##### Table of Contents

---



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



or



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------



For the transition period from
 to



---



Commission file number 0-27914



SIRNA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)



---



|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 34-1697351                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)



185 Berry Street,
Suite 6504

San Francisco, California 94107

(Address of principal executive offices)



Registrants telephone number: (415) 512-7624



N/A

Former name, if changed since last report



---



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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No  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



The number of shares of the registrants common stock, par value $0.01 per share,
outstanding as of November 14, 2005 was 59,550,853.



---



---

##### Table of Contents



SIRNA THERAPEUTICS, INC.

INDEX TO FORM 10-Q



|                               |  |                                                                                                          |  |     
|------------------------------ |  | -------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                          |  | PAGE
|                               | 
|PART 1 - FINANCIAL INFORMATION |  |                                                                                                         
|                               |  |                                                                                                         
|Item 1.                        |  | Financial Statements                                                                                     |  |     
|                               |  |                                                                                                         
|                               |  | Condensed Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004                      |  | 3   
|                               |  |                                                                                                         
|                               |  | Condensed Statements of Operations - Three and Nine Months Ended September 30, 2005 and 2004 (unaudited) |  | 4   
|                               |  |                                                                                                         
|                               |  | Condensed Statements of Cash Flows - Three and Nine Months Ended September 30, 2005 and 2004 (unaudited) |  | 5   
|                               |  |                                                                                                         
|                               |  | Notes to Unaudited Condensed Financial Statements                                                        |  | 6   
|                               |  |                                                                                                         
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 10  
|                               |  |                                                                                                         
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 26  
|                               |  |                                                                                                         
|Item 4.                        |  | Controls and Procedures                                                                                  |  | 26  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                                         
|                               |  |                                                                                                         
|Item 1.                        |  | Legal Proceedings                                                                                        |  | 26  
|                               |  |                                                                                                         
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                              |  | 26  
|                               |  |                                                                                                         
|Item 3.                        |  | Defaults upon Senior Securities                                                                          |  | 26  
|                               |  |                                                                                                         
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                      |  | 27  
|                               |  |                                                                                                         
|Item 5.                        |  | Other Information                                                                                        |  | 27  
|                               |  |                                                                                                         
|Item 6.                        |  | Exhibits                                                                                                 |  | 28  
|                               | 
|SIGNATURES                     |  | 30                                                                                                      
|                               | 
|Exhibit Index                  |  | 31                                                                                                      



2



---

##### Table of Contents



PART I. FINANCIAL INFORMATION

|ITEM I. | FINANCIAL STATEMENTS
|------- | --------------------



SIRNA THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                 |  |                   |          |   |                  |   |          |  
|------------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                 |  | September 30,2005 |          |   | December 31,2004 |  
|                                                 |  | (unaudited)       |          |   |                  |  
|ASSETS                                           |  |                   |          |   |                  |   |          |  
|Current assets                                   |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                        |  | $                 | 24,405   |   |                  | $ | 16,817   |  
|Securities available-for-sale                    |  |                   | 20,318   |   |                  |   | 19,266   |  
|Accounts receivable                              |  |                   | 5,051    |   |                  |   | 66       |  
|Inventories                                      |  |                   | 496      |   |                  |   | 374      |  
|Prepaid expenses and other current assets        |  |                   | 554      |   |                  |   | 527      |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total current assets                             |  |                   | 50,824   |   |                  |   | 37,050   |  
|                                                 |  |                  
|Property, plant and equipment, net               |  |                   | 2,011    |   |                  |   | 2,507    |  
|                                                 |  |                  
|Notes receivable-related parties                 |  |                   | 65       |   |                  |   | 210      |  
|Patents, net                                     |  |                   | 592      |   |                  |   | 946      |  
|Other assets                                     |  |                   | 802      |   |                  |   | 844      |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total assets                                     |  | $                 | 54,294   |   |                  | $ | 41,557   |  
|                                                 |  |                   |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY             |  |                   |          |   |                  |   |          |  
|Current liabilities                              |  |                   |          |   |                  |   |          |  
|Accounts payable-trade                           |  | $                 | 665      |   |                  | $ | 978      |  
|Accrued expenses                                 |  |                   | 2,550    |   |                  |   | 2,541    |  
|Other current liabilities                        |  |                   | 574      |   |                  |   |         |  
|Deferred revenue, current portion                |  |                   | 1,667    |   |                  |   | 281      |  
|Current portion of convertible long-term debt    |  |                   |         |   |                  |   | 3,055    |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total current liabilities                        |  |                   | 5,456    |   |                  |   | 6,855    |  
|                                                 |  |                  
|Deferred revenue, long-term portion              |  |                   | 3,333    |   |                  |   |         |  
|Other long term liabilities                      |  |                   | 275      |   |                  |   | 375      |  
|                                                 |  |                  
|Stockholders equity                             |  |                   |          |   |                  |   |          |  
|Common stock                                     |  |                   | 595      |   |                  |   | 414      |  
|Additional paid-in capital                       |  |                   | 316,699  |   |                  |   | 288,599  |  
|Unrealized gain on securities available-for-sale |  |                   | 331      |   |                  |   | (27      | )
|Accumulated deficit                              |  |                   | (271,349 | ) |                  |   | (253,207 | )
|Unearned compensation                            |  |                   | (1,046   | ) |                  |   | (1,452   | )
|                                                 |  |                   |          |   |                  |   |          |  
|Total stockholders equity                       |  |                   | 45,230   |   |                  |   | 34,327   |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity       |  | $                 | 54,294   |   |                  | $ | 41,557   |  
|                                                 |  |                   |          |   |                  |   |          |  



See
notes to condensed financial statements.



3



---

##### Table of Contents



SIRNA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except
per share amounts)



|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                            |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                            |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Revenue:                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Contract revenues                           |  | $                               | 1,853  |   |                                | $ | 68     |      |  | $ | 1,947   |   |  | $ | 141     |  
|Contract revenues-manufacturing             |  |                                 | (2     | ) |                                |   | 16     |      |  |   | 1,940   |   |  |   | 714     |  
|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                              |  |                                 | 1,851  |   |                                |   | 84     |      |  |   | 3,887   |   |  |   | 855     |  
|Expenses:                                   |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Cost of goods sold                          |  |                                 | 5      |   |                                |   |       |      |  |   | 1,663   |   |  |   | 663     |  
|Research and development                    |  |                                 | 4,618  |   |                                |   | 6,101  |      |  |   | 15,502  |   |  |   | 15,224  |  
|General and administrative                  |  |                                 | 1,682  |   |                                |   | 1,813  |      |  |   | 5,402   |   |  |   | 5,054   |  
|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total expenses                              |  |                                 | 6,305  |   |                                |   | 7,914  |      |  |   | 22,567  |   |  |   | 20,941  |  
|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                            |  |                                 |        |  
|Operating loss                              |  |                                 | (4,454 | ) |                                |   | (7,830 | )    |  |   | (18,680 | ) |  |   | (20,086 | )
|Other income (expense):                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Interest income, expense and other expense  |  |                                 | 272    |   |                                |   | 50     |      |  |   | 538     |   |  |   | 87      |  
|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                    |  | $                               | (4,182 | ) |                                | $ | (7,780 | )    |  | $ | (18,142 | ) |  | $ | (19,999 | )
|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share (basic and diluted)      |  | $                               | (0.08  | ) |                                | $ | (0.21  | )    |  | $ | (0.39   | ) |  | $ | (0.57   | )
|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Shares used in computing net loss per share |  |                                 | 54,795 |   |                                |   | 37,630 |      |  |   | 46,024  |   |  |   | 34,985  |  
|                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



