##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K



---



x    ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT
OF 1934



For the fiscal year ended December 31, 2003



Commission file number 0-27914



---



SIRNA THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its
Charter)



---



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



2950 WILDERNESS
PLACE, BOULDER, COLORADO 80301

(Address of principal executive offices)



(303) 449-6500

(Registrants telephone number, including area code)



---



SECURITIES REGISTERED UNDER SECTION 12(b) OF THE
EXCHANGE ACT:

NONE



SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

COMMON STOCK, PAR VALUE $0.01 PER SHARE



---



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



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



Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy of information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ̈



The aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 16, 2004, was
approximately $33,000,000.



As of March 16, 2004, the
registrant had 31,787,147 shares of common stock, par value $.01 per share, outstanding.



DOCUMENTS INCORPORATED BY REFERENCE:



Portions of the registrants definitive Proxy Statement which will be filed on or before April 30, 2004 with the Securities and Exchange Commission in connection with Registrants annual meeting of
stockholders to be held on or about May 12, 2004 is incorporated by reference into Part III (Items 10,11,12, 13 and 14) of this Report.



---



---

##### Table of Contents

Explanatory Note



TABLE OF CONTENTS



|         |  |                                                                                                          |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                          |  | Page
|         |  | PART I                                                                                                   |  |     
|         |  |                                                                                                         
|Item 1   |  | Business                                                                                                 |  | 3   
|         |  |                                                                                                         
|Item 2.  |  | Properties                                                                                               |  | 17  
|         |  |                                                                                                         
|Item 3.  |  | Legal Proceedings                                                                                        |  | 17  
|         |  |                                                                                                         
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                      |  | 17  
|         |  |                                                                                                         
|         |  | Executive Officers of the Registrant                                                                     |  | 18  
|         |  |                                                                                                         
|         |  | PART II                                                                                                  |  |     
|         |  |                                                                                                         
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Securities |  | 19  
|         |  |                                                                                                         
|Item 6.  |  | Selected Financial Data                                                                                  |  | 21  
|         |  |                                                                                                         
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 22  
|         |  |                                                                                                         
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 32  
|         |  |                                                                                                         
|Item 8.  |  | Financial Statements and Supplementary Data                                                              |  | 32  
|         |  |                                                                                                         
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                     |  | 32  
|         |  |                                                                                                         
|Item 9A. |  | Controls and Procedures                                                                                  |  | 32  
|         |  |                                                                                                         
|         |  | PART III                                                                                                 |  |     
|         |  |                                                                                                         
|Item 10. |  | Directors and Executive Officers of Registrant                                                           |  | 33  
|         |  |                                                                                                         
|Item 11. |  | Executive Compensation                                                                                   |  | 33  
|         |  |                                                                                                         
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management. Changes in Control                       |  | 33  
|         |  |                                                                                                         
|Item 13. |  | Certain Relationships and Related Transactions                                                           |  | 33  
|         |  |                                                                                                         
|Item 14. |  | Principal Accountant Fees and Services                                                                   |  | 33  
|         |  |                                                                                                         
|         |  | PART IV                                                                                                  |  |     
|         |  |                                                                                                         
|Item 15. |  | Exhibits, Financial Statements and Reports on Form 8-K                                                   |  | 34  



2



---

##### Table of Contents

ITEM 1. BUSINESS



Forward-Looking Statements



Statements in this Form 10-K 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, partnerships and collaborations, 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 is made.



An Overview of Our
Company



Sirna Therapeutics, Inc. (known as Ribozyme
Pharmaceuticals, Inc. until our name change became effective on April 16, 2003) is a leader in the field of nucleic acid technology. We are using our proprietary technology and expertise in nucleic acids to develop a new class of nucleic acid-based
therapeutics involving RNA interference.



Since our inception
in 1992, we have dedicated ourselves to engineering RNA-based molecules for therapeutic and diagnostic purposes. Our expertise in nucleic acid technology enables us to focus on the development of a new type of nucleic acid-based therapeutic based on
RNA interference. In 2001 we began to study RNA interference (RNAi) and in 2003, based on advancements in, and potential of, the field, we directed our research and development activities entirely to RNA interference. We are using our expertise to
design, stabilize, manufacture and deliver short interfering ribonucleic acids (siRNAs) that activate selectively the process of RNA interference. We believe siRNA-based drugs may become important therapeutics in the future. We also continue to act
as a manufacturer of oligonucleotides (chains of nucleotides that can be chemically synthesized; oligonucleotides are a form of nucleic acid) for our use and for use by our collaborators and customers, to generate free cash flow for the purpose of
supporting our therapeutic discovery operations.



