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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

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FORM 10-Q

|x                                                      |  | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|------------------------------------------------------ |  | ----------------------------------------------------------------------------------
|For the quarterly period ended June 30, 2003          
|                                                      
|or                                                    
|                                                      
|o                                                      |  | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934          
|For the transition period from     to                 
|                                                      
|                                                      
|                                                      
|Commission file number 0-27914                        
|                                                      
|SIRNA THERAPEUTICS, INC.                              
|(Exact name of registrant as specified in its charter)
|                                                      
|                                                      

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

Indicate by check 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 o
|----- | ----

Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act).

|Yes o | No x
|----- | ----

The
number of shares of the registrants common stock, par value $0.01 per share, outstanding as of August 14, 2003 was 28,386,903.

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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, 2003 (unaudited) and December 31, 2002                     | 3   
|                               |                                                                                                    |     
|                               | Condensed Statements of Operations - Three and Six Months Ended June 30, 2003 and 2002 (unaudited) | 4   
|                               |                                                                                                    |     
|                               | Condensed Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002 (unaudited)           | 5   
|                               |                                                                                                    |     
|                               | Notes to Condensed Financial Statements (unaudited)                                                | 6   
|                               |                                                                                                    |     
|Item 2.                        | Managements Discussion and Analysis of Financial Condition and Results of Operations              | 11  
|                               |                                                                                                    |     
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                                         | 35  
|Item 4.                        | Controls and Procedures                                                                            | 35  
|                               |                                                                                                    |     
|PART II - OTHER INFORMATION    |                                                                                                   
|                               |                                                                                                   
|Item 1.                        | Legal Proceedings                                                                                  | 35  
|Item 2.                        | Changes in Securities and Use of Proceeds                                                          | 35  
|Item 3.                        | Defaults upon Senior Securities                                                                    | 36  
|Item 4.                        | Submission of Matters to a Vote of Security Holders                                                | 36  
|Item 5.                        | Other Information                                                                                  | 37  
|Item 6.                        | Exhibits and Reports on Form 8-K                                                                   | 38  
|                               |                                                                                                    |     
|SIGNATURES                     | 40                                                                                                
|                               |                                                                                                   
|Exhibit Index                  | 41                                                                                                

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PART I. FINANCIAL INFORMATIONITEM I. FINANCIAL STATEMENTS

SIRNA THERAPEUTICS, INC.CONDENSED BALANCE SHEETS

|                                                     |  | June 30, 2003 |              | December 31, 2002 |  
|---------------------------------------------------- |  | ------------- | ------------ | ----------------- | -
|                                                     |  |               |              |                   |  
|                                                     |  | (unaudited)   |              |                   |  
|ASSETS                                               |  |               |              |                   |  
|Current assets                                       |  |               |              |                   |  
|Cash and cash equivalents                            |  | $             | 28,067,137   |                   | $
|Securities available-for-sale                        |  |               | 15,724,191   |                   |  
|Accounts receivable                                  |  |               | 301,360      |                   |  
|Accounts receivable-joint venture                    |  |               |             |                   |  
|Accounts receivable-related parties                  |  |               | 77,369       |                   |  
|Prepaid expenses and other current assets            |  |               | 834,762      |                   |  
|                                                     |  |               |              |                   |  
|Total current assets                                 |  |               | 45,004,819   |                   |  
|Property, plant and equipment, net                   |  |               | 3,948,372    |                   |  
|Notes receivable-related parties                     |  |               | 477,000      |                   |  
|Deferred patent costs, net                           |  |               | 706,845      |                   |  
|Other assets                                         |  |               | 816,779      |                   |  
|                                                     |  |               |              |                   |  
|Total assets                                         |  | $             | 50,953,815   |                   | $
|                                                     |  |               |              |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |               |              |                   |  
|Current liabilities                                  |  |               |              |                   |  
|Accounts payable-trade                               |  | $             | 376,171      |                   | $
|Accrued expenses                                     |  |               | 2,484,204    |                   |  
|Deferred revenue, current portion                    |  |               |             |                   |  
|Deferred revenue, current portion-related parties    |  |               | 199,920      |                   |  
|Current portion of long-term debt                    |  |               | 567,394      |                   |  
|                                                     |  |               |              |                   |  
|Total current liabilities                            |  |               | 3,627,689    |                   |  
|Other long term liabilities                          |  |               | 375,000      |                   |  
|Long term debt                                       |  |               | 820,605      |                   |  
|Convertible debt                                     |  |               | 2,904,678    |                   |  
|Convertible, exchangeable preferred stock; Series A  |  |               |             |                   |  
|Accreted preferred stock dividend                    |  |               |             |                   |  
|Stockholders equity (deficit)                       |  |               |              |                   |  
|Convertible preferred stock; Series B                |  |               |             |                   |  
|Preferred stock issuable                             |  |               |             |                   |  
|Accreted preferred stock dividend                    |  |               |             |                   |  
|Common stock (Note 2)                                |  |               | 283,371      |                   |  
|Additional paid-in capital (Note 2)                  |  |               | 252,757,747  |                   |  
|Unrealized gain on securities available-for-sale     |  |               | 4,847        |                   |  
|Accumulated deficit                                  |  |               | (207,258,091 | )                 |  
|Unearned Compensation                                |  |               | (2,562,031   | )                 |  
|                                                     |  |               |              |                   |  
|Total stockholders equity (deficit)                 |  |               | 43,225,843   |                   |  
|                                                     |  |               |              |                   |  
|Total liabilities and stockholders equity (deficit) |  | $             | 50,953,815   |                   | $
|                                                     |  |               |              |                   |  

See notes to condensed financial statements

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SIRNA THERAPEUTICS, INC.CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

|                                            |  | Three months ended June 30, |            | Six months ended June 30, |  
|------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | -
|                                            |  |                             |            |                           |  
|                                            |  |                             | 2003       |                           |  
|                                            |  |                             |            |                           |  
|Revenue                                     |  |                             |            |                           |  
|Collaborative agreements                    |  | $                           | 2,877,120  |                           | $
|Collaborative agreements-joint venture      |  |                             |           |                           |  
|Collaborative agreements-related parties    |  |                             | 105,398    |                           |  
|                                            |  |                             |            |                           |  
|Total revenues                              |  |                             | 2,982,518  |                           |  
|Expenses                                    |  |                             |            |                           |  
|Research and development                    |  |                             | 4,276,230  |                           |  
|General and administrative                  |  |                             | 1,225,264  |                           |  
|Deferred patent cost write-off              |  |                             | 5,344,266  |                           |  
|                                            |  |                             |            |                           |  
|Total expenses                              |  |                             | 10,845,760 |                           |  
|                                            |  |                             |            |                           |  
|Operating loss                              |  |                             | (7,863,242 | )                         |  
|Other income (expense)                      |  |                             |            |                           |  
|Interest income                             |  |                             | 190,440    |                           |  
|Interest expense                            |  |                             | (83,633    | )                         |  
|Other income (expense)                      |  |                             | (2,060     | )                         |  
|Equity in loss of unconsolidated affiliate  |  |                             | (76,765    | )                         |  
|                                            |  |                             |            |                           |  
|Total other income (expense)                |  |                             | 27,982     |                           |  
|                                            |  |                             |            |                           |  
|Net loss                                    |  |                             | (7,835,260 | )                         |  
|Accretion of dividends on preferred stock   |  |                             |           |                           |  
|                                            |  |                             |            |                           |  
|Net loss applicable to common stock         |  | $                           | (7,835,260 | )                         | $
|                                            |  |                             |            |                           |  
|Net loss per share (basic and diluted)      |  | $                           | (0.28      | )                         | $
|                                            |  |                             |            |                           |  
|Shares used in computing net loss per share |  |                             | 28,273,448 |                           |  
|                                            |  |                             |            |                           |  

See notes to condensed financial statements

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SIRNA THERAPEUTICS, INC.CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

|                                                                            |  | Six months ended June 30, |            
|--------------------------------------------------------------------------- |  | ------------------------- | -----------
|                                                                            |  |                           |            
|                                                                            |  | 2003                      |            
|                                                                            |  |                           |            
|Operating Activities                                                        |  |                           |            
|Net loss                                                                    |  | $                         | (12,749,013
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |            
|Depreciation and amortization                                               |  |                           | 799,141    
|Deferred patent cost write off                                              |  |                           | 5,344,266  
|Patent expense                                                              |  |                           | (182,988   
|Equity in loss of unconsolidated affiliate                                  |  |                           | 132,683    
|Compensation for forgiveness of notes receivable-related parties            |  |                           | 232,000    
|Pay off of financing on manufacturing third party costs                     |  |                           | (1,726,806 
|Gain on pay off of financing on manufacturing third party costs             |  |                           | (246,686   
|Expense related to issuance of common stock                                 |  |                           | 118,227    
|Loss on disposal of equipment                                               |  |                           | 41,939     
|Cash received on sale of assets                                             |  |                           |           
|Accrued interest included in convertible debt                               |  |                           | 120,000    
|Changes in operating assets and liabilities:                                |  |                           |            
|Accounts receivable                                                         |  |                           | 104,916    
|Prepaid expenses and other                                                  |  |                           | (96,010    
|Other assets                                                                |  |                           | 293,429    
|Accounts payable                                                            |  |                           | (566,920   
|Accrued expenses                                                            |  |                           | 539,169    
|Deferred revenue                                                            |  |                           | (893,752   
|Deferred revenue-related parties                                            |  |                           | (200,080   
|                                                                            |  |                           |            
|Net cash used in operating activities                                       |  |                           | (8,936,485 
|Investing activities                                                        |  |                           |            
|Additions to property, plant and equipment                                  |  |                           | (192,060   
|Additions to deferred patent costs                                          |  |                           | (54,973    
|Net sales (purchases) of securities available-for-sale                      |  |                           | (8,970,468 
|Investment in unconsolidated affiliate                                      |  |                           | (132,683   
|Loan repayments-related parties                                             |  |                           |           
|Loan advances-related parties                                               |  |                           |           
|                                                                            |  |                           |            
|Net cash (used in) provided by investing activities                         |  |                           | (9,350,184 
|Financing activities                                                        |  |                           |            
|Net proceeds from issuance of common and preferred stock                    |  |                           | 44,996,191 
|Payments under loan facilities                                              |  |                           | (749,824   
|Borrowings under loan facilities                                            |  |                           | 22,821     
|Conversion of debt                                                          |  |                           | 19,678     
|                                                                            |  |                           |            
|Net cash provided by financing activities                                   |  |                           | 44,288,866 
|                                                                            |  |                           |            
|Net increase (decrease) in cash and cash equivalents                        |  |                           | 26,002,197 
|Cash and cash equivalents at beginning of period                            |  |                           | 2,064,940  
|                                                                            |  |                           |            
|Cash and cash equivalents at end of period                                  |  | $                         | 28,067,137 
|                                                                            |  |                           |            

See notes to condensed financial statements.