4



---

##### Table of Contents



SIRNA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                            |  |                                 |         |   |      |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | ------- | -
|                                                                            |  | Nine months ended September 30, |        
|                                                                            |  | 2005                            |         |   | 2004 |        
|Operating Activities:                                                       |  |                                 |         |   |      |         |  
|Net loss                                                                    |  | $                               | (18,142 | ) |      | (19,999 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |         |   |      |         |  
|Depreciation and amortization                                               |  |                                 | 1,453   |   |      | 1,266   |  
|Purchase of license through issuance of common stock                        |  |                                 | 488     |   |      |        |  
|Compensation related to common stock and options                            |  |                                 | 457     |   |      | 670     |  
|Compensation for forgiveness of notes receivable-related parties            |  |                                 | 145     |   |      | 145     |  
|Accrued interest included in convertible debt                               |  |                                 | 20      |   |      | 180     |  
|Changes in operating assets and liabilities:                                |  |                                 |         |   |      |         |  
|Accounts receivable                                                         |  |                                 | 15      |   |      | 143     |  
|Inventory                                                                   |  |                                 | (122    | ) |      |        |  
|Prepaid expenses and other                                                  |  |                                 | (27     | ) |      | 5       |  
|Other assets                                                                |  |                                 | 41      |   |      | (13     | )
|Accounts payable                                                            |  |                                 | (314    | ) |      | 135     |  
|Accrued expenses                                                            |  |                                 | 484     |   |      | 238     |  
|Deferred revenue                                                            |  |                                 | (281    | ) |      | (61     | )
|                                                                            |  |                                 |         |   |      |         |  
|Net cash used in operating activities                                       |  |                                 | (15,783 | ) |      | (17,291 | )
|                                                                            |  |                                
|Investing activities:                                                       |  |                                 |         |   |      |         |  
|Additions to property, plant and equipment                                  |  |                                 | (412    | ) |      | (339    | )
|Additions to deferred patent costs                                          |  |                                 | (190    | ) |      | (216    | )
|Sales of securities available-for-sale                                      |  |                                 | 14,471  |   |      | 14,463  |  
|Purchases of securities available-for-sale                                  |  |                                 | (15,166 | ) |      | (12,046 | )
|                                                                            |  |                                 |         |   |      |         |  
|Net cash (used in) provided by investing activities                         |  |                                 | (1,297  | ) |      | 1,862   |  
|Financing activities:                                                       |  |                                 |         |   |      |         |  
|Net proceeds from issuance of common and preferred stock                    |  |                                 | 27,743  |   |      | 17,531  |  
|Payments under loan facilities                                              |  |                                 | (3,080  | ) |      | (1,261  | )
|Conversion of debt                                                          |  |                                 | 5       |   |      | 45      |  
|                                                                            |  |                                 |         |   |      |         |  
|Net cash provided by financing activities                                   |  |                                 | 24,668  |   |      | 16,315  |  
|Net increase in cash and cash equivalents                                   |  |                                 | 7,588   |   |      | 886     |  
|Cash and cash equivalents at beginning of period                            |  |                                 | 16,817  |   |      | 18,793  |  
|                                                                            |  |                                 |         |   |      |         |  
|Cash and cash equivalents at end of period                                  |  | $                               | 24,405  |   |      | 19,679  |  
|                                                                            |  |                                 |         |   |      |         |  



See
notes to condensed financial statements.



5



---

##### Table of Contents



SIRNA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

September 30, 2005

(Unaudited)



|Note 1: | Basis of Presentation
|------- | ---------------------



The accompanying unaudited condensed financial statements have been prepared by Sirna Therapeutics, Inc., a Delaware corporation (Sirna or the
Company) in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the
financial statements and disclosures thereto included in our annual report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission.



|Note 2: | Liquidity
|------- | ---------



Development of the Companys products has required substantial funds (including both private and public financings), and will continue to require
substantial funds to conduct the costly and lengthy research, preclinical and clinical testing necessary to bring its proposed products to market. The Companys ability to raise funds in the future will depend on many factors, including, among
others, the progress of the Companys research, development and drug delivery efforts, the ability of the Company to establish collaborative arrangements for clinical testing, progress with preclinical studies and clinical trials, the time and
cost involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, competing technological and market developments, the determination as to the commercial
potential of the Companys potential products, and the cost and availability of third-party financing.



Failure to generate sufficient revenues or raise additional capital could have a material adverse effect on the Companys ability to achieve its
intended business objectives, which include the completion of development and commercialization of its product candidates and the continuation of its research and development programs. Management plans on raising additional funds to meet future
working capital and capital expenditure needs. There can be no assurance that such additional financing will be available or, if available, that such financing can be obtained on terms satisfactory to the Company.



|Note 3: | Inventories
|------- | -----------



The Companys inventories are as follows (in thousands):



|                  |  |                    |     |                   |   |    
|----------------- |  | ------------------ | --- | ----------------- | - | ---
|                  |  | September 30, 2005 |     | December 31, 2004
|Raw materials     |  | $                  | 97  |                   | $ | 135
|Work in progress  |  |                    | 399 |                   |   | 228
|Finished goods    |  |                    |    |                   |   | 11 
|                  |  |                    |     |                   |   |    
|Total inventories |  | $                  | 496 |                   | $ | 374
|                  |  |                    |     |                   |   |    



6



---

##### Table of Contents

|Note 4: | Stock-Based Compensation
|------- | ------------------------



Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensationdefined a fair value method of accounting
for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. As
provided for in SFAS No. 123, the Company has elected to apply Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock-based compensation
plans. Under APB No. 25, if the exercise price of the Companys employee and director stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized. During 2005, the
Company has continued to elect to follow the intrinsic value method prescribed by APB No. 25. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS
No. 123, and in March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 regarding the SECs interpretation of SFAS No. 123(R). SFAS No. 123(R) and SAB 107 require all share-based payments to employees, including
grants of employee stock options, to be recognized as expenses in the income statement based on their fair values. Effective January 1, 2006, the Company will be required to adopt SFAS No. 123(R).



Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options under the fair value method of SFAS No. 123. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options vesting period. Pro forma amounts may not be representative of future years. The Companys pro forma information follows (in thousands, except per share data):



|                                                                                                                 |  |                                         |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | --------------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                 |  | For the three months endedSeptember 30, |        |   | For the nine months ended September 30, |  
|                                                                                                                 |  | 2005                                    |        |   | 2004                                    |   |        | 2005 |  |   | 2004    |  
|Net loss as reported                                                                                             |  | $                                       | (4,182 | ) |                                         | $ | (7,780 | )    |  | $ | (18,142 | ) |  | $ | (19,999 | )
|Add: Stock-based employee compensation expense included in reported income                                       |  |                                         | 135    |   |                                         |   | 149    |      |  |   | 406     |   |  |   | 562     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards |  |                                         | (820   | ) |                                         |   | (990   | )    |  |   | (2,298  | ) |  |   | (3,174  | )
|                                                                                                                 |  |                                         |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                                               |  | $                                       | (4,867 | ) |                                         | $ | (8,621 | )    |  | $ | (20,034 | ) |  | $ | (22,611 | )
|                                                                                                                 |  |                                         |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Pro forma loss per share (basic and diluted)                                                                     |  | $                                       | (0.09  | ) |                                         | $ | (0.23  | )    |  | $ | (0.44   | ) |  | $ | (0.65   | )
|                                                                                                                 |  |                                         |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  



In February 2003, the
Company, in connection with its transition from Ribozyme Pharmaceuticals to Sirna Therapeutics and related recapitalization, granted options to purchase approximately 4.8 million shares of common stock to employees and consultants at an
exercise price of $2.10 per share, subject to stockholder approval, which were granted on April 16, 2003. Related to the February 2003 grants, the Company recorded compensation expense of $135,000 and $406,000 for the three and nine-month
periods ended September 30, 2005. As of September 30, 2005, $1.0 million of unearned compensation is deferred and will be expensed as the options vest, generally over the next three to four years.



7



---

##### Table of Contents

|Note 5: | Use of Estimates
|------- | ----------------



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reporting amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could materially differ from those estimates.



|Note 6: | Reclassifications
|------- | -----------------



For the nine-month period ended September 30, 2004, the Company reclassified $663,000 from research and development to cost of goods sold.



|Note 7: | Private Investment
|------- | ------------------



On July 5, 2005, the Company entered into definitive agreements relating to a private placement of shares of its common stock for $1.60 per share and
warrants to purchase shares of its common stock with an exercise price of $1.92 per share. The private placement took place in two closings in which a total of 17,506,250 shares of the Companys common stock and warrants to purchase 6,302,246
shares of its common stock were issued, with aggregate gross proceeds to the Company of $28.0 million. Pursuant to the terms of the private placement, the Company received $13.3 million upon the first closing which occurred on July 6, 2005. The
Company received the remaining $14.7 million upon the second closing which occurred after stockholder approval at the Companys Special Meeting of Stockholders on August 23, 2005. Under applicable rules of the Nasdaq National Market, the
second closing of the private placement required stockholder approval.



Participants in the private placement consisted of unaffiliated accredited institutional investors and affiliated investors comprising a majority of the Companys board of directors, either directly or through affiliates, who
collectively hold a majority of the Companys issued and outstanding common stock.



|Note 8: | Revenues
|------- | --------



In January 2004, the Company initiated a collaboration with Eli Lilly and Company (Lilly) to apply its RNAi technology against Lillys proprietary
models in oncology. Under the terms of the eighteen-month collaboration, Lilly provided oncology targets, preclinical in vivo models and research funding. Sirna provided the RNAi expertise and a non-exclusive research license for its oncology
technologies during the term of the collaboration. The goal was to establish a proof of concept that could lead to the development of novel RNAi therapies for oncology. The Company achieved the proof of concept milestone set forth under the
collaboration agreement which resulted in a payment to the Company from Lilly of $1.8 million in July 2005.



For the nine-month period ended September 30, 2005, all of the Companys contract manufacturing revenues of $1.9 million are from Archemix
Corporation.



8



---

##### Table of Contents

|Note 9: | Allergan, Inc. Strategic Alliance Agreement
|------- | -------------------------------------------



On September 28, 2005, the Company entered into a Strategic Alliance Agreement with Allergan, Inc. and affiliated entities (collectively,
Allergan). The agreement provides for a multi-year alliance with Allergan to develop Sirna-027, a RNAi-based therapeutic currently in Phase 1 for age-related macular degeneration (AMD), and to discover and develop other RNAi-based
therapeutics against select gene targets in ophthalmic diseases. Pursuant to the agreement, Allergan will pay for all costs related to the continued development of Sirna-027 and, in October, the Company received a $5.0 million upfront license
payment from Allergan. For the period ended September 30, 2005, the $5.0 million payment was classified as deferred revenue and will be recognized over the research period, which is currently the next three years. In addition, the Company will
receive contract manufacturing revenues and research funding, and will be potentially eligible for royalties on the worldwide sales of products resulting from the alliance and development milestones of up to $245 million.



