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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended June 30, 2004



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



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SIRNA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)



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



2950 Wilderness
Place

Boulder, Colorado 80301

(Address of principal executive offices)



Registrants telephone number: (303) 449-6500



N/A

Former name, if changed since last report



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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 12-b-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 August 4, 2004 was 37,621,047.



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SIRNA THERAPEUTICS, INC.

INDEX TO FORM 10-Q



|                               |  |                                                                                                    |  |     
|------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                    |  | PAGE
|PART 1 -
FINANCIAL INFORMATION |  |                                                                                                   
|                               |  |                                                                                                   
|Item 1.                        |  | Financial Statements                                                                               |  |     
|                               |  |                                                                                                   
|                               |  | Condensed Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003                     |  | 3   
|                               |  |                                                                                                   
|                               |  | Condensed Statements of Operations - Three and Six Months Ended June 30, 2004 and 2003 (unaudited) |  | 4   
|                               |  |                                                                                                   
|                               |  | Condensed Statements of Cash Flows - Six Months Ended June 30, 2004 and 2003 (unaudited)           |  | 5   
|                               |  |                                                                                                   
|                               |  | Notes to Condensed Financial Statements (unaudited)                                                |  | 6   
|                               |  |                                                                                                   
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 9   
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 25  
|Item 4.                        |  | Controls and Procedures                                                                            |  | 25  
|                               | 
|PART II -
OTHER INFORMATION    |  |                                                                                                   
|                               |  |                                                                                                   
|Item 1.                        |  | Legal Proceedings                                                                                  |  | 25  
|Item 2.                        |  | Unregistered Sales of Securities and Use of Proceeds                                               |  | 25  
|Item 3.                        |  | Defaults upon Senior Securities                                                                    |  | 26  
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                |  | 26  
|Item 5.                        |  | Other Information                                                                                  |  | 26  
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                   |  | 27  
|                               | 
|SIGNATURES                     |  | 28                                                                                                
|                               | 
|Exhibit Index                  |  | 29                                                                                                



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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS



SIRNA THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(in thousands)



|                                                 |  |              |          |   |                  |   |          |  
|------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                 |  | June 30,2004 |          |   | December 31,2003 |  
|                                                 |  | (unaudited)  |          |   |                  |  
|ASSETS                                           |  |              |          |   |                  |   |          |  
|Current assets                                   |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                        |  | $            | 27,616   |   |                  | $ | 18,793   |  
|Securities available-for-sale                    |  |              | 13,976   |   |                  |   | 17,831   |  
|Accounts receivable                              |  |              | 217      |   |                  |   | 156      |  
|Prepaid expenses and other current assets        |  |              | 542      |   |                  |   | 557      |  
|                                                 |  |              |          |   |                  |   |          |  
|Total current assets                             |  |              | 42,351   |   |                  |   | 37,337   |  
|                                                 |  |             
|Property, plant and equipment, net               |  |              | 3,018    |   |                  |   | 3,402    |  
|                                                 |  |             
|Notes receivable-related parties                 |  |              | 240      |   |                  |   | 355      |  
|Deferred patent costs, net                       |  |              | 747      |   |                  |   | 765      |  
|Other assets                                     |  |              | 835      |   |                  |   | 825      |  
|                                                 |  |              |          |   |                  |   |          |  
|Total assets                                     |  | $            | 47,191   |   |                  | $ | 42,684   |  
|                                                 |  |              |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY             |  |              |          |   |                  |   |          |  
|Current liabilities                              |  |              |          |   |                  |   |          |  
|Accounts payable-trade                           |  | $            | 974      |   |                  | $ | 884      |  
|Accrued expenses                                 |  |              | 2,075    |   |                  |   | 2,376    |  
|Deferred revenue, current portion                |  |              | 167      |   |                  |   | 200      |  
|Current portion of convertible long-term debt    |  |              | 3,024    |   |                  |   | 60       |  
|Current portion of long-term debt                |  |              |         |   |                  |   | 522      |  
|                                                 |  |              |          |   |                  |   |          |  
|Total current liabilities                        |  |              | 6,240    |   |                  |   | 4,042    |  
|                                                 |  |             
|Other long term liabilities                      |  |              | 375      |   |                  |   | 375      |  
|Deferred revenues, long-term                     |  |              | 14       |   |                  |   |         |  
|Long term debt                                   |  |              |         |   |                  |   | 558      |  
|Convertible debt                                 |  |              |         |   |                  |   | 2,935    |  
|                                                 |  |             
|Stockholders equity                             |  |              |          |   |                  |   |          |  
|Common stock                                     |  |              | 376      |   |                  |   | 317      |  
|Additional paid-in capital                       |  |              | 278,718  |   |                  |   | 261,137  |  
|Unrealized loss on securities available-for-sale |  |              | (27      | ) |                  |   | 20       |  
|Accumulated deficit                              |  |              | (236,568 | ) |                  |   | (224,350 | )
|Unearned Compensation                            |  |              | (1,937   | ) |                  |   | (2,350   | )
|                                                 |  |              |          |   |                  |   |          |  
|Total stockholders equity                       |  |              | 40,562   |   |                  |   | 34,774   |  
|                                                 |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity       |  | $            | 47,191   |   |                  | $ | 42,684   |  
|                                                 |  |              |          |   |                  |   |          |  



See notes to condensed financial
statements



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SIRNA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except
share amounts)



