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 in Part II, Item 1a - Risk Factors.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs, with an emphasis on inflammatory and oncology indications. We use our proprietary drug discovery technology, known as phage display, to

identify antibody, small protein and peptide compounds for clinical development. This phage display technology fuels our internal pipeline of promising drug candidates, attracts numerous licensees and collaborators, and has the potential to generate important revenues in the future.

Our lead product candidate, DX-88, is a small recombinant protein that is a highly specific inhibitor of human plasma kallikrein. We and our collaborators are currently developing DX-88 in multiple indications.

The most advanced indication for DX-88 is in the treatment of hereditary angioedema (HAE), a potentially life-threatening inflammatory condition. If approved by the U.S. Food and Drug Administration, (FDA) in this indication, DX-88 will be branded as KALBITOR®. It has orphan drug designation in the United States and European Union (EU) for the treatment of acute attacks of HAE. In this indication, we have completed three Phase 2 trials and two Phase 3 trials of DX-88 for subcutaneous administration. On September 23, 2008, we submitted a Biologics License Application (BLA) with the FDA for the use of DX-88 for the treatment of acute attacks of HAE, and the FDA designated this application for priority review. On February 4, 2009, the FDA's Pulmonary-Allergy Advisory Committee voted in favor of approval of our BLA. On March 25, 2009, we received a complete response letter from the FDA outlining the requirements for approval of DX-88 for HAE. Specifically, the FDA requested submission of a Risk Evaluation and Mitigation Strategy (REMS) and additional information with respect to the chemistry, manufacturing and controls (CMC) section of the BLA. The letter also included a requirement that we conduct certain post-marketing studies, but did not include requirements for any additional clinical trials for approval of DX-88. We believe all issues raised in the complete response letter were fully addressed in our reply, which was submitted on June 1, 2009 and accepted for review by the FDA. In connection with the acceptance, the FDA assigned our BLA a new Prescription Drug User Fee Act (PDUFA) action date of December 1, 2009.

If the BLA is approved, we intend to independently market and sell KALBITOR for HAE in North America. We are currently negotiating with potential partners to commercialize KALBITOR for HAE and other angioedema indications in markets outside of North America.

Outside of HAE, DX-88 is also being developed in additional indications. These include use of DX-88 for the reduction of blood loss during surgery in collaboration with Cubist Pharmaceuticals (Cubist), and for the treatment of retinal diseases in collaboration with Fovea Pharmaceuticals (Fovea), which has entered into an agreement to be acquired by sanofi-aventis. In addition, we are also exploring use of DX-88 for the treatment of ACE inhibitor-induced angioedema, a life threatening inflammatory response brought on by adverse reactions to ACE inhibitors; and acquired angioedema, a condition associated with B-cell lymphoma and autoimmune disorders.

In addition to DX-88, we continue to use our proprietary phage display to identify new drug candidates such as DX-2240 and DX-2400, two fully human monoclonal antibodies with therapeutic potential in oncology indications. In February 2008, we entered into an exclusive license agreement with sanofi-aventis under which they will be responsible for the continued development of DX-2240. DX-2400 is currently in preclinical development within our development pipeline.

Although we use our phage display technology primarily to advance our own internal development activities, we also leverage it through licenses and collaborations designed to generate revenues and provide us access to co-develop and/or co-promote drug candidates identified by other biopharmaceutical and pharmaceutical companies. Through our Licensing and Funded Research Program (LFRP), we have more than 70 licenses and collaborations, which have thus far resulted in 16 product candidates that licensed third parties have advanced into clinical trials and one product that has received market approval from the FDA. A portion of the current and future revenues generated through the LFRP are pledged to secure payment of loans we received from Cowen Healthcare in August 2008 and March 2009, which loans had an aggregate outstanding balance of $59.7 million as of September 30, 2009.

We have incurred net losses since our inception, including net losses of $12.2 million and $51.5 million for the three and nine months ended September 30, 2009, respectively. We expect to continue to

incur significant additional net losses over at least the next several years. We do not expect to generate profits until the therapeutic products from our development portfolio reach the market after being subjected to the uncertainties of the regulatory approval process. Our revenues and operating results have fluctuated on a quarter to quarter basis and we expect these fluctuations to continue in the future.

