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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2003



or



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



For the transition period from              to



Commission file number 0-27914



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SIRNA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)



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|Delaware                                          |  | 34-1697351                          
|------------------------------------------------- |  | ------------------------------------
|(State of or Other Jurisdiction of Incorporation) |  | (I.R.S. Employer Identification No.)



2950 Wilderness
Place

Boulder, Colorado 80301

(Address of principal executive offices)



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



N/A

Former name, if changed since last report



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Indicate by
check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



The number of shares of the registrants common stock, par value $0.01 per share, outstanding as of November 10, 2003 was 31,620,740.



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##### Table of Contents

SIRNA THERAPEUTICS, INC.

INDEX TO FORM 10-Q



|                               |  | PAGE                                                                                                    
|------------------------------ |  | --------------------------------------------------------------------------------------------------------
|PART 1 - FINANCIAL INFORMATION |  |                                                                                                         
|                               |  |                                                                                                         
|Item 1.                        |  | Financial Statements                                                                                    
|                               |  |                                                                                                         
|                               |  | Condensed Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002                     
|                               |  |                                                                                                         
|                               |  | Condensed Statements of Operations - Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
|                               |  |                                                                                                         
|                               |  | Condensed Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002 (unaudited)          
|                               |  |                                                                                                         
|                               |  | Notes to Condensed Financial Statements as of September 30, 2003 (unaudited)                            
|                               |  |                                                                                                         
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                   
|                               |  |                                                                                                         
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                              
|                               |  |                                                                                                         
|Item 4.                        |  | Controls and Procedures                                                                                 
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                                         
|                               |  |                                                                                                         
|Item 1.                        |  | Legal Proceedings                                                                                       
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                                               
|Item 3.                        |  | Defaults upon Senior Securities                                                                         
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                     
|Item 5.                        |  | Other Information                                                                                       
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                        
|                               | 
|SIGNATURES                     |  | 32                                                                                                      
|                               | 
|Exhibit Index                  |  | 33                                                                                                      



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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS



SIRNA THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                     |  | September 30,2003 |          |   | December 31,2002 |  
|---------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | -
|                                                     |  | (unaudited)       |          |   |                  |  
|ASSETS                                               |  |                   |          |   |                  |  
|Current assets                                       |  |                   |          |   |                  |  
|Cash and cash equivalents                            |  | $                 | 18,711   |   |                  | $
|Securities available-for-sale                        |  |                   | 22,576   |   |                  |  
|Accounts receivable                                  |  |                   | 301      |   |                  |  
|Accounts receivable-joint venture                    |  |                   |         |   |                  |  
|Accounts receivable-related parties                  |  |                   | 14       |   |                  |  
|Prepaid expenses and other current assets            |  |                   | 850      |   |                  |  
|                                                     |  |                   |          |   |                  |  
|Total current assets                                 |  |                   | 42,452   |   |                  |  
|                                                     |  |                  
|Property, plant and equipment, net                   |  |                   | 3,639    |   |                  |  
|                                                     |  |                  
|Notes receivable-related parties                     |  |                   | 447      |   |                  |  
|Deferred patent costs, net                           |  |                   | 785      |   |                  |  
|Other assets                                         |  |                   | 821      |   |                  |  
|                                                     |  |                   |          |   |                  |  
|Total assets                                         |  | $                 | 48,144   |   |                  | $
|                                                     |  |                   |          |   |                  |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                   |          |   |                  |  
|Current liabilities                                  |  |                   |          |   |                  |  
|Accounts payable-trade                               |  | $                 | 739      |   |                  | $
|Accrued expenses                                     |  |                   | 2,149    |   |                  |  
|Deferred revenue, current portion                    |  |                   | 200      |   |                  |  
|Deferred revenue, current portion-related parties    |  |                   | 100      |   |                  |  
|Current portion of long-term debt                    |  |                   | 579      |   |                  |  
|                                                     |  |                   |          |   |                  |  
|Total current liabilities                            |  |                   | 3,767    |   |                  |  
|                                                     |  |                  
|Other long term liabilities                          |  |                   | 375      |   |                  |  
|Long term debt                                       |  |                   | 686      |   |                  |  
|Convertible debt                                     |  |                   | 2,920    |   |                  |  
|                                                     |  |                  
|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)                                |  |                   | 316      |   |                  |  
|Additional paid-in capital (Note 2)                  |  |                   | 260,727  |   |                  |  
|Unrealized gain on securities available-for-sale     |  |                   | 13       |   |                  |  
|Accumulated deficit                                  |  |                   | (218,204 | ) |                  |  
|Unearned Compensation                                |  |                   | (2,456   | ) |                  |  
|                                                     |  |                   |          |   |                  |  
|Total stockholders equity (deficit)                 |  |                   | 40,396   |   |                  |  
|                                                     |  |                   |          |   |                  |  
|Total liabilities and stockholders equity (deficit) |  | $                 | 48,144   |   |                  | $
|                                                     |  |                   |          |   |                  |  