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SIRNA THERAPEUTICS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 2003 (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 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, 2003 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2002.

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 (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 pursuant to which the terms of the Stock Purchase Agreement with the Investors were approved. At the Special Meeting and a subsequent adjournment, the stockholders
approved the following proposals:

| | The terms of the private placement to the Investors;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An amendment to the Companys current amended and restated certificate of incorporation to effect a reverse split of its outstanding common stock of 1-for-6, to increase the number of
authorized shares of capital stock, to change the Companys name from Ribozyme Pharmaceuticals, Inc. to Sirna Therapeutics, Inc. and to permit stockholders to act by written consent in lieu of a meeting;                                                                                                                                                  
| | An amendment to the Companys 1996 Stock Option Plan and to the 2001 Stock Option Plan as a result of which the Company will (a) terminate the 1996 Stock Option Plan and have its
outstanding options covered by the 2001 Stock Option Plan, (b) increase the number of shares reserved for issuance pursuant to our 2001 Stock Option Plan by a total of 5,666,667 shares (after giving effect to the reverse stock split), and (c)
provide a maximum limit on options granted to any individual during any calendar year, of 2 million shares; and
| | An increase in the number of shares reserved for issuance pursuant to the Companys Employee Stock Purchase Plan by a total of 833,333 shares (after giving effect to the reverse stock
split).                                                                                                                                                                                                                                                                                                                                                      

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 consideration of approximately $48 million. The common stock was sold 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.

With
the consummation of the above transactions the Investors own approximately 87.7% (after giving effect to the exercise of the warrants pursuant to the Stock Purchase Agreement, but prior to giving

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effect to exercise of any stock options) of the Companys outstanding capital stock. Further, pursuant to the Stock Purchase Agreement, some of the Investors have the
right to designate four of the Companys seven members of the board of directors.

As a result of the one-for-six reverse stock
split, every six shares of the Companys common stock were replaced with one share of the Companys common stock. All references to common stock, common shares outstanding, average number of common shares outstanding and per share amounts
in these Financial Statements and Notes to Financial Statements prior to the effective date of the reverse stock split have been restated to reflect the one-for-six common stock reverse split on a retroactive basis.

In connection with the execution of the Stock Purchase Agreement, the Company obtained certain waivers and amendments to the Companys agreements with Schering
AG ( Schering) and to the Companys agreements with Elan Corporation ( Elan). In exchange for warrants and the Companys agreement to pay accrued interest on the loan on a quarterly basis, Schering
extended the due date for repayment of the loans from April 2004 to January 2005. Among other things, Elan converted all of the outstanding shares of the Companys Series A and Series B Preferred Stock into shares of the Companys common
stock immediately prior to the closing of the transactions, waived certain pre-emptive rights, and waived its right to nominate a director for election to the Companys board of directors. The Series A Preferred Stock and accreted dividends
have been reclassified to permanent equity-common stock following the conversion to common stock in April 2003.

Note 3:     Medizyme

In January 2000, the Company formed a joint venture with Elan for the development and commercialization of HERZYME , the Companys
product to treat breast and other cancers. As part of this arrangement, the Company licensed HERZYME and Elan licensed its MEDIPAD ®and certain liposomal drug delivery technology to the joint venture, Medizyme Pharmaceuticals, Ltd.
(Medizyme). The MEDIPAD ®system is a disposable continuous subcutaneous drug delivery system that allows a patient to administer the drug at home. The Company filed an Investigational New Drug for HERZYME in Canada in
February 2001, which was approved in April 2001.

While the Company owned 80.1% of the outstanding common stock of Medizyme, Elan
retained significant minority investor rights that are 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, the Company did not consolidate the operations of Medizyme, but instead accounted for the investment in Medizyme under the equity method. As of June 30, 2003 the Company had absorbed
the entire cost basis in its equity investment through its share of Medizymes net losses.

In April 2003, the Company entered into
a termination agreement with Elan, under which the Company retains full rights to HERZYME and Elan transferred its 19.9% interest in Medizyme (held as preferred stock) to the Company in exchange for either (a) a portion of any future net revenues
received by the Company if it enters into a commercialization agreement with a third party for HERZYME; or (b) a royalty on net sales of HERZYME by the Company. As of April 2003, the Company owns 100% of the capital stock of Medizyme and therefore
will consolidate Medizymes losses; however, the Company does not intend to pursue independent development of HERZYME. In addition, in connection with the Stock Purchase Agreement, Elan converted all of the outstanding shares of the
Companys Series A and Series B Preferred Stock held by Elan into 541,929 shares of the Companys common stock.

The unaudited results of operations of Medizyme for the six-month period ended June 30, 2003 and 2002 are as follows (in
thousands):

|                         |   | 2003 |   |   | 2002   |  
|------------------------ | - | ---- | - | - | ------ | -
|                         |   |      |   |   |        |  
|Revenue                  | $ |     |   | $ |       |  
|                         |   |      |   |   |        |  
|Research and development |   | 82   |   |   | 1,267  |  
|License fee              |   |     |   |   | 2,500  |  
|                         |   |      |   |   |        |  
|Net loss                 | $ | (82  | ) | $ | (3,767 | )
|                         |   |      |   |   |        |  



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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 Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. The following is a reconciliation of net loss per weighted average
share had the Companys adopted the fair value measurement provisions of SFAS No. 123.

|                                                                                                                 |  | For the three months ended June 30, |            | For the six months ended June 30, |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ---------- | --------------------------------- | -
|                                                                                                                 |  |                                     |            |                                   |  
|                                                                                                                 |  | 2003                                |            | 2002                              |  
|                                                                                                                 |  |                                     |            |                                   |  
|Net loss as reported                                                                                             |  | $                                   | (7,835,260 | )                                 | $
|Add: Stock-based employee compensation expense included in reported income                                       |  |                                     |           |                                   |  
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards |  |                                     | (948,138   | )                                 |  
|                                                                                                                 |  |                                     |            |                                   |  
|Pro forma net loss                                                                                               |  |                                     | (8,783,398 | )                                 |  
|                                                                                                                 |  |                                     |            |                                   |  
|Pro forma net loss applicable to common stock                                                                    |  | $                                   | (8,783,398 | )                                 | $
|Pro forma loss per share (basic and diluted)                                                                     |  | $                                   | (0.31      | )                                 | $

In February 2003, the Company granted approximately
4.7 million options to employees and consultants at a grant price of $2.10.  Prior to the grant, the Companys stock option plan had available 285,000 options and therefore the February 2003 grant required stockholder approval for the
additional 4.4 million shares granted.  At the special meeting held on April 16, 2003, 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 5,666,666 shares.  On the day of the meeting, the Companys stock price closed at $2.70.  Since the price of the stock closed at a higher price on the day of approval than the grant price of the options, the Company is
required to record unearned compensation of $2.6 million, which is the $0.60 difference in stock price multiplied by the 4.4 million shares that required approval.  The compensation is deferred and will be expensed as the options vest. 
Generally, the options vest monthly over four to five years.  Related to the February 2003 grant, the Company recorded $82,300 of compensation expense during the quarter ended June 30, 2003.

Note 5:     Recently adopted Accounting Standards

In June 2001, the FASB
issued SFAS No. 143, Accounting for Asset Retirement Obligations, which sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset
retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. Subsequently, the recorded liability will be accreted to its present value and the capitalized costs will be depreciated. The Company has adopted SFAS
No. 143, as

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required, in its financial statements beginning in the first quarter of fiscal 2003. Management has evaluated the provisions of SFAS No. 143 and the adoption does not have
a material impact on the Companys financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.  SFAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance in EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF 94-3, an entity recognized a liability for an exit cost on the date that the
entity committed itself to an exit plan. Under SFAS 146, an entitys commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of the provisions of SFAS 146 has not had a material effect on the financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based CompensationTransition and Disclosure. SFAS 148 provides two additional
transition methods for entities that adopt the preferable method (as set forth in SFAS 148) of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether,
when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to the traditional annual disclosure. SFAS 148 is effective for fiscal periods ending after
December 15, 2002. See Note 4 to these Notes to Condensed Financial Statements for the quarterly disclosure requirements under SFAS No. 148.

Note 6:     Deferred
revenue

During the first quarter of 2003, the Company received $1.4 million in non-refundable fees from Geron Corporation
( Geron) that was recorded as deferred revenue and is recognized upon the release of product to Geron, which occurred in June 2003.

Note 7:    
Payment to Contract Manufacturer

In the fourth quarter of 2002 the Company took delivery for $3.6 million of ribozyme drugs
that the Company was contractually obligated to purchase from a contract manufacturer. The terms of payment for the purchase were $1.6 million paid on October 30, 2002; $1.1 million to be paid on or before October 30, 2004; and $873,491 to be paid
on or before June 30, 2005. In June 2003 the Company entered into an agreement with the contract manufacturer, wherein in lieu of the payments of $1.1 million and $873,491 together with the interest payable, the Company paid the contract
manufacturer the sum of $1,726,806 to settle all obligations.