|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                            |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|                                            |  | 2004                        |            |   | 2003                      |   |            | 2004 |  |   | 2003       |  
|Revenue                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Contract revenues                           |  | $                           | 450        |   |                           | $ | 2,877      |      |  | $ | 768        |   |  | $ | 3,262      |  
|Contract revenuesjoint venture             |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   | 2          |  
|Contract revenuesrelated parties           |  |                             | 4          |   |                           |   | 105        |      |  |   | 4          |   |  |   | 208        |  
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total revenues                              |  |                             | 454        |   |                           |   | 2,982      |      |  |   | 772        |   |  |   | 3,472      |  
|                                            |  |                             |            |  
|Expenses                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Research and development                    |  |                             | 5,629      |   |                           |   | 4,276      |      |  |   | 10,735     |   |  |   | 8,053      |  
|General and administrative                  |  |                             | 1,147      |   |                           |   | 1,225      |      |  |   | 2,292      |   |  |   | 2,615      |  
|Write-off of patent costs                   |  |                             |           |   |                           |   | 5,344      |      |  |   |           |   |  |   | 5,344      |  
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total expenses                              |  |                             | 6,776      |   |                           |   | 10,845     |      |  |   | 13,027     |   |  |   | 16,012     |  
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating loss                              |  |                             | (6,322     | ) |                           |   | (7,863     | )    |  |   | (12,255    | ) |  |   | (12,540    | )
|                                            |  |                             |            |  
|Other income (expense)                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Interest income, expense and other expense  |  |                             | 41         |   |                           |   | 105        |      |  |   | 36         |   |  |   |           |  
|Equity in loss of unconsolidated affiliate  |  |                             |           |   |                           |   | (77        | )    |  |   |           |   |  |   | (209       | )
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total other income (expense)                |  |                             | 41         |   |                           |   | 28         |      |  |   | 36         |   |  |   | (209       | )
|                                            |  |                             |            |  
|Net loss                                    |  |                             | (6,281     | ) |                           |   | (7,835     | )    |  |   | (12,219    | ) |  |   | (12,749    | )
|                                            |  |                             |            |  
|Accretion of dividends on preferred stock   |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   | 562        |  
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss applicable to common stock         |  | $                           | (6,281     | ) |                           | $ | (7,835     | )    |  | $ | (12,219    | ) |  | $ | (13,311    | )
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss per share (basic and diluted)      |  | $                           | (0.18      | ) |                           | $ | (0.28      | )    |  | $ | (0.36      | ) |  | $ | (0.84      | )
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Shares used in computing net loss per share |  |                             | 35,523,434 |   |                           |   | 28,273,448 |      |  |   | 33,647,086 |   |  |   | 15,895,980 |  
|                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



See notes to condensed financial
statements



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SIRNA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                            |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six months ended June 30, |        
|                                                                            |  | 2004                      |         |   | 2003 |  
|Operating Activities                                                        |  |                           |         |   |      |   |         |  
|Net loss                                                                    |  | $                         | (12,219 | ) |      | $ | (12,749 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                           | 856     |   |      |   | 799     |  
|Deferred patent cost write off                                              |  |                           |        |   |      |   | 5,344   |  
|Patent expense                                                              |  |                           |        |   |      |   | (183    | )
|Equity in loss of unconsolidated affiliate                                  |  |                           |        |   |      |   | 133     |  
|Compensation related to common stock and options                            |  |                           | 495     |   |      |   |        |  
|Compensation for forgiveness of notes receivable-related parties            |  |                           | 115     |   |      |   | 232     |  
|Pay off of financing on manufacturing third party costs                     |  |                           |        |   |      |   | (1,727  | )
|Gain on pay off of financing on manufacturing third party costs             |  |                           |        |   |      |   | (246    | )
|Expense related to issuance of common stock                                 |  |                           |        |   |      |   | 118     |  
|Loss on disposal of equipment                                               |  |                           |        |   |      |   | 42      |  
|Accrued interest included in convertible debt                               |  |                           | 80      |   |      |   | 120     |  
|Changes in operating assets and liabilities:                                |  |                           |         |   |      |   |         |  
|Accounts receivable                                                         |  |                           | (62     | ) |      |   | 105     |  
|Prepaid expenses and other                                                  |  |                           | 15      |   |      |   | (96     | )
|Other assets                                                                |  |                           | (11     | ) |      |   | 293     |  
|Accounts payable                                                            |  |                           | 90      |   |      |   | (567    | )
|Accrued expenses                                                            |  |                           | (300    | ) |      |   | 539     |  
|Deferred revenue                                                            |  |                           | (19     | ) |      |   | (894    | )
|Deferred revenue-related parties                                            |  |                           |        |   |      |   | (200    | )
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                           | (10,960 | ) |      |   | (8,937  | )
|                                                                            |  |                          
|Investing activities                                                        |  |                           |         |   |      |   |         |  
|Additions to property, plant and equipment                                  |  |                           | (292    | ) |      |   | (192    | )
|Additions to deferred patent costs                                          |  |                           | (161    | ) |      |   | (55     | )
|Net proceeds from sale of (investment in) securities available-for-sale     |  |                           | 3,809   |   |      |   | (8,970  | )
|Investment in unconsolidated affiliate                                      |  |                           |        |   |      |   | (133    | )
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                           | 3,356   |   |      |   | (9,350  | )
|                                                                            |  |                          
|Financing activities                                                        |  |                           |         |   |      |   |         |  
|Net proceeds from issuance of common and preferred stock                    |  |                           | 17,558  |   |      |   | 44,996  |  
|Payments under loan facilities                                              |  |                           | (1,161  | ) |      |   | (750    | )
|Borrowings under loan facilities                                            |  |                           |        |   |      |   | 23      |  
|Conversion of debt                                                          |  |                           | 30      |   |      |   | 20      |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                           | 16,427  |   |      |   | 44,289  |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                   |  |                           | 8,823   |   |      |   | 26,002  |  
|Cash and cash equivalents at beginning of period                            |  |                           | 18,793  |   |      |   | 2,065   |  
|                                                                            |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                         | 27,616  |   |      | $ | 28,067  |  
|                                                                            |  |                           |         |   |      |   |         |  



See notes to condensed financial
statements.



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SIRNA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2004

(Unaudited)



Note 1:Basis of Presentation



The accompanying unaudited condensed financial statements have been prepared
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
footnotes required by generally accepted accounting principles 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 six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the financial statements and
footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2003.



Note 2:Special Meeting of Stockholders and Private Placement



On February 11, 2003, the Company entered into a common stock and warrant purchase agreement with the Sprout Group, Venrock Associates, Oxford Bioscience
Partners IV, TVM V Life Science Ventures GmbH & Co. KG and Granite Global Ventures (collectively, the Investors) to sell common stock and warrants for an aggregate amount of approximately $48 million (the Stock Purchase
Agreement). On April 16, 2003, the Company held a Special Meeting of Stockholders at which the terms of the Stock Purchase Agreement with the Investors were approved.



On April 21, 2003, pursuant to the Stock Purchase Agreement, the Company completed the sale of 24,242,425 shares of its
common stock and warrants to purchase 5,015,152 shares of its common stock to the Investors for an aggregate gross consideration of approximately $48 million. The common stock was sold in a private placement at a price per share of $1.98 and the
warrants are exercisable at any time over the five year period measured from the date of issuance at a price per share of $2.52. Expenses related to the sale of common stock and warrants were approximately $3.0 million.