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 (AMD)we are developing chemically
stabilized siRNAs that target the Vascular Endothelial Growth Factor (VEGF) pathway to treat AMD; (b) Hepatitis C Virus (HCV) Infectionwe are developing chemically stabilized siRNAs that target the HCV viral RNA to treat HCV infection and (c)
Oncologywe recently announced a collaboration with Eli Lilly & Company (Lilly) to jointly investigate our proprietary chemically modified siRNAs against specific oncology targets provided by Lilly. We also maintain an active program
evaluating other disease targets and indications for the development of RNA interference-based therapeutics.



We own, or have exclusive license to use, over 180 issued or allowed patents relating to nucleic acid technology. Over 30 of these issued or allowed
patents extend coverage to RNA interference technology. Additionally, we have filed or licensed over 60 patent applications covering various aspects of the RNA interference technology.



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



RNA Interference Background



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



3



---

##### Table of Contents

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



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



RNA interference has potentially significant advantages over traditional drugs.



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



| |  | Broad Applicability. Diseases for which an abnormal gene function can be identified as a cause or as an essential contributing factor, are potentially treatable with RNA
interference-based drugs.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Therapeutic Precision. Some of the side effects associated with traditional drugs may be reduced or avoided by using RNA interference-based drugs designed to inhibit
expression of only disease associated- and targeted-gene and not interfere with other genes in the body.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Target RNA Destruction. Compared to most drugs that only temporarily prevent targeted protein function, RNA interference-based drugs are designed to destroy the target RNA
and therefore stop the associated undesirable protein production required for disease progression.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are developing drugs that address significant and unmet medical needs. We have been in research and/or clinical development with product candidates in
the following areas:



| |  | Age-Related Macular Degeneration: We are developing chemically stabilized siRNAs that target the VEGF pathway to treat age-related macular degeneration. We have selected a
lead candidate, Sirna-027, with which we have completed a pre-Investigational New Drug (IND) meeting with the Food and Drug Administration (FDA). During 2004, we plan to manufacture Sirna-027 and complete its toxicology program in anticipation of
filing an IND with the FDA by the end of the year.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Hepatitis C Virus Infection: We are developing chemically stabilized siRNAs that target HCV RNA to treat HCV infection. This program is in the lead identification phase of
preclinical development and we plan to select a HCV candidate by the end of 2004.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Oncology:As we recently announced, we will be collaborating with Lilly to investigate our proprietary modified small interfering RNAs (siRNAs) against specific oncology
targets provided by Lilly. The goal of the collaboration is to establish a proof of concept that could lead to the development of novel RNA interference therapeutics for oncology. We are also exploring additional partnership opportunities with other
companies in the field of oncology.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other Indications for RNA Interference: We are evaluating other disease targets and indications for the development of RNA interference-based therapeutics.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Solid Tumor Cancers: ANGIOZYME is a ribozyme-based product we were developing in collaboration with Chiron to treat solid tumor cancers. We completed our analysis of data
from a Phase II colorectal cancer clinical trial and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

##### Table of Contents

presented the results at the ASCO meeting in Chicago on May 31, 2003. Due to our new business strategy,
we do not intend to further 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 will be found, and if so, under terms
agreeable to both Chiron and Sirna.



Our Business Strategy



Our strategy is to use our nucleic acid technology expertise and patent
position to create value:



| |  | We intend to independently develop stabilized siRNA molecules for therapeutic applications in several disease areas.
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | We will pursue partnerships with other pharmaceutical or biotechnology companies to develop RNA interference-based therapeutics.
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | We will seek to maintain and expand our patent portfolio and proprietary technology. We own, or have exclusive licenses to use, over 180 issued or allowed patents relating to
nucleic acid technology. Over 30 of these patents extend coverage to RNA interference. Additionally, we have filed over 60 patent applications covering various aspects of the RNA interference. We aggressively pursue patent protection to maintain
worldwide rights relating to the development, manufacture and sale of RNA interference-based therapeutics.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We intend to leverage our nucleic acid expertise through licensing, process development and pilot manufacturing. We believe that we have established one of the leading nucleic acid
chemistry groups that can provide medicinal chemistry, process development and manufacturing to others in need of this expertise. We believe that we will be able to capitalize on our continuing investment in nucleic acid technology by entering into
licensing, process development and pilot manufacturing arrangements with collaborators to generate revenues, while retaining this capability for our own drug development.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gene Expression and Human Disease



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



Protein production generally involves two steps. First, the information from the DNA sequence of the gene is transcribed to mRNA. The second
step involves translation of the mRNA and its information into a protein. The process by which genetic information is expressed in the form of a protein is highly selective; production of a particular protein generally
requires its own specific DNA sequence that leads to a corresponding mRNA sequence. Being able to identify any abnormal production of protein is an important tool in diagnosing human disease. A typical mRNA is believed to produce approximately 5,000
copies of the protein. By destroying a single copy of mRNA, production of 5,000 copies of the target protein could potentially be blocked. Preventing the formation of a protein by targeting the mRNA is, therefore, believed to be a more potent
approach for therapeutic intervention than preventing the function of the target protein. Our RNA interference technology targets the mRNA and blocks the formation of protein. Blocking a genes expression using RNA interference, once a protein
target has been identified, is, we believe, a promising therapeutic approach for those diseases where abnormal protein overproduction is a problem.