Note 8:     Deferred Patent cost write-off

Due to the early stage of the technology, the Company expenses all patent legal costs directly incurred in connection with patent applications or patents until it can
be determined that the estimated recoverability of the patent costs is sufficiently probable, at which time such patent costs are deferred and capitalized.  If capitalized, such deferred patent costs are then amortized over the estimated
economic life of the patent on a straight-line basis. On a quarterly basis, the Company reviews all capitalized patents costs and if a determination is made to abandon a patent or a patent application, or that an issued patent or a patent
application is deemed to no longer have significant economic value, the unamortized balance in deferred patent costs related to that patent is immediately expensed.

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On April 21, 2003, as previously discussed in Note 2, the Company completed a private placement, which resulted in a
change of control for the company. The Company has also changed its 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 second quarter ended June 30, 2003, the Company undertook a detailed review of its existing patent portfolio. As a result of this review, the Company has written off in the
second quarter $447,000 of patent costs related to patents or patents that the Company abandoned. In addition, since the Company is no longer pursuing the development of ribozymes internally, the Company expensed approximately $4.9 million of
capitalized patent costs related to the ribozyme technology. This expense is reflected as a separate line item in the Companys statement of operations for the quarter ended June 30, 2003.

Current patent costs directly related to the Companys 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 a shorter period, estimated to be three years, due to the early stage of the Companys technology.

Note 9:  Subsequent Event - Rights Offering

Pursuant to the Stock Purchase Agreement, the
Company is offering  to its  non-Investor stockholders, non-transferable rights to purchase an aggregate of $5 million of shares, or 2,525,252 shares, of newly issued common stock at a price of $1.98 per share. Each non-Investor
stockholder has received 0.61 rights for each share of common stock held by the stockholder on the record date, which was July 21, 2003, and the aggregate number of rights issued by the Company has been rounded up to the nearest whole number. 
Stockholders may subscribe for additional shares in the event that not all subscribers elect their pro rata portion of stock.   The expiration date of the offering is August 29, 2003.

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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, Section 21E of the Securities Exchange Act 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 those described under Risk Factors included herein.  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 its made.

Overview of our Business

We are using our proprietary technology and expertise in nucleic acids to develop a new class of nucleic acid based therapeutics involving RNA interference. We are
dedicated to engineering RNA-based molecules for therapeutic and diagnostic purposes and contract manufacturing of oligonucleotides.

Since our inception in 1992, we have dedicated ourselves to engineering RNA-based molecules for therapeutic and diagnostic purposes. Until recently, we focused on
developing ribozyme (a type of RNA) based therapeutics and diagnostics. As a result, we advanced three product candidates into clinical development. We also have acted, and intend to 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, in order to generate revenue for the purpose of supporting our therapeutic discovery operations.
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. We have discontinued our efforts in ribozymes and redirected our research to RNA interference
because we believe it has the best prospects for commercial success. We are using our expertise to design, stabilize, manufacture and deliver small interfering nucleic acids, or siNAs, that selectively activate the process of RNA interference. We
believe siNA-based drugs may become important therapeutics in the future.

We are seeking to develop drugs that address significant and
unmet medical needs. We are in research and/or preclinical development with product candidates in the following areas: (a) Hepatitis C Virus, or HCV, Infectionwe are developing chemically stabilized siNAs that target the HCV viral RNA to treat
HCV infection; (b) Age-Related Macular Degenerationwe are developing chemically stabilized siNAs that target the Vascular Endothelial Growth Factor, or VEGF, pathway to treat macular degeneration; and (c) we are evaluating other disease
targets and indications for the development of RNA interference-based therapeutics.

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 over 50 patent applications covering various aspects of the RNA
interference technology.

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Other Programs

As we have redirected our business to
focus on RNA interference, our current partnerships, which are for ribozyme-based technology and do not focus on RNA interference, are winding down.

| | ANGIOZYME is a ribozyme-based product we have been developing in collaboration with Chiron to treat solid tumor cancers. We have completed our preliminary analysis of 12 and 24
week data from a Phase II colorectal cancer clinical trial and presented the results at the American Society of Clinical Oncology meeting in Chicago on May 31, 2003. As we have previously stated, due to our new business strategy, we do not
intend to develop ANGIOZYME independently. If Chiron elects not to conduct additional clinical development studies, we and/or Chiron will seek a third party partner to develop ANGIOZYME. Chiron has not announced whether it will continue with the
ANGIOZYME program, and if they do not continue, there can be no assurance that a new partner will be found.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | We also were developing HERZYME, a ribozyme-based product, in collaboration with Elan Corporation 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 independent
development of HERZYME.                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In 2002, we entered into a collaboration agreement with Fujirebio, Inc., to conduct a feasibility study involving our proprietary ribozyme-based technology for diagnostic applications.
Recently we completed the first phase of our collaboration with Fujirebio. Fujirebio has informed us that it does not wish to continue the collaboration. We do not intend to pursue independent development of this technology.                                                                                                                                                                                                                                                                                                                                                                         

Our Licensing, Process Development and Pilot Manufacturing Activities

Geron Corporation.   In December 2001, we announced a collaboration with Geron Corporation, or Geron, a biopharmaceutical company focused on
developing and commercializing therapeutic and diagnostic products for applications in oncology and regenerative medicine and research tools for drug discovery. Our first program was a process development partnership with Geron for GRN163, a nucleic
acid based telomerase agonist for cancer. Geron paid us for consultation in nucleic acid technology process development and scale-up of the manufacturing process for GRN163. We successfully completed this program and the arrangement was renewed in
July 2002 to manufacture GMP clinical grade GRN163 for Gerons Phase I clinical study. Delivery under this agreement was completed in June 2003.

Archemix.   In May 2001, we entered into a collaborative agreement with Archemix, a privately held company. One of Archemixs
technologies, RiboReportersTM, incorporates allosteric ribozymes. This technology allows researchers to detect individual molecules in complex mixtures, for drug discovery and environmental monitoring. Under the terms of our agreement with Archemix,
we granted certain licenses and sublicenses to our intellectual property covering the allosteric ribozyme technology. We also received a license to Archemixs intellectual property covering allosteric ribozymes for use in molecular diagnostic
applications. We currently own approximately 2.8 percent of the outstanding common stock of Archemix.

atugen AG.   We have used ribozymes and other oligonucleotides for target discovery and validation, the process by which we identify genes that cause or contribute to human diseases. In 1998, we transferred our target discovery and
validation technologies involving ribozymes and antisense

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oligonucleotides to atugen in exchange for a significant equity interest in atugen. atugens primary goal is to accelerate the discovery and validation of human health
therapeutic targets through strategic collaborations. We currently own 31% of atugen common stock, which is subordinate to certain rights and preferences of atugens preferred shares. We have the right to name two designees to atugens
board of directors, so long as we own at least 30% of atugens outstanding stock. We are paid by atugen for a portion of our costs of prosecuting patents applicable to atugens business. As part of its formation, atugen received exclusive
royalty-free licenses to our extensive patents and technologies for target discovery and validation using antisense oligonucleotides and ribozymes. We received a one-time $2.0 million license payment in 1999 for a portion of the licensed
technology.

Recent Developments

On February 11, 2003, we entered into a
common stock and warrant purchase agreement with the Sprout Group, Venrock Associates, Oxford Bioscience Partners, 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, we held a Special Meeting of Stockholders pursuant to which the terms of the Stock Purchase Agreement with the
Investors were approved. At the Special Meeting of Stockholders held on April 16, 2003, our stockholders approved, among other things, a one-for-six reverse stock split. Subsequent to the approval, every six shares of our common stock were replaced
with one share of our common stock.

On April 21, 2003, pursuant to the Stock Purchase Agreement, we completed the sale of 24,242,425
shares of our common stock and warrants to purchase 5,015,152 shares of our common stock to the Investors for an aggregate 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.

With the consummation of the above transactions the Investors own approximately 87.7% (after giving effect to the exercise of the warrants pursuant to the Stock
Purchase Agreement, but prior to giving effect to exercise of any stock options) of our outstanding capital stock. Further, pursuant to the Stock Purchase Agreement, some of the Investors have the right to designate four of the Companys seven
members of the board of directors.

In reviewing our financial information, please note that all references to common stock, common
shares outstanding, average number of common shares outstanding and per share amounts in the Financial Statements, Notes to Financial Statements and Managements Discussion and Analysis prior to the effective date of the reverse stock split
have been restated to reflect the one-for-six common stock reverse split on a retroactive basis.

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. ( Medizyme), 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. However, we do not intend to pursue independent development of HERZYME.

In connection with the execution of the Stock Purchase Agreement, we obtained certain waivers and amendments to our agreements with
Elan. Among other things, Elan converted all of the outstanding shares of our Series A and Series B preferred stock into shares of our common stock immediately prior to the closing of the private placement, waived certain pre-emptive rights, and
waived its right to nominate a director for election to our board of directors. The Series A preferred stock and accreted dividends have

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been reclassified to permanent equity-common stock following the conversion to common stock in April 2003.

At June 30, 2003, we had an outstanding convertible loan, including accrued interest, of $3.1 million to Schering AG. In April 2003, in connection with the Stock
Purchase Agreement and in consideration for the issuance of warrants and our agreement to pay accrued interest on the loan on a quarterly basis, Schering AG extended the due date for repayment of the loans from April 2004 to January 2005. Upon the
closing of the Stock Purchase Agreement in April 2003, we paid $520,000 to Schering AG for interest accrued on the loan through March 2003. Future interest payments to Schering will be paid on a quarterly basis.