Note 3:Private Placement Financing



On May 4, 2004, pursuant to common stock purchase agreements, the Company
completed the sale of 5,760,000 shares of its common stock to institutional investors for aggregate gross proceeds of approximately $18.7 million. The common stock was sold at a price per share of $3.25. Expenses related to the sale of the common
stock were approximately $1.5 million.



Note 4:Accounting for
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 25, if the exercise prices of the options issued to the Companys
employees and directors equal or exceed the fair value of the underlying stock on the date of grant, no compensation



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expense is recognized. However, the Company will continue to evaluate its approach to accounting for stock options in
light of ongoing industry and regulatory developments, which at this time appear likely to require recognition of compensation expense under the fair value method.



The following is a reconciliation of net loss per weighted average share had the Company adopted the fair value measurement
provisions of SFAS No. 123 (in thousands, except per share amounts).



|                                                                                                                 |  |                                     |        |   |                                   |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | --------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                 |  | For the three months ended June 30, |        |   | For the six months ended June 30, |  
|                                                                                                                 |  | 2004                                |        |   | 2003                              |   |        | 2004 |  |   | 2003    |  
|Net loss as reported                                                                                             |  | $                                   | (6,281 | ) |                                   | $ | (7,835 | )    |  | $ | (12,219 | ) |  | $ | (12,749 | )
|Add: Stock-based employee compensation expense included in reported income                                       |  |                                     | 307    |   |                                   |   | 159    |      |  |   | 413     |   |  |   | 159     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards |  |                                     | (1,126 | ) |                                   |   | (948   | )    |  |   | (2,184  | ) |  |   | (1,659  | )
|                                                                                                                 |  |                                     |        |   |                                   |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                                               |  |                                     | (7,100 | ) |                                   |   | (8,624 | )    |  |   | (13,990 | ) |  |   | (14,249 | )
|                                                                                                                 |  |                                     |        |   |                                   |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss applicable to common stock                                                                    |  | $                                   | (7,100 | ) |                                   | $ | (8,624 | )    |  | $ | (13,990 | ) |  | $ | (14,811 | )
|Pro forma loss per share (basic and diluted)                                                                     |  | $                                   | (0.20  | ) |                                   | $ | (0.31  | )    |  | $ | (0.42   | ) |  | $ | (0.93   | )



In February 2003, the
Company 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. At the time of the grants, the Companys stock option
plan had available 285,000 options; therefore, the February 2003 grants required stockholder approval for the approximately 4.5 million of additional shares granted. At the Special Meeting held on April 16, 2003, the Companys stockholders
approved an amendment to the Companys stock option plan to increase the number of shares reserved for issuance pursuant to the plan by a total of 5,666,667 shares. On the day of the meeting, the Companys stock price closed at $2.70 per
share. Since the price of the stock closed at a higher price on the day of approval (effective grant date) than the exercise price of the options, the Company was required to record unearned compensation of $2.7 million, which is the $0.60
difference in stock price multiplied by the 4.5 million shares that required approval. The compensation is deferred and will be expensed as the options vest. Generally, the options vest monthly over four and five years. Related to the February 2003
grants, the Company recorded compensation expense of $307,000 and $413,000 for the three and six month periods ended June 30, 2004, respectively.



Note 5:Recently Adopted Accounting Standards



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes guidelines on how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003. The
Company adopted SFAS No. 150 on June 1, 2003. The adoption did not have a material impact on our results of operations or financial condition of the Company.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. This interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial



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Statements, addresses consolidation by business enterprises of variable interest entities that possess certain
characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity (VIE), the assets, liabilities, and results of the activities of the variable interest entity must be
included in the consolidated financial statements with those of the business enterprise. The Company does not have any ownership in any variable interest entities as of December 31, 2003. The Company will apply the consolidation requirements of FIN
46 in future periods should an interest in a variable interest entity be acquired.



Note 6:Subsequent Event  Archemix Manufacturing and Process Development Agreement



In July 2004, the Company entered into an exclusive four-year process development, analytical development and manufacturing alliance with Archemix, Corp.,
a privately held company, for all of Archemixs cGMP aptamers through Phase IIa clinical development. As part of this agreement, the Company also granted Archemix a worldwide, perpetual, non-exclusive license to its intellectual property for
the manufacture and commercialization of aptamers. In addition to payments for the manufacture of aptamers, the Company will receive certain downstream consideration for the license granted to Archemix. This agreement follows an October 2003
agreement between the companies that provided for the Company to manufacture cGMP grade of Archemixs anti-thrombin aptamer, ARC183, for preclinical, Phase I and Phase IIa studies.



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|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, 2003. 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 six months ended June 30, 2004 compared to the same periods in 2003, 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 (RNAi) technology generally uses a
double-stranded sequence of nucleic acid, such as RNA, capable of reducing the expression of messenger RNA (mRNA) and viral RNA in a sequence-specific manner. For simplicity, we refer to the double-stranded RNA molecule facilitating this process as
a siRNA (short interfering RNA). The process of reducing the expression of an mRNA or viral RNA using siRNAs is called RNA interference or RNAi. RNA interference is a mechanism used by cells to regulate the expression of genes and replication of
viruses. The RNA interference mechanism induces the destruction of target RNA using naturally occurring cellular protein machinery.



Harnessing the natural phenomenon of RNA interference holds potential for the development of a new class of drugs with specificity toward a wide range of
different diseases that result from undesirable protein production or viral replication. Although there is widespread use of RNA interference-based reagents for target validation, the development of RNA interference-based pharmaceuticals for
therapeutic uses to target disease currently is in an early stage of development.



Since our inception in 1992, we have dedicated ourselves to engineering RNA-based molecules for therapeutic and diagnostic purposes. Our expertise in nucleic acid technology enables us to focus on the development of a
new type of nucleic acid-based therapeutic based on RNA interference. In 2001 we began to study RNAi and in 2003, based on advancements in, and potential of, the field, we directed our research



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and development activities entirely to RNA interference. We are using our expertise to design, stabilize, manufacture and
deliver siRNAs that activate selectively the process of RNA interference. We believe siRNA-based drugs may become important therapeutics in the future. We also continue to act as a manufacturer of oligonucleotides (chains of nucleotides that can be
chemically synthesized; oligonucleotides are a form of nucleic acid) for our use and for use by our collaborators and customers, to generate free cash flow for the purpose of supporting our therapeutic discovery operations.