Our Business Strategy

Our strategic goal is to develop new biotherapeutics for unmet medical needs, with an emphasis on inflammatory and oncology indications. We intend to accomplish this goal through the following activities:

† DX-88 Franchise. We will continue to focus our internal efforts on obtaining market approval for DX-88 for the treatment of acute attacks of HAE and other angioedemas. We intend to commercialize DX-88 for HAE as KALBITOR on our own in North America and to establish partnerships in other major markets. We plan to expand the label beyond HAE, in two additional angioedemas (acquired and ACE inhibitor-induced). In addition to our internal efforts, ongoing development of DX-88 for the reduction of blood loss during on-pump cardiothoracic surgery and other surgical indications is being pursued through our collaboration agreement with Cubist. Fovea, which has entered into an agreement to be acquired by sanofi-aventis, is developing an ophthalmic formulation for DX-88 starting with retinal vein occlusion-induced macular edema. We will continue to explore the therapeutic potential of DX-88 in other indications.

† Emerging Pipeline and Phage Display Technology. We will continue to use our proprietary phage display technology to identify new drug candidates and advance others within our preclinical pipeline. These preclinical drug candidates may be developed independently or through strategic partnerships with other biotechnology and pharmaceutical companies. Although we will continue to seek to retain ownership and control of our internally discovered drug candidates by taking them further into preclinical and clinical development, we will also partner certain candidates, as we have with our DX-2240 antibody, in order to balance the risks associated with drug discovery and maximize return for our stockholders.

† Licensing and Funded Research Program. We will also continue to leverage our phage display technology through our LFRP in order to generate ongoing future revenues and to gain rights to co-develop and/or co-promote drug candidates identified by certain of our collaborators. There are currently 16 product candidates that licensed third parties in the LFRP have advanced into clinical trials and one product that has received market approval from the FDA.

DX-88 Development Programs

DX-88 for HAE. We are developing DX-88 as a treatment of acute attacks of HAE. We have completed three Phase 2 trials and two Phase 3 trials of DX-88 for subcutaneous administration. An ongoing, open-label continuation study is also being conducted to augment our clinical data with respect to DX-88.

Our study results in patients exposed to DX-88 suggest that it can provide repeated therapeutic benefit to HAE patients for all types of HAE attacks, including potentially fatal laryngeal attacks. Furthermore, with repeated dosing there is no apparent decrease in DX-88's therapeutic effects on HAE attacks in these patients. To date, DX-88 is generally well tolerated, with the most serious risks being hypersensitivity reactions, including anaphylaxis, which are resolved with treatment. Other adverse events include headache, nausea and fatigue.

Based on the positive efficacy and satisfactory safety profile results from our EDEMA4 and EDEMA3 trials, we submitted our BLA to the FDA on September 23, 2008. The FDA accepted our BLA

for filing and designated the application for priority review. The FDA's Pulmonary-Allergy Drugs Advisory Committee reviewed our submission for the subcutaneous formulation of DX-88 for HAE on February 4, 2009, and the Committee voted in favor of approval of DX-88 for HAE by a margin of six votes in favor to five votes against, with two voters abstaining. In addition to the overall vote in favor of approval, the Committee provided recommendations aimed at a better understanding of DX-88's safety characteristics in the subset of patients that experience hypersensitivity reactions. Earlier in 2009, a pre-approval inspection of the manufacturing site, processes and supporting quality systems was successfully completed at our third-party contract manufacturer, Avecia Biologics, Ltd. On March 25, 2009, we received a complete response letter from the FDA outlining the requirements for approval of DX-88 for HAE. Specifically, the FDA requested submission of a REMS, and additional information with respect to the CMC section of the BLA. The letter also included a requirement that we conduct certain post-marketing studies, but did not include requirements for any additional clinical trials for approval of DX-88. We believe all issues raised in the complete response letter were fully addressed in our reply, which was submitted on June 1, 2009 and accepted for review by the FDA. In connection with the acceptance, the FDA assigned our BLA a new PDUFA action date of December 1, 2009.

Given our familiarity with the HAE market and its relatively small number of treating allergists, we intend to independently commercialize DX-88 for HAE in North America. For markets outside of North America, we will seek to establish arrangements where DX-88 is sold by pharmaceutical companies that are already well established in these regions.