In connection with the Stock Purchase Agreement, we have given our non-Investor stockholders, non-transferable rights to purchase an aggregate of $5 million of shares
of newly issued common stock at a price of $1.98 per share. Each non-Investor stockholder has received 0.61 rights for each share of Common Stock held by the stockholder on the record date, which was July 21, 2003, and the aggregate number of rights
issued by us have been rounded up to the nearest whole number.  In addition, stockholders may subscribe for additional shares in the event that not all subscribers elect their pro rata portion of stock. We are offering the rights to give each
stockholder (other than the Investors) the opportunity to buy more shares of our common stock at the same price at which we sold shares of common stock to the Investors in our recently completed private placement. (Note that a number of important
terms and conditions of the private placement are not being made available or do not apply to stockholders who participate in the rights offering. For example, as part of the private placement, the Investors received warrants and other rights which
are not being offered to the stockholders who participate in the rights offering, and agreed not to sell their shares for 180 days following the date of purchase (April 21, 2003), a restriction which will not apply to the stockholders who
participate). An additional purpose of the rights offering is to raise working capital. The Investors have waived their right to purchase in the rights offering.  The rights offering will expire on August 29, 2003.

Critical Accounting Policies

Revenue Recognition.  To date, we have committed substantially
all our resources to our research and product 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 consists of:

| | Up-front revenue. Up-front non-refundable fees are recognized upon signing an agreement when it represents the culmination of a separate earnings process. All other up-front
fees are deferred and recognized systematically over the period the fees are earned.                                                                                                                                                                                                                   
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Research revenue. Typically, research revenue is based on the fully burdened cost of a researcher working on a collaboration. Rates are billed per employee, per year, pro-rated for time
worked on a project. This revenue is typically invoiced on a monthly basis, either up front or in arrears. Revenue is recognized ratably over the period, with the balance reflected as deferred revenue until earned. The revenue is typically recurring
over the term of a collaboration.
| | License revenue. License revenue is recognized ratably over the term of the license. Payments received in advance are recorded as deferred revenue until earned.                                                                                                                                                                                                                                                                                                                     
| | Milestone revenue. Milestone revenue is recognized in full when the related milestone performance goal is achieved. Milestone revenue is typically not consistent or recurring in
nature.                                                                                                                                                                                                                                                                                            

Our revenue has consisted primarily of research revenue payments from our collaborators. All revenues are
either deferred and recognized over the performance period or recognized upon satisfying

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revenue criteria. As of June 30, 2003, all revenues that have been recognized were fully earned, and no further obligation exists for recognized revenue. 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 translation risks and have not engaged in any hedging.

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

On April 21, 2003, as previously discussed, we completed a private placement, which resulted in a change of control for the company. We have also 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
second quarter ended June 30, 2003, we undertook a detailed review of its existing patent portfolio. As a result of this review, we wrote off in the second quarter $447,000 of patent costs related to patents or patents that we abandoned. 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 quarter ended June 30, 2003.

Current 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 a shorter period, estimated to be 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, Elan retained significant minority investor rights that are 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.

In 1998, we invested $2.0
million and licensed our gene identification and target validation technology to atugen AG, a privately owned German biotechnology company. Upon formation in 1998, we owned a majority of common stock outstanding in atugen; however, similar to the
above discussion on Medizyme about participating rights, minority investors of atugen retained significant investor rights and therefore we did not consolidate operations but instead accounted for our investment in atugen under the
equity method. In 1999, we had absorbed our entire cost basis in our equity investment through our share of atugens net losses. We currently own 31% of atugen common stock, which is subordinate to certain rights and preferences of
atugens preferred shares.

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Redeemable Preferred Stock.   Our balance sheet as of December 31, 2002 presents our Series A
preferred stock and related accreted preferred stock dividends outside of permanent stockholders equity, as a result of the adoption of Emerging Issues Task Force (EITF) Topic No. D-98, Classification of and Measurement of Redeemable
Securities. We issued the Series A preferred stock in January 2000 in connection with the formation of Medizyme. Shares of the Series A preferred stock issued to Elan were exchangeable for a portion of our investment in Medizyme. In April 2003 in
connection with the Stock Purchase Agreement, Elan converted all of the outstanding shares of the Series A preferred stock held by Elan into shares of our common stock immediately prior to the closing of the transaction. The Series A preferred stock
and accreted dividends have been reclassified to permanent equity-common stock following the conversion to common stock in April 2003.

Results of Operations

Three and Six Months Ended June 30, 2003 and 2002

Revenues

Generally, revenue fluctuations result from changes in the number of funded research projects as well as the timing and completion of contract milestones. Our
revenues are split into three categories: (i) Collaborative agreements, (ii) Collaborative agreements-joint venture, and (iii) Collaborative agreements-related parties.  Collaborative agreement revenues primarily include revenues recorded from
Chiron, Fujirebio and Geron.  Chiron revenues are related to our collaboration on ANGIOZYME. Collaborative agreements-joint venture includes revenues from Medizyme, our joint venture we had with Elan.  Collaborative agreements-related
parties, consists of revenues recorded from atugen.

Collectively, collaborative revenues increased to $3.0 million and $3.5 million for
the three and six months ended June 30, 2003, respectively, from $1.6 million and $3.2 million for the corresponding periods in 2002. The increase is primarily due to revenues recognized related to our Geron collaboration.  Geron revenues
increased to $2.8 million for the quarter ended June 30, 2003 compared to $113,000 for the same period in 2002.  During the second quarter of 2003, we recognized deferred revenue of $2.2 million upon the release of product to Geron.  The
increase in revenues related to Geron were offset by lower research revenues associated with ANGIOZYME and Medizyme, our joint venture on the development of HERZYME with Elan.  Revenues for ANGIOZYME and HERZYME are based on the fully loaded
expense of a researcher working on the project.  As both ANGIOZYME and HERZYME moved beyond the research phase and forward in clinical trials, less time was required of our researchers and more third party expenses were incurred. In addition,
the HERZYME program was discontinued in the second quarter of 2003. Reimbursements from our collaborators for third party expenses are credited against expenses and not recognized as revenue.  In addition, in April 2003, we terminated our joint
venture with Elan and do not intend to pursue independent development of HERZYME. Revenues recorded for HERZYME were zero and $2,000 for the three and six month periods ended June 30, 2003, respectively, compared to $425,000 and $851,000 for the
same periods in 2002.  Revenues recorded for ANGIOZYME were $150,000 and $317,000, respectively, for the three and six month period ended June 30, 2003, compared to $694,000 and $1.4 million for the same periods in 2002.  Also, revenues
recorded for atugen decreased to $105,000 and $208,000 for the three and six months ended June 30, 2003, respectively, from $157,000 and $384,000 for the corresponding periods in 2002, due to a reduction in services provided.

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Expenses

Research and development.Research and development expenses decreased to $4.3 million and $8.1 million for the three and six months ended June 30, 2003, compared to $7.9 million and $14.6 million for the corresponding periods in 2002.  The decrease of $3.6 million
for the three-month period ending June 30, 2003 compared to the same period in 2002, was primarily due to the decrease in contract services utilized to support our clinical trials as well as a reduction in personnel costs.  During the second
quarter of 2002, we incurred $2.3 million, net of partner reimbursements, in third party contract manufacturing and distribution costs for ANGIOZYME and HEPTAZYME to support our clinical trials.  Subsequently in 2003, the scale and scope of the
ANGIOZYME trials were decreased and the HEPTAZYME trial was discontinued. During the second quarter of 2003, we accounted for a credit totaling $247,000 due to a discount from Avecia for early payment on our note payable for manufacturing
costs.  The decrease of  $6.6 million for the six-month period ending June 30, 2003 compared to the same period in 2002, was primarily due to $3.8 million in clinical and contract manufacturing costs we incurred during the first half of
2002, compared to a credit for the same costs of $120,000 in the six-month period ending June 30, 2003.  Our revised business plan resulted in a reduction of personnel from a research and development staff of 110 as of June 30, 2002 to a
research and development staff of 60 as of June 30, 2003.  The reduction in personnel resulted in lower salary and benefit expenses of $873,000 for the second quarter of 2003 and $1.9 million in savings for the six months ending June 30, 2003.

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

|          |  | Three months ending June 30, |       | Six months ending June 30, |  
|--------- |  | ---------------------------- | ----- | -------------------------- | -
|          |  |                              |       |                            |  
|          |  | 2003                         |       | 2002                       |  
|          |  |                              |       |                            |  
|RNAI*     |  | $                            | 2,207 |                            | $
|ANGIOZYME |  |                              | 148   |                            |  
|HEPTAZYME |  |                              |      |                            |  
|HERZYME   |  |                              |      |                            |  
|          |  |                              |       |                            |  
|TOTAL     |  | $                            | 2,355 |                            | $

*Prior to 2003, RNAI expenses were part of
basic research and were not separately accounted for on a project basis.

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 last years depending on the technology. The research phase for the first generation ribozyme drug lasted approximately six years and cost more
than $70.0 million starting with the formation of the Company in 1992 until our first chemically synthesized ribozyme-based product IND was filed in 1998.  Preclinical research included development from a conceptual
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|  | ribozyme to the first chemically synthesized ribozymes, through the completion of animal toxicity and pharmacokinetic studies necessary to file the ANGIOZYME IND, our first
chemically synthesized ribozyme-based drug introduced in the clinic.                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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 trials,are large-scale, multi-center, comparative trials with patients afflicted with the target disease in order to provide enough data to demonstrate the
efficacy and safety required by the 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 Food and Drug Administration.  The NDA
process may last several years.

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.General and administrative expenses decreased to $1.2 million and $2.6 million for
the three and six-months ended June 30, 2003, respectively, compared to $1.3 million and $2.8 million for the corresponding periods in 2002. The slight decrease in spending during the first quarter of 2003 compared to the first quarter of 2002 and
the six month ending June 30, 2003 compared to the six month ending June 30, 2002 is the result of cost cutting measures including a reduction in force.   We had a reduction in general and administrative personnel from 19 as of June 30,
2002 to 11 as of June 30, 2003.  The reduction in force occurred during the first quarter of 2003.  The reduction in expenses was not fully realized during the first six months of 2003 due to severance provided.  We expect general and
administrative expenses to continue to decrease for 2003 as a result of the reduction in workforce.