Product Candidate Programs.We are seeking to develop drugs that
address significant and unmet medical needs. Currently, we are in research and/or preclinical development with product candidates in the following areas:



| |  | Age-Related Macular DegenerationAge-related macular degeneration, or AMD, is caused by the deterioration of the central portion of the retina. This disease is the
leading cause of irreversible vision loss among Americans over the age of 55. The wet form of AMD accounts for 10 to 15% of all AMD cases but is associated with severe vision loss. Approximately 1.2 million people in the United States
have wet AMD with 200,000 new cases per year that require treatment. Wet AMD results from a proliferation of abnormal blood vessels beneath the retina called neovascularization. We are in preclinical development of siRNAs that treat macular
degeneration. We recently selected Sirna-027 as our lead candidate to target the VEGF pathway to treat AMD and expect to file an Investigational New Drug (IND) application with the FDA before the end of 2004 to initiate Phase I clinical trials. To
date, we have demonstrated that we can inhibit the formation of new blood vessels in cell culture and several animal model systems of ocular neovascularization using our stabilized siRNAs targeting genes in the VEGF pathway.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Hepatitis C Virus, or HCV, InfectionThere are approximately 3.9 million individuals infected with hepatitis C in the United States and over 170 million worldwide. Of
the 3.9 million infected individuals in the United States, 70% have chronic hepatitis C and are potential candidates for treatment. Each year in the United States, chronic hepatitis C infection leads to between 8,000 to 10,000 deaths. We are in the
lead identification stage of preclinical development of siRNAs that target the HCV viral RNA to treat HCV infection and expect to select a clinical candidate by the end of 2004.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | OncologyIn January 2004, we announced a collaboration with Eli Lilly & Company (Lilly) to jointly investigate our proprietary modified siRNAs against specific
oncology targets provided by Lilly. During the eighteen month collaboration, Lilly will provide oncology targets, preclinical in vivo models and research funding, and in turn, we will provide the chemistry and pharmacology expertise. In
addition, Lilly received a non-exclusive research license to our technologies for oncology. The goal of the collaboration is to establish a proof of concept that could lead to the development of novel RNA interference therapeutics for oncology. We
are also exploring additional partnership opportunities with other companies in the field of oncology.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are also evaluating other disease targets and indications, such as Huntingtons Disease, for the development of RNA interference-based
therapeutics.



Intellectual Property.We have been
working with RNA-based molecules for a number of years; therefore we have accumulated an extensive patent portfolio. We own, or have exclusive licenses to use, over 180 issued or allowed patents relating to nucleic acid technology. Over 30 of these
issued or allowed patents extend coverage to the RNA interference technology. Additionally, we have filed or licensed over 60 patent applications covering various aspects of the RNA interference technology. In addition, in September 2003, we
announced that we entered into a worldwide license agreement with the University of Massachusetts Medical School (Medical School) for its undivided interest in intellectual property relating to



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RNA interference technology covering siRNA. The license grants us rights to the undivided interest of the Medical School
in the intellectual property for uses relating to human and veterinary therapeutic, prophylactic, diagnostic and health care applications. In June 2004, we announced that we entered into a worldwide exclusive license agreement with the University of
Iowa Research Foundation for intellectual property relating to RNA interference technology covering siRNA for targeting neurological disease indications, including Huntingtons Disease and Alzheimers Disease.



Licensing, Process Development and Pilot Manufacturing.In addition to
our work with RNA interference, we also have developed an extensive expertise in nucleic acid technologies. We intend to leverage our nucleic acid expertise through licensing, process development and pilot manufacturing. To date, we have entered
into process development and pilot manufacturing arrangements with collaborators which have generated revenues. In July 2004, we entered into an exclusive four-year process development and manufacturing alliance with Archemix, a privately held
company. Archemix is currently developing ARC183, an antithrombin aptamer. Pursuant to the agreement, we will manufacture all of Archemixs aptamers through Phase IIa clinical development. In addition, in 2003 we completed a collaboration with
Geron Corporation, a biopharmaceutical company focused on oncology and regenerative medicine. Our first program, which began in 2001, was a process development collaboration with Geron for GRN163, a nucleic acid-based telomerase agonist for cancer.
We successfully completed the program and renewed the agreement to manufacture GMP clinical-grade GRN163 for Gerons Phase I clinical study. Delivery under the agreement was completed in June 2003.



Other Programs.As we have redirected our business to focus on RNA
interference, our ribozyme related partnerships are completed. ANGIOZYME is a ribozyme-based product candidate we were developing in collaboration with Chiron Corporation, or Chiron, to treat solid tumor cancers. We completed analysis of data from a
Phase II colorectal cancer clinical trials in 2003. We are no longer developing ANGIOZYME. We have agreed with Chiron to seek a licensee for the further development of ANGIOZYME; however, it is uncertain whether or not an interested party will be
found, and if so, under terms agreeable to both Chiron and Sirna.



We also were developing HERZYME, a ribozyme-based product candidate, in collaboration with Elan Corporation (Elan) to treat breast and other solid tumor cancers. A Phase I clinical trial was completed during the first quarter of 2003. In
April 2003, we entered into a termination agreement with Elan, under which we retain full rights to HERZYME and Elan transferred its 19.9% interest in our joint venture with Elan, Medizyme Pharmaceuticals, Ltd., to us in exchange for either (a) a
portion of any future net revenues received by us if we enter into a commercialization agreement with a third party for HERZYME or (b) a royalty on our net sales of HERZYME. We do not intend to pursue development of HERZYME.



Critical Accounting Estimates



The methods, estimates and judgments we use in applying our accounting
policies have a significant 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
difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include recognition of revenue, valuation of our patent costs and accounting for our
investments in our unconsolidated affiliates.



Revenue
Recognition.To date, we have committed substantially all our resources to our research and product candidate development programs. We have not generated any revenues from therapeutic product sales, nor do we anticipate generating any
therapeutic product revenues in the foreseeable future. Revenue recorded from our collaborative agreements may consist of: research revenue, contract manufacturing



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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
June 30, 2004, we evaluated our estimates for the periods of contractual arrangements and determined that our estimates are appropriate. We depend upon funding from external financing and corporate collaborations for our research and product
development programs and expect to depend upon this funding for the foreseeable future.



Our revenues are denominated in U.S. dollars. Therefore, we have not been exposed to foreign currency exchange risks and have not engaged in any hedging transactions.



