protecting our
intellectual property, sales and marketing expenses as we expand our
chromatography product sales capabilities and facility costs related to our new
premises in Cambridge.

Other expense/income was a net expense of $82,000 for the 2002 Period
compared to income of $1.5 million for the 2001 Period. Interest income
decreased due to lower cash and cash equivalent balances and lower interest
rates. Interest expense increased due to additional long-term debt obligations.

Our net loss for the 2002 Period was $14.8 million compared to $7.2
million for the 2001 Period.

LIQUIDITY AND CAPITAL RESOURCES

Through June 30, 2002, we have funded our operations principally
through the sale of equity securities, which have provided aggregate net cash
proceeds since inception of approximately $132.2 million, including net
proceeds of $62.4 million from our August 2000 initial public offering. We
have also generated funds from product sales, product development, license
fee revenues, interest income, long-term obligations and other sources. As of
June 30, 2002, we had cash and cash equivalents of approximately $39.4
million, a decrease of approximately $11.6 million from December 31, 2001. We
invest excess cash in U.S. Treasury obligations.

Our operating activities used cash of $13.6 million and $9.0 million
for the 2002 and 2001 Periods, respectively. The use of cash in both periods
resulted primarily from losses from operations and changes in our working
capital accounts, net of depreciation, amortization, provision for doubtful
accounts, inventory valuation adjustments and noncash compensation expense.

Our investing activities used cash of $10.7 million and $2.1 million
for the 2002 and 2001 Periods, respectively. Our investing activities
consisted of purchases of fixed assets funded primarily through long-term
obligations.

Our financing activities provided cash of $12.4 million and $134,000
for the 2002 and 2001 Periods, respectively. Our financing activities for the
2002 Period consisted primarily of borrowings under long-term obligations,
proceeds from landlord's financing of leasehold improvements, the exercise of
stock options and the sale of common stock under our employee stock purchase
plan. These proceeds were partly offset by repayments of long-term obligations.
Our financing activities

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for the 2001 Period consisted primarily of proceeds from additional debt and the
exercise of stock options partly offset by repayments of long-term obligations.

In the second quarter of 2002, we completed a build-out of our new
Cambridge, Massachusetts premises. The cost of the build-out was $10.1
million. We funded this project with $4.8 million in proceeds from our
landlord ($2.4 million in loans, $2.4 million in cost reimbursement), $2.8
million in loans from a commercial lender and $2.5 million of internal funds.
As of June 30, 2002, accrued building improvement costs totaled approximately
$500,000 and were included in accounts payable and accrued expenses on the
balance sheet.

We have financed fixed asset purchases through capital leases and debt.
Capital lease obligations are collateralized by the assets under lease. Certain
debt obligations are collateralized by a stand-by letter of credit for the
amount financed. If at the end of any quarter our unrestricted cash is less than
the greater of $25.0 million or annualized cash needs, we must provide to our
principal lender an irrevocable letter of credit in an amount equal to the
amount financed by that lender, which was $2.9 million at June 30, 2002.
Annualized cash needs are determined by multiplying cash used in operations for
the most recently ended quarter by four. We believe that we will be able to
obtain funding for our future fixed asset purchases through existing or
alternative lenders. If we cannot obtain additional funding we will have to use
our existing cash and cash equivalents to fund future fixed asset purchases.