Deferred patent cost write off.On April 21, 2003, as previously discussed, we completed a private placement, which resulted in a change of control for the company. We have also 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

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strategic direction during the second quarter ended June 30, 2003, we undertook a detailed review of our existing patent portfolio. As a result of this review, we have written
off in the second quarter $447,000 related to abandoned patents. In addition, since we are no longer pursuing the development of ribozymes internally, we have expensed approximately $4.9 million of capitalized patent costs related to the ribozyme
technology.

Due to the early stage of our technology, we intend to expense all future patent-related legal costs until we determine
that the estimated recoverability of the associated legal costs is sufficiently probable, at which time such costs will be capitalized.  Future patent-related legal costs will be included in research and development expenses.

Interest income.Interest income increased to $190,000 for the three months ended June 30, 2003 compared to $112,000 for the corresponding
period in 2002.  The increase is due to the $48 million financing which completed in April and increased our average balances in our cash, cash equivalents and securities available-for-sale as compared to the same period in 2002.  Interest
income decreased to $211,000 for the six month period ended June 30, 2003 compared to $266,000 for the corresponding period in 2002 due to lower cash balances in the first four months and lower interest rates for the entire period. Interest income
generally fluctuates as a result of the average amount of cash available for investment and prevailing interest rates.

Interest
expense.Interest expense decreased to $84,000 and $208,000 for the three and six month periods ending June 30, 2003, compared to $266,000 and $603,000, respectively, for the corresponding periods in 2002. The decrease is primarily due to
the conversion of the Elan convertible note to Series B Preferred Stock.  The Elan note accrued interest expense and the Series B Preferred Stock accrued dividends.  The note was converted in June of 2002, therefore interest expense
related to the Elan note of $187,000 and $449,000 was expensed for the three and six month periods ended June 30, 2002, respectively, compared to zero expense for the same periods in 2003.

Equity in loss of unconsolidated affiliate.   Equity in loss of unconsolidated affiliate was $77,000 and $209,000 for the three and six month periods
ended June 30, 2003, respectively, compared to $1.6 million and $3.0 million for the corresponding periods in 2002.  The expense is our 80.1% share of Medizymes expenses.  The decrease in loss recognized for the quarter ended June
30, 2003 is due to the wind-down and subsequent termination of our joint venture with Elan in April 2003.  As of June 30, 2003, all material expenses incurred with HERZYME have been recognized.

Liquidity and Capital Resources

We had cash, cash equivalents and securities available-for-sale of $43.8
million at June 30, 2003 compared with $8.8 million at December 31, 2002. The $35.0 million increase in cash, cash equivalents and securities available-for-sale is primarily the result of $45.0 million received in net proceeds from equity sales,
offset by $8.9 million used for operations, net of revenues of $3.5 million; $380,000 used for investments in equipment, leasehold improvements, patents and additional investment in an unconsolidated affiliate; and $750,000 paid for debt
obligations.

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

Accounts receivable at June 30, 2003 were $379,000 compared to $484,000 at December  31, 2002. Accounts receivable at June 30, 2003 included $275,000
due from Geron for manufacturing and process development work.

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Total additions for property, plant and equipment for the six-month period ended June 30, 2003 were $192,000. 
As of June 30, 2003, we had borrowed $1.8 million on a loan facility through a credit institution. The loan facility averages an interest rate of 9.5%, and matures in 36 or 48 months depending on the type of equipment collateralized.  The
ability to borrow on the loan facility expired in November 2002.  We anticipate future property, plant and equipment needs to be financed through additional credit facilities yet to be determined.

In the fourth quarter of 2002 we took delivery for $3.6 million of ribozyme drugs that we were contractually obligated to purchase from a contract manufacturer. The
terms of payment for the purchase were $1.6 million paid on October 30, 2002; $1.1 million to be paid on or before October 30, 2004; and $873,491 to be paid on or before June 30, 2005. In June 2003, we entered into an agreement with the contract
manufacturer, wherein in lieu of the payments of $1.1 million, and $873,491 together with the interest payable, we paid the contract manufacturer the sum of $1,726,805 to settle all obligations.

Schering AG.At June 30, 2003, the Company had an outstanding convertible loan, including accrued interest, of $3.1 million to
Schering AG.  In connection with the Stock Purchase Agreement, and in consideration for the issuance of warrants and the Companys agreement to pay accrued interest on the loan on a quarterly basis, Schering AG extended the due date for
repayment of the loans from April 2004 to January 2005.  Upon the closing of the Stock Purchase Agreement in April 2003, the Company paid $520,000 to Schering AG for interest accrued on the loan through March 2003.  Future interest
payments to Schering will be paid on a quarterly basis.

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 the Stock Purchase
Agreement, our existing financial resources and expected revenues from collaborations, our cash should be sufficient to meet our anticipated operating and capital requirements into 2005. We expect to incur substantial additional costs, including
costs related to:

| | our research, drug discovery and development programs;
|- | ------------------------------------------------------
|  |                                                       
| | preclinical studies of our products, 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
selling more stock, your ownership share 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 on acceptable terms
when needed.

Recently adopted Accounting Standards

In June 2001, the
FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset
retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. Subsequently, the recorded liability will be accreted to its

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present value and the capitalized costs will be depreciated. We have adopted SFAS No. 143, as required, in our financial statements beginning in the first quarter of
fiscal 2003. We have evaluated the provisions of SFAS No. 143 and the adoption does not have a material impact on our financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS 146 requires that a liability for a
cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).  Under EITF 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. Under SFAS 146, an entitys commitment to
a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of the provisions
of SFAS 146 has not had a material effect on our financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock Based CompensationTransition and Disclosure. SFAS 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of
comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to the traditional annual
disclosure. SFAS is effective for fiscal periods ending after December 15, 2002.   See Note 4 to the Notes to Condensed Financial Statements for the quarterly disclosure requirements under SFAS No. 148.

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 products. There can be no assurance that our technologies will enable us to discover and develop therapeutic products.

All of our products 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 5 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.               

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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, 2003, our accumulated deficit was approximately $207.3 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 recently completed private placement transaction with the Sprout Group, Venrock Associates, Oxford Bioscience Partners, Techno Venture Management 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
products, including preclinical studies and clinical trials.

There is uncertainty relating to our patents that could cause us to incur substantial costs and delays as a result of proceedings
and litigation regarding 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. The scope of our currently issued, or future, patents may not be sufficiently broad to offer meaningful protection against competitive
products. We have received issuance of some additional patent applications covering various aspects of the basic RNA 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 an RNA interference-related patent granted to a potential competitor in Europe.

Additionally, we cannot be certain that the named inventors of subject matter claimed by our patents and patent applications were the first to invent or the first to
file patent applications 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 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 participate in the manufacture, use or sale of products or methods of treatment requiring licenses;
| | lose patent protection for our inventions and product candidates; or                                            

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| | 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, we would lose the rights to those technologies and patents.

To develop 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. All of our 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. To a significant extent, our current partnerships are winding down. We do not intend to develop ANGIOZYME independently so that we can focus on RNA interference. If Chiron elects not to conduct additional
clinical development studies, the Company and/or Chiron will seek a third party partner to develop ANGIOZYME. Chiron has not announced whether it will continue with the ANGIOZYME program, and there can be no assurance that a new partner will be
found. 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. We will not continue with independent development of this product,
and it is not clear whether we will be successful in finding a development partner for it. Generally, if any of our current partners were to terminate its funding of the development of a particular product from our collaboration, we may not have the
right or resources to continue development of that product on our own. Furthermore, since all of our current partnerships relate to the development of non-RNA interference-based products, we may choose not to pursue further development of those
products.

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 products;       
|- | ----------------------------------------------------------------------------------------------------------------------------
| | the pace of development of our products, 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.

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

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

Before commencing clinical trials in human beings, we must submit and receive approval from the FDA for an investigational new drug, or IND. In addition to the FDA,
clinical trials are subject to oversight

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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.

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.

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We currently lack sales and marketing experience and will likely rely upon third parties to market our products that 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.

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 payers 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.

A small number of investors can control the company.

The Investors in our recently
completed private placement collectively own approximately 87.7% (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, and they will own approximately 81.5% of our outstanding common stock after the rights offering (assuming all rights are subscribed and that the number of outstanding shares is 35,920,215, which number assumes the exercise of all
warrants held by the Investors). 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 of April 21, 2003, our stockholders agreed
to amend our certificate of incorporation to permit stockholder action to be taken by written consent in addition to by means of an actual meeting. As a result, our Investors (if they acted together) are now able to take any action, even those
actions that under Delaware law require the affirmative vote of a supermajority of the stockholders, by written consent, 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 affect 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 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 and in recent weeks. The trading price of our common stock may continue to fluctuate substantially due to:

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| | the current rights offering;                                                                                    
|- | ----------------------------------------------------------------------------------------------------------------
| | our recent reverse stock split;                                                                                 
| | quarterly variations in our operating results;                                                                  
| | changes in earnings estimates by market research analysts;                                                      
| | concentrated ownership interest of our new 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;                        
| | 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
have sometimes been unrelated 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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THE COMPANY

We are developing a new class of RNA-based therapeutics.

RNA Interference Background

RNA interference technology generally uses a double-stranded
sequence of nucleic acid, such as RNA, capable of reducing the expression of mRNA and viral RNA in a sequence-specific manner. For simplicity, we refer to the double-stranded RNA molecule facilitating this process as a siNA (short interfering
nucleic acid). The process of reducing the expression of a mRNA or viral RNA is called RNA interference. 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.

RNA interference has become the focus of
multiple scientific publications over the past year. 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.

