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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended
September 30, 2009

Commission File Number 000-13789





MDRNA, INC.

(Exact name of registrant as specified
in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 11-2658569                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3830 Monte Villa Parkway, Bothell, WA                          |  | 98021                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (425) 908-3600





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   ̈

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check One):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:



|                 |  |                                 |  |                   
|---------------- |  | ------------------------------- |  | ------------------
|Date             |  | Class                           |  | Shares Outstanding
|November 2, 2009 |  | Common stock  $0.006 par value |  | 40,807,325        









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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                                                                                                                 |  |   
|---------------------------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION                                                                                   |  |   
|                                                                                                                 | 
|ITEM 1  FINANCIAL STATEMENTS (unaudited)                                                                        |  |   
|Condensed Consolidated Balance Sheets as of December 31, 2008 and September 30,
2009                             |  | 3 
|Condensed Consolidated Statements of Operations for the three and nine months ended September 
30, 2008 and 2009 |  | 4 
|Condensed Consolidated Statement of Stockholders Deficit for the nine months ended September 
30, 2009          |  | 5 
|Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and
2009            |  | 6 
|Notes to Condensed Consolidated Financial Statements                                                             |  | 7 
|                                                                                                                 | 
|ITEM 
2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                  |  | 18
|ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                              |  | 24
|ITEM 4T  CONTROLS AND PROCEDURES                                                                                |  | 24
|                                                                                                                 | 
|PART II  OTHER INFORMATION                                                                                      |  |   
|                                                                                                                 | 
|ITEM 6  EXHIBITS                                                                                                |  | 24
|SIGNATURES                                                                                                       |  | 25
|EXHIBIT INDEX                                                                                                    |  | 26

Items 1, 1A, 2, 3, 4 and 5 of PART II have not been included as they are not
applicable.



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

MDRNA, INC. AND SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                                                      |  | December 31,2008                  |          |   | September 30,2009 |  
|                                                                                                                                                                                                                      |  | (In thousands, except share data) |         
|ASSETS                                                                                                                                                                                                                |  |                                   |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                                                       |  |                                   |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                                                             |  | $                                 | 1,084    |   |                   | $ | 3,431    |  
|Restricted cash                                                                                                                                                                                                       |  |                                   | 2,268    |   |                   |   | 1,157    |  
|Accounts receivable                                                                                                                                                                                                   |  |                                   | 32       |   |                   |   | 49       |  
|Inventories                                                                                                                                                                                                           |  |                                   | 98       |   |                   |   |         |  
|Prepaid expenses and other current assets                                                                                                                                                                             |  |                                   | 935      |   |                   |   | 220      |  
|Assets held for sale                                                                                                                                                                                                  |  |                                   | 541      |   |                   |   |         |  
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                                                  |  |                                   | 4,958    |   |                   |   | 4,857    |  
|Property and equipment, net                                                                                                                                                                                           |  |                                   | 7,844    |   |                   |   | 5,116    |  
|Other assets                                                                                                                                                                                                          |  |                                   | 335      |   |                   |   | 3        |  
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Total assets                                                                                                                                                                                                          |  | $                                 | 13,137   |   |                   | $ | 9,976    |  
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|                                                                                                                                                                                                                      |  |                                  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                                                 |  |                                   |          |   |                   |   |          |  
|                                                                                                                                                                                                                      |  |                                  
|Current liabilities:                                                                                                                                                                                                  |  |                                   |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                                                      |  | $                                 | 2,039    |   |                   | $ | 1,141    |  
|Accrued payroll and employee benefits                                                                                                                                                                                 |  |                                   | 2,410    |   |                   |   | 678      |  
|Accrued expenses                                                                                                                                                                                                      |  |                                   | 1,472    |   |                   |   | 1,672    |  
|Accrued restructuring  current portion                                                                                                                                                                               |  |                                   | 2,091    |   |                   |   | 156      |  
|Capital lease obligations  current portion                                                                                                                                                                           |  |                                   | 4,112    |   |                   |   |         |  
|Deferred revenue  current portion                                                                                                                                                                                    |  |                                   | 400      |   |                   |   |         |  
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                                             |  |                                   | 12,524   |   |                   |   | 3,647    |  
|Accrued restructuring, net of current portion                                                                                                                                                                         |  |                                   | 609      |   |                   |   | 524      |  
|Capital lease obligations, net of current portion                                                                                                                                                                     |  |                                   | 1,017    |   |                   |   |         |  
|Deferred revenue, net of current portion                                                                                                                                                                              |  |                                   | 318      |   |                   |   |         |  
|Fair value liability for price adjustable warrants                                                                                                                                                                    |  |                                   |         |   |                   |   | 10,980   |  
|Deferred rent and other liabilities                                                                                                                                                                                   |  |                                   | 1,928    |   |                   |   | 1,462    |  
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                                                                     |  |                                   | 16,396   |   |                   |   | 16,613   |  
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Commitments and contingencies                                                                                                                                                                                         |  |                                   |          |   |                   |   |          |  
|Stockholders deficit:                                                                                                                                                                                                |  |                                   |          |   |                   |   |          |  
|Preferred stock, $0.01 par value; 100,000 authorized: no shares issued and outstanding:                                                                                                                               |  |                                   |         |   |                   |   |         |  
|Common stock and additional paid-in capital, $0.006 par value; 90,000,000 authorized: 31,244,018 shares issued and outstanding as
of December 31, 2008 and 40,807,325 issued and outstanding as of September 30, 2009 |  |                                   | 250,826  |   |                   |   | 255,595  |  
|Accumulated deficit                                                                                                                                                                                                   |  |                                   | (254,085 | ) |                   |   | (262,232 | )
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Total stockholders deficit                                                                                                                                                                                           |  |                                   | (3,259   | ) |                   |   | (6,637   | )
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Total liabilities and stockholders deficit                                                                                                                                                                           |  | $                                 | 13,137   |   |                   | $ | 9,976    |  
|                                                                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  

See notes to condensed consolidated financial statements



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MDRNA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                 |  | Three Months EndedSeptember 30,       |         |   | Nine Months EndedSeptember 30, |  
|                                                                                 |  | 2008                                  |         |   | 2009                           |   |        | 2008 |  |   | 2009    |  
|                                                                                 |  | (In thousands, except per share data) |        
|Revenue                                                                          |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|License and other revenue                                                        |  | $                                     | 100     |   |                                | $ | 61     |      |  | $ | 1,213   |   |  | $ | 14,435 |  
|Product revenue                                                                  |  |                                       | 243     |   |                                |   |       |      |  |   | 972     |   |  |   | 70     |  
|Government grants                                                                |  |                                       | 62      |   |                                |   | 3      |      |  |   | 237     |   |  |   | 19     |  
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total revenue                                                                    |  |                                       | 405     |   |                                |   | 64     |      |  |   | 2,422   |   |  |   | 14,524 |  
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Operating expenses:                                                              |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Cost of product revenue, including inventory write-down of $2,579 in 2008        |  |                                       | 77      |   |                                |   |       |      |  |   | 2,906   |   |  |   |       |  
|Research and development                                                         |  |                                       | 7,603   |   |                                |   | 3,319  |      |  |   | 27,022  |   |  |   | 11,775 |  
|Sales and marketing                                                              |  |                                       | 422     |   |                                |   | 156    |      |  |   | 1,440   |   |  |   | 369    |  
|General and administrative                                                       |  |                                       | 2,080   |   |                                |   | 3,322  |      |  |   | 9,689   |   |  |   | 7,467  |  
|Restructuring                                                                    |  |                                       | 6,167   |   |                                |   | 118    |      |  |   | 8,084   |   |  |   | 429    |  
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                                         |  |                                       | 16,349  |   |                                |   | 6,915  |      |  |   | 49,141  |   |  |   | 20,040 |  
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Loss from operations                                                             |  |                                       | (15,944 | ) |                                |   | (6,851 | )    |  |   | (46,719 | ) |  |   | (5,516 | )
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Other income (expense):                                                          |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Interest income                                                                  |  |                                       | 69      |   |                                |   | 1      |      |  |   | 497     |   |  |   | 4      |  
|Interest and other expense                                                       |  |                                       | (195    | ) |                                |   |       |      |  |   | (697    | ) |  |   | (311   | )
|Change in fair value liability for price adjustable warrants                     |  |                                       |        |   |                                |   | (160   | )    |  |   |        |   |  |   | (2,092 | )
|Gain on settlement of liabilities, net                                           |  |                                       |        |   |                                |   |       |      |  |   |        |   |  |   | 654    |  
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total other expense                                                              |  |                                       | (126    | ) |                                |   | (159   | )    |  |   | (200    | ) |  |   | (1,745 | )
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net loss                                                                         |  | $                                     | (16,070 | ) |                                | $ | (7,010 | )    |  | $ | (46,919 | ) |  | $ | (7,261 | )
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Loss per common share  basic and diluted:                                       |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net loss per common share  basic and diluted                                    |  | $                                     | (0.52   | ) |                                | $ | (0.17  | )    |  | $ | (1.62   | ) |  | $ | (0.20  | )
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Weighted average shares used in computing net loss per share  basic and diluted |  |                                       | 31,003  |   |                                |   | 40,710 |      |  |   | 28,986  |   |  |   | 36,336 |  
|                                                                                 |  |                                       |         |   |                                |   |        |      |  |   |         |   |  |   |        |  

See notes to condensed consolidated financial statements



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MDRNA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT

For the Nine Months Ended September 30, 2009

(Unaudited)



|                                                                                           |  |                                            |   |  |                    |         |   |                           |   |          |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------------------------------ | - |  | ------------------ | ------- | - | ------------------------- | - | -------- | - |  | - | ------ | -
|                                                                                           |  | Common Stock and AdditionalPaid-In Capital |   |  | AccumulatedDeficit |         |   | TotalStockholdersDeficit |  
|                                                                                           |  | Shares                                     |   |  | Amount             |         |   |                          
|                                                                                           |  | (In thousands, except share data)          |  
|Balance December 31, 2008                                                                  |  | 31,244,018                                 |   |  | $                  | 250,826 |   |                           | $ | (254,085 | ) |  | $ | (3,259 | )
|Cumulative effect of change in accounting principle                                        |  |                                           |   |  |                    |        |   |                           |   | (886     | ) |  |   | (886   | )
|                                                                                           |  |                                            |   |  |                    |         |   |                           |   |          |   |  |   |        |  
|Balance January 1, 2009                                                                    |  | 31,244,018                                 |   |  |                    | 250,826 |   |                           |   | (254,971 | ) |  |   | (4,145 | )
|Proceeds from the issuance of common shares, net                                           |  | 5,250,000                                  |   |  |                    | 1,221   |   |                           |   |         |   |  |   | 1,221  |  
|Shares issued in connection with settlement of liabilities                                 |  | 3,596,010                                  |   |  |                    | 982     |   |                           |   |         |   |  |   | 982    |  
|Shares issued in connection with amendment of license agreement                            |  | 606,061                                    |   |  |                    | 1,000   |   |                           |   |         |   |  |   | 1,000  |  
|Proceeds from the exercise of options, warrants and employee stock purchase plan purchases |  | 124,858                                    |   |  |                    | 181     |   |                           |   |         |   |  |   | 181    |  
|Reclassification of fair value of warrants exercised                                       |  |                                           |   |  |                    | 109     |   |                           |   |         |   |  |   | 109    |  
|Compensation related to restricted stock, net of forfeitures                               |  | (13,622                                    | ) |  |                    | (384    | ) |                           |   |         |   |  |   | (384   | )
|Compensation related to stock options and employee stock purchase plan, net of forfeitures |  |                                           |   |  |                    | 1,660   |   |                           |   |         |   |  |   | 1,660  |  
|Net loss                                                                                   |  |                                           |   |  |                    |        |   |                           |   | (7,261   | ) |  |   | (7,261 | )
|                                                                                           |  |                                            |   |  |                    |         |   |                           |   |          |   |  |   |        |  
|Balance September 30, 2009                                                                 |  | 40,807,325                                 |   |  | $                  | 255,595 |   |                           | $ | (262,232 | ) |  | $ | (6,637 | )
|                                                                                           |  |                                            |   |  |                    |         |   |                           |   |          |   |  |   |        |  