See
notes to condensed financial statements



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SIRNA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except
per share amounts)



|                                                 |  | Three months ended September 30, |            |   | Nine months ended September 30, |  
|------------------------------------------------ |  | -------------------------------- | ---------- | - | ------------------------------- | -
|                                                 |  | 2003                             |            |   | 2002                            |  
|Revenue                                          |  |                                  |            |   |                                 |  
|Collaborative agreements                         |  | $                                | 180        |   |                                 | $
|Collaborative agreements-joint venture           |  |                                  |           |   |                                 |  
|Collaborative agreements-related parties         |  |                                  | 103        |   |                                 |  
|                                                 |  |                                  |            |   |                                 |  
|Total revenues                                   |  |                                  | 283        |   |                                 |  
|                                                 |  |                                  |            |  
|Expenses                                         |  |                                  |            |   |                                 |  
|Research and development                         |  |                                  | 10,349     |   |                                 |  
|General and administrative                       |  |                                  | 873        |   |                                 |  
|Deferred patent cost write-off                   |  |                                  |           |   |                                 |  
|                                                 |  |                                  |            |   |                                 |  
|Total expenses                                   |  |                                  | 11,222     |   |                                 |  
|                                                 |  |                                  |            |   |                                 |  
|Operating loss                                   |  |                                  | (10,939    | ) |                                 |  
|                                                 |  |                                  |            |  
|Other income (expense)                           |  |                                  |            |   |                                 |  
|Interest expense, interest income, other expense |  |                                  | (7         | ) |                                 |  
|Equity in loss of unconsolidated affiliate       |  |                                  |           |   |                                 |  
|                                                 |  |                                  |            |   |                                 |  
|Total other income (expense)                     |  |                                  | (7         | ) |                                 |  
|                                                 |  |                                  |            |   |                                 |  
|Net loss                                         |  |                                  | (10,946    | ) |                                 |  
|Accretion of dividends on preferred stock        |  |                                  |           |   |                                 |  
|                                                 |  |                                  |            |   |                                 |  
|Net loss applicable to common stock              |  | $                                | (10,946    | ) |                                 | $
|                                                 |  |                                  |            |   |                                 |  
|Net loss per share (basic and diluted)           |  | $                                | (0.37      | ) |                                 | $
|                                                 |  |                                  |            |   |                                 |  
|Shares used in computing net loss per share      |  |                                  | 29,443,040 |   |                                 |  
|                                                 |  |                                  |            |   |                                 |  



See notes to condensed financial
statements



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SIRNA THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                            |  | Nine months endedSeptember 30, |        
|--------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                            |  | 2003                           |        
|Operating Activities                                                        |  |                                |        
|Net loss                                                                    |  | $                              | (23,695
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |        
|Depreciation and amortization                                               |  |                                | 1,224  
|Deferred patent cost write off                                              |  |                                | 5,344  
|Purchase of license through issuance of common stock                        |  |                                | 3,000  
|Patent expense                                                              |  |                                | (183   
|Equity in loss of unconsolidated affiliate                                  |  |                                | 133    
|Compensation for forgiveness of notes receivable-related parties            |  |                                | 262    
|Pay off of third party manufacturing costs                                  |  |                                | (1,727 
|Gain on pay off of third party manufacturing costs                          |  |                                | (247   
|Compensation expense related to common stock and options                    |  |                                | 267    
|Loss on disposal of equipment, net                                          |  |                                | 46     
|Accrued interest included in convertible debt                               |  |                                | 180    
|Changes in operating assets and liabilities:                                |  |                                |        
|Accounts receivable                                                         |  |                                | 169    
|Prepaid expenses and other                                                  |  |                                | (111   
|Other assets                                                                |  |                                | (86    
|Accounts payable                                                            |  |                                | (204   
|Accrued expenses                                                            |  |                                | 579    
|Deferred revenue                                                            |  |                                | (694   
|Deferred revenue-related parties                                            |  |                                | (300   
|                                                                            |  |                                |        
|Net cash used in operating activities                                       |  |                                | (16,043
|                                                                            |  |                               
|Investing activities                                                        |  |                                |        
|Additions to property, plant and equipment                                  |  |                                | (236   
|Additions to deferred patent costs                                          |  |                                | (208   
|Net sales (purchases) of securities available-for-sale                      |  |                                | (15,814
|Investment in unconsolidated affiliate                                      |  |                                | (133   
|Loan repayments-related parties                                             |  |                                |       
|Loan advances-related parties                                               |  |                                |       
|                                                                            |  |                                |        
|Net cash (used in) provided by investing activities                         |  |                                | (16,391
|                                                                            |  |                               
|Financing activities                                                        |  |                                |        
|Net proceeds from issuance of common and preferred stock                    |  |                                | 49,955 
|Payments under loan facilities                                              |  |                                | (932   
|Borrowings under loan facilities                                            |  |                                | 23     
|Conversion of debt                                                          |  |                                | 34     
|                                                                            |  |                                |        
|Net cash provided by financing activities                                   |  |                                | 49,080 
|                                                                            |  |                                |        
|Net increase (decrease) in cash and cash equivalents                        |  |                                | 16,646 
|Cash and cash equivalents at beginning of period                            |  |                                | 2,065  
|                                                                            |  |                                |        
|Cash and cash equivalents at end of period                                  |  | $                              | 18,711 
|                                                                            |  |                                |        