9



---

##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------



The following Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as
information contained elsewhere in this report, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private
Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current events.
Forward-looking statements use words such as anticipate, estimate, expect, will, may, intend, plan, believe and similar expressions in connection with
discussion of future operating or financial performance. The forward-looking statements include statements relating to future actions, prospective products and product approvals, future performance or results of current and anticipated products,
sales efforts, expenses and financial results. Forward-looking statements are not guarantees of future performance and they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Actual results may differ
materially from those projected in the forward-looking statements as a result of various factors, including, without limitation, those listed under Risk Factors in this Quarterly Report on Form 10-Q and under Item 1. Business-Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2004. Except to fulfill our obligations under the federal securities laws, we undertake no obligation to update forward-looking statements to reflect events or
circumstances after the date on which it is made.



We begin
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with the Companys business overview to give you an understanding of the technology of our business and the direction in which our business
and our product candidates are moving. This is followed by a discussion of the Critical Accounting Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss
our Results of Operations for the three and nine-months ended September 30, 2005 compared to the same period in 2004, separated by our functions. We then provide an analysis of changes in our balance sheet and cash flows, and discuss our
financial commitments in the section entitled Liquidity and Capital Resources.



Business Overview



RNA Interference



RNA interference (RNAi) is a natural, selective process
for turning off genes. RNAi is triggered by short interfering RNA (siRNA) molecules that engage a group of cellular proteins, known as RISC (RNA induced silencing complex). The RISC guides the siRNA to its target messenger RNA (mRNA, the messenger
between DNA and proteins) by complementary base pairing for the targeted break-up of the mRNA thus halting protein expression or viral replication. The RISC-siRNA-complex binds and cleaves multiple mRNA molecules in a catalytic fashion.



Harnessing the natural phenomenon of RNAi through the targeted delivery of
synthetic siRNAs holds potential for a new and important future class of drugs. Although there is widespread use of RNAi-based reagents for target validation in drug discovery, the development of RNAi-based pharmaceuticals for therapeutic uses to
treat disease is currently in an early stage of development.



10



---

##### Table of Contents

Product Candidate Programs



We are seeking to develop new drugs using siRNAs that address significant and unmet medical needs. We are continuing our
progress from an early-stage research company to a development company and are focusing our efforts around core programs. These programs, which are our most advanced, are in the following areas:



| |  |  | Age-related Macular Degeneration.Our first program to advance into the clinic targets age-related macular degeneration (AMD), a degenerative eye disease that is the leading
cause of blindness in the elderly in the United States. In November 2004, we initiated Phase 1 testing of Sirna-027, a chemically modified siRNA targeting Vascular Endothelial Growth Factor Receptor-1 (VEGFR-1), which is a key component of the
clinically validated vascular endothelial growth factor (VEGF) pathway. In May 2005, we reported interim data from the Phase 1 clinical trial with Sirna-027. In September 2005, we entered into a Strategic Alliance Agreement with Allergan. Pursuant
to the agreement, Allergan will assume all responsibility, including financial, for advancing Sirna-027 into Phase 2 clinical trials. Subject to the collaboration, we expect Sirna-027 to advance into Phase 2 clinical trials in 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hepatitis C.Hepatitis C is a liver disease caused by the hepatitis C virus (HCV) and, when chronic, may ultimately cause cirrhosis or liver cancer. In the US, an estimated
3.9 million (1.8%) have been infected with HCV, of whom 2.7 million are chronically infected. In 2003, in the US alone, 30,000 new cases of HCV were diagnosed. Current combination therapies can get rid of the virus in only 50% of
patients treated. We are in the preclinical stages of development of siRNAs that target the viral RNA to treat the hepatitis C infection. We plan to begin Phase 1 clinical trials for a product candidate targeting HCV before the end of 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dermatology (Hair Removal).In December 2004, we launched a dermatology division following the acquisition of Skinetics Biosciences, Inc. (Skinetics). Our first dermatology
program is focused on the permanent removal of unwanted hair. Skinetics founder, and a leader in the field of hair biology, Dr. Angela Christiano of Columbia University, is an exclusive consultant to Sirna. We are in the preclinical stages of
developing siRNA targeting the hairless protein. We plan to file an investigational new drug (IND) with the FDA by the end of 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We plan to advance our earlier stage programs - Huntingtons disease, asthma, oncology and diabetes - with a combination of internal and external
support. In Huntingtons disease, in January 2005 we entered into a collaboration with Targeted Genetics Corporation for the development of adeno-associated viral (AAV) vector delivery of siRNAs that target the expression of Huntingtons
protein. We are also collaborating with Dr. Beverly Davidson at the University of Iowa, who has published data in this area. In asthma, we are in the preclinical stages of developing a drug candidate to treat asthma via local delivery and are
working with Dr. Erwin Gelfand of the National Jewish Medical & Research Center to test siRNAs that target inflammation and bronchconstriction in the airways.



Collaborations



Allergan In September 2005, we entered into a Strategic Alliance Agreement with Allergan. The agreement provides for a multi-year alliance
with Allergan to develop Sirna-027, a RNAi-based therapeutic currently in Phase 1 for AMD, and to discover and develop other RNAi-based therapeutics against select gene targets in ophthalmic diseases. Pursuant to the agreement, Allergan will pay for
all costs related to the continued development of Sirna-027 and, in October, we received an upfront license fee of $5 million. In addition, the Company will receive contract manufacturing revenues and research funding, and will be potentially
eligible for royalties on the worldwide sales of products resulting from the alliance and development milestones of up to $245 million.



11



---

##### Table of Contents

ProtivaIn February 2005, we entered into a Strategic Alliance Agreement with Protiva
Biotherapeutics Inc. (Protiva) for delivery technology applicable to RNAi products. The alliance expands our delivery capability with respect to a number of targets and provides Protiva with access to our RNAi technology against a limited number of
other non-proprietary targets.



Targeted Genetics
In January 2005, we entered into a collaboration with Targeted Genetics Corporation to develop siRNAs targeting Huntingtons disease gene using an adeno-associated virus (AAV) vector. Under the terms of the collaboration, Sirna and Targeted
Genetics will share the costs and revenues associated with research and development of AAV-based siRNA product for the treatment of Huntingtons disease.



Eli LillyIn January 2004, we initiated a collaboration with Eli Lilly and Company (Lilly) to apply our RNAi technology against
Lillys proprietary models in oncology. Under the terms of the eighteen-month collaboration, Lilly provided oncology targets, preclinical in vivo models and research funding. We provided the RNAi expertise and a non-exclusive research
license for our oncology technologies during the term of the collaboration. The goal was to establish a proof of concept that could lead to the development of novel RNAi therapies for oncology. We achieved the proof of concept milestone set forth
under the collaboration agreement which resulted in a payment to us from Lilly of $1.8 million in July 2005.



Contract Process Development and Pilot Manufacturing



ArchemixIn addition to our work with RNAi, we also have developed extensive expertise in nucleic acid technologies. We are leveraging our nucleic acid expertise through licensing, process
development and pilot manufacturing opportunities. In July 2004, we entered into an exclusive four-year process development and manufacturing alliance with Archemix Corporation (Archemix), a privately held company. Pursuant to the agreement, we
would manufacture all of Archemixs aptamers through Phase 2a clinical development. For the nine months ended September 30, 2005, we had revenues of $1.9 million related to the Archemix alliance.



Intellectual Property



Obtaining patent protection as well as protecting patents and other proprietary rights is crucial to developing our
business. In addition to patents, we rely upon trade secrets, know-how and continuing technological innovations. As part of our overall intellectual property strategy, we selectively enter into agreements with third parties, such as academic
institutions, either to license pre-existing technology or to support the development of new technologies. For example, in 2003 we entered into a worldwide licensing agreement with the University of Massachusetts (UMASS) Medical School for its
undivided interest in intellectual property relating to the seminal RNA interference technology covering siRNA (the Tuschl 1 Patent) for uses relating to human and veterinary therapeutic, prophylactic, diagnostic and health care
applications. This pending Tuschl 1 Patent broadly covers siRNAs, including those with blunt ends and ends with 3-overhangs. In 2003, we obtained a non-exclusive license to the early RNAi patents filed jointly by Carnegie Institution of
Washington and UMASS (Carnegie Patent). The Carnegie Patent is based on the work of Drs. Andrew Fire and Craig Mello governing genetic inhibition of genes by double-stranded RNA via RNAi. In June 2004, we entered into a worldwide exclusive license
agreement with the University of Iowa Research Foundation for intellectual property relating to RNAi technology covering siRNA for targeting neurological disease indications, including Huntingtons disease and Alzheimers Disease. In
December 2004, we entered into a worldwide exclusive license agreement with Columbia University for intellectual property relating to genes involved in the hair growth pathway. This license includes rights to siRNAs targeting the
hairless gene that can be used to inhibit hair growth. This intellectual property is



12



---

##### Table of Contents

based on pioneering work of Dr. Angela Christiano at Columbia University on identifying genes involved in promotion and inhibition of hair growth.