See notes to condensed consolidated financial statements



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MDRNA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                             |  |                                |         |   |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | -
|                                                                                             |  | Nine Months EndedSeptember 30, |        
|                                                                                             |  | 2008                           |         |   | 2009 |  
|                                                                                             |  | (In thousands)                 |        
|Operating activities:                                                                        |  |                                |         |   |      |   |        |  
|Net loss                                                                                     |  | $                              | (46,919 | ) |      | $ | (7,261 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    |  |                                |         |   |      |   |        |  
|Non-cash compensation related to stock options and employee stock purchase plan              |  |                                | 3,134   |   |      |   | 1,660  |  
|Non-cash compensation (benefit) related to restricted stock                                  |  |                                | 1,702   |   |      |   | (384   | )
|Depreciation and amortization                                                                |  |                                | 3,373   |   |      |   | 1,889  |  
|Accretion of restructuring liability                                                         |  |                                |        |   |      |   | 148    |  
|Loss on disposition of property and equipment                                                |  |                                | 30      |   |      |   | 317    |  
|Write-down of inventory and prepaid supplies                                                 |  |                                | 2,681   |   |      |   |       |  
|Non-cash restructuring charges                                                               |  |                                | 5,448   |   |      |   | 93     |  
|Net gain on settlement of liabilities                                                        |  |                                |        |   |      |   | (654   | )
|Change in fair value of price adjustable warrants                                            |  |                                |        |   |      |   | 2,092  |  
|Changes in assets and liabilities:                                                           |  |                                |         |   |      |   |        |  
|Accounts receivable                                                                          |  |                                | 324     |   |      |   | (17    | )
|Inventories                                                                                  |  |                                | 12      |   |      |   | 6      |  
|Prepaid expenses and other assets                                                            |  |                                | 1,142   |   |      |   | 814    |  
|Accounts payable                                                                             |  |                                | (2,905  | ) |      |   | (332   | )
|Deferred revenue                                                                             |  |                                | (575    | ) |      |   | (718   | )
|Accrued expenses and deferred rent and other liabilities                                     |  |                                | (1,851  | ) |      |   | 92     |  
|Accrued restructuring                                                                        |  |                                |        |   |      |   | (1,543 | )
|                                                                                             |  |                                |         |   |      |   |        |  
|Net used in operating activities                                                             |  |                                | (34,404 | ) |      |   | (3,798 | )
|                                                                                             |  |                                |         |   |      |   |        |  
|Investing activities:                                                                        |  |                                |         |   |      |   |        |  
|Change in restricted cash                                                                    |  |                                |        |   |      |   | 1,111  |  
|Purchases of property and equipment                                                          |  |                                | (112    | ) |      |   | (91    | )
|Proceeds from sales of property and equipment                                                |  |                                | 614     |   |      |   | 1,159  |  
|Purchases of investments                                                                     |  |                                | (1,024  | ) |      |   |       |  
|Sales and maturities of investments                                                          |  |                                | 12,718  |   |      |   |       |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Net cash provided by investing activities                                                    |  |                                | 12,196  |   |      |   | 2,179  |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Financing activities:                                                                        |  |                                |         |   |      |   |        |  
|Payments on note payable                                                                     |  |                                |        |   |      |   | (5,547 | )
|Payments on capital lease obligations                                                        |  |                                | (4,116  | ) |      |   |       |  
|Proceeds from exercise of stock options, warrants and employee stock purchase plan purchases |  |                                | 85      |   |      |   | 181    |  
|Proceeds from the issuance of common shares and warrants, net                                |  |                                | 7,254   |   |      |   | 9,332  |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Net cash provided by financing activities                                                    |  |                                | 3,223   |   |      |   | 3,966  |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                         |  |                                | (18,985 | ) |      |   | 2,347  |  
|Cash and cash equivalents  beginning of period                                              |  |                                | 27,704  |   |      |   | 1,084  |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Cash and cash equivalents  end of period                                                    |  | $                              | 8,719   |   |      | $ | 3,431  |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Non-cash financing activities:                                                               |  |                                |         |   |      |   |        |  
|Note payable issued upon cancellation of capital lease obligations                           |  | $                              |        |   |      | $ | 5,128  |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Issuance of common stock to settle liabilities                                               |  | $                              |        |   |      | $ | 1,982  |  
|                                                                                             |  |                                |         |   |      |   |        |  
|Supplemental disclosure:                                                                     |  |                                |         |   |      |   |        |  
|Cash paid for interest                                                                       |  | $                              | 697     |   |      | $ | 311    |  
|                                                                                             |  |                                |         |   |      |   |        |  

See notes to condensed consolidated financial statements



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MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Note 1  Business, Going Concern and Summary of Significant Accounting Policies

Business

We are a biotechnology company focused on the discovery, development and commercialization of pharmaceuticals based on RNA interference (RNAi). Our goal is to be the leader in RNAi therapeutics and improve human health through
the development of RNAi-based compounds that provide superior therapeutic options for patients. Our team of approximately 30 scientists brings expertise in the discovery, evaluation and optimization of small interfering RNAs (siRNAs) as
well as siRNA delivery. We have the requisite experience in the areas of RNAi, molecular and cellular biology, lipid, oligonucleotide and peptide chemistry, pharmacology and bioinformatics necessary to discover and develop tailored RNAi-based
compounds designed to elicit specific therapeutic effects on a target-by-target basis. Our infrastructure provides for pre-clinical scale manufacturing of both siRNAs and delivery materials, the comprehensive analysis and optimization of these
compounds both individually and as drug candidates, and the filing of Investigational New Drug Applications. In addition to our own, internally developed technologies, we strategically in-license and further develop RNAi- and delivery-related
technologies, forming a single integrated drug discovery platform. In order to protect our innovations, which encompass a broad platform of both siRNA and delivery technologies, and the eventual drug products that emerge from that platform, we will
aggressively continue to build upon our extensive and enabling intellectual property (IP) estate.

Our business strategy is two-fold. First, we strive to establish collaborations and strategic partnerships with pharmaceutical and biotechnology companies in the area of RNAi-based therapeutics to: (1) generate revenue and non-dilutive
financing; (2) gain access to technical resources; and (3) validate our drug discovery platform. Secondly, we expect to advance our own pipeline of RNAi-based therapeutics as a foundation upon which to improve all aspects of our drug
discovery platform and eventually to have the opportunity to commercialize a drug therapy. Our pipeline is focused on liver and bladder cancer. With respect to collaborations and strategic partnerships, we are currently focused on our UsiRNA
constructs, as well as our DiLA2and peptide delivery
technologies. Typically, we would expect to collaborate with partners who can take a drug candidate through to commercialization by utilizing their late stage clinical development, regulatory, marketing and sales capabilities. We expect to structure
our collaborative arrangements in such a manner to receive upfront non-refundable payments, research and development funding, milestone payments and royalties on commercial sales of products.

We believe we have established ourselves as a leading RNAi-based therapeutics company by leveraging our broad and proven expertise in RNAi
science and delivery into an industry-leading RNAi drug discovery platform, which is protected by a strong IP position and validated through licensing agreements with two large international pharmaceutical companies.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the
satisfaction of liabilities in the normal course of business. As of September 30, 2009, we had an accumulated deficit of approximately $262.2 million and expect to incur losses in the future as we continue our research and development
(R&D) activities. In the prior year quarter ended September 30, 2008 we suspended all further clinical development of our intranasal programs and incurred a restructuring charge to exit a facility which was used primarily for
our intranasal activities. As of September 30, 2008, our accumulated deficit, which was primarily related to clinical development of our intranasal programs, was approximately $241.8 million. Our operating expenses, primarily R&D in
connection with the further development of our RNAi programs, will consume the majority of our cash resources and will require additional funding. We have funded our losses primarily through the sale of common stock and warrants in the public
markets and private placements, revenue provided by our collaboration partners, and, to a lesser extent, equipment financing facilities and loans.

In June 2009, we raised net proceeds of approximately $9.3 million in a private placement of 5,250,000 units at a price of $2.00 per unit, each unit comprised of one share of common stock and a warrant to
purchase one share of common stock. The warrants are exercisable during the five-year period beginning December 13, 2009 at a price of $2.38 per share.

At September 30, 2009, we had working capital (current assets less current liabilities) of $1.2 million and approximately $4.6 million in cash and cash equivalents, including approximately $1.2
million in restricted cash. We believe that our current resources will be sufficient to fund our planned operations to the end of 2009.

We plan to continue to work with large pharmaceutical companies regarding research and development collaboration agreements or investments, and to pursue public and private sources of financing to raise
cash. However, there can be no assurance that we will be successful in such endeavors. The volatility in our stock price, as well as general market conditions, could make it difficult for us to complete a financing transaction on favorable terms, or
at all. Any financing we obtain may further dilute the ownership interest of our current stockholders. If we are unable to obtain additional capital when required, we could modify, delay or



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



abandon some or all of our programs. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial
statements do not include any adjustments that may result from the outcome of this uncertainty.

Basis of Preparation
and Summary of Significant Accounting Policies

Basis of Preparation The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. The accompanying unaudited financial information should be read
in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the year ended December 31, 2008, included in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission
(the SEC). The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of
operations and cash flows for periods presented. The results of operations for interim periods are not necessarily indicative of operating results for an entire fiscal year.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and
reported amounts of revenues and expenses during the reporting periods. Estimates having relatively greater significance include revenue recognition, R&D costs, stock-based compensation, valuation of our warrants, inventory reserves, impairment
of long-lived assets, estimated accrued restructuring charges and income taxes. Actual results could differ from those estimates.

Impairment of Long-Lived Assets and Assets Held for Sale Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Conditions that would necessitate an impairment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant
adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Long-lived assets are considered held for sale when certain criteria are met, including whether management has committed to a plan to sell the asset, whether the asset is available for sale in its immediate condition, and whether the sale
is probable within one year of the reporting date. Assets held for sale are measured as the lower of carrying amount or fair value less cost to sell.

Accrued Restructuring We ceased using our facility at 3450 Monte Villa Parkway, Bothell, Washington (3450 Monte Villa), in 2008. We recorded an accrued liability for remaining
lease termination costs at fair value, based on the remaining payments due under the lease and other costs, reduced by sublease rental income that could be reasonably obtained from the property, and discounted using a credit-adjusted risk-free
interest rate. We use a credit-adjusted risk-free interest rate of 15%, and we based our estimated future payments on current rental rates available in the Bothell real estate market, and our evaluation of the ability to sublease the facility.
Accrued restructuring, and in particular those charges associated with exiting a facility, are based upon managements estimates of future payments. These estimates significantly impact the accrual and actual results may differ from our
estimates. We review these estimates at least quarterly and when there are changes in facts or circumstances, and adjust our accrual if necessary. For a further discussion of our restructuring charges, see Note 3  Accrued Restructuring and
Assets Held for Sale.

Fair Value of Financial Instruments  We consider the fair value of cash and cash
equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities to not be materially different from their carrying value. These financial instruments have short-term maturities.