See notes to condensed financial
statements



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SIRNA THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

September 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30, 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 amended and restated certificate of incorporation to effect a reverse split of its outstanding common stock of one-for-six, 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 (a) terminated the 1996 Stock Option Plan and made its
outstanding options covered by the 2001 Stock Option Plan, (b) increased the number of shares reserved for issuance pursuant to its 2001 Stock Option Plan by a total of 5,666,667 shares (after giving effect to the reverse stock split) and (c)
provided a maximum limit on options granted to any individual during any calendar year of 2,000,000 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 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 owned, at the
time of the closing, 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 the Companys outstanding capital stock.
Further, pursuant to the Stock Purchase Agreement, some of the Investors have, in the aggregate, the



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right to designate four of the seven members of the Companys board of directors. Currently, three of the six board members represent the Sprout Group,
Venrock Associates and Oxford Bioscience Partners IV (one seat on the board is currently unfilled).



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 outstanding
convertible loan 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 candidate 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.



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



|                         |  | 2003 |   | 2002 |  
|------------------------ |  | ---- | - | ---- | -
|Revenue                  |  | $    |  |      | $
|                         |  |     
|Research and development |  |      |  |      |  
|License fee              |  |      |  |      |  
|                         |  |      |   |      |  
|Net loss                 |  | $    |  |      | $
|                         |  |      |   |      |  



Note 4: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 is determined that the likelihood of recovery of 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.



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 wrote-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, 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 nine month period
ended September 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 5:Rights Offering



On July 30, 2003, the Company offered 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 received 0.61 rights for each share of common stock held by the stockholder, with the aggregate number of rights received by each stockholder rounded up to the nearest whole number, on the record date, which
was July 21, 2003. In addition, stockholders were permitted to subscribe for additional shares in the event that there were unsubscribed rights. The expiration date of the offering was August 29, 2003. Stockholders fully subscribed to the offering
and in September 2003 the Company issued 2,525,252 shares of common stock for net proceeds of $4.6 million.



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Note 6:Accounting for Stock-Based Compensation



Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensationdefined a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting period. As provided for in SFAS No. 123, the Company has elected to apply Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock-based compensation plans. Under APB 25, if the exercise price of the Companys employee and director stock options equals or exceeds the fair value of the underlying stock
on the date of grant, no compensation expense is recognized. The Company has elected to follow the intrinsic value method prescribed by APB 25, however, the Company will continue to evaluate its approach to accounting for stock options in light of
ongoing industry and regulatory developments.



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



|                                                                                                                 |  | For the three monthsended September 30, |         |   | For the nine monthsended September 30, |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | -------------------------------------- | -
|                                                                                                                 |  | 2003                                    |         |   | 2002                                   |  
|Net loss as reported                                                                                             |  | $                                       | (10,946 | ) |                                        | $
|Add: Stock-based employee compensation expense included in reported income                                       |  |                                         | 106     |   |                                        |  
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards |  |                                         | (1,290  | ) |                                        |  
|                                                                                                                 |  |                                         |         |   |                                        |  
|Pro forma net loss                                                                                               |  |                                         | (12,130 | ) |                                        |  
|                                                                                                                 |  |                                         |         |   |                                        |  
|Pro forma net loss applicable to common stock                                                                    |  | $                                       | (12,130 | ) |                                        | $
|Pro forma loss per share (basic and diluted)                                                                     |  | $                                       | (0.41   | ) |                                        | $



In February 2003, the
Company granted approximately 4.8 million options to employees and consultants at an exercise price of $2.10 per share. At the time of the grants, the Companys stock option plan had available 285,000 options and therefore the February 2003
grants required stockholder approval for the additional 4.5 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 5,666,667 shares. On the day of the meeting, the Companys stock price closed at $2.70. Because the price of the stock closed at a higher price on the day of approval than the exercise price of
the options, the Company was required to record unearned compensation of $2.7 million, which is the $0.60 difference in stock price multiplied by the 4.5 million shares that required approval. The compensation is deferred and will be expensed as the
options vest. Generally, the options vest monthly over four and five years. Related to the February 2003 grants, the Company recorded compensation expense of $106,000 and $267,000 for the three and nine month periods ended September 30, 2003,
respectively.