It is our policy to file patent applications when appropriate
to protect technology, inventions and improvements that are considered important in the development of our business. We seek patent protection in the United States as well as in several key foreign countries. The following table summarizes the
Companys current intellectual property estate (excluding ribozyme technology):



|                                                                                                                             |  |                          |  |                                      
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ |  | -------------------------------------
|Sirna Controlled and Licensed Intellectual Property                                                                          |  | Patent Filings           |  | Status                               
|Seminal RNAi or siRNA Technology and Targets:                                                                                |  |                          |  |                                      
|                                                                                                                             |  |                         
|Tuschl et al. PatentWorldwide Exclusive License from UMass Medical School                                                    |  | 2 patent applications    |  | Pending                              
|                                                                                                                             |  |                         
|Fire et al. PatentWorldwide Nonexclusive License Carnegie Institution                                                        |  | 3 patent applications    |  | 1 Issued                             
|                                                                                                                             |  |                         
|Sirna  No-ribo siNA Technology                                                                                            |  | 10 patent applications   |  | 2 granted (UK)                       
|                                                                                                                             |  |                         
|Sirna - Multifunctional siRNA Technology                                                                                     |  | 5 patent applications    |  | Pending                              
|                                                                                                                             |  |                         
|Sirna - RNAi Gene Targets (including those covering targets in the VEGF, IL-4, IL-13, Hairless, PTP-1B, HCV and HD pathways) |  | >135 patent applications |  | 5 granted (UK), 1 granted (Australia)
|                                                                                                                             |  |                         
|Sirna - Oligonucleotide Chemistry & Delivery Technology                                                                      |  | >70 patent applications  |  | 23 Issued                            
|                                                                                                                             |  |                         
|Sirna - Oligonucleotide Manufacturing & Process Technology                                                                   |  | >25 patent applications  |  | 16 Issued                            
|Summary of Intellectual Property Estate:                                                                                     |  | >250 Patent Applications |  | 48 Issued                            



We believe our
intellectual property holdings adequately enable the Company to pursue its business plans. We cannot however guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us or that such patents, if
issued, will have scope sufficient to prevent competing products. We have been issued several broad patents on our RNAi technology in the United Kingdom and we expect these patents to issue in other European countries, the United States, Japan, and
Canada. However, we cannot guarantee that such patents will issue outside the United Kingdom or that the claims of such patents will have the scope commensurate with those issued in the United Kingdom or Australia. In addition, the scope of our
present or future patents may not be sufficiently broad to prevent competitive products. The Company, to the best of its ability, will defend its intellectual property estate from infringement. There is however inherent uncertainty in administrative
proceedings and litigation relating to our patents that could cause us to incur substantial costs and delays in obtaining and enforcing our patents and other proprietary rights. The ultimate result of any patent litigation could be the loss of some
or all protection for the patent involved. We may also decide to oppose or challenge third party patents. When prudent and for appropriate consideration, the Company is willing to out license its intellectual property. The manufacture, use or sale
of our products may infringe on the patent rights of others. We may not have identified all United States and foreign patents and patent applications that pose a risk of infringement. We may be forced to in-license or litigate if an intellectual
property dispute arises.



The Drug Discovery and Development Process



The new drug discovery and development process is
generally considered a long (5 to 7 years or greater) and expensive (greater than $100 million) undertaking, which is subject to many uncertainties and substantial regulatory oversight. These generalized timelines and costs are estimates and as such
involve



13



---

##### Table of Contents

known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from
estimates. Research and development project costs, among others, include costs of salaries, benefits, clinical trial site costs, outside services, materials and supplies incurred to support the clinical programs. Indirect costs allocated to projects
include facility and occupancy costs, license and royalty payments. The primary phases of new drug discovery and development include:



| |  |  | Preclinical research  Preclinical research includes development from conception to small scale manufacturing of the drug to completion of the animal toxicity and
pharmacokinetic studies necessary to file an IND application.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase 1 clinical trials Phase 1 clinical trials are generally conducted with small groups of patients or healthy volunteers to determine the drugs safety profile
and its blood concentration profile over time.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase 2 clinical trials  Phase 2 clinical trials are generally expanded safety, optimal dosing and efficacy studies in small groups of patients afflicted with the
targeted disease.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase 3 clinical trials Phase 3 clinical trials are large-scale, multi-center, comparative trials with patients afflicted with the targeted disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA prior to commercialization of the drug.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The most significant costs associated with clinical development are the Phase 3 trials, as they tend to be the longest and largest studies conducted
during the drug development process. The FDA closely monitors the progress of each phase of clinical testing. The FDA may, at its discretion, re-evaluate, alter, suspend or terminate testing based upon the data accumulated to that point and the
FDAs assessment of the risk/benefit ratio to patients. If Phase 3 trials are successful, the final step in a drug approval timeline is submission of a New Drug Application (NDA) with the FDA. The NDA process may last several years.



Development stage companies, like Sirna Therapeutics, often seek
collaborations and/or partnerships with large, established pharmaceutical companies to assist in the cost and complexities of developing and marketing new drugs.



Critical Accounting Policies and Estimates



The methods, estimates and judgments we use in applying our accounting policies may have an impact on the results we report in our financial
statements, which we discuss under the heading Results of Operations following this section of our MD&A. Some of our accounting policies require us to make subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain.



Revenue Recognition



Revenues recorded from our collaborative agreements may consist of
research revenue, contract manufacturing revenue, milestone revenue and license or royalty revenue. We generally recognize revenue when we have satisfied all contractual obligations and we are reasonably assured of collecting the resulting
receivable. Given the nature of our business and the infrastructure that we need to support, we often enter into collaborations where we receive nonrefundable up-front payments for prior or future expenditures. In compliance with current accounting
rules, we recognize revenue related to up-front payments over the period of the contractual arrangements as we satisfy our performance obligations. Occasionally, we are required to estimate the period of a contractual arrangement or our performance
obligation when the information is not clearly defined in the agreements we enter into. Should different estimates prevail, revenue recognized could be different. As of September 30, 2005, we evaluated our estimates for the periods of
contractual arrangements and determined that our estimates are appropriate.



14



---

##### Table of Contents

Patent Expenses



Due to the early stage of development of RNAi technology, we expense all legal costs directly incurred in connection with patent applications or patents
until we determine that the estimated recoverability of such costs is sufficiently probable, at which time such costs are capitalized. If capitalized, such deferred patent costs are then amortized over the estimated economic life of the patent on a
straight-line basis. We review all capitalized patent costs on a quarterly basis and, if we decide to abandon a patent or a patent application or determine that an issued patent or a patent application no longer has significant economic value, the
unamortized balance in deferred patent costs related to that patent or patent application is immediately expensed.



Results of Operations



Three and Nine Months Ended September 30, 2005 and 2004



Revenues



The following
table sets forth information on revenues earned from our collaborations and manufacturing for the periods indicated (in thousands):



|                                |  |                                  |       |                                 |      |   |      |  |      |       |  |   |    
|------------------------------- |  | -------------------------------- | ----- | ------------------------------- | ---- | - | ---- |  | ---- | ----- |  | - | ---
|                                |  | Three months ended September 30, |       | Nine months ended September 30,
|                                |  | 2005                             |       |                                 | 2004 |   | 2005 |  | 2004
|Revenues                        |  |                                  |       |                                 |      |   |      |  |      |       |  |   |    
|Contract revenues               |  |                                  |       |                                 |      |   |      |  |      |       |  |   |    
|Eli Lilly                       |  | $                                | 1,814 |                                 |      | $ | 42   |  | $    | 1,897 |  | $ | 112
|Other                           |  |                                  | 39    |                                 |      |   | 26   |  |      | 50    |  |   | 29 
|                                |  |                                  |       |                                 |      |   |      |  |      |       |  |   |    
|Total contract revenues         |  |                                  | 1,853 |                                 |      |   | 68   |  |      | 1,947 |  |   | 141
|Contract revenuesmanufacturing |  |                                  |       |                                 |      |   |      |  |      |       |  |   |    
|Archemix                        |  |                                  | (2    | )                               |      |   | 16   |  |      | 1,940 |  |   | 714
|                                |  |                                  |       |                                 |      |   |      |  |      |       |  |   |    
|Total Revenues                  |  | $                                | 1,851 |                                 |      | $ | 84   |  | $    | 3,887 |  | $ | 855
|                                |  |                                  |       |                                 |      |   |      |  |      |       |  |   |    



Our revenues for the
three months ended September 30, 2005 were $1.9 million, an increase of $1.8 million compared to the same period in 2004. In addition, our revenues for the nine-months ended September 30, 2005 were $3.9 million, an increase of $3.0 million
over the same period in 2004. The increase for the three-month period is a result of a milestone payment we received from Lilly related to our eighteen-month collaboration to jointly investigate our proprietary modified siRNAs against specific
oncology targets provided by Lilly. Upon the completion of activities and achievement of milestones set forth in the research plan under the Lilly contract, a milestone payment of $1.8 million was paid to us in July 2005. Our year to date increase
in revenues is a result of our payment received from Lilly, as well as our increased production of aptamers and process development work related to our manufacturing agreement with Archemix.