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Effective January 1, 2008, we adopted the authoritative guidance issued by the
Financial Accounting Standards Board (FASB), for financial assets and liabilities. This guidance defines fair value, provides guidance for measuring fair value and requires certain disclosures. The guidance does not require any new fair
value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements and does not apply to measurements related to share-based payments. The guidance discusses valuation techniques, such as the
market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

We currently measure and report at fair value the liability for price adjustable warrants using the Black-Scholes-Merton
valuation model. The following table summarizes our financial liabilities measured at fair value on a recurring basis as of September 30, 2009 (in thousands):



|                                                   |  |                             |        |                                                           |   |                                          |   |                                      |   |       
|-------------------------------------------------- |  | --------------------------- | ------ | --------------------------------------------------------- | - | ---------------------------------------- | - | ------------------------------------ | - | ------
|                                                   |  | Balance atSeptember 30,2009 |        | Level 1Quoted prices inactive markets foridentical assets |   | Level 2Significant otherobservableinputs |   | Level 3Significantunobservableinputs
|Liabilities:                                       |  |                             |        |                                                           |   |                                          |   |                                      |   |       
|Fair value liability for price adjustable warrants |  | $                           | 10,980 |                                                           |  |                                          |  |                                      | $ | 10,980
|                                                   |  |                             |        |                                                           |   |                                          |   |                                      |   |       
|Total financial liabilities at fair value          |  | $                           | 10,980 |                                                           |  |                                          |  |                                      | $ | 10,980
|                                                   |  |                             |        |                                                           |   |                                          |   |                                      |   |       

The following presents activity of the fair value liability of price adjustable
warrants determined by Level 3 inputs (in thousands):



|                                                         |  |   |        |  
|-------------------------------------------------------- |  | - | ------ | -
|Balance at December 31, 2008                             |  | $ |       |  
|Cumulative effect of change in accounting                |  |   | 886    |  
|                                                         |  |   |        |  
|Balance at January 1, 2009                               |  |   | 886    |  
|Fair value of warrants exercised                         |  |   | (109   | )
|Fair value of warrants issued                            |  |   | 8,111  |  
|Change in fair value included in statement of operations |  |   | 2,092  |  
|                                                         |  |   |        |  
|Balance at September 30, 2009                            |  | $ | 10,980 |  
|                                                         |  |   |        |  

Net Loss Per Common Share  Basic and diluted net loss per common share
is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per share excludes the effect of common stock equivalents (stock options, unvested restricted stock and warrants)
since such inclusion in the computation would be anti-dilutive. Common stock equivalents excluded in per share computations as of September 30 are as follows (in thousands):



|                                                               |  |        |  |       
|-------------------------------------------------------------- |  | ------ |  | ------
|                                                               |  | 2008   |  | 2009  
|Stock options outstanding under our various stock option plans |  | 7,952  |  | 8,327 
|Unvested restricted stock                                      |  | 155    |  | 39    
|Warrants                                                       |  | 6,197  |  | 10,020
|                                                               |  |        |  |       
|Total                                                          |  | 14,304 |  | 18,386
|                                                               |  |        |  |       

Recent Accounting Pronouncements  In April 2009, accounting guidance was
issued, which requires disclosures about the fair value of financial instruments for interim reporting periods, and which is effective for reporting periods ending after June 15, 2009. We have incorporated required disclosures in these
financial statements.



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



In May 2009, accounting guidance was issued that establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued, and which is effective for reporting periods ending after June 15, 2009. We have
incorporated required disclosures in these financial statements.

In October 2009, accounting guidance was issued, which
establishes standards for accounting for certain revenue arrangements that include software elements and multiple-deliverable revenue arrangements, which is effective prospectively for revenue arrangements into or materially modified in fiscal years
beginning on or after June 15, 2010. The guidance will be effective for our fiscal year beginning January 1, 2011. We are in the process of determining the effects, if any, the adoption of the guidance will have on our financial
statements.

Note 2  Concentration of Credit Risk and Significant Customers

We operate in an industry that is highly regulated, competitive and rapidly changing and involves numerous risks and uncertainties.
Significant technological and/or regulatory changes, the emergence of competitive products and other factors could negatively impact our consolidated financial position or results of operations.

We have been dependent on our collaborative agreements with a limited number of third parties for a substantial portion of our revenue, and
our discovery and development activities may be delayed or reduced if we do not maintain successful collaborative arrangements. We had revenue from customers, as a percentage of total revenue, as follows:



|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                                            |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                            |  | 2008                            |   |  | 2009                           |   |  | 2008 |   |  | 2009 |  
|Novartis                                    |  |                                |   |  |                               |   |  |     |   |  | 52   | %
|Roche                                       |  |                                |   |  |                               |   |  |     |   |  | 34   | %
|Amylin                                      |  |                                |   |  |                               |   |  | 1    | % |  | 7    | %
|QOL Medical, LLC                            |  | 85                              | % |  |                               |   |  | 55   | % |  | 6    | %
|Par Pharmaceuticals                         |  |                                |   |  | 95                             | % |  |     |   |  | 1    | %
|Government grant                            |  | 15                              | % |  | 5                              | % |  | 10   | % |  |     |  
|Undisclosed partner  undisclosed compounds |  |                                |   |  |                               |   |  | 23   | % |  |     |  
|Undisclosed partner  Factor IX             |  |                                |   |  |                               |   |  | 11   | % |  |     |  
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Total                                       |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100  | %
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  

Note 3  Accrued Restructuring and Assets Held For Sale

Since late 2007, we have restructured our operations to focus on our RNAi programs. As part of the restructuring, we have reduced our
workforce from approximately 235 employees in late 2007 to approximately 45 full-time employees at September 30, 2009. We have also exited certain of our facilities and have taken other steps to reduce our cash expenditures. We have recorded
restructuring charges related to employee termination costs, our facility consolidation and impairment of assets in accordance with our long-lived assets policy.

During 2008, we exited our facility at 3450 Monte Villa Parkway, Bothell, Washington and recorded a restructuring liability, representing estimated future payments due under the lease and other costs and
discounted using a credit-adjusted risk-free interest rate. In March 2009, we entered into an amendment of our lease for the exited facility, which reduced our lease obligations by approximately $1.9 million until July 2010. Under the terms of the
amendment, we released both a cash deposit of approximately $0.3 million and restricted cash under a letter of credit for approximately $1.0 million to the landlord. As inducement to enter into the amendment, we issued 1.5 million shares of our
common stock to the sole member of the landlord. As a result of this amendment, we have no further rent obligations under the 3450 Monte Villa lease until July 2010.

In the third quarter of 2009 the landlord leased approximately 37% of the exited facility to a new tenant. In order to facilitate the new tenancy, we entered into an additional amendment to our lease
agreement which terminated the lease with respect to this portion of the premises and decreased our future lease obligations. During the three and nine months ended September 30, 2009, we recorded approximately $118,000 and $241,000 in
accretion and restructuring charges with respect to our estimate of this liability. We expect to incur approximately $0.3 million in accretion expense through the expiration of this lease in January 2016.

As a result of our restructuring, we evaluated our long-lived assets for possible impairment. At December 31, 2008 property and
equipment having a net realizable value of approximately $0.5 million, net of estimated costs to sell, were held for sale, were sold in 2009 and an additional loss on sale of assets of approximately $0.1 million was included in restructuring expense
in the second quarter of 2009.



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Accrued restructuring, and in particular those charges associated with exiting a
facility, are subject to managements assumptions and estimates, as well as changes in facts and circumstances. In addition to the interest rate used, the assumptions as to estimated future payments significantly impact the accrual and actual
results may differ from our estimates.

The components of restructuring are summarized as follows (in thousands):



|                                                                                   |  |                                 |       |                                |   |                                |  |      |       |  |   |     |  |   |      
|---------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ------------------------------ |  | ---- | ----- |  | - | --- |  | - | -----
|                                                                                   |  | Three Months endedSeptember 30, |       | Nine Months endedSeptember 30, |   | Cumulative toSeptember 30,2009
|                                                                                   |  | 2008                            |       | 2009                           |   | 2008                           |  | 2009 |      
|Employee severance and termination benefits (including stock compensation charges) |  | $                               | 2,363 |                                | $ |                               |  | $    | 3,986 |  | $ |    |  | $ | 3,986
|Property and equipment impairment                                                  |  |                                 | 1,592 |                                |   |                               |  |      | 1,592 |  |   | 137 |  |   | 2,099
|Facility related charges                                                           |  |                                 | 2,212 |                                |   | 118                            |  |      | 2,212 |  |   | 292 |  |   | 2,307
|Other restructuring charges                                                        |  |                                 |      |                                |   |                               |  |      | 294   |  |   |    |  |   | 294  
|                                                                                   |  |                                 |       |                                |   |                                |  |      |       |  |   |     |  |   |      
|Total restructuring                                                                |  | $                               | 6,167 |                                | $ | 118                            |  | $    | 8,084 |  | $ | 429 |  | $ | 8,686
|                                                                                   |  |                                 |       |                                |   |                                |  |      |       |  |   |     |  |   |      

The following table reflects the activity in accrued restructuring for the nine
months ended September 30, 2009 (in thousands):



|                            |  |                                         |      |   |                        |   |        |       |  |   |        |  
|--------------------------- |  | --------------------------------------- | ---- | - | ---------------------- | - | ------ | ----- |  | - | ------ | -
|                            |  | EmployeeSeveranceandTerminationBenefits |      |   | FacilityRelatedCharges |   |        | Total | 
|Balance, December 31, 2008  |  | $                                       | 349  |   |                        | $ | 2,351  |       |  | $ | 2,700  |  
|Additional accruals         |  |                                         |     |   |                        |   | 144    |       |  |   | 144    |  
|Payments                    |  |                                         | (349 | ) |                        |   | (1,963 | )     |  |   | (2,312 | )
|Accretion                   |  |                                         |     |   |                        |   | 148    |       |  |   | 148    |  
|                            |  |                                         |      |   |                        |   |        |       |  |   |        |  
|Balance, September 30, 2009 |  | $                                       |     |   |                        | $ | 680    |       |  | $ | 680    |  
|                            |  |                                         |      |   |                        |   |        |       |  |   |        |  

Note 4  Note Payable and Capital Lease Obligations

In January 2009, we entered into a Loan and Security Agreement (the Loan Agreement) with General Electric Capital Corporation
(GECC) pursuant to which GECC converted the balance due under capital lease obligations, along with a lease termination fee and amounts payable for property taxes, to a promissory note in the amount of $5.5 million at a fixed interest
rate of 12.3% per year. As a result of the capital lease termination and issuance of the note payable, we recorded a lease termination fee of approximately $0.2 million during the first quarter of 2009, which was presented as a component of
gain on settlement of liabilities, net. The loan was paid off in full in June 2009.

Note 5  Stockholders Equity

Common Stock Issuances In January 2008, we filed a universal shelf registration statement with the SEC
pursuant to which we can issue up to $50.0 million of our common stock, preferred stock, debt securities, warrants to purchase any of the foregoing securities and units comprised of any of the foregoing securities. The universal shelf registration
statement was declared effective by the SEC on February 4, 2008. We accessed our universal shelf registration statement in connection with our April 2008 and June 2009 registered direct offerings of common stock and warrants described below. As
of September 30, 2009, we had approximately $8.6 million remaining on our universal shelf registration statement. As of September 30, 2009, we also had approximately $82.8 million remaining on the registration statement that we filed with
the SEC on October 19, 2006, and that was subsequently declared effective by the SEC on November 29, 2006, pursuant to which we were originally eligible to issue up to $125.0 million of our common stock. We previously accessed this latter
registration statement in connection with our January 2007 offering of common stock.