Our Nucleic Acid Technology



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



5



---

##### Table of Contents

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



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



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



Stability. To be useful as a therapeutic treatment,
siRNAs must remain stable in human serum and cells long enough to destroy the targeted RNA and, ideally, long enough to destroy multiple copies of the target RNA. Unmodified siRNAs are stable in human serum for only a few minutes. We have
successfully produced chemically modified siRNAs that retain their activity in cell culture and are stable in human serum for several days in serum stability assays, thereby overcoming the first barrier to making an effective drug. We have carried
out experiments in animal model systems that demonstrate the activity of our stabilized siRNA molecules.



Circulation Time. Another hurdle in the development of siRNAs for therapeutic use is reducing drug clearance from the blood stream and the site of
action. siRNAs are rapidly cleared from circulation by the renal system in less than an hour. We have successfully produced chemically modified siRNAs and formulations that have improved the circulation time of siRNAs to several days. We have
carried out proof-of-principle experiments in animal model systems that demonstrate the activity of these stabilized siRNA formulations with improved circulation time.



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



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



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



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



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



6



---

##### Table of Contents

Our Product Programs



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



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



Age-Related Macular Degeneration



Age-related macular degeneration, or AMD, is caused by the deterioration of the central portion of the retina. This disease is the leading cause of
irreversible vision loss among Americans over the age of 55. There are two different forms of AMD: dry AMD and wet AMD. The dry form accounts for the majority of AMD cases but usually does not lead to vision loss. The wet form accounts for 10 to 15%
of all AMD cases but is associated with severe vision loss. Approximately 1.2 million people in the United States have wet AMD with 200,000 new cases per year that require treatment. Wet AMD results from a proliferation of abnormal blood vessels
beneath the retina called neovascularization. This neovascularization results in fragile blood vessels that leak blood and fluid into the retina. The leakage occurs in the macula, the portion of the retina responsible for central vision. If left
untreated, wet AMD leads to rapid vision loss for most patients.



Current therapies for wet AMD include laser photocoagulation and Visudyne® (QLT/Novartis). In 2002, Visudyne had global sales of $287 million. The most advanced new therapy under development for AMD is Macugen (Eyetech/Pfizer), which has been tested in Phase III clinical trials. Macugen is a nucleic acid drug that reportedly
binds and neutralizes Vascular Endothelial Growth Factor (VEGF). Both Visudyne and Macugen are reported to result in improved vision in about 25% of patients, although each product utilizes a different mechanism of action. The clinical results from
these two products suggest that there will be a market for additional therapies to treat this serious disease.



We recently selected Sirna-027 as our lead candidate, targeting the VEGF pathway to treat AMD, and expect to file an Investigational New Drug (IND)
application with the FDA to initiate Phase I clinical trials. To date, we have demonstrated that we can inhibit the formation of new blood vessels in cell culture and several animal model systems of ocular neovascularization using our stabilized
siRNAs targeting genes in the VEGF pathway.



Hepatitis C



There are approximately 3.9 million individuals
infected with hepatitis C in the United States and over 170 million worldwide. Of the 3.9 million infected individuals in the United States, 70% have chronic hepatitis C and are potential candidates for treatment. Each year in the United States,
hepatitis C infects between 250,000 to 500,000 new individuals and leads to between 8,000 to 10,000 deaths. It is one of the most common blood-borne infections in the United States and has been identified as a silent epidemic and a
daunting challenge to public health by the United States Congress. Current therapies for hepatitis C that include various interferons combined with Ribavarin are effective in approximately 50% of patients and have significant side effects.



We are developing an siRNA therapeutic targeting the hepatitis
C virus. This program is in the lead identification phase of preclinical development. We have identified several stabilized siRNAs that we are currently testing in appropriate animal model systems. We are also screening these siRNAs in a cell
culture system of HCV infection, where the preliminary results show that chemically modified siRNAs can successfully inhibit viral replication. We plan to select a lead candidate targeting HCV infection by the end of 2004.



Oncology



In January 2004, we announced a collaboration with Eli Lilly to develop
novel RNA interference therapeutics. During the eighteen-month collaboration, the companies will jointly investigate Sirnas proprietary modified small interfering RNAs against Lillys specific oncology targets. Lilly will provide oncology
targets, preclinical in vivo models and research funding, and Sirna will provide stabilized siRNAs, formulations and pharmacokinetic support. In addition, Lilly received a non-exclusive



7



---

##### Table of Contents

research license to our technologies for oncology. The goal of the collaboration is to establish a proof of concept that
could lead to the development of novel RNA interference therapeutics for oncology. We are also exploring additional partnership opportunities with other companies in the field of oncology.