During the three months ended September 30, 2009 (the 2009 Quarter), HAE program expenses totaled $5.3 million compared with $9.0 million in the three months ended September 30, 2008 (the 2008 Quarter). The decrease in spending in the 2009 Quarter as compared to the 2008 Quarter is attributable primarily to cost savings as a result of the workforce reduction in March 2009 and a decrease of $1.6 million in clinical trial costs for the completion of the EDEMA 4 trial and other external research and development costs related to the BLA submission in 2008. These decreases were partially offset by increased sales and marketing expenses for the HAE program in preparation of the commercialization of our lead product candidate, DX-88. During the nine months ended September 30, 2009 (the 2009 Period), HAE program expenses totaled $26.4 million compared with $26.1 million in the nine months ended September 30, 2008 (the 2008 Period). Although the change in the 2009 Period as compared to the 2008 Period was not substantial, there were significant fluctuations in categories of expenditures from period to period, including a decrease in internal costs as a result of the workforce reduction in March 2009 and a decrease of $3.6 million in clinical trial costs for the completion of the EDEMA 4 trial. In addition, other external research and development costs decreased in the 2009 Period due to the activities related to the initial BLA filing in late 2008. These decreases were partially offset by an increase of $7.5 million associated with the manufacture of DX-88 drug material, as well as, an increase in infrastructure costs to support plans for commercialization of DX-88 for HAE of approximately $1.0 million.

DX-88 for the Treatment of Other Angioedemas. Another form of angioedema is induced by the use of so-called ACE inhibitors. With an estimated 30 to 40 million prescriptions written annually worldwide, ACE inhibitors are widely prescribed to reduce Angiotensin Converting Enzyme (ACE) and generally reduce high blood pressure and vascular constriction. Approximately 17% of all angioedemas admitted to medical centers for treatment are identified as ACE inhibitor-induced angioedema. Research suggests the use of ACE inhibitors increases the relative activity of bradykinin, a protein that causes blood vessels to enlarge, or dilate, which can also cause the swelling known as angioedema. As a specific inhibitor of plasma kallikrein, an enzyme needed to produce bradykinin, DX-88 has the potential to be effective for treating this condition. We are working with investigators affiliated with the University of Cincinnati as they prepare to initiate an investigator sponsored study for drug-induced angioedema.

Acquired angioedema is a condition associated with B-cell lymphoma and autoimmune disorders. Dr. Marco Cicardi, of the University of Milan, plans to sponsor a compassionate use program for DX-88 in acquired angioedema.

Both of these studies are expected to be initiated by the end of 2009.

DX-88 for On-Pump CTS. Industry publications report that there are an estimated one million procedures performed worldwide each year involving on-pump cardiothoracic surgery, or CTS. On-pump CTS procedures, which are performed for patients who have narrowings or blockages of the coronary arteries, often involve use of a heart-lung machine commonly referred to as the "pump". In these procedures, the heart is stopped with medications, and the pump does the work of the heart and lungs during surgery. This allows the surgeon to position the heart as needed, to accurately identify the arteries and to perform the bypass while the heart is stationary.

The use of the pump during CTS procedures elicits an adverse systemic inflammatory response. Many patients undergoing on-pump CTS procedures experience significant intraoperative blood loss that requires transfusion. Plasma kallikrein has been implicated in the body's response to on-pump heart surgery as a major contributor to the significant blood loss seen in on-pump CTS patients and to the pathologic inflammation that plays a role in the complications of on-pump CTS procedures.

In April 2008, Dyax entered into an exclusive license and collaboration agreement with Cubist for the development and commercialization in North America and Europe of the intravenous formulation of DX-88 for the reduction of blood loss during surgery. Under this agreement, Cubist assumed responsibility for all further development and costs associated with DX-88 in the licensed indications in the Cubist territory.

Cubist has initiated two Phase 2 trials. The first, known as CONSERVTM 1, is a dose ranging study evaluating 5, 25 and 75 milligram doses of DX-88 versus placebo in patients undergoing primary coronary artery bypass graft (CABG) surgery who are at a low risk of bleeding complications. The second trial, known as CONSERVTM 2, compares a single 75 milligram dose of DX-88 to tranexamic acid in patients at a higher risk of bleeding. Combined, these trials are expected to enroll approximately 650 patients. Cubist expects to have data unblinded from these trials in early 2010 and currently anticipates an end of Phase 2 meeting with the FDA in mid-2010.