In April 2008, we raised net proceeds of
approximately $7.3 million in a registered direct offering of 4,590,277 shares of common stock together with warrants to purchase up to 5,967,361 shares of common stock at a negotiated purchase price of $1.728 per unit. Warrants to purchase up to
4,590,277 shares of common stock are exercisable until October 2015 at a price of $2.376 per share. In addition, warrants to purchase up to 229,514 shares of common stock are exercisable until October 2013 at a price of $2.376 per share, were issued
to the placement agent in connection with the transaction. On June 9, 2009, 50,000 of the placement agent warrants were exercised resulting in cash proceeds of approximately $119,000.



In 2009, we issued to several of our vendors an aggregate of
1,364,285 shares of our common stock having an estimated market value of approximately $0.4 million on the issue dates to settle amounts due to these vendors of approximately $0.6 million in total and as a result we recorded a gain on settlement of
liabilities of approximately $0.2 million during the first quarter of 2009.



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



In March 2009, we entered into an amendment of our lease for 3450 Monte Villa which
reduced our future cash expenditures related to this lease. As inducement to enter into the amendment, we issued 1.5 million shares of our common stock (the Shares) to the landlord pursuant to the Stock Purchase Agreement. The
estimated market value of the shares issued was approximately $0.4 million on the date of issuance and was recorded as an increase in common stock and additional paid-in capital and as a decrease to the previously recorded restructuring liability.

In March 2009, we entered into an amendment of our agreement regarding severance obligations with a former executive,
pursuant to which we paid the former executive a reduced sum of $0.9 million on June 30, 2009, and issued the former executive 731,275 unregistered shares of our common stock having an estimated market value of approximately $0.2 million as of
the agreement date, in full satisfaction of $1.7 million in severance obligations which was included in accrued employee compensation and employee benefits at December 31, 2008. As a result, we recorded a gain on settlement of liabilities of
approximately $0.7 million during the first quarter of 2009. We also agreed to use our best efforts to file a registration statement with the SEC to register the shares to be issued to the former executive on or prior to September 30, 2009.
However, since such shares were eligible to be sold publicly on September 30, 2009 without registration under the Securities Act of 1933, as amended, we were under no obligation to file, and thus did not file, such registration statement.

In June 2009, we raised net proceeds of approximately $9.3 million in a private placement of 5,250,000 units at a price of
$2.00 per unit, each unit comprised of one share of common stock and a warrant to purchase one share of common stock. The warrants are exercisable during the five-year period beginning December 13, 2009 at a price of $2.38 per share.

In June 2009, we issued 606,061 shares of our common stock to Ribotask ApS as consideration for an amendment of our
Patent Assignment and License Agreement dated May 21, 2008, as amended. The estimated market value of the common stock of approximately $1.0 million was recorded as research and development expense during the second quarter of 2009.

Warrants In connection with offerings of our common stock, we have issued warrants to purchase shares of our common stock.
Warrants to purchase up to 4,590,277 shares of common stock are exercisable until October 2015 at a price of $2.376 per share. In addition, warrants to purchase up to 229,514 shares of common stock, which are exercisable until October 2013 at a
price of $2.376 per share, were issued to the placement agent in connection with the transaction. In June 2009, 50,000 of the placement agent warrants were exercised resulting in cash proceeds of approximately $119,000 and the issuance of 50,000
shares of our common stock.

The warrants provide that the exercise price of the warrant will be reduced in the event of
subsequent financings at an effective price per share less than the exercise price of the warrants, subject to certain exceptions and limitations. When the warrants were issued in 2008, we concluded that the warrants did not contain any net-cash
settlement provisions or any provisions deemed to be equivalent to net-cash settlement provisions and were appropriately classified as equity. Subsequently, the Emerging Issues Task Force of the Financial Accounting Standards Board issued new
accounting guidance which is effective for fiscal years beginning after December 15, 2008. The new guidance affects accounting for convertible instruments and warrants with provisions that protect holders from declines in the stock price.
Warrants with such price protection provisions will be recorded as a liability measured at fair value rather than included in equity. In accordance with the new guidance, the cumulative effect of the change in accounting principle was recognized as
an adjustment to the opening balance of retained earnings for that fiscal year, presented separately. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial position before initial application
of the guidance and the amounts recognized in the statement of financial position at initial application.

In connection with
warrants issued in April 2008, the financial reporting (non-cash) effect of initial adoption of this accounting requirement for future financial statements resulted in a cumulative effect of change in accounting principle of approximately $0.9
million, based on a per share price of $0.34 at December 31, 2008, which increased accumulated deficit and recorded a fair value liability for price adjustable warrants. The warrants issued in June 2009 also contained price protection
provisions and were valued at $8.1 million as of June 12, 2009, which was recorded as fair value liability of price adjustable warrants, based on a per share price of $1.91 as of June 12, 2009. The June 2009 financing, at $2.00 per share
of common stock together with warrants, was specifically excluded by the April 2008 investors from triggering any potential anti-dilution provisions of the April 2008 financing that could have resulted from the June 2009 financing.

The fair value liability is revalued at each balance sheet date utilizing the Black-Scholes-Merton valuation model with the increase or
decrease in fair value being reported in the statement of operations as other income (expense). At September 30, 2009 the weighted average assumptions used in our calculation were as follows: contractual life equal to 5.6 years, volatility
equal to 114%, risk-free rate of 2.4% and dividend rate of 0%. During the three and nine months ended September 30, 2009, the fair value increased approximately $0.2 and $2.1 million, respectively, which increased net loss.

The following summarizes warrant activity during the nine months ended September 30, 2009 (in thousands).



|                                                    |  |   |        |  
|--------------------------------------------------- |  | - | ------ | -
|Warrants outstanding, December 31, 2008             |  |   | 6,197  |  
|Warrants issued                                     |  |   | 5,250  |  
|Warrants exercised                                  |  |   | (50    | )
|Warrants expired                                    |  |   | (1,377 | )
|                                                    |  |   |        |  
|Warrants outstanding, September 30, 2009            |  |   | 10,020 |  
|                                                    |  |   |        |  
|Weighted average exercise price, September 30, 2009 |  | $ | 2.38   |  
|                                                    |  |   |        |  



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Stockholder Rights Plan In February 2000, our board of directors adopted a
stockholder rights plan and declared a dividend of one preferred stock purchase right for each outstanding share of common stock. Each right entitles the holder, once the right becomes exercisable, to purchase from us one one-thousandth of a share
of our Series A Junior Participating Preferred Stock, par value $.01 per share. We issued these rights in March 2000 to each stockholder of record on such date, and these rights attach to shares of common stock subsequently issued. The rights will
cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors and could, therefore, have the effect of delaying or preventing someone from taking control of us, even if a change of
control were in the best interest of our stockholders.

Holders of our preferred share purchase rights are generally entitled
to purchase from us one one-thousandth of a share of Series A preferred stock at a price of $50.00, subject to adjustment as provided in the Stockholder Rights Agreement. These preferred share purchase rights will generally be exercisable only if a
person or group becomes the beneficial owner of 15 percent or more of our outstanding common stock or announces a tender offer for 15 percent or more of our outstanding common stock. Each holder of a preferred share purchase right, excluding an
acquiring entity or any of its affiliates, will have the right to receive, upon exercise, shares of our common stock, or shares of stock of the acquiring entity, having a market value equal to two times the purchase price paid for one one-thousandth
of a share of Series A preferred stock. The preferred share purchase rights expire on March 17, 2010, unless we extend the expiration date or in certain limited circumstances, we redeem or exchange such rights prior to such date. Initially,
10,000 Series A Junior Participating Preferred shares were authorized. In January 2007 this was increased to 50,000 shares, and in June 2008 this was further increased to 90,000 shares, so that a sufficient number of Series A Junior Participating
Preferred shares would be available to the holders of shares of common stock for issuance in satisfaction of such rights, given increases in the number of shares of common stock outstanding.

Note 6  Stock Incentive Plans

At September 30, 2009, options to purchase up to 8,327,231 shares of our common stock were outstanding, unvested restricted stock awards for an aggregate of 39,479 shares of our common stock were outstanding under our 2004 Stock
Incentive Plan and 347,894 shares were available for future grants or awards under our various stock incentive plans.

We
generally issue new shares for option exercises unless treasury shares are available for issuance. We had no treasury shares as of September 30, 2009 and have no plans to purchase any in the next year, however, we may accept the surrender of
vested restricted shares from employees to cover tax requirements at our discretion.

Stock-based Compensation 
The following summarizes stock-based compensation expense (benefit) (in thousands):



|                               |  |                                 |       |                                |   |       |  |      |       |  |   |       |  
|------------------------------ |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | ----- | -
|                               |  | Three Months endedSeptember 30, |       | Nine Months endedSeptember 30, |  
|                               |  | 2008                            |       | 2009                           |   | 2008  |  | 2009 |      
|Stock-based compensation:      |  |                                 |       |                                |   |       |  |      |       |  |   |       |  
|Research and development       |  | $                               | 1,529 |                                | $ | 294   |  | $    | 2,982 |  | $ | 14    |  
|Sales and marketing            |  |                                 | 129   |                                |   | 12    |  |      | 365   |  |   | (1    | )
|General and administrative     |  |                                 | 420   |                                |   | 991   |  |      | 1,489 |  |   | 1,263 |  
|                               |  |                                 |       |                                |   |       |  |      |       |  |   |       |  
|Total stock-based compensation |  | $                               | 2,078 |                                | $ | 1,297 |  | $    | 4,836 |  | $ | 1,276 |  
|                               |  |                                 |       |                                |   |       |  |      |       |  |   |       |  

Non-cash compensation expense is recognized on a straight-line basis over the
applicable vesting periods of one to five years, based on the fair value on the grant date. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the applicable plan and certain employment
agreements we have with key officers).



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Stock Options Stock options to purchase shares of our common stock are
granted under our existing stock-based incentive plans to certain employees, at prices at or above the fair market value on the date of grant. In addition, in June 2008, we granted 1,099,963 options to our Chief Executive Officer, outside of our
stock-based incentive plans as an employment inducement grant. In March 2009, a former executive surrendered for cancellation, options to purchase 800,000 shares of common stock at an exercise price of $12.94 per share.

Option activity was as follows during the nine-month period ended September 30, 2009:



|                                  |  |                |   |  |                              |       |                                         |           |                         |   |    
|--------------------------------- |  | -------------- | - |  | ---------------------------- | ----- | --------------------------------------- | --------- | ----------------------- | - | ---
|                                  |  | Options        |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife |           | AggregateIntrinsicValue
|                                  |  | (in thousands) |   |  |                              |       |                                         |           | (in thousands)         
|Outstanding December 31, 2008     |  | 6,189          |   |  | $                            | 4.35  |                                         |           |                         |   |    
|Options granted                   |  | 3,288          |   |  |                              | 1.39  |                                         |           |                         |   |    
|Options exercised                 |  | (15            | ) |  |                              | 2.14  |                                         |           |                         |   |    
|Options expired                   |  | (115           | ) |  |                              | 11.67 |                                         |           |                         |   |    
|Options forfeited                 |  | (220           | ) |  |                              | 1.54  |                                         |           |                         |   |    
|Options cancelled                 |  | (800           | ) |  |                              | 12.94 |                                         |           |                         |   |    
|                                  |  |                |   |  |                              |       |                                         |           |                         |   |    
|Outstanding at September 30, 2009 |  | 8,327          |   |  | $                            | 2.33  |                                         | 7.7 years |                         | $ | 969
|                                  |  |                |   |  |                              |       |                                         |           |                         |   |    
|Exercisable at September 30, 2009 |  | 3,864          |   |  | $                            | 2.96  |                                         | 6.7 years |                         | $ | 353
|                                  |  |                |   |  |                              |       |                                         |           |                         |   |    

The fair value of stock-based awards was estimated at the date of grant using the
Black-Scholes-Merton option valuation model with the following weighted average assumptions for the periods presented as follows:



|                              |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|----------------------------- |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                              |  | Three months endedSeptember 30, |           |   | Nine months endedSeptember 30, |  
|                              |  | 2008                            |           |   | 2009                           |   |           | 2008 |  |   | 2009      |  
|Expected dividend yield       |  |                                 | 0         | % |                                |   | 0         | %    |  |   | 0         | % |  |   | 0         | %
|Risk free interest rate       |  |                                 | 3.1       | % |                                |   | 2.6       | %    |  |   | 3.5       | % |  |   | 2.3       | %
|Expected stock volatility     |  |                                 | 75        | % |                                |   | 117       | %    |  |   | 71        | % |  |   | 105       | %
|Expected option life          |  |                                 | 6.0 years |   |                                |   | 6.0 years |      |  |   | 7.1 years |   |  |   | 5.8 years |  
|Fair value of options granted |  | $                               | 0.40      |   |                                | $ | 1.17      |      |  | $ | 0.80      |   |  | $ | 0.95      |  

As of September 30, 2009, we had approximately $2.6 million of total
unrecognized compensation cost related to unvested stock options. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of approximately 1.7
years.