Other Programs



Since we have redirected our business to focus on RNA interference, our
previous partnerships for ribozyme-based technology are winding down.



| |  | ANGIOZYME is a ribozyme-based product candidate were developing in collaboration with Chiron Corporation, or Chiron, to treat solid tumor cancers. We have completed our analysis of
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 will be found, and if so, under terms agreeable to both Chiron and Sirna.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We also were developing HERZYME, a ribozyme-based product candidate, in collaboration with Elan 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Licensing, Process Development
and Pilot Manufacturing Activities



University of
Massachusetts License Agreement. 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 technology covering 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 us 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, we paid $3.0 million in cash and issued 579,150 shares of our common stock, valued at $3.0 million at the time of signing, 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.



Archemix. In September 2003, we entered into a manufacturing agreement with Archemix, a privately held company, to manufacture and supply to
Archemix cGMP-grade ARC183, an anti-thrombin aptamer. In addition, in May 2001 we entered into a collaborative agreement with Archemix related to one of Archemixs technologies, RiboReporters that 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.



Geron Corporation. In December 2001, we announced a collaboration with
Geron Corporation (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.



8



---

##### Table of Contents

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 has been to accelerate the discovery and validation of human health therapeutic targets through strategic collaborations. We currently
own approximately 10% of atugen common stock, which is subordinate to certain rights and preferences of atugens preferred shares. 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. In November 2003, the license agreement was amended to grant atugen a non-exclusive license to our
cationic lipid delivery technology for target discovery and validation using certain double stranded siRNAs constructs. In consideration for this additional license, the company received an additional one percent of equity in atugen.



Our Competition



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



We face direct competition from other companies engaged in the
research, development and commercialization of RNA interference-based technology, as well as competition from companies attempting other methods of gene expression control. In addition, we compete with large pharmaceutical companies and established
biotechnology firms, many of whom are developing new products to treat the same diseases that we target. In some cases, those companies have already commenced clinical trials for their products. Many of these companies have significantly greater
financial resources and expertise in research and development, manufacturing, preclinical studies and clinical trials, obtaining regulatory approvals and marketing than we do. Our collaborators and licensees may be conducting research and
development programs using non-RNA interference technologies directed at the same diseases that we are targeting. Smaller companies also may prove to be significant competitors, particularly through collaborative arrangements with large
pharmaceutical and biotechnology companies. In addition, our competitors may complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before us, thus achieving a significant competitive
advantage.



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



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



Our Patents and Proprietary Technology



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



9



---

##### Table of Contents

We own, or have exclusive licenses to use, over 180 issued or allowed patents relating to nucleic acid
technology. Over 30 of these issued or allowed patents extend coverage to the RNA interference technology. Additionally, we have filed over 60 patent applications covering various aspects of this technology, including chemically stabilized RNA
interference constructs, method of synthesizing RNA interference constructs, application of RNA interference to specific therapeutic targets and for target discovery. We are in the process of filing additional patent applications to expand our
coverage for the RNA interference technology, inventions and improvements that are considered important to the development of our business.



As part of our overall intellectual property strategy, we selectively enter into agreements with academic institutions either to license pre-existing
technology or to support the development of new technologies. With these agreements we intend to gain the commercial rights to such new technologies, such as RNA interference. It is our policy to file patent applications when appropriate to protect
technology, inventions and improvements that are considered important in the development of our business. In 2003, 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 the seminal RNA interference technology covering 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 us 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. In addition, we have non-exclusive license to another RNAi-related technology patent from the Carnegie Institute of Washington and University of Massachusetts. The
license covers the RNAi technology patent filed by Fire et al., U. S. Patent No. 6,506,559 B1, which is jointly owned by Carnegie Institute of Washington and University of Massachusetts.



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



Government Regulation of our Drug Development Activities



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



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



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



Data from preclinical and clinical trials are submitted to the FDA as a New Drug Application, or NDA, for marketing approval and to other health
authorities as a marketing authorization application. The process of completing clinical trials for a new drug is likely to take a number of years and requires the expenditure of substantial resources. Preparing an NDA or marketing authorization
application involves considerable data collection, verification, analysis and expense. There can be no assurance that FDA or any other health authority approval will be granted on a timely basis, if at all. The approval process is



10



---

##### Table of Contents

affected by a number of factors, primarily the risks and benefits demonstrated in clinical trials as well as the severity
of the disease and the availability of alternative treatments. The FDA or other health authorities may deny an NDA or marketing authorization application if the authoritys regulatory criteria are not satisfied or may require additional testing
or information.



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



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



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



Our Manufacturing and Marketing



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



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



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



Our Employees



As of December 31, 2003, we had 71 full-time employees, including a technical scientific and support staff of 60 and the
balance in general administration. Our future performance depends significantly on the continued service of our key personnel. None of our employees are covered by collective bargaining arrangements. We believe our employee relations are good.