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Note 7:Recently Adopted Accounting Standards



In June 2001, the Financial Accounting Standards Board (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
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 No. 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 Emerging Issues Task
Force (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 No. 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 No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted SFAS No. 146, as required, in its financial statements beginning in the first quarter of fiscal 2003.
Management has evaluated the provisions of SFAS No. 146 and the adoption does not have a material impact on the Companys financial statements.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS No. 148 provides two
additional transition methods for entities that adopt the preferable, fair value-based method (as set forth in SFAS No. 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 No. 148 is effective
for fiscal periods ending after December 15, 2002. The Company has adopted SFAS No. 148, as required, in its financial statements beginning in the first quarter of fiscal 2003. See Note 6 to these Notes to Condensed Financial Statements for the
quarterly disclosure requirements under SFAS No. 148.



Note 8:University of Massachusetts License Agreement



In September 2003, the Company announced that it entered into a worldwide license agreement with the University of Massachusetts Medical School (the Medical School) for its undivided interest in intellectual property relating to
RNA interference (RNAi) technology covering short interfering RNA (siRNA). The license covers the RNAi technology patent application filed by Tuschl et al., International PCT Publication No. WO 01/75164, which was jointly
developed and is owned by the University of Massachusetts Medical School, Max-Planck Institute, Whitehead Institute and the Massachusetts Institute of Technology. The subject matter of this intellectual property includes the demonstration that short
pieces of RNA, or siRNAs, could be engineered to inhibit gene expression in mammalian cells. The license grants the Company rights to the undivided interest of the Medical School in the Tuschl et al., intellectual property for uses relating to human
and veterinary therapeutic, prophylactic, diagnostic and health care applications.



Under the terms of the license agreement, the Company paid $3.0 million in cash and issued 579,150 shares of the Companys common stock, valued at $3.0 million, to the Medical School in exchange for the license.
The purchase price was expensed as in-process research and development due to the uncertainty of



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both the technological feasibility and alternative future uses of the technology as of the acquisition date. The Medical School will receive additional cash
and common stock from the Company following the achievement of certain milestones, including the issuance of the patent in the United States and the European Union. The Medical School may also receive royalties on commercial product sales covered by
the licensed patents. In addition, the Medical School will receive a portion of any revenues the Company may generate from the direct sublicensing of this patent.



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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 product candidates, 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 any
forward-looking statements to reflect events or circumstances after the date on which it its made.



On February 11, 2003, we entered into a common stock and warrant purchase agreement with certain 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 at which the terms of the Stock Purchase Agreement with the investors were approved. At the
Special Meeting of Stockholders, 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. 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.



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 developing RNA-based molecules for therapeutic purposes.



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 can become
important therapeutics in the future.



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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) 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 (b) Hepatitis C Virus, or HCV, Infectionwe are developing chemically stabilized siNAs that target the HCV viral RNA to treat HCV infection. We are also 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 or licensed over 50
patent applications covering various aspects of the RNA interference technology.



Our Licensing, Process Development and Pilot Manufacturing Activities



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% of the outstanding common stock of
Archemix. In addition, in September 2003, we entered into a manufacturing agreement with Archemix, whereby we will manufacture and supply to Archemix cGMP-grade ARC183, an anti-thrombin aptamer.



Geron Corporation.In December 2001, we announced a collaboration with
Geron Corporation, or Geron, a biopharmaceutical company focused on oncology and regenerative medicine. 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.



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 oligonucleotides to atugen AG (atugen), a privately owned German biotechnology company, 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. However, should atugen seek additional financing, we would expect our ownership
percentage to decrease. 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.



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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 candidate we have been developing in collaboration with Chiron Corporation, or 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. Due to our new business strategy, we do not
intend to develop ANGIOZYME independently. We have agreed with Chiron to seek a licensee for the further development of ANGIOZYME; however, it is uncertain whether or not an interested party can be found, and if so, under terms agreeable to both
Chiron and Sirna.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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 IV, TVM V Life Science Ventures GmbH & Co. KG and Granite Global Ventures (collectively, the Investors) to sell common stock and warrants for an
aggregate amount of approximately $48 million (the Stock Purchase Agreement). On April 16, 2003, we held a Special Meeting of Stockholders at 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.