Patent Expenses. Due to the early stage of development of siRNA
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.



In 2003, we changed our business strategy which focused on development of
ribozyme-based therapeutics and diagnostics to developing a new class of nucleic acid-based therapeutics based on RNA interference. As a result of finalizing this change in strategic direction during the quarter ended June 30, 2003, we undertook a
detailed review of our existing patent portfolio. Based on this review, we wrote off $447,000 of patent costs related to patents or patents that we abandoned in the second quarter of 2003. In addition, since we are no longer pursuing the development
of ribozymes internally, we expensed approximately $4.9 million of capitalized patent costs related to the ribozyme technology. This expense is reflected as a separate line item in our statement of operations for the year ended December 31, 2003.



Certain patent costs directly related to our existing RNAi
technology and chemistry technology relating to process development, manufacturing, stabilization and delivery of oligonucleotides continue to remain capitalized and will be amortized over three years, due to the early stage of the RNAi technology.



Accounting for Investments in Unconsolidated
Affiliates. As part of the joint venture with Elan, we licensed HERZYME and Elan licensed its MEDIPAD® and certain liposomal drug delivery technologies to the joint venture, Medizyme. The joint venture was terminated in April 2003. While we own 100% of the outstanding common stock of
Medizyme, during the collaboration, Elan retained significant minority investor rights that were considered participating rights as defined in EITF 96-16, Investors Accounting for an Investee When the Investor Owns a Majority of the
Voting Stock but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. Therefore, we did not consolidate the operations of Medizyme, but instead accounted for the investment in Medizyme under the equity method. As of
June 30, 2003, we had absorbed the entire cost basis in our equity investment through our share of Medizymes net losses.



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Results of Operations



Three and Six Months Ended June 30, 2004 and 2003



Revenues



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



|                          |  |                            |     |                          |   |       |  |      |     |  |   |      
|------------------------- |  | -------------------------- | --- | ------------------------ | - | ----- |  | ---- | --- |  | - | -----
|                          |  | Three months endedJune 30, |     | Six months endedJune 30,
|                          |  | 2004                       |     | 2003                     |   | 2004  |  | 2003
|Revenues                  |  |                            |     |                          |   |       |  |      |     |  |   |      
|Archemix (Manufacturing)  |  | $                          | 409 |                          |   |      |  | $    | 698 |  |   |     
|Geron (Manufacturing)     |  |                            |    |                          |   | 2,723 |  |      |    |  |   | 2,766
|Chiron (ANGIOZYME)        |  |                            |    |                          |   | 150   |  |      |    |  |   | 317  
|atugen (Licensing)        |  |                            | 3   |                          |   | 105   |  |      | 4   |  |   | 208  
|Fujirebio (Diagnostics)   |  |                            |    |                          |   |      |  |      |    |  |   | 169  
|Eli Lilly (RNAi Research) |  |                            | 42  |                          |   |      |  |      | 70  |  |   |     
|Medizyme (HERZYME)        |  |                            |    |                          |   | 1     |  |      |    |  |   | 2    
|Other                     |  |                            |    |                          |   | 3     |  |      |    |  |   | 10   
|                          |  |                            |     |                          |   |       |  |      |     |  |   |      
|Total Revenues            |  | $                          | 454 |                          | $ | 2,982 |  | $    | 772 |  | $ | 3,472
|                          |  |                            |     |                          |   |       |  |      |     |  |   |      



Generally, revenue
fluctuations result from changes in the number of funded research projects as well as the timing and completion of contractual milestones. Our revenues are split into three categories: (i) Contract revenues, (ii) Contract revenues-joint venture, and
(iii) Contract revenues-related parties. Contract revenues primarily include revenues recorded from Archemix, Geron, Eli Lilly, Chiron, and Fujirebio Diagnostics, Inc. Chiron revenues were related to our collaboration on ANGIOZYME. Contract
revenues-joint venture include revenues from Medizyme, our joint venture we had with Elan for the development of HERZYME. Contract revenues-related parties consist of revenues recorded from atugen AG.



Our revenues for the three and six months ended June 30, 2004 were $454,000
and $772,000, respectively, a decrease of $2.5 million and $2.7 million compared to the same periods in 2003. The decrease is primarily due to the completion of our process development and manufacturing scale-up for Gerons anti-cancer drug,
GRN163 in June 2003. During the second quarter of 2003, we completed our manufacturing contract with Geron, whereby we recognized $2.7 million upon the release of product. In addition, the decrease is also a result of our change in business strategy
in mid 2003 and the subsequent termination of ribozyme related programs and the associated revenues from Chiron, Fujirebio and atugen. As discussed previously, we are not pursuing development of ANGIOZYME and discontinued clinical trials of
ANGIOZYME in 2003. Also, in April 2003, we terminated our joint venture with Elan and are not pursuing development of HERZYME. Offsetting our loss in revenues in the ribozyme programs are revenues related to our Archemix manufacturing collaboration.
Archemix revenues were $409,000 and $698,000 for the three and six months ended June 30, 2004. In addition, during the first quarter of 2004, we entered into an eighteen-month collaboration with Lilly to jointly investigate our proprietary modified
siRNAs against specific oncology targets provided by Lilly. Revenues recognized during the first half of 2004 are from Lillys access to a non-exclusive research license of certain of our technologies in oncology during the eighteen-month
collaboration. We are actively pursuing partnerships and collaborations to fund our research and development programs.



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Expenses



Research and Development



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



|                              |  |                            |       |      |                          |       |      |  |      |        |  |   |      
|----------------------------- |  | -------------------------- | ----- | ---- | ------------------------ | ----- | ---- |  | ---- | ------ |  | - | -----
|                              |  | Three months endedJune 30, |       |      | Six months endedJune 30,
|                              |  | 2004                       |       | 2003 |                          |       | 2004 |  | 2003
|Research and development      |  |                            |       |      |                          |       |      |  |      |        |  |   |      
|Personnel expense             |  | $                          | 1,911 |      | $                        | 1,750 |      |  | $    | 3,831  |  | $ | 3,458
|Chemicals and supplies        |  |                            | 533   |      |                          | 409   |      |  |      | 1,254  |  |   | 766  
|License fees                  |  |                            | 168   |      |                          | 2     |      |  |      | 407    |  |   | 152  
|Outside services              |  |                            | 849   |      |                          | (145  | )    |  |      | 1,092  |  |   | 215  
|Patent expense                |  |                            | 423   |      |                          | 315   |      |  |      | 770    |  |   | 315  
|Depreciation and amortization |  |                            | 429   |      |                          | 374   |      |  |      | 856    |  |   | 800  
|Other                         |  |                            | 1,316 |      |                          | 1,571 |      |  |      | 2,525  |  |   | 2,347
|                              |  |                            |       |      |                          |       |      |  |      |        |  |   |      
|Total R&D expenses            |  | $                          | 5,629 |      | $                        | 4,276 |      |  | $    | 10,735 |  | $ | 8,053
|                              |  |                            |       |      |                          |       |      |  |      |        |  |   |      
|R&D average staffing          |  |                            | 61    |      |                          | 61    |      |  |      | 62     |  |   | 60   