During the three and nine months ended September 30, 2008, research and development expenses for the CTS program totaled $760,000 and $2.4 million, respectively. There have been no costs incurred by us in 2009 and we do not expect to incur future expenditures for this program.

DX-88 for Ophthalmic Indications. We have entered into a license agreement with Fovea, which has entered into an agreement to be acquired by sanofi-aventis, for the ocular formulation of DX-88 for the treatment of retinal diseases in the EU. Under this agreement, Fovea will fully fund development for the first indication, retinal vein occlusion-induced macular edema, for which a Phase 1 trial was initiated in the third quarter of 2009. Dyax retains all rights to commercialize DX-88 in this indication outside of the EU.

Goals for DX-88 Development Programs. Our goal for the ongoing development of DX-88 is to ensure that we and our various collaborators move rapidly to develop DX-88 in multiple indications and obtain marketing approval from the FDA and international regulatory agencies in such indications. Cash inflows from these programs, other than upfront and milestone payments from our collaborations will not commence until after marketing approvals are obtained, and then only if the product candidate finds acceptance in the marketplace as a treatment for its disease indication. Because of the many risks and uncertainties related to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when cash inflows from these programs will commence, if ever.

Other Discovery and Development Programs

In addition to our drug candidates in clinical trials, our phage display technology and expertise has allowed us to develop a pipeline of drug candidates. Of our existing pipeline candidates, the most advanced

are DX-2240 and DX-2400, two fully human monoclonal antibodies with therapeutic potential in oncology indications.

Our DX-2240 antibody has a novel mechanism of action that targets the Tie-1 receptor on tumor blood vessels. In preclinical animal models, DX-2240 has demonstrated activity against a broad range of solid tumor types. Data also indicates increased activity when combined with antiangiogenic therapies such as Avastin® and Nexavar®. In February 2008, we entered into agreements with sanofi-aventis, under which we granted sanofi-aventis exclusive worldwide rights to develop and commercialize DX-2240 as a therapeutic product, as well as a non-exclusive license to our proprietary antibody phage display technology.

Our DX-2400 antibody is a specific inhibitor of Matrix Metalloproteinase-14 (MMP-14), a protease expressed on tumor cells and tumor blood vessels. To date, small molecule approaches have failed to produce compounds that distinguish between closely related MMPs. In contrast, our technology has allowed us to identify a highly selective inhibitor of MMP-14 that does not inhibit other proteases that we have tested. In animal models, DX-2400 has been shown to significantly inhibit tumor progression and metastasis in a dose-dependent manner in breast, prostate and melanoma tumors. Herceptin®, a leading breast cancer treatment, is effective in only the subtype of breast tumors which are Her2+. Current data suggests that DX-2400 may be effective against both Her2+ and Her2- breast tumors, potentially offering promise for treatment of a wider range of breast cancer patients. DX-2400 is currently in preclinical development within our development pipeline.

Given the uncertainties of the research and development process, it is not possible to predict with confidence if we will be able to enter into additional partnerships or otherwise internally develop any of these other preclinical drug candidates into marketable pharmaceutical products. We monitor the results of our discovery research and our nonclinical and clinical trials and frequently evaluate our preclinical pipeline in light of new data and scientific, business and commercial insights with the objective of balancing risk and potential. This process can result in relatively abrupt changes in focus and priority as new information becomes available and we gain additional insights into ongoing programs and potential new programs.

Results of Operations

Three Months Ended September 30, 2009 and 2008

Revenue. Substantially all our revenue has come from licensing, funded research and development fees, including milestone payments from our licensees and collaborators. This revenue fluctuates from quarter-to-quarter due to the timing of the clinical activities of our collaborators and licensees. Revenue was $4.5 million in the 2009 Quarter and $5.5 million in the 2008 Quarter. The decrease resulted primarily from lower funded research revenue.

Research and Development. Our research and development expenses for the 2009 and 2008 Quarters were $7.1 million and $16.5 million, respectively. Our research and development expenses arise primarily from compensation and other related costs for our personnel dedicated to research and development activities, fees paid and costs reimbursed to outside parties to conduct research and clinical trials and the cost of manufacturing drug material prior to FDA approval. The 2009 decrease in research and development expenses was primarily related to cost savings of approximately $4.0 million as a result of the workforce reduction in March 2009. In addition, external research and development costs decreased by approximately $5.0 million, including a decrease of $2.0 million in clinical trial costs, as we completed our EDEMA4 clinical trial in 2008.