In September, 2005, we entered into an agreement with Allergan to develop
Sirna-027 and other RNAi-based therapeutics for ophthalmic diseases. Subsequently, in October, we received a $5.0 million upfront license payment from Allergan that we have classified as deferred revenue. We plan to recognize the $5.0 million over
the research period, which is currently the next three years. We are actively pursuing additional partnerships and collaborations to fund and advance our research and development programs.



15



---

##### Table of Contents

Expenses



Research and Development



The following table sets forth information on research and development expenses for the periods indicated (in thousands):



|                         |  |                                  |       |                                 |   |       |  |      |        |  |   |       
|------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                         |  | Three months ended September 30, |       | Nine months ended September 30,
|                         |  | 2005                             |       | 2004                            |   | 2005  |  | 2004
|Research and development |  |                                  |       |                                 |   |       |  |      |        |  |   |       
|Personnel expense        |  | $                                | 1,659 |                                 | $ | 1,941 |  | $    | 5,857  |  | $ | 5,772 
|Chemicals and supplies   |  |                                  | 568   |                                 |   | 526   |  |      | 2,124  |  |   | 1,780 
|License fees             |  |                                  | 50    |                                 |   | 1,270 |  |      | 1,341  |  |   | 1,677 
|Outside services         |  |                                  | 1,233 |                                 |   | 629   |  |      | 3,035  |  |   | 1,721 
|Depreciation             |  |                                  | 295   |                                 |   | 306   |  |      | 887    |  |   | 983   
|Other                    |  |                                  | 813   |                                 |   | 1,429 |  |      | 2,258  |  |   | 3,291 
|                         |  |                                  |       |                                 |   |       |  |      |        |  |   |       
|Total R&D expenses       |  | $                                | 4,618 |                                 | $ | 6,101 |  | $    | 15,502 |  | $ | 15,224
|                         |  |                                  |       |                                 |   |       |  |      |        |  |   |       
|R&D average staffing     |  |                                  | 55    |                                 |   | 61    |  |      | 61     |  |   | 61    
|                         |  |                                  |       |                                 |   |       |  |      |        |  |   |       



Our research and
development expenses for the three and nine months ended September 30, 2005 were $4.6 million and $15.5 million, respectively, a decrease of $1.5 million and an increase of $278,000 compared to the same periods in 2004. The quarterly decrease
is primarily due to a decrease in license fees of $1.2 million because of one time payments we owed University of Massachusetts for the first anniversary of the license agreement and for the filing of our first IND for Sirna-027 in September 2004,
as well as a decrease of $282,000 in personnel expenses due to lower staffing. Our average staffing was reduced in 2005 due to a work force reduction we implemented in May 2005. Year to date, our increase in research and development expense is
primarily due to a $988,000 expense we took in the first quarter of 2005 in connection with our strategic alliance agreement with Protiva for delivery technology applicable to RNAi products. The alliance expands our delivery capability with respect
to a number of targets and provides Protiva with access to our RNAi technology against a limited number of other targets. Pursuant to the alliance agreement, Protiva received 155,763 shares of our common stock, valued at $488,000, and $500,000 in
cash, which was subject to the release from escrow pursuant to the terms of the agreement. In the third quarter $574,000 was transferred back to us because certain conditions of the agreement were not met; however, in the event that the conditions
are met at a future date, the funds are payable to Protiva. Therefore, we have elected not to reverse the expense, but instead record a $574,000 liability, which we believe will be due within the next year. The remainder of the increase, net of the
$1.5 million decrease described above, is due to the scale-up of our research and outside services as we progress in our clinical activities for Sirna-027, our RNAi drug candidate targeting AMD.



16



---

##### Table of Contents

General and Administrative.



The following table sets forth information on general and administrative expenses for the periods indicated (in thousands):



|                                |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|------------------------------- |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                |  | Three months ended September 30, |       | Nine months ended September 30,
|                                |  | 2005                             |       | 2004                            |   | 2005  |  | 2004
|General and administrative      |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|Personnel costs                 |  | $                                | 556   |                                 | $ | 569   |  | $    | 2,010 |  | $ | 1,947
|Patent and amortization expense |  |                                  | 535   |                                 |   | 704   |  |      | 1,677 |  |   | 1,653
|Other                           |  |                                  | 591   |                                 |   | 540   |  |      | 1,715 |  |   | 1,454
|                                |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|Total G&A expenses              |  | $                                | 1,682 |                                 | $ | 1,813 |  | $    | 5,402 |  | $ | 5,054
|                                |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|G&A average staffing            |  |                                  | 13    |                                 |   | 13    |  |      | 14    |  |   | 11   
|                                |  |                                  |       |                                 |   |       |  |      |       |  |   |      



General and
administrative expenses for the three and nine months ended September 30, 2005 were $1.7 million and $5.4 million, respectively, a decrease of $131,000 and an increase of $348,000 for the same periods in 2004. The decrease between the quarters
presented is primarily due to lower patent expenses. The increase in the year to date personnel costs, as well as other costs, in 2005 compared to 2004 is primarily due to a higher average number of employees for the first six months of 2005. In May
2005, in an effort to reduce expenses, we executed a restructuring of our programs and a reduction in workforce.



Interest income, expense and other expense



Interest income was $272,000 and $583,000 for the three and nine months ended September 30, 2005, respectively, compared to $126,000 and $346,000 for
the same periods in 2004. The fluctuations are due to changes in average balances in our cash, cash equivalents and securities available-for-sale, as well as an overall increase in the interest rate since last year. There was no interest expense
recorded in the third quarter of 2005 and $26,000 for the nine month period ended September 30, 2005, compared to $75,000 and $259,000 during the same periods in 2004. The reduction in interest expense is a result of paying off a $1.0 million
loan that we carried through a credit institution in February 2004, as well as repayment of our $3.0 million loan from Schering in January 2005.



Liquidity and Capital Resources



We had cash, cash equivalents and securities available-for-sale of $44.7 million at September 30, 2005 compared with $36.1 million at
December 31, 2004. The $8.6 million increase in cash, cash equivalents and securities available-for-sale is primarily the result of $27.7 million net received in equity sales; $3.1 million to pay off our debt obligation; $15.8 million used for
operations; $602,000 used for investments in equipment, leasehold improvements and patents; and $329,000 received in stock related to our investment in Atugen.



Our securities available-for-sale consist of interest bearing, investment-grade securities.



Accounts receivable at September 30, 2005 were $5.1 million compared to
$66,000 at December 31, 2004. Accounts receivable at September 30, 2005 included an up front $5.0 million license fee payable from Allergan related to our strategic alliance agreement which was paid in October.



Total additions for property, plant and equipment for the nine months ended
September 30, 2005 were $412,000. We anticipate future property, plant and equipment needs to be financed either through credit facilities, equity sales or revenues, all of which are yet to be determined.



17



---

##### Table of Contents

Schering AG  In January 2005, we paid off an outstanding convertible loan, including accrued
interest, of $3.1 million from Schering AG.



Liquidity
 We have financed our operations through sales of equity securities in public offerings, private placements of preferred and common stock, funds received under our collaborative agreements and financing under equipment and tenant improvement
loans. In July 2005 and August 2005, we received $13.3 million and $14.7 million, respectively, in two closings of a private placement of shares of our common stock and warrants to purchase our common stock. We anticipate that with the completion of
this private placement, our existing financial resources and expected revenues from collaborations, our cash should be sufficient to meet our anticipated operating and capital requirements into 2007. We will need to raise additional capital through
any or all of the following: public or private financing, merger or acquisition, new collaborative relationships, new credit facilities and/or other sources. If we raise funds by issuing and selling more stock, your ownership in us will be diluted.
We may grant future investors rights superior to those of existing stockholders. In addition, we do not know if additional funding will be available or available on acceptable terms when needed.



We expect to incur substantial additional costs, including costs related to:



| |  |  | our research, drug discovery and development programs;
| | - |  | ------------------------------------------------------



| |  |  | preclinical studies of our product candidates, if developed;
| | - |  | ------------------------------------------------------------



| |  |  | prosecuting and enforcing patent claims;
| | - |  | ----------------------------------------



| |  |  | general administrative and legal fees; and
| | - |  | ------------------------------------------



| |  |  | manufacturing and marketing of our products, if any.
| | - |  | ----------------------------------------------------



Recently Issued Accounting Standards



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,and amends SFAS No. 95,
Statement of Cash Flows. In addition, in March 2005, the SEC issued SAB 107 regarding the SECs interpretation of SFAS No. 123(R). SFAS No. 123(R) and SAB 107 require all share-based payments to employees, including grants
of employee stock options, to be recognized as expense in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



SFAS No. 123(R) must be adopted in 2006. We expect to adopt SFAS No. 123(R) in the first quarter of 2006. SFAS No. 123(R)
permits companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R)
for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are still assessing the appropriate transition method.