In April 2003, we entered into a termination agreement with Elan, under which we retained 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 September 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. Subsequent to
March 2003, interest payments to Schering are paid on a quarterly basis.



In connection with the Stock Purchase Agreement, we gave 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 received 0.61 rights for each share of common stock held by the stockholder, with the aggregate number of rights of each stockholder rounded up to the nearest whole number, on the record date, which was July 21,
2003. In addition, stockholders were permitted to subscribe for additional shares in the event that there were unsubscribed rights. We offered 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 were not made available or do not
apply to stockholders who participated in the rights offering.) An additional purpose of the rights offering was to raise working capital. The Investors waived their right to purchase in the rights offering. The rights offering expired on August 29,
2003 and was fully subscribed. Net proceeds from the offering were $4.6 million.



In September 2003, we announced that we entered into a worldwide license agreement with the University of Massachusetts Medical School (Medical School) for its undivided interest in intellectual property
relating to RNA interference (RNAi) technology covering short interfering RNA (siRNA). The license grants us rights to the undivided interest of the Medical School in the intellectual property for uses relating to human and
veterinary therapeutic, prophylactic, diagnostic and health care applications.



Under the terms of the license agreement, we paid $3.0 million in cash and issued 579,150 shares of our common stock, valued at $3.0 million, to the Medical School in exchange for the license. The Medical School will
receive additional cash and common stock from us following the achievement of certain milestones, including the issuance of the patent in the United States and the European Union. The Medical School may also receive royalties on commercial product
sales covered by the licensed patents. In addition, the Medical School will receive a portion of any revenues we may generate from the direct sublicensing of this patent.



We recently filed a complaint in federal court against a privately-held company, alleging infringement of certain
ribozyme-related patents to which we have exclusive rights. The complaint does not relate to our primary business, the development of nucleic acid-based therapeutics involving RNA interference.



Critical Accounting Policies



Revenue Recognition.We generally recognize revenue when we have
satisfied all contractual obligations and we are reasonably assured of collecting the resulting receivable. We often enter into collaborations where we receive nonrefundable up-front payments for prior or future expenditures. In compliance with
current accounting rules, we recognize revenue related to up-front payments over the period of the contractual arrangements as we satisfy our performance obligations. Occasionally, we are



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required to estimate the period of a contractual arrangement or our performance obligation when the information is not clearly defined in the agreements we
enter into. Should different estimates prevail, revenue recognized could be materially different. As of September 30, 2003, we evaluated our estimates for the periods of contractual arrangements and determined that our estimates are appropriate.



In November 2002, the EITF published Issue No. 00-21
(EITF 00-21 ), Accounting for Revenue Arrangements with Multiple Deliverables. This issue addresses the timing and method of revenue recognition for revenue arrangements that include the delivery of more than one product or
service. EITF 00-21 is effective for revenue arrangements entered into in fiscal quarters beginning after June 15, 2003. We reviewed EITF 00-21 and have determined that this issue will not have a material impact on our operating results and
financial positions.



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



| |  | 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Contract manufacturing revenue. We generally recognize revenue related to our contract manufacturing as we ship or deliver drugs to our partners.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Milestone revenue. We recognize revenue related to milestones upon completion of the milestones performance requirement.
|- |  | -------------------------------------------------------------------------------------------------------------------------



| |  | License or royalty revenue. We recognize as revenue immediately those licensing and royalty agreements we enter into for which we have no future performance obligations and are
reasonably assured of collecting the resulting receivable. For licenses that we enter into where we have future performance obligations, the revenue is recognized ratably over the term of the obligations.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All revenues are either deferred and recognized over the performance period
or recognized upon satisfying revenue criteria. As of September 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.



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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 our 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 periods ended September 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 September 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. Upon formation in 1998, we owned a majority of the 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.



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 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.



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Results of Operations



Three and Nine Months Ended September 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, Geron and Fujirebio Diagnostics, Inc. 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 decreased to $283,000 and $3.8 million for the three and nine months ended September 30, 2003, respectively, from $1.3 million and $4.5 million for the corresponding periods in 2002. The decrease is
primarily due to lower research revenues associated with ANGIOZYME and HERZYME. 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. 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 are not pursuing independent development of HERZYME. Revenues recorded for HERZYME were zero and $2,000 for the three and nine month periods ended September 30, 2003,
respectively, compared to $183,000 and $1.0 million for the same periods in 2002. Also, our ANGIOZYME Phase II clinical trials are winding down and as of September 30, 2003 we no longer had patients remaining on the drug. Revenues recorded for
ANGIOZYME were $164,000 and $480,000, for the three and nine month periods ended September 30, 2003, respectively, compared to $446,000 and $1.9 million for the same periods in 2002. Revenues recorded for atugen were $103,000 and $311,000 for the
three and nine month periods ended September 30, 2003, respectively, compared to $100,000 and $484,000 for the corresponding periods in 2002. The decrease for the period to date are due to an overall reduction in services provided.