The intrinsic value of stock options outstanding and exercisable at September 30, 2009 is based on the $1.40
closing market price of our common stock on that date, and is calculated by aggregating the difference between $1.40 and the exercise price of each of the outstanding vested and unvested stock options which have an exercise price less than $1.40. We
recorded stock-based compensation expense related to stock options of approximately $2.1 million and $3.4 million in the three and nine-month periods ended September 30, 2008 and approximately $1.2 million and $1.6 million in the three and
nine-month periods ended September 30, 2009, respectively. The total fair value of options that vested during the three and nine-month periods ended September 30, 2008 was approximately $2.1 million and $3.0 million, respectively. The
total fair value of options that vested during the three and nine-month periods ended September 30, 2009 was approximately $0.6 million and $1.9 million, respectively.

In June 2008, in connection with our annual shareholders meeting, five members of our board of directors retired. Our board of directors approved a
resolution to extend the amount of time the retiring directors have to exercise their vested options from 90 days to two years. Additional compensation expense recognized as a result of the modification was not material. In May 2009, in
connection with our annual shareholders meeting, three members of our board of directors retired. Our board of directors approved a resolution to extend the amount of time two of the retiring directors have to exercise their vested options from 90
days to two years. Additional compensation expense recognized as a result of the modification was approximately $117,000. The third retiring directors options were governed by his employment contract at his employment termination date. Our
August 2008 workforce reduction included three executives from our intranasal programs. In accordance with the terms of their employment agreements, the vesting of their outstanding unvested options was accelerated as of September 30, 2008. The
related non-cash stock-based compensation expense of $0.4 million was included in restructuring expense in the three- and nine-month periods ended September 30, 2008. In the third quarter of 2009, we terminated two employees who received
accelerated vesting of their stock options and additional time to exercise their options, which resulted in recognition of additional compensation expense in the amount of $0.8 million in the three- and nine-month periods ended September 30,
2009.



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##### Table of Contents

MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Non-Employee Option Grants  In June 2008 and in May 2009 we granted
stock options to non-employee members of our Scientific Advisory Board. Non-employee option grants are recorded as an expense over the vesting period of the underlying stock options. At the end of each financial reporting period prior to vesting,
the value of these options, as calculated using the Black-Scholes-Merton option pricing model, will be re-measured using the fair value of our common stock and the non-cash compensation recognized during the period will be adjusted accordingly.
Since the fair value of options granted to non-employees is subject to change in the future, the amount of future compensation expense will include fair value re-measurements until the stock options are fully vested. During the three and nine-month
periods ended September 30, 2008, we recognized expense of approximately $14,000 and $52,000, respectively, relating to options granted to non-employee members of our Scientific Advisory Board. During the three and nine-month periods ended
September 30, 2009, we recognized expense of approximately $33,000 and $50,000, respectively, relating to options granted to non-employee members of our Scientific Advisory Board.

Restricted Stock Awards Pursuant to restricted stock awards granted under our 2004 Stock Incentive Plan, we have issued shares
of restricted stock to certain employees and members of our Board. Non-cash compensation expense is recognized on a straight-line basis over the applicable vesting periods of one to four years of the restricted shares based on the fair value of such
restricted stock on the grant date. We granted restricted stock awards representing 66,429 shares of common stock with a per share weighted average fair value of $2.28 in the nine-month period ending September 30, 2008. There were no restricted
stock awards granted during the nine-month period ending September 30, 2009. Additional information on restricted shares is as follows (in thousands, except per share amount):





|                                                           |  |   |      |  
|---------------------------------------------------------- |  | - | ---- | -
|Unvested restricted shares outstanding, January 1, 2009    |  |   | 107  |  
|Restricted shares granted                                  |  |   |     |  
|Restricted shares forfeited                                |  |   | (14  | )
|Restricted shares vested                                   |  |   | (54  | )
|                                                           |  |   |      |  
|Unvested restricted shares outstanding, September 30, 2009 |  |   | 39   |  
|                                                           |  |   |      |  
|Weighted average grant date fair value per share           |  | $ | 6.58 |  
|                                                           |  |   |      |  

Our total unrecognized compensation cost related to unvested restricted stock awards
granted under our 2004 Stock Incentive Plan was approximately $0.1 million at September 30, 2009. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this cost over a
weighted average period of approximately 1.0 years.

We recorded stock-based compensation expense related to restricted stock
grants of approximately $0.8 million and $2.2 million in the three and nine months ended September 30, 2008. In the three months ended September 30, 2009 we recorded expense of $0.1 million and in the nine months ended September 30,
2009 we recorded a benefit of $0.4 million due to forfeitures. The fair value of restricted stock vested during the three and nine-month periods ended September 30, 2008 was approximately $1.9 million and $3.5 million and the fair value of
restricted stock vested during the three and nine-month periods ended September 30, 2009 was approximately $0.2 million and $0.5 million.

On June 10, 2008, in connection with our annual shareholders meeting, five members of our board of directors retired. Our board of directors approved a resolution to accelerate the vesting of
approximately 21,320 restricted shares which would have vested for the retiring directors over the next one or two years. Additional compensation expense recognized as a result of the modification was not material. On May 20, 2009, in
connection with our annual shareholders meeting, three members of our board of directors retired. Our board of directors approved a resolution to accelerate the vesting of approximately 10,000 restricted shares which would have vested for two of the
retiring directors over the next one or two years. The third retiring director held no unvested shares. The benefit to compensation expense recognized as a result of the modifications was not material. Our August 2008 workforce reduction included
three executives from our intranasal programs. In accordance with the terms of their employment agreements, the vesting of all of their outstanding unvested restricted stock awards was accelerated as of September 30, 2008. The related non-cash
stock-based compensation expense in the amount of $0.5 million was included in restructuring expense in the three- and nine-month periods ended September 30, 2008.

Employee Stock Purchase Plan In June 2007, our shareholders approved the adoption of our 2007 Employee Stock Purchase Plan (ESPP). A total of 300,000 shares of common stock have
been reserved for issuance under our ESPP, of which 165,551 have been issued as of September 30, 2009. Under the terms of the ESPP, a participant may purchase shares of our common stock at a price equal to the lesser of 85% of the fair market
value on the date of offering or on the date of purchase. We recorded stock-based compensation expense related to the ESPP of approximately $26,000 and $99,000 in the three and nine months ended September 30, 2008 and approximately $14,000 and
$36,000 in the three and nine months ended September 30, 2009, respectively.



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MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Note 7  Contractual Agreements

RNAi-related

Roche In February 2009, we entered into an agreement with Hoffman-La Roche Inc., a New Jersey corporation, and F. Hoffmann-La Roche Ltd., a Swiss corporation (collectively,
Roche), pursuant to which we granted to Roche a worldwide, non-exclusive license to a portion of our technology platform, for the development of RNAi-based therapeutics, in consideration of a one-time non-refundable licensing fee of $5
million, which was recognized as license fee revenue during the three months ended March 31, 2009.

Novartis  In March 2009, we entered into an agreement with Novartis Institutes for BioMedical Research, Inc. (Novartis), pursuant to which we granted to Novartis a worldwide, non-exclusive license to our
DiLA2-based siRNA delivery platform in consideration of a
one-time, non-refundable fee of $7.25 million, which was recognized as license fee revenue during the three months ended March 31, 2009. Additionally, we entered into a separate agreement with Novartis to provide them with an exclusive period
in which to negotiate a potential research and development collaboration as well as possible broader licensing rights related to our RNAi drug delivery platform. This exclusive period expired in the second quarter of 2009 and all remaining deferred
revenue under this separate agreement of approximately $0.2 million was recognized as license fee revenue.

Ribotask ApS. In October 2008, we announced that we had acquired the intellectual property related to Unlocked Nucleobase Analogs (UNA) from Ribotask ApS, a privately held Danish company specializing in the development and synthesis
of novel RNA chemistries. This technology will permit us to stabilize and provide drug-like properties to UsiRNAs in a novel and proprietary manner. This includes protection from enzymatic destruction and reduction, or elimination, of a cytokine
response, two primary limitations for therapeutic application of siRNA; yet the appropriate substitution of UNA preserves high efficacy. These attributes have the potential for effective protein down regulation with lower total doses of siRNA while
improving the safety profile. In June 2009, we issued 606,061 shares of our common stock to Ribotask ApS and agreed to certain payments in consideration of an amendment to eliminate all downstream financial consideration to Ribotask resulting
from collaborations established between us and potential pharmaceutical and biotechnology partners. The estimated market value of the common stock of $1.0 million was recorded as research and development expense in the three months ended
June 30, 2009.

City of Hope In November 2006, we entered into a license with the Beckman Research
Institute/City of Hope for exclusive and non-exclusive licenses to the Dicer-substrate RNAi IP developed there. In the first quarter of 2009, we terminated our license agreement with the City of Hope for technology and intellectual property related
to Dicer substrates to focus on the development of UsiRNA and meroduplex constructs.

Intranasal related

Amylin Pharmaceuticals, Inc.  In January 2009 we received a milestone payment, in the amount of $1.0
million, which was recognized as license fee revenue, from Amylin Pharmaceuticals, Inc. (Amylin) under our 2006 Development and License Agreement, as amended, for the development of intranasal exenatide (the License
Agreement). The License Agreement was amended in January 2009 to provide for the accelerated $1.0 million milestone payment, and to reduce the aggregate amount of milestone and royalty payments that could be due to us from $89 million to $80
million. We are no longer responsible for any further development of the nasal spray formulation of intranasal exenatide or its manufacture.

Par Pharmaceutical  In March 2009 we entered into an Asset Purchase Agreement with Par Pharmaceutical (Par) pursuant to which, among other things, a 2004 License and Supply
Agreement with Par, and a 2005 Supply Agreement with QOL Medical LLC, were terminated. Under the Asset Purchase Agreement, Par acquired certain assets pertaining to calcitonin, including tooling and equipment, inventories and the related technology,
trade secrets, know-how, proprietary information and other intellectual property rights, and assumed certain contracts, including our manufacturing obligation to QOL Medical as well as our two building leases related to our operations in Hauppauge,
New York. We received $0.8 million in cash and are entitled to receive earn-out payments for five years based on commercial sales of calcitonin. Calcitonin received full FDA approval and was launched in June 2009. We recognized a gain of
approximately $0.1 million on the asset sale to Par which is included in research and development expense in the first quarter of 2009. In addition, in the first quarter of 2009 we recognized $0.7 million in deferred revenue related to the QOL
Agreement. In the three and nine months ended September 30, 2009 we recognized $0.1 million in revenue relating to earn-out payments based on commercial sales of calcitonin.