On May 31, 2002, we and Genzyme Corporation amended our
collaboration agreement for the development and commercialization of DX-88
(the Amended Collaboration Agreement). Under the Amended Collaboration
Agreement, we are responsible for funding the development of DX-88 for the
treatment of HAE until the later of incurring $8.0 million of development
costs or completion of the first Phase II clinical trial for HAE (the Initial
Program). Genzyme has an option to acquire a 50 percent interest in the DX-88
program upon our completion of the first Phase II clinical trial in HAE, and
will have a period of 60 days after review of the data to exercise its
option. If Genzyme exercises its option, it will be responsible for 50% of
the development costs incurred subsequent to completion of the Initial
Program, and upon dosing the first patient in a pivotal clinical trial of
DX-88 for HAE, Genzyme will be obligated to pay us one-half of the
development costs in excess of $6.0 million that were incurred by us through
completion of the Initial Program. As of June 30, 2002, we had incurred
approximately $8.3 million of costs under this program. Under the Amended
Collaboration Agreement, we have an option until March 31, 2003 to purchase
Genzyme's interest in the application of DX-88 for the prevention of blood
loss and other systemic inflammatory responses in cardiopulmonary bypass and
other surgery. We also executed a senior secured promissory note and security
agreement under which Genzyme agreed to loan us up to $7.0 million and we
pledged certain tangible and intangible personal property of or arising out
of the DX-88 program. The security agreement provides for additional
collateral should we, under the Amended Collaboration Agreement, exercise our
option to purchase Genzyme's interest in the application of DX-88 in
cardiopulmonary bypass and other surgery, or should we fail to meet certain
financial covenants. The financial covenants state that we must maintain at
least $20.0 million in cash or cash equivalents based on our quarterly
consolidated financial statements and that we maintain at least one continued
listing standard for the Nasdaq National Market.

Advances under the promissory note may be made once each calendar
quarter, beginning on May 31, 2002 and ending upon completion of the first
Phase II clinical trial for the treatment of HAE, and may not exceed $4.0
million during the second quarter of 2002 and $1.5 million during any
subsequent calendar quarter. The loan bears interest at a rate of prime plus
two percent, 6.75% at June 30, 2002. Interest is payable quarterly. The
principal and all unpaid interest are due on May 31, 2005 (the Maturity
Date). We may extend the Maturity Date to May 31, 2007 if the Amended
Collaboration Agreement is in effect, no default or event of default exists
and we satisfy the financial covenants as of the Maturity Date. As of June
30, 2002, we had received $4.0 million under this note, which is included in
long-term obligations on our balance sheet. We anticipate receiving the
remaining $3.0 million prior to the end of 2002.

14

OUTLOOK

For the year ending December 31, 2002, we anticipate that total
revenues should be approximately $38 million to $40 million. We expect cost of
products sold as a percentage of product revenues to be consistent with those in
the first half of 2002.

As of June 30, 2002, we had two product candidates in clinical
trials, DX-890 and DX-88. Our collaborator for DX-890 recently completed a
Phase IIa trial for the treatment of cystic fibrosis. We are currently
conducting a Phase II trial of DX-88 in hereditary angioedema in Europe and
expect to initiate a second Phase II study of DX-88 in HAE and a Phase I/II
study of DX-88 in cardiopulmonary bypass in 2002. Research and development
expenses are expected to be approximately $34 million to $39 million for the
year ending December 31, 2002, an increase of approximately 75% to 100% from
the year ended December 31, 2001, due to continued progress of our clinical
trials, expanded development of our preclinical pipeline, facility costs
associated with our Cambridge premises and higher headcount. Selling, general
and administrative expenses are expected to be approximately $26 million to
$28 million for the year ending December 31, 2002, an increase of
approximately 10% to 15% from the year ended December 31, 2001.

We estimate that our Biotage subsidiary will invest approximately $2.6
million in the remaining six months of 2002 to complete construction of its
51,000 square foot facility in Charlottesville, Virginia. This investment is
being funded through a loan with a commercial bank. We expect to spend
approximately $2.5 million on other fixed asset purchases during the remaining
six months of 2002.

We expect net cash outflows to be approximately $12 million during
the remaining six months of 2002. We believe that existing cash and cash
equivalents plus anticipated cash flow from product revenues and
collaborations will be sufficient to support our current operating plans
through 2003. We anticipate that we will need to raise additional cash to
fund our operations and we may raise such capital through the sale of equity
or through debt financing. The sale of equity or issuance of debt may result
in dilution to our stockholders, and we cannot be certain that additional
financing will be available in amounts or on terms acceptable to us, if at
all. In light of the current condition of the capital markets, we will also
have to consider other alternatives, including reducing the scope of our
planned research, development and commercialization activities, which could
negatively impact our business.