Our research and
development expenses for the three and six months ended June 30, 2004 were $5.6 million and $10.7 million, respectively, an increase of $1.3 million and $2.7 million compared to the same periods in 2003. The increases are primarily due to the scale
up of our research and outside services as we progress in our preclinical activities for Sirna-027, our RNAi drug candidate targeting AMD. Year-to-date 2003 outside service expenses included completing Phase II clinical studies for ANGIOZYME and
outside studies conducted for our preclinical work in our RNAi programs, whereas year-to-date 2004 the expenses were exclusively RNAi related. The credit in outside services during the second quarter of 2003 is attributable to a discount totaling
$247,000 from Avecia, our contract manufacturer of ribozyme products, for early payment on our note payable for manufacturing costs. In addition, patent expense increased due to our increased activity in patent applications related to RNAi
technology. Until we can determine that the estimated recoverability of the patent costs is sufficiently probable, we expense all legal costs directly incurred in connection with patent applications or patents. Personnel expense for the second
quarter of 2004 was $1.9 million, an increase of $161,000 compared to the same period in 2003. While average staffing remained constant in 2004, our personnel expense increased $140,000 primarily due to increased salaries and accrued bonuses which
became effective in January, as well as an increase related to hiring our Senior Vice President of Development in April. In addition, we incurred a net increase of $21,000 in additional accruals for increases in benefits and non-cash stock option
expense. Year-to-date 2004 personnel expenses also include $50,000 in severance payments incurred during the first quarter. We expect research and development expenses to increase as we move forward in our development activities.



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We have incurred the following expenses, net of partner reimbursements, related to our major research and
development projects (in thousands):



|                                |  |                            |       |                          |   |       |  |      |       |  |   |      
|------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                |  | Three months endedJune 30, |       | Six months endedJune 30,
|                                |  | 2004                       |       | 2003                     |   | 2004  |  | 2003
|Project expenses                |  |                            |       |                          |   |       |  |      |       |  |   |      
|RNAi  General                  |  | $                          |      |                          | $ | 2,207 |  | $    |      |  | $ | 3,832
|RNAi  AMD                      |  |                            | 2,431 |                          |   |      |  |      | 3,973 |  |   |     
|RNAi  HCV                      |  |                            | 845   |                          |   |      |  |      | 1,910 |  |   |     
|RNAi  Oncology                 |  |                            | 320   |                          |   |      |  |      | 456   |  |   |     
|RNAi  Development and Delivery |  |                            | 1,002 |                          |   |      |  |      | 1,885 |  |   |     
|Ribozyme projects               |  |                            |      |                          |   | 148   |  |      |      |  |   | 646  
|                                |  |                            |       |                          |   |       |  |      |       |  |   |      
|Total project expenses          |  | $                          | 4,598 |                          | $ | 2,355 |  | $    | 8,224 |  | $ | 4,478
|                                |  |                            |       |                          |   |       |  |      |       |  |   |      



Research and
development project costs 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,
intellectual property-related expenses, including patent prosecution and maintenance, and license and royalty payments. For purposes of project tracking, we capture the level of effort expended on a project through our project management system,
which is based primarily on human resource time allocated to each project, supplemented by an allocation of indirect costs and other specifically identifiable costs, if any. As a result, the costs we allocate to a project are not intended to, and do
not necessarily, reflect the precise actual incremental costs of the project.



Future costs related to the projects are difficult to estimate due to the nature of the technology and the inability to foresee outcomes of key milestones in the clinical development of each drug. However, in the
biotechnology industry, drug timelines generally track certain averages such as the following:



| | Preclinical research may take years depending on the technology. Preclinical research includes development from conception, to small scale manufacturing of the drug, through
completion of animal toxicity and pharmacokinetic studies necessary to file an IND application.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Phase I clinical trialsare 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 I trials may last anywhere from a few months to two years and may cost several million dollars depending on the drug and indication targeted.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Phase II clinical trials are generally expanded safety, optimal dosing and efficacy studies in small groups of patients afflicted with the targeted disease. Phase II trials
can last up to several years and can cost several million dollars more than Phase I due to the larger scope and complexity of the trials. Variances in cost and time between trials may be due to the trial regimen, number of patients and length of
time patients are on trial.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Phase III clinical trialsare 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 Food and Drug Administration, or FDA, prior to commercialization of the drug. A Phase III trial may last anywhere from a year to several years and could cost many millions of dollars.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The most significant costs associated with clinical development are the
Phase III 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 III 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.



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The above timelines and costs are estimates and generalizations and as such involve known and unknown
risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from estimates. In addition, we intend to seek collaborations and corporate partners to assist in the cost and
complexities of developing our drugs. If we are successful in our drug development, we intend to rely on our corporate partners or third parties with established direct sales forces to market, distribute and sell our products. These partners or
third parties 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 promotional activities.



General and Administrative.



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



|                           |  |                            |       |                          |   |       |  |      |       |  |   |      
|-------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                           |  | Three months endedJune 30, |       | Six months endedJune 30,
|                           |  | 2004                       |       | 2003                     |   | 2004  |  | 2003
|General and administrative |  |                            |       |                          |   |       |  |      |       |  |   |      
|Personnel costs            |  | $                          | 719   |                          | $ | 654   |  | $    | 1,378 |  | $ | 1,665
|Other                      |  |                            | 428   |                          |   | 571   |  |      | 914   |  |   | 950  
|                           |  |                            |       |                          |   |       |  |      |       |  |   |      
|Total G&A expenses         |  | $                          | 1,147 |                          | $ | 1,225 |  | $    | 2,292 |  | $ | 2,615
|                           |  |                            |       |                          |   |       |  |      |       |  |   |      
|G&A average staffing       |  |                            | 11    |                          |   | 11    |  |      | 11    |  |   | 11   



General and
administrative expenses for the three and six months ended June 30, 2004 were $1.1 million and $2.3 million, respectively, a decrease of $78,000 and $323,000 for the same periods in 2003. The decrease year-to-date 2004 compared to 2003 is primarily
due to severance paid in the first quarter of 2003 related to a reduction in force that occurred in February of 2003. The increase in personnel costs for the second quarter comparison is primarily due to a non-cash stock option expense we are
required to record (see Note 3). We expect general and administrative costs to approximate the same levels in 2004 as in 2003.