11



---

##### Table of Contents

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 December 31, 2003, our accumulated deficit was approximately $224.3 million. We expect that the ability to use our net operating loss as a
tax benefit will be significantly restricted in the future as a result of the change of control associated with the 2003 private placement transaction with the Sprout Group, Venrock Associates, Oxford Bioscience Partners IV, TVM V Life Science
Ventures GmbH & Co. KG and Granite Global Ventures (collectively, the Investors).



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



There is
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 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.



12



---

##### Table of Contents

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.



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



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



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



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



Generally, if a partner were to terminate its funding of the development of a particular product candidate from our collaboration, we may not have the
right or resources to continue development of that product candidate on our own. Similarly, if we are unable to attract partners for particular product candidates, then we may be unable to develop those candidates.



13



---

##### Table of Contents

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



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



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



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



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



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



We currently lack sales and marketing experience and will likely rely upon
third parties to market our products which will result in a loss of control over the marketing process. Currently, we intend to rely on third parties with established direct sales forces to market, distribute and sell many of our products. These
third parties may have significant control over important aspects of the commercialization of our products, including market identification, marketing methods, pricing, sales force recruitment and management and promotional activities. We may be
unable to control the actions of these third parties. We may be unable to make or maintain arrangements with third parties to perform these activities on favorable terms.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



14



---

##### Table of Contents

A small number of investors can control the company.



As of December 31, 2003, the Investors in our recently completed private
placement collectively own approximately 79.2% (after giving effect to the exercise of their warrants issued in connection with the private placement, but prior to giving effect to exercise of any stock options) of our outstanding common stock. In
addition, some of the Investors currently have the right to select four of seven members of our Board of Directors. In connection with the private placement transaction 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 products require materials that may not be
readily available or cost effective, which may reduce our competitiveness or reduce our profitability.



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



Disclosure of our trade secrets could reduce our competitiveness.



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



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



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



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



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



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



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



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



15



---

##### Table of Contents

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



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



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



These fluctuations are not necessarily related to our operating performance. As a result, the value of your shares could vary significantly from time to
time. The historical trading volume of our common stock has been limited.



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



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



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



The personal liability of our directors is limited.



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



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



Available Information



Our principal Internet address is www.sirna.com. We make available free of charge on www.sirna.com our annual, quarterly and current reports, and
amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.



16



---

##### Table of Contents

ITEM 2. PROPERTIES



We lease
approximately 57,000 square feet of laboratory, manufacturing and office space in two adjacent buildings in Boulder, Colorado, under operating leases that will expire in October 2007 and June 2007 respectively. Our facilities are sufficient to meet
our needs for the foreseeable future.



ITEM 3. LEGAL PROCEEDINGS



We do
not have any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we are a party or of which any of our property is the subject.



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



Not applicable.



17



---

##### Table of Contents

EXECUTIVE OFFICERS OF THE REGISTRANT



Our executive officers, who are elected by and serve at the discretion of the Board of Directors, are as follows (all ages are as of March 15, 2004):



|                                |  |     |  |                                                                                 
|------------------------------- |  | --- |  | --------------------------------------------------------------------------------
|Name                            |  | Age |  | Position                                                                        
|Howard W. Robin                 |  | 51  |  | Chief Executive Officer, President and Director                                 
|                                |  |    
|Nassim Usman, Ph.D              |  | 44  |  | Chief Operating Officer and Senior Vice President                               
|                                |  |    
|Barry Polisky, Ph.D             |  | 57  |  | Senior Vice President of Research                                               
|                                |  |    
|Bharat M. Chowrira, Ph.D., J.D. |  | 38  |  | Vice President, Legal Affairs, Licensing, Patent Counsel and Corporate Secretary



Howard W. Robin has
served as Chief Executive Officer, President and Director since July 2001. From January 2001 to June 2001, Mr. Robin was Chief Operating Officer, President and Director. From 1991 to 2001, Mr. Robin was Corporate Vice President and General Manager
at Berlex Laboratories, Inc., a subsidiary of Schering, AG, and from 1987 to 1991 he served as Vice President of Finance and Business Development and Chief Financial Officer. From 1984 to 1987, Mr. Robin was Director of Business Planning and
Development at Berlex. He was a Senior Associate with Arthur Andersen & Co. prior to joining Berlex. He received his BS in Accounting and Finance from Farleigh Dickinson University in 1974.