18



---

##### Table of Contents

As permitted by SFAS No. 123, we currently account for share-based payments to employees using
the APB No. 25 intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will have an impact on our results of
operations, although it will have no impact on our overall financial position or cash flows. We have not yet determined the method of adoption or the effect of adopting SFAS No.123(R) will have on our results of operations, and also have not
determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.



Risk Factors



Risks Relating to our Business, Industry and Common Stock



We are a biotechnology company in the early stage of development and have only a limited operating history for you to review in evaluating our current business and its prospects.



Our focus is directed towards RNAi technology, which is in an early stage of
pre-clinical and clinical development and will require substantial further testing. There can be no assurance that our technologies will enable us to discover and develop therapeutic products.



All of our product candidates are in early stages of development, have never
generated any sales and require extensive testing before commercialization. Our RNAi-based drugs, which are the focus of our business, may require more than five years to bring to market, and may never reach the market. You must consider, based on
our limited history, our ability to:



| |  |  | obtain the human and financial resources necessary to develop, test, manufacture and market products;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | engage corporate partners to assist in developing, testing, manufacturing and marketing our products;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | satisfy the requirements of clinical trial protocols, including patient enrollment;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | establish and demonstrate the clinical efficacy and safety of our products;
| | - |  | ---------------------------------------------------------------------------



| |  |  | obtain necessary regulatory approvals; and
| | - |  | ------------------------------------------



| |  |  | market our products to achieve acceptance and use by the medical community in general.
| | - |  | --------------------------------------------------------------------------------------



We have a history of losses, expect future losses, have a continuing need to raise additional capital, and cannot assure you that we will
ever become or remain profitable.



We have incurred
significant losses and have had negative cash flows from operations since inception. To date, we have dedicated most of our financial resources to research and development and general and administrative expenses. We have financed our operations
through sales of equity securities in public offerings, private placements of preferred and common stock, funds received under our collaborative agreements and financing under equipment and tenant improvement loans. We anticipate that based on our
existing financial resources and expected revenues from collaborations, our cash should be sufficient to meet our anticipated operating and capital requirements into 2007. We will need to raise additional capital through any or all of the following:
public or private financing, merger or acquisition, new collaborative relationships, new credit facilities and/or other sources. If we raise funds by issuing and selling more stock, your ownership in us will be diluted. We may grant future investors
rights superior to those of existing stockholders. In addition, we do not know if additional funding will be available or available on acceptable terms when needed.



As of September 30, 2005, our accumulated deficit was approximately $271.3 million. We expect that the ability to use
our net operating loss as a tax benefit have been significantly restricted as a result of the change of control associated with the 2003 private placement transaction with the Sprout Group,



19



---

##### Table of Contents

Venrock Associates, Oxford Bioscience Partners IV, TVM V Life Science Ventures GmbH & Co. KG and Granite Global Ventures. Since the date of the
change of control, we have generated approximately $53.7 million of net operating losses that would not be subject to such limitations.



We expect to incur losses for at least the next several years because we plan to spend substantial amounts on research and development of our product
candidates, including preclinical studies and clinical trials.



Because we
must obtain regulatory approval to market our products in the United States and foreign jurisdictions, we cannot predict whether or when we will be permitted to commercialize our products.



The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether regulatory clearance will be obtained for any product we develop. A pharmaceutical product cannot be marketed in the United States until it has completed rigorous preclinical testing and clinical
trials and an extensive regulatory clearance process implemented by the Food and Drug Administration, the FDA. Satisfaction of regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product, and
requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use.



Before commencing clinical trials in human beings, we must submit and receive
approval from the FDA for an investigational new drug, or IND. In addition to the FDA regulations, clinical trials are subject to oversight by institutional review boards at the universities or research institutions where we plan to carry out our
clinical trials. The clinical trials:



| |  |  | must be conducted in conformity with the FDAs good laboratory practice regulations;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | must meet requirements for institutional review board oversight;
| | - |  | ----------------------------------------------------------------



| |  |  | must meet requirements for informed consent;
| | - |  | --------------------------------------------



| |  |  | must meet requirements for good clinical practices;
| | - |  | ---------------------------------------------------



| |  |  | are subject to continuing FDA oversight;
| | - |  | ----------------------------------------



| |  |  | may require large numbers of test subjects; and
| | - |  | -----------------------------------------------



| |  |  | may be suspended by the FDA or us at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds
deficiencies in the IND or the conduct of these trials.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Before receiving FDA clearance to market a product, we must demonstrate that the product is safe and effective on the patient population that would be treated. Data obtained from preclinical and clinical activities are susceptible to
varying interpretations that could delay, limit or prevent regulatory clearances. In addition, delays or rejections may be encountered based upon additional government regulation from future legislation or administrative action or changes in FDA
policy during the period of product development, clinical trials and FDA regulatory review.



Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or
injunction, as well as other regulatory action against our potential products or us. Additionally, we have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval.



If regulatory clearance for a product is granted, this clearance will be
limited to those disease states and conditions for which the product is demonstrated through clinical trials to be safe and efficacious. We cannot ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious
in clinical trials and will meet all the applicable regulatory requirements needed to receive marketing clearance.



20



---

##### Table of Contents

Outside the United States, our ability to market a product is contingent upon receiving a marketing
authorization from the appropriate regulatory authorities. This foreign regulatory approval process includes all of the risks associated with FDA clearance described above.



We may experience negative results, problems or delays in our clinical trials with Sirna-027, or other product candidates, that could
adversely affect our stock price, financial position and our commercial prospects.



We are required to do extensive testing in animal models with our product candidates before we can be approved by the FDA to initiate clinical trials in humans. We cannot be sure that our drugs will be safely
tolerated by humans or be efficacious. Therefore, as our clinical trials progress we will closely monitor results for both safety and efficacy. Results from our early stage clinical trials are based on a limited number of patients and may, upon
review, be revised or negated by authorities or by later stage clinical trials. Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new
drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. We have recently announced positive interim data for Sirna-027;
however, such data may not be indicative of future results. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may encounter
regulatory delays or rejections as a result of many factors, including: changes in regulatory policy during the period of product development; delays in obtaining regulatory approvals to commence a study; lack of efficacy during clinical trials; or
unforeseen safety issues. Problems with our clinical trials may result in a decline in our stock price, failure to raise capital when needed and would harm our business, financial condition and results of operations.



To develop, market or sell RNAi-based drugs, we may need to find partners for
collaboration.



Engaging corporate partners and other
third parties to help develop, manufacture and market our RNAi-based products may be a requirement of a successful business strategy. Generally, if a partner were to terminate its funding of the development of a particular product candidate from our
collaboration, we may not have the right or resources to continue development of that product candidate on our own. Similarly, if we are unable to attract partners for particular product candidates, then we may be unable to develop those candidates.



In addition, there are many aspects of our collaborations that
have been and will continue to be outside of our control, including:



| |  |  | our ability to find and enter into agreements with appropriate collaborators for our RNAi-based product candidates;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the pace of development of our product candidates, including the achievement of performance milestones;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | development by our collaborators of competing technologies or products;
| | - |  | -----------------------------------------------------------------------



| |  |  | exercise by our collaborators of marketing or manufacturing rights; and
| | - |  | -----------------------------------------------------------------------



| |  |  | the loss of our rights to products or the profits from our products if we are unable to fund our share of development costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



We currently lack sales and marketing experience and may need to rely upon
third parties to market our products which will result in a loss of control over the marketing process. These third parties, if engaged, may have significant control over important aspects of the commercialization of our products, including market
identification, marketing methods, pricing, sales force recruitment and management and



21



---

##### Table of Contents

promotional activities. We may be unable to control the actions of these third parties. We may be unable to make or maintain arrangements with third parties
to perform these activities on favorable terms.



Our strategic
alliance with Allergan will seek to advance our AMD treatment into Phase 2 clinical trials. However, there can be no assurances that we will recognize additional revenue under the agreement, that the AMD or other ophthalmic treatment will result in
an FDA-approved drug, or that we will be able to engage other partners.



There is inherent uncertainty in administrative proceedings and litigation relating to our patents that could cause us to incur substantial costs and delays in obtaining and enforcing our patents and other proprietary rights. The
ultimate result of any patent litigation could be the loss of some or all protection for the patent involved or the loss of ability to pursue business opportunities. We may also decide to oppose or challenge third party patents.



We have filed patent applications on various aspects of RNAi technology, a
majority of which have not yet been approved. We cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us or that such patents, if issued, will have scope sufficient to prevent competing
products. In addition, the scope of our present or future patents may not be sufficiently broad to prevent competitive products. We have received issuance of patents covering various aspects of basic RNA and other oligonucleotide technology, and we
have filed patent applications for other technology improvements and modifications that have not yet been approved. We have been issued several broad patents on our RNAi technology in the United Kingdom and we expect these patents to issue in other
European countries, the United States, Japan, and Canada. However, we cannot guarantee that such patents will issue outside the United Kingdom or that the claims of such patents will have the scope commensurate with those issued in the United
Kingdom.



We are involved in a re-examination proceeding
involving one of our patents in the United States that relates to oligonucleotides. Additionally, we have filed documents in opposition to two RNA interference-related European patents granted to potential competitors. Also, we have filed opposition
documents against an RNA interference-related Australian patent granted to a competitor.