CRITICAL ACCOUNTING POLICIES

In our Form 10-K for the year ended December 31, 2001, our most
critical accounting policies and estimates upon which our financial status
depends upon were identified as those relating to inventories, allowance for
doubtful accounts, valuation of long-lived and intangible assets, revenue
recognition and litigation claims. We reviewed our policies and determined
that those policies remain our most critical accounting policies for the
quarter and six months ended June 30, 2002. We did not make any changes in
those policies during the six months ended June 30, 2002.

IMPORTANT FACTORS THAT MAY AFFECT FUTURE OPERATIONS AND RESULTS

This Quarterly Report on Form 10-Q contains forward-looking statements.
These forward-looking statements appear principally in the section entitled
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations." Forward-looking statements may appear in other sections of this
report as well. Generally, the forward-looking statements in this report use
words like "expect," "believe," "continue," "anticipate," "estimate," "may,"
"will," "could," "should," "opportunity," "future," "project," and similar
expressions.

The forward-looking statements include statements about our:
- clinical trials;

15

- results of operations;
- research and development programs; and
- collaborations.

Statements that are not historical facts are based on our current
expectations, beliefs, assumptions, estimates, forecasts and projections for our
business and the industry and markets in which we compete. The forward-looking
statements contained in this report are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed in such forward-looking statements. We caution investors not to
place undue reliance on the forward-looking statements contained in this report.
These statements speak only as of the date of this report, and we do not
undertake any obligation to update or revise them, except as required by law.

The following factors, among others, create risks and uncertainties
that could affect our future or other performance:
- our history of operating losses and our expectation that we will
incur significant additional operating losses;
- any inability to raise the capital that we will need to sustain our
operations;
- any inability to successfully and expeditiously complete the
rigorous clinical trials and regulatory approvals that any
biopharmaceutical that we develop must undergo, which could
substantially delay or prevent their development or marketing;
- our dependence on third parties to manufacture biopharmaceuticals,
which may adversely affect our ability to commercialize any
biopharmaceuticals we may develop;
- our lack of experience in conducting clinical trials, regulatory
processes, and conducting sales and marketing activities, any or all
of which may adversely impact our ability to commercialize any
biopharmaceuticals we may develop;
- our dependence on the expertise, effort, priorities and contractual
obligations of our collaborators, any changes in our collaborators'
business direction or priorities or defaults in their obligations
may have an adverse impact on our research revenues and ultimately
our license revenues and expenses;
- any failure by us or our collaborators to gain market acceptance of
our biopharmaceuticals;
- competition and technological change that may make our potential
products and technologies less attractive or obsolete;
- any inability to obtain and maintain intellectual property
protection for our products and technologies;
- time consuming and expensive proceedings to obtain, enforce or
defend patents and to defend against charges of infringement that
may result in unfavorable outcomes and could limit our patent rights
and our activities;
- significant fluctuations in our revenues and operating results,
which have occurred in the past and which we expect to continue to
fluctuate in the future;
- any loss or inability to hire and retain qualified personnel;
- difficulties in managing our growth;
- our dependence on one supplier for a key component in our
separations products;
- risks associated with international sales and operations and
collaborations;
- failure to acquire technology and integrate complementary
businesses;
- our common stock may continue to have a volatile public trading
price and low trading volume; and
- anti-takeover provisions in our governing documents and under
Delaware law and our shareholder rights plan that may make an
acquisition of us more difficult.

As a result of the foregoing and other factors, we may experience
material fluctuations in our future operating results, which could materially
affect our

16

business, financial position, and stock price. These risks and uncertainties are
discussed in more detail in Exhibit 99.1 entitled, "Important Factors Affecting
Future Operations and Results" filed with our Annual Report on Form 10-K for the
year ended December 31, 2001.

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cash and cash
equivalents. We place our investments in high-quality financial instruments,
primarily U.S. Treasury funds, which we believe are subject to limited credit
risk. We currently do not hedge interest rate exposure. As of June 30, 2002, we
had cash and cash equivalents of $39.4 million consisting of cash and highly
liquid, short-term investments. Our short-term investments will decline by an
immaterial amount if market interest rates increase, and therefore, our exposure
to interest rate changes is immaterial. Declines of interest rates over time
will, however, reduce our interest income from our short-term investments. Our
outstanding capital lease obligations are all at fixed interest rates and
therefore have minimal exposure to changes in interest rates.