The majority of our revenues for the nine months ended September 30, 2003
were attributable to revenues recognized related to our Geron collaboration. Geron revenues increased to $2.8 million for the nine months ended September 30, 2003 compared to $621,000 for the same period in 2002. During the second quarter of 2003,
we recognized deferred revenue of $2.2 million upon the completion of the contract and the release of product to Geron.



Expenses



Research and development.Research and development expenses increased to $10.3 million and $18.4 million for the three and nine months ended
September 30, 2003, respectively, compared to $5.6 million and $20.3 million for the corresponding periods in 2002. The increase of $4.7 million for the three month period ended September 30, 2003 compared to the same period in 2002, was primarily
due to the acquisition of a license to the University of Massachusetts RNAi technology for $6.0 million. In September 2003, we entered into a license agreement with the University of Massachusetts Medical Center for its interest in RNAi technology.
Under the terms of the license agreement, we paid $3.0 million in cash and issued 579,150 shares of our common stock, valued at $3.0 million, to the Medical School in exchange for the license. The purchase price was expensed as in-process research
and development due to the uncertainty of both the technological feasibility and alternative future uses of the technology as of the acquisition date. The $1.3 million decrease in remaining expenses were due to a decrease in contract services
utilized to



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support our clinical trials, as well as a reduction in personnel costs. During the third quarter of 2002, we incurred
$785,000, 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 decreased and the
HEPTAZYME trial was discontinued, therefore our clinical trial expenses during the third quarter of 2003 were only $257,000 to support ANGIOZYME clinical trials. The decrease of $1.9 million for the nine month period ended September 30, 2003
compared to the same period in 2002, was primarily due to $4.5 million in clinical and contract manufacturing costs we incurred during the first half of 2002, compared to the same costs of $137,000 in the nine month period ended September 30, 2003.
The 2003 period to date expenses are net of a $247,000 credit taken in the second quarter for early payment on our note payable to Avecia Limited for manufacturing costs. In addition, our revised business plan resulted in a reduction of personnel in
research and development from a high of 115 in January 2002, to a staff of 70 as of September 30, 2002 and subsequently to a staff of 60 as of September 30, 2003. The reduction in personnel resulted in lower salary and benefit expenses of $393,000
for the third quarter of 2003 and $2.3 million in savings for the nine months ended September 30, 2003 when compared to the same periods in 2002.



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 ended September 30, |       | Nine months ended September 30,
|--------- |  | -------------------------------- | ----- | -------------------------------
|          |  | 2003                             |       | 2002                           
|RNAi*     |  | $                                | 2,908 |                                
|ANGIOZYME |  |                                  | 249   |                                
|HEPTAZYME |  |                                  |      |                                
|HERZYME   |  |                                  |      |                                
|          |  |                                  |       |                                
|TOTAL     |  | $                                | 3,157 |                                

---

|* |  | 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 candidate investigational new drug, or IND, was filed in 1998. Preclinical research included development from a conceptual
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.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Phase I clinical trialsare generally conducted with small groups of patients or healthy volunteers to determine the drugs safety profile and its blood concentration
profile over time. Phase I trials may last anywhere from a few months to two years and may cost several million dollars depending on the drug and indication targeted.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Phase III clinical trialsare large-scale, multi-center, comparative trials with patients afflicted with the targeted disease in order to provide enough data to demonstrate
the efficacy and safety required by the Food and Drug Administration, or FDA, prior to commercialization of the drug. A Phase III trial may last anywhere from a year to several years and could cost many millions of dollars.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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 $873,000 and $3.5 million for the three and nine months ended
September 30, 2003, respectively, compared to $1.1 million and $3.9 million for the corresponding periods in 2002. The decrease in spending for the three and nine months ended September 30, 2003 compared to the same periods in 2002 is the result of
cost cutting measures, including a reduction in force. Through the reduction in force and attrition, general and administrative personnel staffing was reduced from a high of 21 in May 2002, to 16 as of September 30, 2002 and to 10 as of September
30, 2003. The reduction in force occurred during the first quarter of 2003.



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 strategic direction during the second
quarter, we undertook a detailed review of our existing patent portfolio. As a result of this review, we wrote off $447,000 related to abandoned patents in the second quarter. 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 are expensing all patent-related legal costs until we determine that the estimated recoverability of the
associated legal costs is sufficiently probable, at which



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time such costs will be capitalized. Future patent-related legal costs will be included in research and development expenses.