Additionally, we cannot be certain that the patents and patent applications that we own or have licensed represent named inventors or assignees who were the first to invent or the first to file patent applications, or
that those persons are proper assignees for these inventions.



The
manufacture, use or sale of our products may infringe on the patent rights of others. We may not have identified all United States and foreign patents and patent applications that pose a risk of infringement. We may be forced to in-license or
litigate if an intellectual property dispute arises.



If
we infringe or are alleged to have infringed another partys patent rights, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming
and unpredictable. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, do not successfully defend an infringement action, or are unable to have infringed patents
declared invalid, we may:



| |  |  | incur substantial monetary damages;
| | - |  | -----------------------------------



| |  |  | encounter significant delays in marketing our products;
| | - |  | -------------------------------------------------------



| |  |  | be unable to conduct or participate in the manufacture, use or sale of products or methods of treatment requiring licenses;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | lose patent protection for our inventions and products; or
| | - |  | ----------------------------------------------------------



| |  |  | find our patents are unenforceable, invalid, or have a reduced scope of protection.
| | - |  | -----------------------------------------------------------------------------------



22



---

##### Table of Contents

In addition, we regularly enter into agreements to license technologies and patent rights. Should we fail
to comply with the terms of those license agreements, including payment of any required maintenance fees or royalties, or should the licensors fail to maintain their licensed interest in the licensed patents, we could lose the rights to those
technologies and patents.



We are aware of a number of issued
patents and patent applications that are owned by third parties and that purport to cover chemically modified oligonucleotides as well as their manufacture and use. We have investigated the breadth and validity of these patents to determine their
impact upon our programs in the field of RNAi. Based on our review of these patents and, in some instances, the advice of outside patent counsel, we believe that our technology does not infringe any valid claims of such patents and that these
patents are not likely to impede the advancement of our programs. There can be no assurance, however, that third parties will not assert infringement claims against our programs with respect to these patents or otherwise, or that any such assertions
will not result in costly litigation or require us to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to us, if at all. Parties making such
claims may be able to obtain injunctive relief that could effectively block our ability to further develop or commercialize our products in the United States and abroad and could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could substantially harm us. Litigation, regardless of outcome, could result in substantial cost to and a diversion of efforts by us.



We have moved our headquarters from Colorado to California, and this move could reduce employee retention and efficiency and could add to
our expenses.



In April 2005, we moved our headquarters
from Boulder, Colorado to San Francisco, California. For potentially up to several years, certain management will be based in the Bay Area, while research, manufacturing, and our other operations continue to be based in Boulder. This could impair
managements ability to supervise employees and operations and could reduce employee retention, morale, or efficiency or impair our focus. While we believe that our move to the Bay Area will facilitate recruiting top talent to Sirna, some of
our employees who may be required to relocate may be unwilling or unable to do so and we could lose talented personnel that are hard to replace. The cost of living in the Bay Area is substantially higher than in Boulder, Colorado, which could make
retention of existing employees and recruiting of new employees more difficult.



It is possible that costs of additional facilities in California will be significantly higher than we estimate. The move could potentially add significantly to our real estate, payroll and other expenses.



Our success depends on attracting and retaining qualified personnel.



We are highly dependant on qualified personnel in highly specialized
technological fields. We also depend on academic collaborators for each of our research and development programs. The loss of any of our key employees or academic collaborators could delay our discovery research program and the development and
commercialization of our product candidates or result in termination of them in their entirety. Our future success also will depend in large part on our continued ability to attract and retain other highly qualified scientific, technical and
management personnel, as well as personnel with expertise in clinical testing, governmental regulation and commercialization. We face competition for personnel from other companies, universities, public and private research institutions, government
entities and other organizations. We also rely on consultants, collaborators and advisors to assist us in formulating and conducting our research. All of our consultants, collaborators and advisors are employed by other employers or are
self-employed and may have commitments to or consulting contracts with other entities that may limit their ability to contribute to our company.



23



---

##### Table of Contents

Disclosure of our trade secrets could reduce our competitiveness.



Because trade secrets and other unpatented proprietary information are
critical to our business, we attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. However, these agreements can be breached and, if they are, there may not be an adequate
remedy available to us. In addition, third parties may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights.



Our competitors may develop and market drugs that are more effective,
safer, easier to use, or less expensive than our product candidates.



The pharmaceutical market is highly competitive. Many pharmaceutical and biotechnology companies have developed or are developing products that will compete with products we are developing. Several significant
competitors are working on, or already marketing drugs, for the same indications as Sirna-027, diabetes, chronic hepatitis, Huntingtons disease, oncology and asthma. It is possible that our competitors will develop and market products that are
more effective, safer, easier to use, or less expensive, than our future products, or will render our products obsolete. It is also possible that our competitors will commercialize competing products before any of our product candidates are approved
and marketed. We expect that competition from pharmaceutical and biotechnology companies, universities and public and private research institutions will increase. Many of these competitors have substantially greater financial, technical, research
and other resources than we do. We may not have the financial resources, technical and research expertise or marketing, distribution or support capabilities to compete successfully.



Our success may depend on third party reimbursement of patients costs for our products that could result in price pressure or
reduced demand for our products.



Our ability to market
products successfully will depend in part on the extent to which various third parties are willing to reimburse patients for the costs of our products and related treatments. These third parties include government authorities, private health
insurers and other organizations, such as health maintenance organizations. Third party payors are increasingly challenging the prices charged for medical products and services. Accordingly, if less costly drugs are available, third party payors may
not authorize or may limit reimbursement for our products, even if our products are safer or more effective than the alternatives. In addition, the trend toward managed healthcare and government insurance programs could result in lower prices and
reduced demand for our products. Cost containment measures instituted by healthcare providers and any general healthcare reform could affect our ability to sell our products and may have a material adverse effect on us. We cannot predict the effect
of future legislation or regulation concerning the healthcare industry and third party coverage and reimbursement on our business.



Our common stock has limited trading volume and a history of volatility, which could impair your investment.



You may be unable to sell securities you purchase from us at the time or
price desired. The market price of our common stock has fluctuated dramatically in recent years. The trading price of our common stock may continue to fluctuate substantially due to:



| |  |  | our ability to raise additional funds
| | - |  | -------------------------------------



| |  |  | clinical trials of products;
| | - |  | ----------------------------



| |  |  | timing or denial by the FDA of clinical trial protocols or marketing applications;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | changes in the status of our corporate collaborative agreements;
| | - |  | ----------------------------------------------------------------



| |  |  | research activities, technological innovations or new products by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------



24



---

##### Table of Contents

| |  |  | developments or disputes concerning patents or proprietary rights;
| | - |  | ------------------------------------------------------------------



| |  |  | quarterly variations in our operating results;
| | - |  | ----------------------------------------------



| |  |  | changes in earnings estimates by market research analysts;
| | - |  | ----------------------------------------------------------



| |  |  | concentrated ownership interest of our Investors;
| | - |  | -------------------------------------------------



| |  |  | purchases or sales of our stock by our executive officers, directors or substantial holders of our common stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | securities class actions or other litigation; and
| | - |  | -------------------------------------------------



| |  |  | changes in government regulations.
| | - |  | ----------------------------------



These fluctuations are not necessarily related to our operating performance. Additionally, future sales of our equity securities may dilute our
shareholders or cause our stock price to fluctuate. As a result, the value of your shares could vary significantly from time to time. The historical trading volume of our common stock has been limited.



A small number of investors can control the company.



As of September 30, 2005, the investors in our April 2003 private
placement collectively own a majority of our issued and our outstanding common stock. Three of seven members of our Board of Directors are affiliated with our three largest investors and serve on the audit committee, nominations and corporate
governance committee, and/or compensation committee. These three investors, if their affiliated directors were to act in concert, could potentially determine the votes of the Board of Directors and the nominations and corporate governance committee,
although they have not indicated any present intent to do so. Also, our certificate of incorporation permits stockholder action to be taken by written consent in addition to by means of an actual meeting. As a result, our investors (if they acted
together) are able to take any action without the need for a stockholders meeting. For example, if our investors were to act in concert, they could decide to take us private, to sell some or all of our assets, or to effect a merger without
holding a stockholders meeting. If the investors were to act in concert, they would have sufficient voting power to effect these types of transactions, although they have not indicated any present intent to do so.



Both our charter documents and Delaware law have anti-takeover provisions that may
discourage transactions involving actual or potential changes of control at premium prices.



Our corporate documents and provisions of Delaware law applicable to us include provisions that discourage change of control transactions. For example,
our charter documents authorize our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval and to set the rights, preferences and other designations of preferred stock, including the voting rights, at its
discretion.



In addition, we are subject to provisions of
Delaware General Corporation Law that may make some business combinations more difficult. As a result, transactions that otherwise could involve a premium over prevailing market prices to holders of our common stock may be discouraged or may be more
difficult for us to effect as compared to companies organized in other jurisdictions.



Our products require materials that may not be readily available or cost effective, which may reduce our competitiveness or reduce our profitability.