Most of our transactions are conducted in U.S. dollars. We have
collaboration and technology license agreements, and product sales with
parties located outside the United States. Transactions under certain of
these and other agreements are conducted in local foreign currency. If
exchange rates undergo a change of up to 10%, we do not believe that it would
have a material impact on our results of operations or cash flows.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

The Company reported in its Annual Report on Form 10-K for the year
ended December 31, 2001 that the Company's first phage display patent in Europe,
Patent 436,597 (the 597 Patent) was opposed by two parties in late 1997. The
oppositions primarily related to whether the written description of the
inventions in the Company's European patent was sufficient under European patent
law. A hearing on these oppositions was held on April 6, 2000 and the patent was
revoked. The Company appealed this decision to the Technical Board of Appeals of
the European Patent Office (the Technical Board).

In July 2002, the Company announced that at a hearing on July 2, 2002,
the Technical Board affirmed the April 6, 2000 revocation of the Company's 597
Patent ruling that the patent was not valid on the grounds that it failed to
provide verification of the claimed display of a proteinaceous binding domain.
The decision of the Technical Board is final and cannot be appealed.

The Company has two divisional patent applications of the 597 Patent
pending in the European Patent Office. The Company will not be able to
prevent other parties from using its phage display technology in Europe if
the European Patent Office does not grant it another patent. The Company
cannot assure that it will prevail in the prosecution of these patent
applications. The Company believes that the outcome of these proceedings will
not have a material adverse effect on its financial position and operating
results.

Item 2 - Use of Proceeds from Registered Securities

On August 18, 2000, we sold 4,600,000 shares of common stock
(including 600,000 shares pursuant to the exercise by the underwriters of
their overallotment option) at a price of $15.00 per share in our initial
public offering and received proceeds of approximately $62.4 million, net of
underwriter commissions. From August 18, 2000 through June 30, 2002, we used
approximately $30.0 million to fund operating activities and $22.0 million
for the purchase of fixed assets. The remaining proceeds were held in cash
and cash equivalents at June 30, 2002.

17

Item 4 - Submission of Matters to a Vote of Security Shareholders

We held our Annual Meeting of Stockholders on May 16, 2002. The
following represents the results of the voting on proposals submitted to the
stockholders at the Annual Meeting:

(a) Proposal to elect James W. Fordyce, Thomas L. Kempner and Alix
Marduel to the Board of Directors, each to serve a three-year term.

There were no broker non-votes or abstentions with respect to this
matter.

Each nominee received a plurality of the votes cast, and therefore has
been duly elected a director of Dyax. The terms in office of directors
Constantine E. Anagnostopoulos, Henry R. Lewis, David J. McLachlan,
Henry E. Blair, Gregory D. Phelps and John W. Littlechild continued
after the meeting.

(b) Proposal to amend Dyax's Amended and Restated 1995 Equity Incentive
Plan to, among other things, increase the number of shares reserved for
issuance under the plan from 4.5 million to 6.5 million shares and to
provide for automatic annual increases up to an aggregate amount of not
more than 10.25 million shares. The proposal received a majority of the
shares represented in person or by proxy and therefore has been
adopted.

(c) Proposal to amend Dyax's 1998 Employee Stock Purchase Plan to
increase the number of shares of Common Stock issued and issuable under
the plan from 98,000 to 200,000 shares. The proposal received a
majority of the shares represented in person or by proxy and therefore
has been adopted.

Item 6 - Exhibits and Reports on Form 8-K

(a) - Exhibits

See the Exhibit Index immediately following the signature page
to this report, which Exhibit Index is incorporated herein by
reference.

(b) - Reports on Form 8-K

No reports on Form 8-K were filed during the quarter for which
this report is filed.

18

DYAX CORP.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DYAX CORP.

Date: August 14, 2002 /s/ STEPHEN S. GALLIKER
----------------------------------
Executive Vice President, Finance
and Administration, and Chief
Financial Officer

19

DYAX CORP.

EXHIBIT INDEX