Interest expense, net.Interest expense, net, included interest
expense of $105,000 and $313,000 for the three and nine month periods ended September 30, 2003, as well as interest income of $101,000 and $312,000 for the same periods, respectively. Interest expense increased slightly to $105,000 from $102,000,
for the three month period ended September 30, 2003 and 2002, respectively. However, interest expense decreased to $313,000 from $705,000 for the nine months ended September 30, 2003 and 2002, respectively. 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 $449,000 was expensed for the nine month period ended September 30, 2002,compared to zero expense for the same period in 2003.



Interest income increased to $101,000 for the three months ended September 30, 2003 compared to $57,000 for the corresponding period in 2002. The increase
is due to the $48 million financing, which we completed in April, increasing the average balances in our cash, cash equivalents and securities available-for-sale as compared to the same period in 2002. Interest income decreased slightly to $312,000
for the nine month period ended September 30, 2003 compared to $323,000 for the corresponding period in 2002 due to lower cash balances in the first four months of 2003 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.



Equity in loss of unconsolidated affiliate. Equity in loss of unconsolidated affiliate was zero and $209,000 for the three and nine month periods
ended September 30, 2003, respectively, compared to $1.3 million and $4.4 million for the corresponding periods in 2002. The expense is our share of Medizymes expenses. The decrease in loss recognized for the quarter and period to date ended
September 30, 2003 is due to the wind-down and subsequent termination of our joint venture with Elan in April 2003. As of September 30, 2003, all material expenses incurred with Medizyme have been recognized.



Liquidity and Capital Resources



We had cash, cash equivalents and securities available-for-sale of $41.3
million at September 30, 2003 compared with $8.8 million at December 31, 2002. The $32.5 million increase in cash, cash equivalents and securities available-for-sale is primarily the result of $50.0 million received in net proceeds from equity
sales, offset by $16.0 million used for operations, net of revenues of $3.8 million; $577,000 used for investments in equipment, leasehold improvements, patents and additional investment in an unconsolidated affiliate; and $932,000 paid for debt
obligations.



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



Accounts
receivable at September 30, 2003 were $315,000 compared to $483,000 at December 31, 2002. Accounts receivable at September 30, 2003 included $258,000 due from Chiron for expenses incurred on ANGIOZYME.



Total additions for property, plant and equipment for the nine month period
ended September 30, 2003 were $236,000. As of September 30, 2003, we have $1.2 million outstanding 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.



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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 September 30, 2003, we 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 our agreement to pay accrued interest on the loan on
a quarterly basis, Schering AG extended the due date for repayment of the loan 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. Interest payments to Schering are 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 our recent private placements, 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 product candidates, if developed;
|- |  | ------------------------------------------------------------



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



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



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



We will continue to need to raise additional capital through any or all of the following: public or private financing, merger or acquisition, new
collaborative relationships, new credit facilities and/or other sources. If we raise funds by 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 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 No. 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,



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Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Under EITF No. 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 No. 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 No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. We have adopted SFAS No. 146, as required, in our financial statements
beginning in the first quarter of fiscal 2003. The adoption of the provisions of SFAS No. 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 No. 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 No. 148 is effective for fiscal periods ending after December 15,
2002. We have adopted SFAS No. 148, as required, in our financial statements beginning in the first quarter of fiscal 2003. See Note 6 to the Notes to Condensed Financial Statements for the quarterly disclosure requirements under SFAS No. 148.



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RISK FACTORS



Risks Relating to our Business, Industry and Common Stock



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



Our focus is directed towards RNA interference technology, which is in an early stage of development and will require substantial further testing before we can begin any clinical development of RNA-based therapeutic
product candidates. There can be no assurance that our technologies will enable us to discover and develop therapeutic products.



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



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



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



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



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



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



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



We have a history of losses, expect future losses and cannot assure you that we will ever become or remain profitable.



We have incurred significant losses and have had negative cash flows from
operations since inception. To date, we have dedicated most of our financial resources to research and development and general and administrative expenses. We have funded our activities primarily from sales of our stock, revenues we receive under
contract manufacturing of oligonucleotides, research and development agreements, and lines of credit. As of September 30, 2003, our accumulated deficit was approximately $218 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 IV, TVM V Life
Science Ventures GmbH & Co. KG and Granite Global Ventures (collectively, the Investors).



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



There is
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 owned or licensed 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



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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.



We recently filed a complaint in federal court against a privately-held
company, alleging infringement of certain ribozyme-related patents to which we have exclusive rights. The complaint does not relate to our primary business, the development of nucleic acid-based therapeutics involving RNA interference.