Thiakis Limited (Thiakis)  In September
2004, we acquired exclusive worldwide rights to the Imperial College Innovations and Oregon Health & Science University PYY patent applications in the field of nasal delivery of PYY and the use of glucagon-like peptide-1 (GLP-1) used in
conjunction with PYY for the treatment of obesity, diabetes and other metabolic conditions. We recorded $1.2 million in research and development expense in the fourth quarter of 2008 related to the estimated obligations under this license agreement
at December 31, 2008. This agreement terminated on May 6, 2009. In April 2009 we entered into a Deed of Release and termination pursuant to which we agreed to pay $1.1 million, payable in quarterly amounts commencing April 2009 and ending
April 2010. The difference between $1.1 million and the amount originally estimated was recorded as reduction of expense in the first quarter of 2009. The balance remaining at September 30, 2009 was $0.7 million.



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MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)



Note 8  Income Taxes

We continue to record a valuation allowance in the full amount of deferred tax assets since realization of such tax benefits has not been
determined by our management to be more likely than not. At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year, and the rate so determined is used in providing for
income taxes on a current year-to-date basis. The difference between the expected provision or benefit computed using the statutory tax rate and the recorded provision or benefit of zero, is primarily due to the estimated change in valuation
allowance more likely to result due to taxable losses anticipated for the applicable fiscal year.

Note 9  Commitments and
Contingencies

Leases We lease space for our research and development and corporate offices in Bothell,
Washington under operating leases expiring in 2016. In connection with the terms of our lease of our Bothell, Washington facility at 3830 Monte Villa Parkway, we have provided our landlord with a stand-by letter of credit in the amount of
approximately $1.2 million at September 30, 2009.

Until March 2009, we had facilities for manufacturing, warehousing and
research and development activities in Hauppauge, New York under operating leases expiring in June 2010. In March 2009 we entered into an Asset Purchase Agreement with Par under which Par assumed full responsibility for all future operating costs
and leases associated with the Hauppauge facilities.

In March 2009, we entered into an amendment of our lease for 3450 Monte
Villa, which reduced our lease obligations by approximately $1.9 million until July 2010. Under the terms of the amendment, we released both a cash deposit of $0.3 million and restricted cash under a letter of credit for $1.0 million to the landlord
and issued 1.5 million shares of our common stock to the sole member of the landlord. Because of this amendment, we have no further rent obligations under the 3450 Monte Villa Parkway lease until July 2010. In the third quarter of 2009 the
landlord leased approximately 37% of the exited facility to a new tenant. In order to facilitate the new tenancy, we entered into an additional amendment to our lease agreement which terminated the lease with respect to this portion of the premises.

Contingencies We are subject to various legal proceedings and claims that arise in the ordinary course of
business. Our management currently believes that resolution of such legal matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

Note 10  Subsequent Events through November 12, 2009

On November 6, 2009, we received a Staff Deficiency Letter from The Nasdaq Stock Market (Nasdaq) notifying us that for the 10 consecutive trading days ending on November 5, 2009, the aggregate
market value of our common stock was below the $50,000,000 minimum market value required for continued listing on the Nasdaq Global Market, as specified by Marketplace Rule 5450(b)(2). In accordance with Marketplace Rule 5810(c)(3)(C), we have
90 calendar days, or until February 4, 2010 to regain compliance with the minimum market value requirement. To regain compliance, the closing market value of our common stock must equal or exceed $50,000,000 for a minimum of 10 consecutive business
days or for such longer period that Nasdaq may, in its discretion, require. If we do not regain compliance with the minimum market value requirement by February 4, 2010, Nasdaq will provide us written notification that our common stock will be
subject to delisting. At that time, we may appeal Nasdaqs determination to a Nasdaq Listings Qualifications Panel. The Staff Deficiency Letter has no immediate effect on the listing or trading of the Companys common stock on the Nasdaq
Global Market.



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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Overview

Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are subject to a variety of risks and uncertainties. There are a number of important
factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement made by us. These factors include, but are not limited to: (i) our ability to obtain additional funding;
(ii) our ability to attract and/or maintain manufacturing, research, development and commercialization partners; (iii) the ability of our company and/or a partner to successfully complete product research and development, including
pre-clinical and clinical studies and commercialization; (iv) the ability of our company and/or a partner to obtain required governmental approvals, including product and patent approvals; and (v) the ability of our company and/or a
partner to develop and commercialize products that can compete favorably with those of competitors. In addition, significant fluctuations in quarterly results may occur as a result of the timing of milestone payments, the recognition of revenue from
milestone payments and other sources not related to product sales to third parties, and the timing of costs and expenses related to our research and development programs. Additional factors that would cause actual results to differ materially from
those projected or suggested in any forward-looking statements are contained in our filings with the Securities and Exchange Commission, including those factors discussed under the caption Forward-Looking Information in our most recent
Annual Report on Form 10-K, as may be supplemented or amended from time to time, which we urge investors to consider. We undertake no obligation to publicly release revisions in such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as otherwise required by securities and other applicable laws.

We are a biotechnology company focused on the discovery, development and commercialization of pharmaceuticals based on RNA interference
(RNAi). Our goal is to be the leader in RNAi therapeutics and improve human health through the development of RNAi-based compounds that provide superior therapeutic options for patients. Our team of approximately 30 scientists brings
expertise in the discovery, evaluation and optimization of small interfering RNAs (siRNAs) as well as siRNA delivery. We have the requisite experience in the areas of RNAi, molecular and cellular biology, lipid, oligonucleotide and
peptide chemistry, pharmacology and bioinformatics necessary to discover and develop tailored RNAi-based compounds designed to elicit specific therapeutic effects on a target-by-target basis. Our infrastructure provides for pre-clinical scale
manufacturing of both siRNAs and delivery materials, the comprehensive analysis and optimization of these compounds both individually and as drug candidates, and the filing of Investigational New Drug Applications. In addition to our own, internally
developed technologies, we strategically in-license and further develop RNAi- and delivery-related technologies, forming a single integrated drug discovery platform. In order to protect our innovations, which encompass a broad platform of both siRNA
and delivery technologies, and the eventual drug products that emerge from that platform, we will aggressively continue to build upon our extensive and enabling intellectual property (IP) estate.

We believe we have established ourselves as a leading RNAi-based therapeutics company by leveraging our broad and proven expertise in RNAi
science and delivery into an industry-leading RNAi drug discovery platform, which is protected by a strong IP position and validated through licensing agreements with two large international pharmaceutical companies. Our business model is centered
on the development of strategic R&D partnerships with international pharmaceutical companies as well as the pre-clinical and early stage clinical development of our own pipeline of RNAi-based therapeutics. Over the near- and mid-term, we will
focus on: (1) expanding our siRNA and delivery technologies; (2) maintaining and expanding our IP estate; and (3) raising sufficient capital necessary to support and execute our business model. There can be no assurance that our
efforts will produce acceptable results. This business model or any other future changes to the business may not prove successful in the short or long term due to a variety of factors, including competition, success of our research efforts or our
ability to establish pharmaceutical partnerships, and may have a material impact on our financial results including a decline in our stock price.

We have substantially completed the restructuring of our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company. Since July 2008, we have
accomplished the following: (1) reduced our workforce from approximately 75 employees in July 2008 to approximately 45 employees as of the date of this filing; (2) suspended all further clinical development of our intranasal programs in
August 2008; (3) renegotiated and significantly reduced our long-term legacy liabilities; and (4) sold our intranasal contract manufacturing operations, in New York, to Par Pharmaceutical Companies, Inc. (Par) in March 2009.

We are developing novel technologies and therapeutics based on the Nobel Prize-winning discovery of RNAi. The discovery of
RNAi, in 1988, has led not only to its widespread use in the research of biological mechanisms and target validation but also to its application in down-regulating the expression of certain disease-causing proteins found in multiple diseases such as
inflammation, cancer, and metabolic dysfunction. RNAi-based therapeutics work through a naturally occurring process within cells that has the effect of reducing levels of messenger RNA (mRNA) required for the production of proteins. RNAi enables the
targeting of disease at a genetic level and thus is highly specific to particular disease-causing proteins. At this time, several RNAi-based therapeutics are being evaluated in human clinical trials.

We have created a drug discovery platform that combines novel and proprietary siRNA constructs with novel and proprietary siRNA delivery
technologies, to develop RNAi-based therapeutics for the treatment of human diseases. Since 2008, we have demonstrated pre-clinical efficacy using both local and systemic routes of administration in rodent models of cancer and metabolic dysfunction.
At present, we are focusing our resources on liver (hepatocellular carcinoma  HCC) and bladder cancer. We intend to build on our pre-clinical successes as we move these programs toward early clinical studies. In addition, we will continue to
increase the breadth and capabilities of our drug discovery platform including advancing additional proprietary delivery technologies. Our business model anticipates that the advancement of a therapeutic pipeline, either through partnerships or on
our own, will provide proof of concept for our drug discovery platform as well as value for shareholders. We will continue to focus our R&D efforts on RNAi-based therapeutics, and continue to develop and expand our RNAi technologies and IP
estate. As of November 2, 2009, we owned or controlled 5 issued or allowed U.S. patents, 44 pending U.S. patent applications, including provisional patent applications, to protect our RNAi proprietary technologies.

Our collaboration efforts are expected to generate license fees, non-refundable upfront payments, R&D funding,
milestone payments, patent- and product-based royalties and profit sharing. Because of our collaborations and other agreements, we recognized revenue of approximately $0.4 million and $2.4 million in the three and nine months ended
September 30, 2008 and $0.1 million and $14.5 million in the three and nine months ended September 30 2009, respectively. In 2008, our revenue related primarily to our intranasal programs including the supply agreement with QOL for
Nascobal® and agreements with feasibility partners. In 2009, our revenue was primarily from revenue from
licensing our RNAi platforms including agreements with Novartis and Roche.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that we will continue as a going
concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of



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business. We have incurred recurring losses and negative cash flows from operations, and have an accumulated deficit (approximately $262.2 million at September 30, 2009) and expect to incur
losses in the future as we continue our research and development (R&D) activities. The Report of Independent Registered Public Accounting Firm included in our Annual Report as of December 31, 2008 stated that these conditions
raise substantial doubt about our ability to continue as a going concern. Our operating expenses, primarily R&D in connection with the further development of our RNAi programs, will consume the majority of our cash resources and will require
additional funding. We have funded our losses primarily through the sale of common stock and warrants in the public markets and private placements, revenue provided by our collaboration partners, and, to a lesser extent, equipment financing
facilities and loans.

In June 2009, we raised net proceeds of approximately $9.3 million in a private placement of 5,250,000
units at a price of $2.00 per unit, each unit comprised of one share of common stock and a warrant to purchase one share of common stock. The warrants are exercisable during the five-year period beginning December 13, 2009 at a price of $2.38
per share.

At September 30, 2009, we had working capital (current assets less current liabilities) of $1.2 million and
approximately $4.6 million in cash and cash equivalents, including approximately $1.2 million in restricted cash. We believe that our current resources will be sufficient to fund our planned operations to the end of 2009.

We plan to continue to work with large pharmaceutical companies regarding research and development collaboration agreements or investments,
and to pursue public and private sources of financing to raise cash. However, there can be no assurance that we will be successful in such endeavors. The volatility in our stock price, as well as general market conditions, could make it difficult
for us to complete a financing transaction on favorable terms, or at all. Any financing we obtain may further dilute the ownership interest of our current stockholders. If we are unable to obtain additional capital when required, we could modify,
delay or abandon some or all of our programs. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result
from the outcome of this uncertainty.