Nassim Usman, Ph.D., has served as Chief Operating Officer and Senior Vice
President since December 2003. Prior to December 2003 he served as Chief Scientific Officer since February 2002, and as Vice President of Research and Development since August 2000. From December 1999 to July 2000, Dr. Usman served as Senior Vice
President of Research. From May 1996 to December 1999, Dr. Usman served as Vice President of Research. From April 1994 until May 1996, Dr. Usman served as Director of Chemistry and Biochemistry Research and from September 1992 until April 1994 Dr.
Usman served as Senior Scientist in Chemistry and Biochemistry. From January 1987 to September 1992, Dr. Usman was a Postdoctoral Fellow and Scientist in the Departments of Biology and Chemistry at the Massachusetts Institute of Technology. Dr.
Usman received his Ph.D. in chemistry from McGill University.



Barry Polisky, Ph.D., has served as Senior Vice President of Research since December 2003. Dr Polisky joined Sirna Therapeutics in June 2002 as Vice President of Research. Prior to joining Sirna Therapeutics, Dr. Polisky served as
Vice-President of Research at ThermoBiostar, Inc. where he initiated and launched a SNP diagnostic platform. From 1992 to 1998, Dr. Polisky was Vice President of Research and Drug Discovery at NeXstar, Inc. where he developed several aptamers
(nucleic acid-based therapeutics including the VEGF aptamer currently in Phase III development). Prior to joining NeXstar, Dr. Polisky was Professor and Chairman of the Molecular Biology program at Indiana University. Dr. Polisky received his Ph.D.
in molecular biology from the University of Colorado and conducted his post-doctoral work in the Department of Biochemistry and Biophysics, University of California, San Francisco.



Bharat M. Chowrira, Ph.D., J.D. has served as our Vice President, Legal Affairs, Licensing & Patent Counsel since May
2002. Dr. Chowrira joined Sirna Therapeutics in 1993 and is responsible for Sirna Therapeutics legal and business licensing activities and general corporate matters. Dr. Chowrira also serves as the corporate secretary. Dr. Chowrira has been
responsible for building and maintaining our intellectual property portfolio and strategic alliance initiatives. Dr. Chowrira received his J.D. degree from the College of Law at the University of Denver and holds a Ph.D. in Microbiology and
Molecular Genetics from the University of Vermont. Dr. Chowrira is a registered patent attorney and a member of the Colorado Bar Association, American Intellectual Property Law Association, Licensing Executive Society and the American Corporate
Counsel Association.



18



---

##### Table of Contents

PART II



ITEM 5. MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES



Our common stock is traded on the Nasdaq National Market under the symbol RNAI. The last sale price of the common stock as reported on the
Nasdaq National Market on March 16, 2004, was $4.30 per share. On March 16, 2004, there were approximately 229 holders of record of our common stock. Effective April 16, 2003, we declared a 1-for-6 reverse stock split. The sale prices below reflect
the 1-for-6 reverse stock split. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq National Market.



|                                       |  |      |       |     |   |      
|-------------------------------------- |  | ---- | ----- | --- | - | -----
|                                       |  | High |       | Low
|Year Ended December 31, 2002,          |  |      |       |     |   |      
|First Quarter                          |  | $    | 30.72 |     | $ | 17.04
|Second Quarter                         |  | $    | 18.00 |     | $ | 4.26 
|Third Quarter                          |  | $    | 8.28  |     | $ | 2.16 
|Fourth Quarter                         |  | $    | 4.14  |     | $ | 1.20 
|Year Ended December 31, 2003,          |  |      |       |     |   |      
|First Quarter                          |  | $    | 4.56  |     | $ | 1.20 
|Second Quarter                         |  | $    | 11.44 |     | $ | 2.10 
|Third Quarter                          |  | $    | 9.21  |     | $ | 3.65 
|Fourth Quarter                         |  | $    | 8.16  |     | $ | 4.75 
|Year Ended December 31, 2004,          |  |      |       |     |   |      
|First Quarter (through March 16, 2004) |  | $    | 6.49  |     | $ | 3.90 



Dividend Policy



We have never declared or paid cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. The Companys ability to pay dividends is restricted by the terms of its convertible debt and equipment loan facility agreements.



Equity Compensation Plan Information



Information regarding our equity compensation plans may be found in Item 12
of this annual report on Form 10-K and is incorporated herein by this reference.



Purchases of Securities



None



Recent Sales of Unregistered Securities



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 as a portion of the compensation 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 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 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.



19



---

##### Table of Contents

In April 2003, we issued a warrant to Elan International Services, Ltd. to purchase 85,718 shares of our
common stock at an exercise price of $2.52 per share.



On
February 11, 2003, we issued to Schering AG a warrant to purchase 41,667 shares of our common stock at an exercise price of $2.52 per share. On November 6, 2003, Schering AG executed a cashless exercise of this warrant, pursuant to which we issued
to Schering AG a net of 28,170 shares of our common stock.



On
December 21, 2001, we entered into a Securities Purchase Agreement with Elan International Services, Ltd. to issue to Elan International Services, Ltd. 125,000 shares of our common stock and a warrant to acquire up to 12,500 shares of our common
stock at an exercise price of $30.00 per share.