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



The manufacture, use or sale of our products may infringe on the patent rights of others.
We may not have identified all United States and foreign patents 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 products; or
|- |  | ----------------------------------------------------------



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



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



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. 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 candidate. We
will not continue with independent development of this product candidate, and it is not clear whether we will be successful in finding a development partner for it. Generally, if any of



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our current partners were to terminate its funding of the development of a particular product candidate from our
collaboration, we may not have the right or resources to continue development of that product candidate on our own. Furthermore, since all of our current partnerships relate to the development of non-RNA interference-based product candidates, we may
choose not to pursue further development of those product candidates.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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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.



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 payors may not authorize or may limit reimbursement for our products, even if our products are safer or more effective than the



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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.



As of September 30, 2003, the Investors in our recently completed private placement collectively own approximately 80.0% (after giving effect to the exercise of their warrants issued in connection with the private
placement, but prior to giving effect to exercise of any stock options) of our outstanding common stock. In addition, some of the Investors currently have the right to select four of seven members of our Board of Directors. In connection with the
private placement transaction 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 effect a merger without holding a stockholders meeting. If the Investors were to act in concert, they would have
sufficient voting power to effect these types of transactions, although they have not indicated any present intent to do so.



Our 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:



| |  | 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.



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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.



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.



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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



None



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



On July 17, 2003 we amended our Certificate of Incorporation to increase our authorized common stock from 60,000,000 to 120,000,000 shares, par value $0.01, pursuant to a vote of shareholders on April 16, 2003. Our
board of directors may issue authorized shares of common stock from time to time as it determines desirable. Additional issuances of common stock could dilute the ownership of current holders of common stock.



On September 29, 2003, we completed a rights offering of 2,525,252 shares of
our common stock for $1.98 per share that resulted in gross proceeds of $5.0 million.



Pursuant to an agreement dated September 26, 2003 between Sirna Therapeutics, Inc. and the University of Massachusetts Medical School, we issued 579,150 shares of our common stock in exchange for a worldwide license
agreement with the University of Massachusetts Medical School for its undivided interest in its intellectual property on RNA interference technology covering short interfering RNA.



On September 30, 2003, we filed a Form S-3 Registration Statement to register 30,842,129 shares of our common stock for
certain of our stockholders pursuant to the Stock Purchase agreement entered into by the Company in April, 2003. We will receive no proceeds from the sale of these shares by the selling stockholders.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not applicable.



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



Not applicable.



ITEM 5. OTHER INFORMATION



Not
applicable.



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (10) |  | Exhibits
| | ---- |  | --------



|     | 
|---- | 
|3.1  | 
|     | 
|3.2  | 
|     | 
|10.1 | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 

---

|(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) |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2003 filed with the Securities and Exchange Commission on August 14, 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Filed herewith.
|--- |  | ---------------



| | (b) |  | Reports on Form 8-K. We filed the following Current Reports on Form 8-K during the quarter ended September 30, 2003:
| | --- |  | --------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated July 25, 2003, filed with the Securities and Exchange Commission on July 30, 2003 under Item 5. Other Events and Required FD Disclosure and Item 7.
Financial Statements, Pro Forma Financial Information and Exhibits.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated July 30, 2003, filed with the Securities and Exchange Commission on July 31, 2003 under Item 5. Other Events and Required FD Disclosure and Item 7.
Financial Statements, Pro Forma Financial Information and Exhibits.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated August 29, 2003, filed with the Securities and Exchange Commission on September 9, 2003 under Item 5. Other Events and Required FD Disclosure.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated September 9, 2003, filed with the Securities and Exchange Commission on September 9, 2003 under Item 5. Other Events and Required FD Disclosure and
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated September 16, 2003, filed with the Securities and Exchange Commission on September 16, 2003 under Item 5. Other Events and Required FD Disclosure
and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated September 19, 2003, filed with the Securities and Exchange Commission on September 19, 2003 under Item 5. Other Events and Required FD Disclosure
and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We furnished the following Current Report on Form 8-K during the quarter ended September 30, 2003:



| |  | Current Report on Form 8-K dated August 14, 2003, furnished to the Securities and Exchange Commission on August 14, 2003 under Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits and Item 12. Results of Operations and Financial Condition.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



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##### Table of Contents

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: November 10, 2003 |  | By:                     
|                         |  |                         
|                         |  |                         
|Dated: November 10, 2003 |  | By:                     
|                         |  |                         



32



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##### Table of Contents

Exhibit Index



|Exhibit No. |  | Exhibit Description                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|            | 
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                             
|            | 
|3.2         |  | Amended and Restated By-Laws of the Company (2)                                                                                  
|            | 
|10.1        |  | 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(4)                            
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(4)                            
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(4)

---

|(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) |  | Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2003 filed with the Securities and Exchange Commission on August 14, 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Filed herewith.
|--- |  | ---------------



33