Cash flows

Operating activities used cash of approximately $3.8 million in the first nine months of 2009, compared to using cash of approximately $34.4
million in the first nine months of 2008. Cash provided by operating activities relates primarily to amounts received under license and other agreements. Cash used in operating activities relates primarily to funding operating expenses and changes
in deferred revenue, accounts and other receivables, accounts payable and accrued expenses and other liabilities, partially offset by non-cash restructuring charges, depreciation and amortization and non-cash compensation related to restricted stock
and stock options. We expect operating activities to use cash for the foreseeable future as we continue our R&D activities.

Investing activities provided cash of approximately $2.2 million in the first nine months of 2009 resulting from proceeds from sales of property and equipment and a change in restricted cash compared to $12.2 million in the first nine
months of 2008, which resulted primarily from maturities of short-term investments net of purchases.

Financing activities
provided cash of approximately $4.0 million in the first nine months of 2009, consisting primarily of net proceeds from the sale of common stock and warrants of $9.3 million, offset by paying off our note payable of approximately $5.5 million. In
the first nine months of 2008, our financing activities provided approximately $3.2 million in cash, consisting primarily of net proceeds from the sale of common stock and warrants of $7.3 million, offset by regular monthly lease payments under our
former capital lease obligations of approximately $4.1 million.

Recent Financing Activities

On June 12, 2009, we raised net proceeds of approximately $9.3 million in a private placement of 5,250,000 shares of common stock
together with warrants to purchase up to 5,250,000 shares of common stock at a per unit price of $2.00, which warrants are exercisable during the five-year period beginning December 12, 2009 at a price of $2.38 per share. We issued the common
stock and warrants using the universal shelf registration statement that was declared effective by the SEC on February 4, 2008. As of September 30, 2009, we had approximately $8.6 million remaining on our universal shelf registration
statement and approximately $82.8 million remaining on the common stock registration statement that was declared effective by the SEC on November 29, 2006.

Debt restructuring and reduction of other liabilities

In January
2009, we entered into a Loan and Security Agreement (the Loan Agreement) with General Electric Capital Corporation (GECC) pursuant to which GECC converted the balance due under capital lease obligations, along with a lease
termination fee and amounts payable for property taxes, to a promissory note in the amount of approximately $5.5 million at a fixed interest rate of 12.3% per year. As a result of the capital lease termination and issuance of the note payable,
we recorded a lease termination fee of approximately $0.2 million during the first quarter of 2009, which was presented as a component of gain on settlement of liabilities, net. The loan was paid off in full in June 2009.



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During the three months ended March 31, 2009, we entered into agreements with certain
vendors to reduce certain current and future obligations, including professional service fees due to our vendors incurred in the normal course of our business, rent on a facility we ceased using in 2008, and severance obligations due to certain of
our former employees, and as a result issued an aggregate of 1,364,285 shares of our common stock to settle amounts due of approximately $0.6 million in total.

Additionally, in March 2009, we negotiated amendments to our agreements regarding severance obligations to both our former President and to our former Chief Scientific Officer to reduce our overall cash
obligations through September 2009. In particular, we entered into an amendment of our agreement regarding severance obligations with our former Chief Scientific Officer, pursuant to which we agreed to pay to him a reduced sum of $0.9 million and to
issue to him 731,275 unregistered shares of our common stock, in full satisfaction of $1.7 million in severance obligations. These obligations were included in accrued payroll and employee benefits at December 31, 2008. We made the cash payment
to the former executive in June 2009.

Corporate restructuring

We have recently completed a major restructuring of our business from a clinical stage intranasal drug delivery company to a pre-clinical
RNAi drug discovery company. Since July 2008, we have accomplished the following: (1) reduced our workforce from approximately 75 employees in July 2008 to approximately 45 employees as of the date of this filing; (2) suspended all further
clinical development of our intranasal programs in August 2008; (3) renegotiated and significantly reduced our long-term legacy liabilities; and (4) sold our intranasal contract manufacturing operations, in New York, to Par in March 2009.
We have recorded restructuring charges related to employee termination costs, our facility consolidation and impairment of assets in accordance with our long-lived assets policy. We continue to work to identify a partner or partners to further
develop and commercialize our remaining legacy intranasal programs through either a sale or licensing transaction; however, there can be no assurance that we will be able to identify suitable partners for our intranasal programs or a sale or
licensing transaction on terms acceptable to us or at all.

We have streamlined operations and reduced expenses, which has
included reductions in our workforce. We continue to focus on maximizing the performance of our business and controlling costs to respond to the economic environment and will continue to evaluate our underlying cost structure to improve our
operating results and better position ourselves for growth. We have in the past and may in the future find it advisable to restructure operations and reduce expenses, including, without limitation, such measures as reductions in the workforce,
discretionary spending, and/or capital expenditures, as well as other steps to reduce expenses. As such, we may incur further restructuring charges, including severance, benefits and related costs due to a reduction in workforce and/or charges for
facilities consolidation or for assets disposed of or removed from operations as a direct result of a reduction of workforce. In the remainder of 2009, we anticipate that our costs and operating expenses will track to a level that is consistent with
our expected revenue and allow us to continue to invest in accordance with our strategic priorities. However, we may be unable to achieve these expense levels without adversely affecting our business and results of operations. We are likely to
continue to experience losses and negative cash flows in the near term, even if revenue related to collaborative partnerships grows.

Summary

We believe that our current resources are sufficient to fund our planned operations to the end
of 2009. We based our estimate on our ability to perform planned R&D activities and the receipt of planned funding. Volatility in our stock price, as well as general market conditions, could make it difficult for us to raise capital on favorable
terms, or at all. Any financing we obtain may further dilute or otherwise impair the ownership interest of our current stockholders. If we fail to generate positive cash flows or fail to obtain additional capital when required, we could modify,
delay or abandon some or all of our programs. These factors, among others, raise substantial doubt about our ability to continue as a going concern.



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Consolidated Results of Operations

Comparison of Quarterly Results of Operations

Percentage comparisons have been omitted where they are not considered meaningful. All amounts, except amounts expressed as a percentage, are presented in thousands.



|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------ | - | ------ | ------------------------------ |  | - | ------ | - |  | ---- | -- |  | ---- | ------- | - | - | - | ------ | - |  | - | ------- | - |  | ----- | --
|                                                             |  | Three Months EndedSeptember 30, |         |   | Change |   |        | Nine Months EndedSeptember 30, |  |   | Change |  
|                                                             |  | 2008                            |         |   | 2009   |   |        | $                              |  |   | %      |   |  | 2008 |    |  | 2009 |         |   | $ |   |        | % | 
|Revenue                                                      |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|License and other revenue                                    |  | $                               | 100     |   |        | $ | 61     |                                |  | $ | (39    | ) |  | (39  | )% |  | $    | 1,213   |   |   | $ | 14,435 |   |  | $ | 13,222  |   |  | 1,090 | % 
|Product revenue                                              |  |                                 | 243     |   |        |   |       |                                |  |   | (243   | ) |  | (100 | )% |  |      | 972     |   |   |   | 70     |   |  |   | (902    | ) |  | (93   | )%
|Government grants                                            |  |                                 | 62      |   |        |   | 3      |                                |  |   | (59    | ) |  | (95  | )% |  |      | 237     |   |   |   | 19     |   |  |   | (218    | ) |  | (92   | )%
|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|Total revenue                                                |  |                                 | 405     |   |        |   | 64     |                                |  |   | (341   | ) |  | (84  | )% |  |      | 2,422   |   |   |   | 14,524 |   |  |   | 12,102  |   |  | 500   | % 
|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|Operating expenses                                           |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|Cost of product revenue                                      |  |                                 | 77      |   |        |   |       |                                |  |   | (77    | ) |  | (100 | )% |  |      | 2,906   |   |   |   |       |   |  |   | (2,906  | ) |  | (100  | )%
|Research and development                                     |  |                                 | 7,603   |   |        |   | 3,319  |                                |  |   | (4,284 | ) |  | (56  | )% |  |      | 27,022  |   |   |   | 11,775 |   |  |   | (15,247 | ) |  | (56   | )%
|Sales and marketing                                          |  |                                 | 422     |   |        |   | 156    |                                |  |   | (266   | ) |  | (63  | )% |  |      | 1,440   |   |   |   | 369    |   |  |   | (1,071  | ) |  | (74   | )%
|General and administrative                                   |  |                                 | 2,080   |   |        |   | 3,322  |                                |  |   | 1,242  |   |  | 60   | %  |  |      | 9,689   |   |   |   | 7,467  |   |  |   | (2,222  | ) |  | (23   | )%
|Restructuring                                                |  |                                 | 6,167   |   |        |   | 118    |                                |  |   | (6,049 | ) |  | (98  | )% |  |      | 8,084   |   |   |   | 429    |   |  |   | (7,655  | ) |  | (95   | )%
|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|Total operating expenses                                     |  |                                 | 16,349  |   |        |   | 6,915  |                                |  |   | (9,434 | ) |  | (58  | )% |  |      | 49,141  |   |   |   | 20,040 |   |  |   | (29,101 | ) |  | (59   | )%
|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|Operating loss                                               |  |                                 | (15,944 | ) |        |   | (6,851 | )                              |  |   | 9,093  |   |  | (57  | )% |  |      | (46,719 | ) |   |   | (5,516 | ) |  |   | 41,203  |   |  | (88   | )%
|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|Interest income                                              |  |                                 | 69      |   |        |   | 1      |                                |  |   | (68    | ) |  | (99  | )% |  |      | 497     |   |   |   | 4      |   |  |   | (493    | ) |  | (99   | )%
|Interest and other expense                                   |  |                                 | (195    | ) |        |   |       |                                |  |   | 195    |   |  | (100 | )% |  |      | (697    | ) |   |   | (311   | ) |  |   | 386     |   |  | (55   | )%
|Change in fair value liability for price adjustable warrants |  |                                 |        |   |        |   | (160   | )                              |  |   | (160   | ) |  |      |    |  |      |        |   |   |   | (2,092 | ) |  |   | (2,092  | ) |  |       |   
|Gain on settlement of liabilities, net                       |  |                                 |        |   |        |   |       |                                |  |   |       |   |  |      |    |  |      |        |   |   |   | 654    |   |  |   | 654     |   |  |       |   
|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   
|Net loss                                                     |  | $                               | (16,070 | ) |        | $ | (7,010 | )                              |  | $ | 9,060  |   |  | (56  | )% |  | $    | (46,919 | ) |   | $ | (7,261 | ) |  | $ | 39,658  |   |  | (85   | )%
|                                                             |  |                                 |         |   |        |   |        |                                |  |   |        |   |  |      |    |  |      |         |   |   |   |        |   |  |   |         |   |  |       |   

Comparison of the Three and Nine Months Ended September 30, 2008 to the Three and Nine Months
Ended September 30, 2009

Revenue.We had revenue from certain customers, as a percentage of total revenue, as
follows:



|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                                            |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                            |  | 2008                            |   |  | 2009                           |   |  | 2008 |   |  | 2009 |  
|Novartis                                    |  |                                |   |  |                               |   |  |     |   |  | 52   | %
|Roche                                       |  |                                |   |  |                               |   |  |     |   |  | 34   | %
|Amylin                                      |  |                                |   |  |                               |   |  | 1    | % |  | 7    | %
|QOL Medical, LLC                            |  | 85                              | % |  |                               |   |  | 55   | % |  | 6    | %
|Par Pharmaceuticals                         |  |                                |   |  | 95                             | % |  |     |   |  | 1    | %
|Government grant                            |  | 15                              | % |  | 5                              | % |  | 10   | % |  |     |  
|Undisclosed partner  undisclosed compounds |  |                                |   |  |                               |   |  | 23   | % |  |     |  
|Undisclosed partner  Factor IX             |  |                                |   |  |                               |   |  | 11   | % |  |     |  
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Total                                       |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100  | %
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  

License and other revenue.License and other revenue increased by $13.2
million to $14.4 million in the nine months ended September 30, 2009 compared to $1.2 million the same period in 2008. For the three-month periods ended September 30, 2008 and September 30, 2009, license and other revenue was $0.1
million. In the nine months ended September 30, 2009, license and other revenue was primarily from licensing our RNAi platforms including agreements with Novartis and Roche as well as a $1.0 million



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milestone payment received from Amylin, recognition of $0.7 million in deferred revenue recognized upon termination of the QOL agreement and revenue recognized under the asset purchase agreement
with Par. License and other revenue recognized in the three- and nine-month periods ended September 30, 2008 consisted primarily of revenue from our intranasal partners including QOL Medical and other collaboration or feasibility partners.