To date, one of the major limitations of RNA interference has been the instability of
unmodified siNAs. Unmodified siNAs generally break down rapidly in the body, thereby restricting the duration of their potential therapeutic activity. Effective drugs need to be resistant to breaking down in the human body and cells to ensure a
sustained therapeutic response. Over the past 10 years, we have developed chemical and pharmacological expertise and a portfolio of patents in this area of nucleic acid research. This capability allows informed design and rapid synthesis of
chemically modified and stabilized siNA derivatives that retain substantially all the properties required for recognizing their target but also have increased resistance to degradation. Recently, we have shown in cell culture that stabilized siNAs
can reduce the expression of specific genes without affecting expression of other genes. Our chemically modified and stabilized siNAs are stable in human serum for several days in serum stability assays. This is in contrast to unmodified siNAs most
of which have human serum stability of less than a few minutes. We have made stabilized siNAs against a number of targets and successfully tested them in cell culture, and in some cases, with animal experiments. These targets cover the therapeutic
fields of oncology, metabolic, inflammatory, central nervous system, renal and infectious diseases. Finally, we have filed for patent protection of our siNAs against these targets. We believe this provides us with a competitive advantage in
developing RNA interference-based therapeutics.

RNA interference has potentially significant advantages over traditional drugs.

RNA interference-based therapeutics have potentially significant advantages over traditional approaches to treating diseases, including the following:

| | Broad Applicability.   Diseases for which an abnormal gene function can be identified as a cause or as an essential contributing factor, are potentially
treatable with RNA interference-based drugs.                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                 
| | Therapeutic Precision.   Some of the side effects associated with traditional drugs may be reduced or avoided by using RNA interference-based drugs designed to
inhibit expression of only disease associated- and targeted-gene and not interfere with other genes in the body.

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|                                                                                                                                                                              | Target RNA Destruction.   Compared to most drugs that only temporarily prevent targeted protein function, RNA interference-based drugs should destroy the
target RNA and stop the associated undesirable protein production required for disease progression.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|We are developing drugs that address significant and unmet medical needs. We have been in research and/or clinical development with product
candidates in the following areas:
|                                                                                                                                                                              
|                                                                                                                                                                              | Hepatitis C Virus Infection:   We are developing chemically stabilized siNAs that target the HCV viral RNA to treat HCV infection. This program is in the lead
identification phase of development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                              | Age-Related Macular Degeneration:   We are developing chemically stabilized siNAs that target the Vascular Endothelial Growth Factor pathway to treat age-related
macular degeneration. This program is in the lead identification phase of development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                              | Other Indications for RNA Interference:   We are evaluating other disease targets and indications for the development of RNA interference-based
therapeutics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                              | Solid Tumor Cancers:   ANGIOZYME is a ribozyme-based product we have been developing in collaboration with Chiron to treat solid tumor cancers. We have completed our
preliminary analysis of 12 and 24 week data from a Phase II colorectal cancer clinical trial and presented the results at the ASCO meeting in Chicago on May 31, 2003. We do not intend to develop ANGIOZYME independently so that we can focus on RNA
interference. If Chiron elects not to conduct additional clinical development studies, we and/or Chiron will seek a third party partner to develop ANGIOZYME. Chiron has not announced whether it will continue with the ANGIOZYME program, and there can
be no assurance that a new partner will be found.
|                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Our Business Strategy                                                                                                                                                         
|                                                                                                                                                                              
|                                                                                                                                                                               | Our strategy is to use our nucleic acid technology expertise and patent position to create value:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                              | We intend to develop stabilized siNA molecules for therapeutic applications in several disease areas.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                              | We will pursue partnerships with other pharmaceutical or biotechnology companies to develop RNA interference-based therapeutics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                              | We will seek to maintain and expand our patent portfolio and proprietary technology. 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 over 50 patent applications covering various aspects of the RNA interference technology. We aggressively pursue
patent protection to maintain worldwide rights relating to the development, manufacture and sale of ribozyme and RNA interference-based therapeutics.                                                                                                                                
|                                                                                                                                                                              | We want to leverage our nucleic acid expertise through licensing, process development and pilot manufacturing. We believe that we have established one of the leading nucleic acid chemistry
groups that can provide medicinal chemistry, process development and manufacturing to others in need of this expertise. We believe that we will be able to capitalize on our continuing investment in nucleic acid technology by entering into licensing,
process development and pilot manufacturing arrangements with collaborators to generate revenues, while retaining this capability for our own drug development.                                                                                                                  
|                                                                                                                                                                              | We intend to spin off or sell our diagnostic technology. We have demonstrated proof-of-principle for the use of allosteric ribozymes for both diagnostic protein and nucleic acid detection.
We have decided not to develop further our diagnostic technology internally and, therefore, we intend to spin-off or sell this technology.                                                                                                                                                                                                                                                                                                                                                                                                 

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Gene Expression and Human Disease

The undesirable
production of certain proteins (gene expression) is a substantial factor in many human diseases. The abnormality may be due to a defective gene, the over- or under-production of a protein by a normal gene, or the expression of genes from
viruses or bacteria. This abnormal protein production may have direct effects on cells within the body or may initiate a series of events involving other proteins, thereby producing disease. Gene expression by viruses or bacteria causes replication
and growth of infectious agents.

Protein production generally involves two steps. First, the information from the DNA sequence of the
gene is transcribed to messenger RNA (mRNA). The second step involves translation of the mRNA and its information into a protein. The process by which genetic information is expressed in the form of a protein is
highly selective; production of a particular protein generally requires its own specific DNA sequence that leads to a corresponding mRNA sequence. Being able to identify any abnormal production of protein is an important tool in diagnosing human
disease. Blocking a genes expression using RNA interference once a protein target has been identified is, we believe, a promising therapeutic approach.

Our Nucleic Acid Technology

Our approach to drug discovery and development begins by either identifying a gene in human beings causing or contributing to
disease or identifying an essential gene in a disease-causing infectious agent. We analyze the nucleotide sequence of the mRNA corresponding to the target gene and create one or more complementary siNA nucleotide sequences. We then synthesize the
siNAs using our proprietary processes.

Initially, we test the effectiveness of the siNA in cell culture and, if possible, in animal
models. If the siNA reduces or stops production of the protein associated with the disease, or slows the associated growth or spread of the disease, not only have we validated the disease contributing function of the gene, but we also have
identified a drug candidate.

Once we identify a target gene and related siNA, we improve the effectiveness of the siNA by varying its
structure to increase further its stability and improve its pharmacokinetic properties in the human body.

To date, we have achieved a
number of significant milestones in RNA technology development, including the following:

Stability.   To be
useful as a therapeutic treatment, siNAs must remain stable in human serum and cells long enough to destroy the targeted RNA and, ideally, long enough to destroy several RNA molecules. Unmodified siNAs are stable in human serum for only a few
minutes. We have successfully produced chemically modified siNAs that retain their activity in cell culture and are stable in human serum for several days in serum stability assays, thereby overcoming the first barrier to making an effective drug.
Another hurdle is reducing drug clearance from the blood stream and the site of action. One way to accomplish this is to increase drug stability in a specific target organ and cell type that will vary depending on the disease target. We have carried
out proof-of-principle experiments in animal model systems that demonstrate the activity of our stabilized siNA molecules.

Selectivity.   Our siNA molecules should interact only with the target RNA and therefore not affect the functions of other genes. As a result,
our siNA molecules have the potential to be less toxic than traditional drugs that interact with many targets. We have demonstrated a high degree of selectivity with siNAs. Based on our work and the work of others, we believe that a binding region
of approximately 19

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nucleotides is optimal for siNA selectivity. We can compare to the published human genome sequence data to ensure that only the desired gene sequence is targeted.

Delivery.   Successful development of any drug requires that the drug be delivered to the desired site in the body, and
delivery of nucleic acid-based therapeutics is generally challenging. We are exploring a number of delivery possibilities, including local (directly to the target area) and systemic (directly into the blood stream) delivery. To date, we have
demonstrated in animal model systems that chemically stabilized siNA molecules are present in the bloodstream after intravenous delivery and that exposure can be prolonged by subcutaneous (into the skin) delivery. We believe that some chemically
stabilized siNAs can be delivered via a single subcutaneous injection to patients with extended presence of siNAs in the patients blood. We are working on improving the delivery of siNAs by various methods, to increase the tissue-specific
delivery of these drugs in vivo.

Safety.   To date we have not assessed the safety of our chemically stabilized
siNA drugs in human beings. However, we have completed single and multiple dose animal safety studies with our other oligonucleotides, for example with several ribozymes, that have confirmed the lack of significant toxicity at clinically relevant
doses. Certain ribozyme-based compounds have shown a lack of toxicity in rodents and monkeys for periods of up to three months. In clinical trials for one of our ribozyme-based compounds, we have observed safety and tolerability for periods of up to
16 months of daily subcutaneous injections in approximately 170 cancer patients.

Effectiveness.   We have
demonstrated through internal research that RNA interference can reduce the amount of target mRNA and the corresponding level of protein produced in cell culture, and that our siNAs targeted against the VEGF pathway inhibit the development of new
blood vessels in ocular animal model systems. In addition, we have shown the effectiveness of our anti-viral siNAs in decreasing HCV and HBV viral replication in cell culture model systems.

Manufacturing.To meet our needs for research, preclinical studies, clinical trials and the eventual commercialization of RNA interference-based therapeutics,
we must be able to manufacture sufficient amounts of drug in a cost effective manner. We have developed proprietary technology allowing us to synthesize several hundred stabilized siNA molecules in hundreds of microgram quantities per month. These
quantities are sufficient to permit us to perform direct cell-based screening of multiple potential target sites over short periods of time. We also have developed the capability to manufacture kilogram quantities under the FDAs current good
manufacturing practices (cGMP). In early 2002, we expanded our internal manufacturing capabilities and increased our level of cGMP compliance to enable the production of nucleic acid material for clinical trials.

Our Product Programs

The development process for our products starts with research and preclinical
development. Research includes identifying a target protein or viral sequence, synthesizing a panel of appropriate siNAs to block expression of the target protein or virus, and testing the activity of the siNAs in a specific cell population. We will
pursue preclinical and clinical testing only for those products that we believe have a high likelihood of commercial success based on identifying a disease causing target, favorable pharmacokinetics and unmet medical need.