General and Administrative. Our general and administrative expenses consist primarily of the costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees, market research,

promotion activities and the reporting requirements of a public company. General and administrative expenses for the 2009 and 2008 Quarters were $5.9 million and $4.9 million, respectively. Costs increased during the 2009 Quarter due to the expanded infrastructure to support plans for commercialization of DX-88 for HAE.

Restructuring and Impairment. As a result of the decrease in necessary facility space following the workforce reduction in March 2009, we amended our facility lease during the 2009 Quarter, to reduce our leased space. In the 2009 Quarter, a one-time charge of approximately $1.4 million was recorded of which, approximately $955,000 was recorded as a result of the write-down of leasehold improvements.

In the 2008 Quarter, we incurred restructuring fees of $876,000 related to the closing of our Liege, Belgium research facility. There was no impairment of fixed assets in the 2008 Quarter.

Loss on Extinguishment of Debt. In the 2008 Quarter, we incurred a one-time loss on extinguishment of debt of $8.3 million related to the repayment in full of our debt with Paul Royalty.

Nine Months Ended September 30, 2009 and 2008

Revenue. Substantially all our revenue has come from licensing, funded research and development fees, including milestone payments from our licensees and collaborators. This revenue fluctuates from period-to-period due to the timing of the clinical activities of our collaborators and licensees. Revenue increased to $15.3 million in the 2009 Period from $12.0 million in the 2008 Period. This increase primarily relates to higher revenue from library license activity of approximately $2.5 million and additional revenue recognized under our April 2008 agreement with Cubist.

Research and Development. Our research and development expenses for the 2009 and 2008 Periods were $37.8 million and $51.6 million, respectively. Our research and development expenses are primarily from compensation and other related costs for our personnel dedicated to research and development activities, fees paid and costs reimbursed to outside parties to conduct research and clinical trials and the cost of manufacturing drug material prior to FDA approval. The 2009 decrease in research and development expenses was primarily related to cost savings of approximately $8.7 million as a result of the workforce reduction in March 2009, and approximately $2.2 million from the closure of our Liege, Belgium research facility in the second quarter of 2008. In addition, clinical trial costs decreased by approximately $6.6 million during the 2009 Period, as we completed our EDEMA4 clinical trial in 2008. License expense and other external research and development costs also decreased during the 2009 Period as well. These decreases were offset by an increase in costs of $7.5 million associated with the manufacture of drug substance.

General and Administrative. Our general and administrative expenses consist primarily of the costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees, market research, promotion activities and the reporting requirements of a public company. General and administrative expenses were $18.9 million for the 2009 Period compared to $15.6 million for the 2008 Period. The higher general and administrative costs in 2009 were primarily due to an increase in infrastructure to support plans for commercialization of DX-88 for HAE and a $1.1 million charge for share-based compensation expense for amendments to the exercise and vesting schedules of certain options, as required under ASC 718.

Restructuring and Impairment. In March 2009, we implemented a workforce reduction to focus necessary resources on the commercialization of DX-88 and to support our long-term financial success. As a result, during the first quarter of 2009, we recorded one-time restructuring charges related to the workforce reduction of approximately $1.9 million. We expect the reduction in personnel costs, along with other external costs, will result in approximately $18.0 million in annual savings.

As a result of the decrease in necessary facility space following the workforce reduction in March 2009, we amended our facility lease during the 2009 Quarter to reduce our leased space. In the 2009 Quarter, a one-time charge of approximately $1.4 million was recorded of which, approximately $955,000 was recorded as a result of the write-down of leasehold improvements.

In the 2008 Period, we incurred restructuring fees of $4.6 million, and recorded an impairment charge related to fixed assets of $352,000 in conjunction with the closing of our Liege, Belgium research facility.

Loss on Extinguishment of Debt. In the 2008 Period, we incurred a one-time loss on extinguishment of debt of $8.3 million related to the repayment in full of our debt with Paul Royalty.

Liquidity and Capital Resources



                                                        September 30, 2009      December 31, 2008
                                                                     (in thousands)
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