Interest income, expense and other expense.Interest income was $116,000 and $221,000 for the three and six months ended June 30, 2004,
respectively, compared to $190,000 and $211,000 for the same periods in 2003. The fluctuations are due to changes in average balances in our cash, cash equivalents and securities available-for-sale. Interest expense was $75,000 and $184,000 for the
three and six month periods ended June 30, 2004, respectively, compared to $84,000 and $208,000 during the same periods in 2003. 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.



Equity in loss of
unconsolidated affiliate. Equity in loss of unconsolidated affiliate was zero for the three and six months ended June 30, 2004, compared to $77,000 and $209,000 for the same periods in 2003. The losses recognized in 2003 was our share of
Medizymes expenses. The decrease in loss is due to the wind-down and subsequent termination of our joint venture with Elan in April 2003. As of June 30, 2004, all material expenses incurred with Medizyme have been recognized.



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Liquidity and Capital Resources



We had cash, cash equivalents and securities available-for-sale of $41.6 million at June 30, 2004 compared with $36.6
million at December 31, 2003. The $5.0 million increase in cash, cash equivalents and securities available-for-sale is primarily the result of $17.6 million received in net proceeds from equity sales; $11.0 million used for operations, net of
revenues of $772,000; $453,000 used for investments in equipment, leasehold improvements and patents; and $1.2 million paid for debt obligations.



We invest our securities available-for-sale in interest bearing, investment-grade securities.



Accounts receivable at June 30, 2004 were $217,000 compared to $156,000 at
December 31, 2003. Accounts receivable at June 30, 2004 were primarily due from Archemix related to our manufacturing agreement.



Total additions for property, plant and equipment for the six months ended June 30, 2004 were $292,000. In February 2004, we paid off a loan of $1.0
million that we carried through a credit institution. 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.



Schering AG. At June 30, 2004, we had an outstanding convertible loan,
including accrued interest, of $3.06 million from Schering AG. Accrued interest is paid on a quarterly basis. The $3.0 million principal is due in January 2005.



Private Placement. In May 2004, we completed a private placement financing of 5.76 million common shares to institutional investors for proceeds
of approximately $17.2 million, net of $1.5 million in 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, with the consummation of our private placements in April 2003 and May 2004, our existing financial resources and expected revenues from collaborations, our cash should be sufficient to meet our anticipated operating and
capital requirements through 2005. 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.
| | - | ----------------------------------------------------



We will continue to 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.



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Recently Adopted Accounting Standards



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes guidelines on how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or
modified after May 31, 2003. The Company adopted SFAS No. 150 on June 1, 2003. The adoption did not have a material impact on our results of operations or financial condition.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a
business enterprise has a controlling financial interest in a variable interest entity (VIE), the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. We do not have any ownership in any variable interest entities as of December 31, 2003. We will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable
interest entity be acquired.



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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 RNA interference technology, which is in an early stage of development and will require substantial further testing before we can begin any clinical development of RNA-based therapeutic
product candidates. 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 RNA interference-based drugs, which are the focus of our business, will 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 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 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 funded our activities primarily from sales of our stock, revenues we receive under
contract manufacturing of oligonucleotides, research and development agreements, and lines of credit. As of June 30, 2004, our accumulated deficit was approximately $236.6 million. We expect that the ability to use our net operating loss as a tax
benefit will be significantly restricted in the future as a result of the change of control associated with the 2003 private placement transaction with the Sprout Group, Venrock Associates, Oxford Bioscience Partners IV, TVM V Life Science Ventures
GmbH & Co. KG and Granite Global Ventures (collectively, the Investors).



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.



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. We may also decide to oppose or challenge third party patents.



We have filed patent applications on various aspects of RNA interference technology that 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



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prevent competitive products. We have received issuance of some additional patent applications 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 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 patents granted to a potential competitor in Europe.



Additionally, we cannot be certain that the named inventors or assignees of subject matter claimed by our owned or licensed patents or patent applications
were the first to invent or the first to file patent applications or 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 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. 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.
| | - | -----------------------------------------------------------------------------------



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 the
companys programs in the field of RNA interference. Based on our review of these patents and 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 the companys programs. There can be no assurance, however, that third parties will not assert infringement claims against the companys programs with respect to these patents or otherwise, or that any
such assertions will not result in costly litigation or require the company 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 the companys 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 the company. Litigation, regardless of outcome, could result in substantial cost to and a diversion of efforts by the company.



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To develop, market or sell RNA interference-based drugs, we will need to find partners for collaboration.



Engaging corporate partners and other third parties to
help develop, manufacture and market our RNA interference-based products is an element of our strategy. Our partnership with Lilly is focused on developing novel RNA interference therapeutics in oncology. During the eighteen-month collaboration, the
companies will jointly investigate Sirnas proprietary modified small interfering RNAs against Lillys specific oncology targets. There can be no assurances that Lilly will extend the collaboration beyond the eighteen-month period or that
we will be able to engage other partners.



Our other current
partnerships are focused on the development of ribozyme-based drugs (including our partnership with Chiron for our most advanced ribozyme-based drug, ANGIOZYME), which are no longer the focus of our business. Due to our new business strategy, we do
not intend to develop ANGIOZYME independently. We have agreed with Chiron to seek a licensee for the further development of ANGIOZYME; however, it is uncertain whether or not an interested party can be found, and if so, under terms agreeable to both
Chiron and Sirna. Additionally, on April 11, 2003, we announced that we had concluded our collaboration with Elan Corporation with respect to the development of the HERZYME ribozyme product candidate. We will not continue with independent
development of this product candidate, and it is not clear whether we will be successful in finding a development partner for it.