Preclinical testing includes pharmacology and toxicology testing in animal models, product formulation, dosage studies and manufacturing scale-up for
submission of the data necessary to comply with regulatory requirements of the FDA and similar agencies in other countries prior to commencing human trials.

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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. There are two different forms of AMD: dry AMD and wet AMD.
The dry form accounts for the majority of AMD cases but usually does not lead to vision loss. The wet form 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. This neovascularization results in fragile blood vessels that leak blood and
fluid into the retina. The leakage occurs in the macula, the portion of the retina responsible for central vision. If left untreated, wet AMD can lead to rapid vision loss for most patients.

We are developing siNAs that target the VEGF pathway to treat macular degeneration. This program is in the lead identification phase of development. To date, we have
demonstrated that we can inhibit the formation of new blood vessels in ocular animal model systems of neovascularization using our stabilized siNAs targeting the VEGF pathway.

Hepatitis C

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, hepatitis C infects between 250,000 to 500,000 new individuals and
leads to between 8,000 to 10,000 deaths. It is one of the most common blood-borne infections in the United States and has been identified as a silent epidemic and a daunting challenge to public health by the United States
Congress. Current therapies for hepatitis C that include various interferons combined with Ribavarin are effective in approximately 50% of patients and have serious side effects.

We are
developing an siNA therapeutic targeting the HCV. This program is in the lead identification phase of development. We have identified several stabilized siNAs that we are currently testing in appropriate animal model systems. We are also screening
these siNAs in a cell culture system of HCV infection, where the preliminary results show that chemically modified siNAs can successfully inhibit viral replication.

Our Competition

We are engaged in the rapidly changing business of developing treatments for human disease through the regulation of gene
expression. Competition among entities attempting to develop products to treat diseases by regulating gene expression is intense and is expected to increase. In addition to competitors in the regulation of gene expression field, there are other
competitors using other technologies to target the same diseases that we are targeting. In the fields of HCV and macular degeneration, in addition to currently marketed products, there are several compounds in preclinical and clinical testing.

We face direct competition from other companies engaged in the research, development and commercialization of RNA interference-based
technology, as well as competition from companies attempting other methods of gene expression control. In addition, we compete with large pharmaceutical companies and established biotechnology firms, many of whom are developing new products to treat
the same diseases that we target. In some cases, those companies have already commenced clinical trials for their products. Many of these companies have significantly greater financial resources and expertise in research and development,
manufacturing, preclinical studies and clinical trials, obtaining regulatory

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approvals and marketing than we do. Our collaborators and licensees may be conducting research and development programs using non-RNA interference technologies directed at the
same diseases that we are targeting. Smaller companies also may prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. In addition, our competitors may complete
clinical trials, obtain required regulatory approvals and commence commercial sales of their products before us, thus achieving a significant competitive advantage.

We are aware that a number of companies, including biotechnology companies and pharmaceutical companies, are pursuing research and development programs relating to
the emerging area of RNA interference. A number of these companies have filed patents in the area of RNA interference. It is difficult to predict whether any of these companies will be successful in obtaining patent protection, whether the patent
protection sought will address important aspects of the technology, and, to what extent these companies will be successful in their RNA interference ventures.

Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent protection and establish
collaborative arrangements for products and clinical development and marketing. These companies and institutions compete with us in recruiting and retaining highly qualified scientific and management personnel.

Our Patents and Proprietary Technology

Protecting patents and other proprietary rights is crucial to
developing our business. In addition to patents, we rely upon trade secrets, know-how and continuing technological innovations in the design, synthesis, and purification of nucleic acid molecules, such as RNA and in nucleic acid chemistry. We also
rely on licensing opportunities to develop and maintain our competitive position. It is our policy to file patent applications when appropriate to protect technology, inventions and improvements that are considered important in the development of
our business.

In the RNA interference field, we have filed over 50 patent applications covering various aspects of this technology,
including chemically stabilized RNA interference constructs, method of synthesizing RNA interference constructs, application of RNA interference to specific therapeutic targets and for target discovery. We are in the process of filing additional
patent applications to expand our coverage for the RNA interference technology, inventions and improvements that are considered important to the development of our business.

In the ribozyme field, we have rights to over 180 issued or allowed patents, and over 150 pending patents covering various aspects of the ribozyme technology,
including synthesis, delivery, methods of production and uses thereof, such as applications to human therapeutics and diagnostics, agriculture and animal health. These patents provide us with broad intellectual property protection in the field of
ribozyme research and development.

As part of our overall intellectual property strategy, we selectively enter into agreements with
academic institutions either to license pre-existing technology or to support the development of new technologies. With these agreements we intend to gain the commercial rights to such new technologies, such as RNA interference. It is our policy to
file patent applications when appropriate to protect technology, inventions and improvements that are considered important in the development of our business.

We have filed opposition documents against an RNA interference-related patent granted to a competitor in Europe. We are also involved in a re-examination proceeding
involving one of our patents in the United States. We may not have identified all United States and foreign patents that pose a risk of infringement.

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Government Regulation of our Drug Development Activities

The development, manufacture and potential sale of therapeutics are subject to extensive regulation by United States and foreign governmental authorities. In
particular, pharmaceutical products undergo rigorous preclinical and clinical testing and other approval requirements by the FDA in the United States under the federal Food, Drug and Cosmetic Act and the Public Health Service Act and by comparable
agencies in most foreign countries.

Before we may begin testing agents with potential therapeutic value in healthy human test subjects
or patients, stringent government requirements for preclinical data must be satisfied. The data, obtained from studies in several animal species, as well as from laboratory studies, are submitted in an IND application or its equivalent in countries
outside the United States where clinical studies are to be conducted. Preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initiation of clinical trials.

Clinical trials are typically conducted in three sequential phases, although these phases may overlap. In Phase I, which frequently begins with initial introduction
of the compound into healthy human subjects prior to introduction into patients, the product is tested for safety, adverse affects, dosage, tolerance, absorption, metabolism, excretion and clinical pharmacology. Phase II typically involves studies
in a small sample of the intended patient population to assess the efficacy of the compound for a specific indication to determine dose tolerance and the optimal dose range as well as to gather additional information relating to safety and potential
adverse effects. Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population at geographically dispersed study sites to determine the overall risk-benefit ratio of the compound and to provide an
adequate basis for product labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the IND.

Data from preclinical and clinical trials are submitted to the FDA as a New
Drug Application, or NDA, for marketing approval and to other health authorities as a marketing authorization application. The process of completing clinical trials for a new drug is likely to take a number of years and requires the expenditure of
substantial resources. Preparing an NDA or marketing authorization application involves considerable data collection, verification, analysis and expense. There can be no assurance that FDA or any other health authority approval will be granted on a
timely basis, if at all. The approval process is affected by a number of factors, primarily the risks and benefits demonstrated in clinical trials as well as the severity of the disease and the availability of alternative treatments. The FDA or
other health authorities may deny an NDA or marketing authorization application if the authoritys regulatory criteria are not satisfied or may require additional testing or information.

Even after initial FDA or other health authority approval has been obtained, further studies, including Phase IV post-marketing studies, may be required to
provide additional data on safety and will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or other regulatory authorities may
require post-marketing reporting to monitor the side effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including changes in
indication, manufacturing process or labeling or a change in manufacturing facility, an application seeking approval of such changes will be required to be submitted to the FDA or other regulatory authority.

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Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries
must be obtained prior to commencing commercial sales of the product in such countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval may be
longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country at this time has its own procedures and requirements. Further, the FDA regulates
the export of products produced in the United States and may prohibit the export of such products even if they are approved for sale in other countries.

We are also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resources
Conservation and Recovery Act and other present and potential future federal, state and local regulations. Completing the multitude of steps necessary before marketing can begin requires the expenditure of considerable resources and a lengthy period
of time. Delay or failure in obtaining the required approvals, clearances or permits by us, our corporate partners or our licensees would have a material adverse affect on our ability to generate sales or royalty revenue. The impact of new or
changed laws or regulations cannot be predicted with any accuracy.

Our Manufacturing and Marketing

To support our research, preclinical and clinical trial manufacturing requirements, we constructed in our leased buildings manufacturing facilities that we believe
comply with applicable regulatory requirements. We have also established operational quality assurance and quality control procedures. We believe that our existing facilities and capability will be satisfactory for production of siNAs needed for
clinical trials.

We do not currently have the internal facilities or means to manufacture, market, distribute or sell on a commercial
scale any products we may develop. We have expanded our quality control and quality assurance program internally, including adopting a set of standard operating procedures designed to assure that any products manufactured by or for us are made in
accordance with GMP and other applicable domestic and foreign regulations.

We expect our corporate collaborators to enter into
distribution or partnership agreements with pharmaceutical or biotechnology companies that have large, established sales organizations to market and sell most products developed, at least initially.

Our Employees

As of August 14, 2003, we had 71 full-time employees, including a technical scientific and
support staff of 60 and the balance in general administration. This includes a recent staff reduction in the administration and service areas of our company. Our future performance depends significantly on the continued service of our key personnel.
None of our employees are covered by collective bargaining arrangements. We believe our employee relations are good.

Description of Property

We lease approximately 60,000 square feet of laboratory, manufacturing and office space in two adjacent buildings in Boulder, Colorado, under operating leases that
last through October 2007 and June 2007. We believe that our facilities are sufficient to meet our current needs.

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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

We have carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are
designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our
periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.