In May 2001,
we issued 83,417 shares of our common stock to Elan International Services, Ltd. for an aggregate purchase price of approximately $5,000,000.



In March 2001, we issued 6,487 shares of our common stock to Chiron in exchange for our reacquiring all rights to develop any ribozyme product containing
or using an HIV target. We recorded an expense of $275,000 in connection with the issuance of the shares.



The sale and issuance of the securities in each of the transactions described above were deemed to be exempt from registration under the Securities Act of
1933, as amended in reliance upon Section 4(2) of the Securities Act of 1933, as amended and/or Rule 506, as promulgated thereunder. The recipients of securities represented their intention to acquire the securities for investment only and not with
a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions these sales were made without general solicitation or advertising. Each recipient was an accredited
investor. All recipients had adequate access, through their relationship with Sirna, to information about us.



The shares issued in some of the above transactions were subsequently registered on Form S-3 registration statements. We received and will receive no
proceeds from the resale of these shares by the selling stockholders under the registration statements.



20



---

##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



The following selected financial data are derived from our audited financial statements. Our financial statements for 2003, 2002, 2001, 2000 and 1999 have been audited by Ernst & Young LLP, independent auditors. These historical results
do not necessarily indicate future results. When you read this data, it is important that you also read our financial statements and related notes, as well as the section Managements Discussion and Analysis of Financial Condition and
Results of Operations.



|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ------------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                     |  | Year Ended December 31,               |         
|                                                                     |  | 2003                                  |          |   | 2002 |   |          | 2001 |  |   | 2000     |   |  | 1999 |        
|                                                                     |  | (In Thousands, except per share data) |         
|Statement of Operations Data:                                        |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Revenues                                                             |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Collaborative agreements                                             |  | $                                     | 3,756    |   |      | $ | 3,488    |      |  | $ | 3,318    |   |  | $    | 8,302   |   |  | $ | 5,797   |  
|Collaborative agreements-joint venture                               |  |                                       | 2        |   |      |   | 1,069    |      |  |   | 3,960    |   |  |      | 6,052   |   |  |   |        |  
|Collaborative agreements-related parties                             |  |                                       | 417      |   |      |   | 591      |      |  |   | 1,030    |   |  |      | 1,191   |   |  |   | 1,867   |  
|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Total revenues                                                       |  |                                       | 4,175    |   |      |   | 5,148    |      |  |   | 8,308    |   |  |      | 15,545  |   |  |   | 7,664   |  
|Expenses                                                             |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Research and development                                             |  |                                       | 23,460   |   |      |   | 28,659   |      |  |   | 56,689   |   |  |      | 21,721  |   |  |   | 15,395  |  
|General and administrative                                           |  |                                       | 5,005    |   |      |   | 5,505    |      |  |   | 4,512    |   |  |      | 3,723   |   |  |   | 2,132   |  
|Write-off of patent costs                                            |  |                                       | 5,344    |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Total operating expenses                                             |  |                                       | 33,809   |   |      |   | 34,164   |      |  |   | 61,201   |   |  |      | 25,444  |   |  |   | 17,527  |  
|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Operating loss                                                       |  |                                       | (29,634  | ) |      |   | (29,016  | )    |  |   | (52,893  | ) |  |      | (9,899  | ) |  |   | (9,863  | )
|Other income (expense):                                              |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Interest income                                                      |  |                                       | 426      |   |      |   | 389      |      |  |   | 2,165    |   |  |      | 3,196   |   |  |   | 614     |  
|Interest expense                                                     |  |                                       | (415     | ) |      |   | (803     | )    |  |   | (820     | ) |  |      | (151    | ) |  |   | (552    | )
|Other income (expense)                                               |  |                                       | (9       | ) |      |   |         |      |  |   | 51       |   |  |      | 4       |   |  |   |        |  
|Equity in loss of unconsolidated affiliates                          |  |                                       | (209     | ) |      |   | (5,276   | )    |  |   | (8,341   | ) |  |      | (9,032  | ) |  |   | (860    | )
|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Total other income (expense)                                         |  |                                       | (207     | ) |      |   | (5,690   | )    |  |   | (6,945   | ) |  |      | (5,983  | ) |  |   | (798    | )
|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net loss                                                             |  |                                       | (29,841  | ) |      |   | (34,706  | )    |  |   | (59,838  | ) |  |      | (15,882 | ) |  |   | (10,661 | )
|Accretion of dividends on preferred stock                            |  |                                       | 562      |   |      |   | 1,571    |      |  |   | 775      |   |  |      | 716     |   |  |   |        |  
|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net loss applicable to common stock                                  |  | $                                     | (30,403  | ) |      | $ | (36,277  | )    |  | $ | (60,613  | ) |  | $    | (16,598 | ) |  | $ | (10,661 | )
|                                                                     |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Net loss per share (basic and diluted)                               |  | $                                     | (1.31    | ) |      | $ | (10.81   | )    |  | $ | (21.54   | ) |  | $    | (6.92   | ) |  | $ | (6.30   | )
|Shares used in computing net loss per share (basic and diluted)      |  |                                       | 23,279   |   |      |   | 3,356    |      |  |   | 2,814    |   |  |      | 2,398   |   |  |   | 1,693   |  
|                                                                     |  |                                       |          |   |     
|Balance Sheet Data:                                                  |  |                                       |          |   |      |   |          |      |  |   |          |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents and securities available-for-sale             |  | $                                     | 36,624   |   |      | $ | 8,821    |      |  | $ | 34,995   |   |  | $    | 64,475  |   |  | $ | 14,000  |  
|Working capital                                                      |  |                                       | 33,295   |   |      |   | 5,027    |      |  |   | 31,908   |   |  |      | 65,002  |   |  |   | 14,086  |  
|Total assets                                                         |  |                                       | 42,684   |   |      |   | 21,898   |      |  |   | 52,023   |   |  |      | 83,897  |   |  |   | 25,092  |  
|Capital lease obligations and long-term debt, current portion.       |  |                                       | 582      |   |      |   | 480      |      |  |   | 169      |   |  |      |        |   |  |   | 200     |  
|Capital lease obligations and long-term debt, net of current portion |  |                                       | 3,868    |   |      |   | 6,489    |      |  |   | 12,591   |   |  |      | 3,757   |   |  |   | 6,811   |  
|Series A preferred stock and accreted dividends                      |  |                                       |         |   |      |   | 14,329   |      |  |   | 13,507   |   |  |      | 12,731  |   |  |   |        |  
|Accumulated deficit                                                  |  |                                       | (224,350 | ) |      |   | (194,509 | )    |  |   | (159,803 | ) |  |      | (99,965 | ) |  |   | (84,083 | )
|Total stockholders equity (deficit)                                 |  |                                       | 34,774   |   |      |   | (3,953   | )    |  |   | 20,398   |   |  |      | 63,263  |   |  |   | 14,881  |  