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 RNA interference-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 will likely rely upon
third parties to market our products which will result in a loss of control over the marketing process. Currently, we intend to rely on third parties with established direct sales forces to market, distribute and sell many of our products. These
third parties 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 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.



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



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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.



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.



A small number of investors can control the company.



As of June 30, 2004 the Investors in our April 2003 private placement collectively own approximately 68.2% (after giving effect to the exercise of their
warrants issued in connection with the private placement, but prior to giving effect to exercise of any stock options) of our outstanding common stock. In addition, some of the Investors currently have the right to select four of seven members of
our Board of Directors. In connection with the private placement transaction, our stockholders agreed to amend our certificate of incorporation to permit stockholder action to be taken by written consent in addition to by



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means of an actual meeting. As a result, our Investors (if they acted together) are now 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.



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.



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 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:



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



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



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



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



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



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



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



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



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



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



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



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



These fluctuations are not necessarily related to our operating performance. 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.



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.



The personal liability of our directors is limited.



Our charter documents limit the liability of our directors for breach of their fiduciary duty or duty of care to our
company. The effect is to eliminate liability of directors for monetary damages arising out of negligent or grossly negligent conduct. However, liability of directors under the federal securities laws will not be affected.



Any of our stockholders would be able to institute an action against a
director for monetary damages only if he, she or it can show a breach of the individual directors duty of loyalty, a failure to act in good faith, intentional misconduct, a knowing violation of the law, an improper personal benefit, or an
illegal dividend or stock purchase, and not for such directors negligence or gross negligence in satisfying his duty of care.



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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.



PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



In our
previous filing, we noted that we had filed a complaint in federal court against a privately held company, alleging infringement of certain ribozyme-related patents. We have withdrawn the Complaint (without prejudice) due to pending settlement
negotiations. The dispute does not relate to our primary business, the development of nucleic acid-based therapeutics involving RNA interference.



ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS



On May 4, 2004, pursuant to common stock purchase agreements, we completed the sale of 5,760,000 shares of our common stock to institutional investors for aggregate gross proceeds of approximately $18.7 million. The
common stock was sold at a price per share of $3.25. The sale and issuance of these securities were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance upon Section 4(2) of the Securities Act of 1933, as
amended and/or Rule 506, as promulgated thereunder. The recipients of securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions these sales were made without general solicitation or advertising. Each recipient was an accredited investor. All recipients had adequate access, through their relationship with
Sirna, to information about us. The shares issued were subsequently registered on a Form S-3 registration statement. We received and will receive no proceeds from the resale of these shares by the selling stockholders under the registration
statements.



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ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not applicable.



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



On May 12, 2004 we held our Annual Meeting of Shareholders. Matters voted on and the results of such voting are as follows:



|1. | The election of two directors to serve for the ensuing three years until the expiration of their terms in 2007 or until their successors are duly elected and qualified. The
following persons were elected as our directors and received the number of votes set forth below:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                      |  |            |  |        
|--------------------- |  | ---------- |  | -------
|Director              |  | For        |  | Against
|Dr. Douglas Fambrough |  | 26,911,948 |  | 124,001
|Dr. Bryan Roberts     |  | 26,789,864 |  | 246,085



|2. | To amend and restate the 2001 Stock Option plan providing for an increase in the number of shares reserved for issuance by a total of 750,000 shares, prohibition on discounted
options, and prohibition on repricing.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  |           
|--------------- |  | ----------
|Votes For       |  | 22,533,162
|Votes Against   |  | 437,632   
|Votes Abstained |  | 17,944    



|3. | To ratify the selection of Ernst & Young, LLP as our independent auditors for the year ending December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------------------------



|                |  |           
|--------------- |  | ----------
|Votes For       |  | 26,977,165
|Votes Against   |  | 47,314    
|Votes Abstained |  | 11,469    



ITEM 5. OTHER INFORMATION



Not
applicable.



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



|     |  |                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                      
|     | 
|3.2  |  | Amended and Restated By-Laws of the Company (2)                                                                                           
|     | 
|31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3)                                
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3)                                
|     | 
|32.1 |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3)

---

|(1) | Incorporated by reference 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 to certain exhibits to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2003 (Commission File
No. 000-27914).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed herewith.
|--- | ---------------



| | (b) | Reports on Form 8-K. We filed the following Current Reports on Form 8-K during the quarter ended June 30, 2004:
| | --- | ---------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated April 14, 2004, filed with the Securities and Exchange Commission on April 16, 2004 under Item 5. Other Events and Required FD Disclosure and Item
7. Financial Statements, Pro Forma Financial Information and Exhibits.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated April 30, 2004, filed with the Securities and Exchange Commission on May 3, 2004 under Item 5. Other Events and Required FD Disclosure and Item 7.
Financial Statements, Pro Forma Financial Information and Exhibits.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated May 5, 2004, filed with the Securities and Exchange Commission on May 5, 2004, under Item 5. Other Events and Required FD Disclosure and Item 7.
Financial Statements, Pro Forma Financial Information and Exhibits.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated June 7, 2004, filed with the Securities and Exchange Commission on June 9, 2004, under Item 5. Other Events and Required FD Disclosure and Item 7.
Financial Statements, Pro Forma Financial Information and Exhibits.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                      |  |                          |  |                                        
|--------------------- |  | ------------------------ |  | ---------------------------------------
|                      |  | SIRNA THERAPEUTICS, INC.
|                      |  |                         
|Dated: August 4, 2004 |  | By:                      |  | /s/ Howard W. Robin                    
|                      |  |                          |  | Howard W. Robin                        
|                      |  |                          |  | Chief Executive Officer and President  
|                      |  |                          |  | (Principal Executive Officer)          
|                      |  |                         
|Dated: August 4, 2004 |  | By:                      |  | /s/ Patti Ketchner                     
|                      |  |                          |  | Vice President and Corporate Controller
|                      |  |                          |  | (Acting Principal Financial and        
|                      |  |                          |  | Accounting Officer)                    



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Exhibit Index



|           |  |                                                                                                                                          
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Exhibit Description                                                                                                                      
|3.1        |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                     
|           | 
|3.2        |  | Amended and Restated By-Laws of the Company (2)                                                                                          
|           | 
|31.1       |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(3)                                
|           | 
|31.2       |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(3)                                
|           | 
|32.1       |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3)

---

|(1) | Incorporated by reference 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 to certain exhibits to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2003 (Commission File
No. 000-27914).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed herewith.
|--- | ---------------



29