No change in our internal control over financial reporting
occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We were a defendant in several class
action lawsuits, that were consolidated into a single lawsuit, brought on behalf of purchasers of our common stock on November 16 and 17, 1999. The lawsuits, which were substantially identical, alleged that we violated certain federal securities
laws based upon our having made an allegedly misleading announcement on November 15, 1999. On November 7, 2002, we announced that an agreement had been reached with the plaintiffs to settle the stockholder class action lawsuit. By Order filed April
8, 2003, the Court approved the settlement, dismissed all claims in the action with prejudice, and directed that judgement be entered dismissing the case.  Our liability insurance covered the full amount of the settlement.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On April 21,
2003, pursuant to a common stock and warrant purchase agreement dated February 11, 2003, we completed the sale of 24,242,425 shares of our common stock and warrants to purchase 5,015,152 shares of our common stock to a group of investors led by the
Sprout Group, Oxford Bioscience Partners IV, Venrock Associates, TVM V Life Science Ventures GmbH & Co. KG and Granite Global Ventures for an aggregate consideration of approximately $48 million.  The common stock was sold 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.  The sale and issuance of these securities were deemed to be exempt

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from registration under the Securities Act of 1933, as amended, in reliance upon Section 4(2) of the Securities Act of 1933, as amended.  The recipients of these
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 the Company, to information about the
Company.

|ITEM 3.                                                                                                                                                                                                                          | DEFAULTS UPON SENIOR SECURITIES                                                                                                                                                                                                                                            
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                 | Not applicable.                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                            
|ITEM 4.                                                                                                                                                                                                                          | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                            
|On April 16, 2003 we held a Special Meeting of Stockholders.  Results of matters
voted on at the Special Meeting and, with respect to Proposal 3, at subsequent adjournment,(on a pre-reverse stock split basis) are as follows:
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                            
|1.                                                                                                                                                                                                                               | Proposal to approve the terms of the Companys private placement of $48 million of shares of its common stock at a purchase price of either $0.28 or $0.33 per share and five year
warrants exercisable for shares of common stock at an exercise price of $0.42 per share.

|For        |  | Against |           | Abstentions | 
|---------- |  | ------- | --------- | ----------- | 
|           |  |         |           |             | 
|13,860,929 |  |         | 1,128,366 |             | 

|2. | Proposal to approve an amendment to our current amended and restated certificate of incorporation to effect a reverse split of our common stock of not less than 1-for-5 and not
more than 1-for-15, with our board of directors having the authority to determine which, if any, of these reverse stock splits to effect within those parameters.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For        |  | Against |           | Abstentions | 
|---------- |  | ------- | --------- | ----------- | 
|           |  |         |           |             | 
|17,383,371 |  |         | 1,299,468 |             | 

|3. | Proposal to approve an amendment to our current amended and restated certificate of incorporation to increase the number of authorized shares of capital stock.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|For        |  | Against |           | Abstentions | 
|---------- |  | ------- | --------- | ----------- | 
|           |  |         |           |             | 
|13,573,833 |  |         | 1,363,128 |             | 

|4. | Proposal to approve an amendment to our current amended and restated certificate of incorporation to change our name from Ribozyme Pharmaceuticals, Inc. to a name that better
reflects our new business focus, with our board of directors having authority to decide on an appropriate name.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For        |  | Against |         | Abstentions | 
|---------- |  | ------- | ------- | ----------- | 
|           |  |         |         |             | 
|17,810,613 |  |         | 809,231 |             | 

|5. | Proposal to approve an amendment to our current amended and restated certificate of incorporation to permit stockholders to act by written consent in lieu of a
meeting.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For        |  | Against |           | Abstentions | 
|---------- |  | ------- | --------- | ----------- | 
|           |  |         |           |             | 
|17,396,350 |  |         | 1,220,742 |             | 

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|6. | Proposal to approve an amendment to our 1996 Stock Option Plan and to our 2001 Stock Option Plan as a result of which we will (a) terminate the 1996 Stock Option Plan and merge
it into the 2001 Stock Option Plan, (b) increase the number of shares reserved for issuance pursuant to our 2001 Stock Option Plan by a total of 34 million shares and (c) provide a maximum limit on options granted to any individual during any
calendar year of 12 million shares.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For        |  | Against |           | Abstentions | 
|---------- |  | ------- | --------- | ----------- | 
|           |  |         |           |             | 
|12,642,570 |  |         | 2,179,590 |             | 

|7. | Proposal to approve an increase in the number of shares reserved for issuance pursuant to our Employee Stock Purchase Plan by a total of 5 million shares.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|For        |  | Against |           | Abstentions | 
|---------- |  | ------- | --------- | ----------- | 
|           |  |         |           |             | 
|12,290,944 |  |         | 2,520,692 |             | 

|On May 29, 2003 we held our Annual Meeting of Shareholders.  Matters voted on and
the results of such voting are as follows:
|----------------------------------------------------------------------------------------------------------------------------
|                                                                                                                            
|1.                                                                                                                          

|Director            |  | For |            | Against | 
|------------------- |  | --- | ---------- | ------- | 
|                    |  |     |            |         | 
|Jeremy Curnock Cook |  |     | 26,727,844 |         | 
|Howard Robin        |  |     | 26,727,844 |         | 

|2. | To ratify the selection of Ernst & Young, LLP as our independent auditors for the year ending December 31, 2003.
|-- | ----------------------------------------------------------------------------------------------------------------

|Votes For       |  |  | 26,729,195 | 
|--------------- |  |  | ---------- | 
|Votes Against   |  |  | 18,025     | 
|Votes Abstained |  |  | 2,550      | 

|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)                                                                                    
| | 10.1  | Employment Agreement dated as of February 11, 2003 between the Company and Howard Robin (2)                                        
| | 10.2  | Employment Agreement dated as of February 11, 2003 between the Company and Marvin Tancer (2)                                       
| | 10.3  | Employment Agreement dated as of February 11, 2003 between the Company and Nassim Usman (2)                                        
| | 10.4  | Indemnification Agreement dated as of April 18, 2003 between the Company and Howard Robin (2)                                      
| | 10.5  | Indemnification Agreement dated as of April 18, 2003 between the Company and Jeremy Curnock Cook (2)                               
| | 10.6  | Indemnification Agreement dated as of April 18, 2003 between the Company and Douglas Fambrough and Alan G. Walton (2)              
| | 10.7  | Indemnification Agreement dated as of April 18, 2003 between the Company and James Niedel (2)                                      
| | 10.8  | Indemnification Agreement dated as of April 18, 2003 between the Company and Bryan Roberts (2)                                     
| | 10.9  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Howard Robin (2)              
| | 10.10 | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Marvin Tancer (2)             
| | 10.11 | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Nassim Usman (2)              
| | 10.12 | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Barry Polisky (2)             
| | 10.13 | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Bharat Chowrira (2)           
| | 10.14 | Indemnification Agreement dated as of July 28, 2003 between the Company and R. Scott Greer (3)                                     
| | 31.1  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)                            
| | 31.2  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)                            
| | 32.1  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)

---

|(1) | Incorporated by reference to the Companys Registration Statement on Form S-1 dated July 22, 2003 filed with the Securities and
Exchange Commission on July 22, 2003 (Registration No. 333-107216).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference to the Companys Current Report on Form 8-K dated April 11, 2003 filed with the Securities and Exchange
Commission on April 24, 2003 (Commission File No. 0-27914).      
|(3) | Filed herewith.                                                                                                                                                                                    
|    |                                                                                                                                                                                                    
|    |                                                                                                                                                                                                    

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| | Current Report on Form 8-K dated April 11, 2003, filed with the Securities and Exchange Commission on April 24, 2003 under Item 1. Changes in Control of Registrant, Item 5.
Other Events and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Current Report on Form 8-K dated May 19, 2003, filed with the Securities and Exchange Commission on May 20, 2003 under Item 5. Other Events and Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.                                              
| | Current Report on Form 8-K dated May 31, 2003, filed with the Securities and Exchange Commission on June 3, 2003 under Item 5. Other Events.                                                                                                                             
|  |                                                                                                                                                                                                                                                                          
|  | We furnished the following Current Report on Form 8-K during the quarter ended June 30, 2003;                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                          
| | Current Report on Form 8-K dated May 14, 2003, furnished to the Securities and Exchange Commission on May 14, 2003 under Item 9. Regulation FD Disclosure (Item 12. Results of Operations and
Financial Condition).                                                      

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SIGNATURES

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

|                           | SIRNA THERAPEUTICS, INC.
|-------------------------- | ------------------------
|                           |                         
|Dated:     August 14, 2003 | By:                     
|                           |                         
|                           |                         
|                           |                         
|Dated:     August 14, 2003 | By:                     
|                           |                         
|                           |                         

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Exhibit Index

|Exhibit No. |  | Exhibit Description                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                    
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                               
|3.2         |  | Amended and Restated By-Laws of the Company (2)                                                                                    
|10.1        |  | Employment Agreement dated as of February 11, 2003 between the Company and Howard Robin (2)                                        
|10.2        |  | Employment Agreement dated as of February 11, 2003 between the Company and Marvin Tancer (2)                                       
|10.3        |  | Employment Agreement dated as of February 11, 2003 between the Company and Nassim Usman (2)                                        
|10.4        |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Howard Robin (2)                                      
|10.5        |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Jeremy Curnock Cook (2)                               
|10.6        |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Douglas Fambrough and Alan G. Walton (2)              
|10.7        |  | Indemnification Agreement dated as of April 18, 2003 between the Company and James Niedel (2)                                      
|10.8        |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Bryan Roberts (2)                                     
|10.9        |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Howard Robin (2)              
|10.10       |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Marvin Tancer (2)             
|10.11       |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Nassim Usman (2)              
|10.12       |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Barry Polisky (2)             
|10.13       |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Bharat Chowrira (2)           
|10.14       |  | Indemnification Agreement dated as of July 28, 2003 between the Company and R. Scott Greer (3)                                     
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)                            
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)                            
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)

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|(1) | Incorporated by reference to the Companys Registration Statement on Form S-1 dated July 22, 2003 filed with the Securities and Exchange Commission on July 22, 2003
(Registration No. 333-107216).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference to the Companys Current Report on Form 8-K dated April 11, 2003 filed with the Securities and Exchange Commission on April 24, 2003 (Commission File No.
0-27914).      
|(3) | Filed herewith.                                                                                                                                                                                    

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