The products we are developing are new chemical entities that are not yet available in commercial quantities. Raw materials
necessary for the manufacture of our products may not be available in sufficient quantities or at a reasonable cost in the future. Therefore, our products may not be available at a reasonable cost in the future.



25



---

##### Table of Contents

|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



We are exposed to changes in interest rates primarily from our investments in certain short-term investments. We invest our excess cash in highly liquid
short-term investments that are typically held for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments to manage
exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in
interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



As of the end of the period covered by this report, we have carried out an evaluation, under the supervision and with the participation of our principal
executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the evaluation, our principal executive officer and principal financial officer concluded
as of the end of the period covered by this report that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosure.



There were no changes in our internal control over financial reporting during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to affect, our internal control over
financial reporting.



PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



Not Applicable.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------



Not Applicable.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



Not applicable.



26



---

##### Table of Contents

|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



On August 23, 2005 we held a Special Meeting of Stockholders. Matters voted on and the results of such voting are as follows:



|1. | To approve the issuance and sale to investors, in the second closing of a private placement by Sirna Therapeutics, Inc. pursuant to the Securities Purchase Agreements, of 9,186,686
shares of common stock at $1.60 per share and warrants exercisable for 3,307,210 shares of common stock at $1.92 per share (subject to certain adjustments).
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  |           
|--------------- |  | ----------
|Votes For       |  | 16,045,018
|Votes Against   |  | 705,499   
|Votes Abstained |  | 30,001    



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



Not applicable.



27



---

##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------



| | (a) | Exhibits
| | --- | --------



|     |  |                                                                                                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.1  |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                                                                                                                                                   
|     | 
|3.2  |  | Amended and Restated By-Laws of the Company, including amendment executed on May 6, 2004 (2)                                                                                                                                                                           
|     | 
|4.1  |  | Specimen Stock Certificate (3)                                                                                                                                                                                                                                         
|     | 
|4.2  |  | Rights Agreement, dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, which includes the form of Certificate of Designation of
Series AA Junior Participating Preferred Stock attached as Exhibit A thereto (4)
|     | 
|4.3  |  | Amendment dated February 11, 2003 to Rights Agreement dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American Stock Transfer & Trust Company (5)                                                                                                   
|     | 
|4.4  |  | Common Stock and Warrant Purchase Agreement dated as of February 11, 2003 by and among Ribozyme Pharmaceuticals, Inc. and the Investors named therein (5)                                                                                                              
|     | 
|4.5  |  | Form of First Replacement Warrants (6)                                                                                                                                                                                                                                 
|     | 
|4.6  |  | Form of Five Year Replacement Warrant (6)                                                                                                                                                                                                                              
|     | 
|4.7  |  | Form of Securities Purchase Agreement dated as of July 5, 2005 by and between the Company and certain investors (7)                                                                                                                                                    
|     | 
|4.8  |  | Form of Warrant to purchase Common Stock of the Company (7)                                                                                                                                                                                                            
|     | 
|10.1 |  | Form of Voting Agreement and Irrevocable Proxy dated as of July 1, 2005 by and between the Company and certain stockholders of the Company (7)                                                                                                                         
|     | 
|10.2 |  | Employment Agreement dated as of July 1, 2005 by and between the Company and J. Michael French (8)                                                                                                                                                                     
|     | 
|10.3 |  | Offer Letter to Dennis H. Langer to serve as a Director of the Company, dated August 18, 2005 (8)                                                                                                                                                                      
|     | 
|10.4 |  | Strategic Alliance Agreement dated September 28, 2005 by and between the Company and Allergan, Inc. and affiliated entities (8) (*)                                                                                                                                    
|     | 
|10.5 |  | 2005 Amended Director Compensation Plan of the Company, executed on September 30, 2005 (8)                                                                                                                                                                             
|     | 
|10.6 |  | Indemnification Agreement dated as of August 19, 2005 by and between the Company and Dennis H. Langer (8)                                                                                                                                                              
|     | 
|31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)                                                                                                                                                             
|     | 
|31.2 |  | Certification of Acting Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)                                                                                                                                                      
|     | 
|32.1 |  | Certification of Principal Executive Officer and Acting Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (8)                                                                                                                      

---

|(1) | Incorporated by reference herein to certain exhibits to the Companys Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 22, 2003
(File No. 333-107216).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference herein to certain exhibits to the Companys Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and
Exchange Commission on March 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form SB-2 Registration Statement filed with the Securities and Exchange Commission on
September 5, 1997 (File No. 333-1908-D).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed with the Securities and Exchange Commission on December 5,
2000.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed with the Securities and Exchange Commission on February 14,
2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference herein to certain exhibits to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



---

##### Table of Contents

|(7) | Incorporated by reference herein to certain exhibits to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Filed herewith.
|--- | ---------------



|(*) | Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential
Treatment Application filed with the Commission.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29



---

##### Table of Contents

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 thereunto duly authorized.



|                         |  |  |  |                          |  |                     |  |                                                   
|------------------------ |  |  |  | ------------------------ |  | ------------------- |  | --------------------------------------------------
|                         |  |  |  | SIRNA THERAPEUTICS, INC.
|                         |  |  | 
|Dated: November 14, 2005 |  |  |  | By:                      |  | /s/ Howard W. Robin
|                         |  |  |  |                          |  |                     |  | Howard W. Robin                                   
|                         |  |  |  |                          |  |                     |  | Chief Executive Officer and President             
|                         |  |  |  |                          |  |                     |  | (Principal Executive Officer)                     
|                         |  |  | 
|Dated: November 14, 2005 |  |  |  | By:                      |  | /s/ Patti Ketchner 
|                         |  |  |  |                          |  |                     |  |                                                   
|                         |  |  |  |                          |  |                     |  | Vice President and Corporate Controller           
|                         |  |  |  |                          |  |                     |  | (Acting Principal Financial andAccounting Officer)



30



---

##### Table of Contents



Exhibit Index



|            |  |                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Description                                                                                                                                                                                                                                                    
|            | 
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                                                                                                                                                   
|            | 
|3.2         |  | Amended and Restated By-Laws of the Company, including amendment executed on May 6, 2004 (2)                                                                                                                                                                           
|            | 
|4.1         |  | Specimen Stock Certificate (3)                                                                                                                                                                                                                                         
|            | 
|4.2         |  | Rights Agreement, dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, which includes the form of Certificate of Designation of
Series AA Junior Participating Preferred Stock attached as Exhibit A thereto (4)
|            | 
|4.3         |  | Amendment dated February 11, 2003 to Rights Agreement dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American Stock Transfer & Trust Company (5)                                                                                                   
|            | 
|4.4         |  | Common Stock and Warrant Purchase Agreement dated as of February 11, 2003 by and among Ribozyme Pharmaceuticals, Inc. and the Investors named therein (5)                                                                                                              
|            | 
|4.5         |  | Form of First Replacement Warrants (6)                                                                                                                                                                                                                                 
|            | 
|4.6         |  | Form of Five Year Replacement Warrant (6)                                                                                                                                                                                                                              
|            | 
|4.7         |  | Form of Securities Purchase Agreement dated as of July 5, 2005 by and between the Company and certain investors (7)                                                                                                                                                    
|            | 
|4.8         |  | Form of Warrant to purchase Common Stock of the Company (7)                                                                                                                                                                                                            
|            | 
|10.1        |  | Form of Voting Agreement and Irrevocable Proxy dated as of July 1, 2005 by and between the Company and certain stockholders of the Company (7)                                                                                                                         
|            | 
|10.2        |  | Employment Agreement dated as of July 1, 2005 by and between the Company and J. Michael French (8)                                                                                                                                                                     
|            | 
|10.3        |  | Offer Letter to Dennis H. Langer to serve as a Director of the Company, dated August 18, 2005 (8)                                                                                                                                                                      
|            | 
|10.4        |  | Strategic Alliance Agreement dated September 28, 2005 by and between the Company and Allergan, Inc. and affiliated entities (8) (*)                                                                                                                                    
|            | 
|10.5        |  | 2005 Amended Director Compensation Plan of the Company, executed on September 30, 2005 (8)                                                                                                                                                                             
|            | 
|10.6        |  | Indemnification Agreement dated as of August 19, 2005 by and between the Company and Dennis H. Langer (8)                                                                                                                                                              
|            | 
|31.1        |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)                                                                                                                                                             
|            | 
|31.2        |  | Certification of Acting Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)                                                                                                                                                      
|            | 
|32.1        |  | Certification of Principal Executive Officer and Acting Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (8)                                                                                                                      

---

|(1) | Incorporated by reference herein to certain exhibits to the Companys Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 22, 2003
(File No. 333-107216).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference herein to certain exhibits to the Companys Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and
Exchange Commission on March 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form SB-2 Registration Statement filed with the Securities and Exchange Commission on
September 5, 1997 (File No. 333-1908-D).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed with the Securities and Exchange Commission on December 5,
2000.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed with the Securities and Exchange Commission on February 14,
2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



---

##### Table of Contents

|(6) | Incorporated by reference herein to certain exhibits to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference herein to certain exhibits to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Filed herewith.
|--- | ---------------



|(*) | Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential
Treatment Application filed with the Commission.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32