Product Revenue.During the three and nine months ended September 30, 2008, product revenue
was $0.2 million and $0.9 million, respectively, which consisted of sales of Nascobal® brand products. We
recognized $0.1 million in the first quarter of 2009 related to a cancellation fee paid by QOL for cancellation of a planned production lot. As a result of the Asset Purchase Agreement with Par, our Supply Agreement for Nascobal® brand products with QOL was terminated and we no longer receive product revenue from Nascobal®. We expect no product revenue for the rest of 2009.

Government grants revenue.The National Institutes of Health awarded us a grant in September 2006 for $1.9 million over a five year
period to prevent and treat influenza. Revenue recognized under this grant totaled $0.1 million and $0.2 million for the three and nine months ended September 30, 2008 and $3,000 and $19,000 for the three and nine months ended
September 30, 2009. We terminated our government grant in the third quarter of 2009.

Cost of
product revenue.Cost of product revenue consists of raw materials, labor and overhead expenses. We did not produce any production lots of Nascobal® nasal spray in 2009. We recorded a non-cash charge of approximately $2.6 million to cost of goods sold related to the write-down of inventory in the second quarter of
2008.

Research and Development.R&D expense consists primarily of salaries and other personnel-related expenses,
costs of pre-clinical studies and clinical trials, consulting and other outside services, laboratory supplies, facilities costs and other costs. We expense all R&D costs as incurred. R&D expense for the three and nine months ended
September 30, 2009 decreased $4.3 million and $15.2 million as compared to the 2008 periods, due to the following:



| |  |  | Personnel-related expenses decreased by 43% and 56% to $1.2 million and $3.6 million in the three and nine months ended September 30, 2009
compared to $2.0 million and $8.2 million in the three and nine months ended September 30, 2008, due primarily to a decrease in headcount as a result of our restructuring.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs of clinical trials, lab supplies, consulting, and outside testing and services decreased by 65% and 85% to $0.6 million and $1.3 million in the
three and nine months ended September 30, 2009 compared to $1.8 million and $8.6 million in the three and nine months ended September 30, 2008. The costs for the 2009 period were significantly lower than 2008 as we restructured our
business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company. Patent license fees increased by $3.1 million in the nine months ended September 30, 2009 due to our acquisition of intellectual
property from Ribotask ApS and fees paid in connection with the termination of our license agreement with the City of Hope.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Facilities and equipment costs decreased by 52% and 54% to $1.0 million and $3.0 million in the three and nine months ended September 30, 2009
compared to $2.0 million and $6.6 million in the three and nine months ended September 30, 2008 due to a decrease in rent and related expenses and a decrease in depreciation of equipment and related maintenance and calibration costs.
Depreciation expense included in R&D in the three and nine months ended September 30, 2009 was $0.5 million and $1.3 million, compared with $0.7 million and $2.4 million in the three and nine months ended September 30, 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stock-based compensation included in R&D expense decreased from approximately $1.5 million and $3.0 million in the three and nine months ended
September 30, 2008 to $0.3 million and $14,000 in the three and nine months ended September 30, 2009. The decrease was due to lower headcount and to recognize the accounting impact of forfeitures of restricted stock awards in the current
year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | R&D expense by project, as a percentage of total R&D project expense, was as follows:
| | - |  | -------------------------------------------------------------------------------------



|                           |  |                                 |   |  |                                |   |  |      |   |  |      |  
|-------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                           |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                           |  | 2008                            |   |  | 2009                           |   |  | 2008 |   |  | 2009 |  
|RNAi Projects              |  | 52                              | % |  | 100                            | % |  | 39   | % |  | 96   | %
|Legacy Intranasal Projects |  | 48                              | % |  |                               |   |  | 61   | % |  | 4    | %
|                           |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Total                      |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100  | %
|                           |  |                                 |   |  |                                |   |  |      |   |  |      |  

We expect our R&D expenses to decrease in 2009 compared to 2008 due to the
restructuring of our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company. Our current strategy is focused on entering into collaborations with third parties to participate in the development
of, and ultimately the commercialization of, our RNAi technology.



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Sales and marketing.Sales and marketing expense consists primarily of salaries and
other personnel-related expenses, consulting, trade shows and advertising. The 63% and 74% decrease in sales and marketing expense in the three and nine months ended September 30, 2009 compared to the three and nine months ended
September 30, 2008 resulted primarily from headcount reductions in connection with our restructuring and our cost containment efforts. We expect sales and marketing costs, which primarily include business development staff and activities, to
increase from the level of spending in the third quarter of 2009.

General and administrative.General and
administrative expense consists primarily of salaries and other personnel-related expenses to support our R&D activities, non-cash stock-based compensation for general and administrative personnel and non-employee members of our Board,
professional fees, such as accounting and legal, corporate insurance and facilities costs. Compared to the prior year periods, general and administrative expenses increased 60% in the three months ended September 30, 2009 and decreased 23% in
the nine months ended September 30, 2009 primarily due to the following:



| |  |  | Personnel-related expenses increased by 82% to $0.9 million in the three months ended September 30, 2009 compared to $0.5 million in the three
months ended September 30, 2008 due primarily to employee severance costs and recruiting and relocation costs. In the nine months ended September 30, 2009 personnel-related expenses decreased 11% to $2.0 million compared to $2.2 million in
the nine months ended September 30, 2008 due primarily to decreased headcount related to administrative activities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs of legal and accounting fees, consulting, corporate insurance and other administrative costs increased by 52% and decreased by 33% to
approximately $1.2 million and $3.4 million in the three and nine months ended September 30, 2009 compared to approximately $0.8 million and $5.1 million in the three and nine months ended September 30, 2008. The increase in the
three-month period was primarily due to patent-related legal fees and consulting and the decrease in the nine-month period was due primarily to cost containment efforts and the restructuring of our business from a clinical stage intranasal drug
delivery company to a pre-clinical RNAi drug discovery company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Non-cash stock-based compensation included in general and administrative expense increased from approximately $0.4 million in the three months ended
September 30, 2008 to $1.0 million in the three months ended September 30, 2009 primarily due to expense recognized as a result of employee terminations. In the nine months ended September 30, 2009 non-cash stock-based compensation
decreased from $1.5 million to $1.3 million due to forfeitures recorded in the current year period offset in part by expense recognized as a result of employee terminations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect general and administrative expenses to decrease in 2009 compared to 2008 due to continued cost containment efforts.

Restructuring. We have recorded restructuring charges related to employee termination costs, our facility consolidation and
impairment of assets in accordance with our long-lived assets policy. During 2008, we exited our facility at 3450 Monte Villa Parkway, Bothell, Washington and recorded a restructuring liability, representing estimated future payments due under the
lease and other costs and discounted using a credit-adjusted risk-free interest rate. In March 2009, we entered into an amendment of our lease for the exited facility, which reduced our lease obligations by approximately $1.9 million until July
2010. Under the terms of the amendment, we released both a cash deposit of approximately $0.3 million and restricted cash under a letter of credit for approximately $1.0 million to the landlord. As inducement to enter into the amendment, we issued
1.5 million shares of our common stock to the sole member of the landlord. As a result of this amendment, we have no further rent obligations under the 3450 Monte Villa lease until July 2010.

In the third quarter of 2009 the landlord leased approximately 37% of the exited facility to a new tenant. In order to facilitate the new
tenancy, we entered into an additional amendment to our lease agreement which terminated the lease with respect to a portion of the premises and decreased our future lease obligations. During the three and nine months ended September 30, 2009,
we recorded approximately $118,000 and $241,000 in accretion and restructuring charges with respect to our estimate of this liability. We expect to incur approximately $0.3 million in accretion expense through the expiration of this lease in January
2016.

In 2008, leasehold improvements having a net book value of approximately $1.5 million and fixed assets whose net book
value exceeded the net realizable value by approximately $0.4 million in aggregate were considered impaired by management as they related to our facility which we had ceased to use. A related charge was included in restructuring expense in 2008. At
December 31, 2008, property and equipment having a net realizable value of approximately $0.5 million, net of estimated costs to sell, was held for sale. All of these assets were sold in 2009.

Interest Income.The decrease in interest income in 2009 compared to 2008 was primarily due to lower average balances available for
investment.

Interest Expense.We incurred interest expense on our capital leases and in 2009 on our note payable,
which we paid off in June 2009. There was no interest expense in the three months ended September 30, 2009. In the nine months ended September 30, 2009 interest expense decreased by $0.4 million to $0.3 million compared to the same period
in 2008 due to a decrease in average borrowings. At September 30, 2009, we have no interest-bearing debt.



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##### Table of Contents

Change in fair value liability for price adjustable warrants.For the three and nine
months ended September 30, 2009, we recorded expense related to the increase in valuation of the price adjustable warrants of approximately $0.2 million and $2.1 million based on the September 30, 2009 closing price of our stock of $1.40
per common share.

Gain on settlement of liabilities, net. We recorded a net gain on settlement of liabilities
of approximately $0.7 million in the first quarter of 2009. This included a $0.7 million gain relating to the amendment of our agreement regarding severance obligations with a former executive. In addition, we recorded a gain of approximately $0.2
million related to the issuance of shares of stock valued at $0.4 million to certain of our vendors to settle amounts due to these vendors of approximately $0.6 million in total. These gain amounts were partially offset by a lease termination fee of
approximately $0.2 million incurred pursuant to the termination of our lease agreement and subsequent refinance of amounts due.

Off-Balance Sheet Arrangements

As of September 30, 2009, we did not have any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 3  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4T.  CONTROLS AND PROCEDURES

(a)
Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our senior management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in reports filed under the Securities Exchange Act of 1934, as amended.

(b) Internal Control Over Financial Reporting.There have been no changes in our internal controls over financial reporting or in
other factors during the fiscal quarter ended September 30, 2009, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II  OTHER INFORMATION

ITEM 6  EXHIBITS

The exhibits required by this item are set forth in the Exhibit Index attached hereto.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, duly authorized, in the City of Bothell, State of Washington, on November 12, 2009.



MDRNA, INC.By:

/s/    J. MICHAEL
FRENCHJ. Michael FrenchChief Executive Officer and PresidentBy:

/s/    PETER S.
GARCIAPeter S. Garcia Chief Financial Officer




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EXHIBIT INDEX



|            |  |                                                                                                                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                               
|            | 
|31.1        |  | Certification of our Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (1)               
|            | 
|31.2        |  | Certification of our Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (1)               
|            | 
|32.1        |  | Certification of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
|            | 
|32.2        |  | Certification of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)



|(1) | Filed herewith.
|--- | ---------------

|(2) | Furnished herewith.
|--- | -------------------



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