21



---

##### Table of Contents

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS



We begin Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with the companys business overview
to give you an understanding of the technology of our business and the direction in which our business and our product candidates are moving. This is followed by a discussion of the Critical Accounting Estimates that we believe are important to
understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our Results of Operations for 2003 compared to 2002, and for 2002 compared to 2001, separated by our functions. We then provide an analysis
of changes in our balance sheet and cash flows, and discuss our financial commitments in the section entitled Liquidity and Capital Resources.



This MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Item 1: Business, Item
6: Selected Financial Data, and Item 8: Financial Statements and Supplementary Data. This MD&A and various other sections of this Annual Report on Form 10-K contain a number of forward-looking statements, all of which are based
on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. 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 under Item 1. 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.



Business Overview



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



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



Since our inception in 1992, we have dedicated ourselves to engineering RNA-based molecules for therapeutic and diagnostic purposes. Our expertise in nucleic acid technology enables us to focus on the development of a
new type of nucleic acid-based therapeutic based on RNA interference. In 2001 we began to study RNA interference (RNAi) and in 2003, based on advancements in, and potential of, the field, we directed our research and development activities entirely
to RNA interference. We are using our expertise to design, stabilize, manufacture and deliver short interfering ribonucleic acids (siRNAs) that activate selectively the process of RNA interference. We believe siRNA-based drugs may become important
therapeutics in the future. We also continue to act as a manufacturer of oligonucleotides (chains of nucleotides that can be chemically synthesized; oligonucleotides are a form of nucleic acid) for our use and for use by our collaborators and
customers, to generate free cash flow for the purpose of supporting our therapeutic discovery operations.



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



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



22



---

##### Table of Contents

| |  | Hepatitis C Virus, or HCV, Infection There are approximately 3.9 million individuals infected with hepatitis C in the United States and over 170 million worldwide. Of
the 3.9 million infected individuals in the United States, 70% have chronic hepatitis C and are potential candidates for treatment. Each year in the United States, hepatitis C infects between 250,000 to 500,000 new individuals and leads to between
8,000 to 10,000 deaths. We are in lead identification stage of preclinical development of siRNAs that target the HCV viral RNA to treat HCV infection and expect to select a clinical candidate by the end of 2004.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



We are also evaluating other disease targets and indications for the development of RNA interference-based therapeutics.



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



Licensing, Process Development and Pilot Manufacturing.In addition to our work with RNA interference, we also have
developed an extensive expertise in nucleic acid technologies. We intend to leverage our nucleic acid expertise through licensing, process development and pilot manufacturing. To date, we have entered into certain process development and pilot
manufacturing arrangements with collaborators which have generated revenues. Recently, we entered into an agreement with Archemix, a privately held company, whereby we are manufacturing Archemixs cGMP-grade ARC183, an anti-thrombin aptamer. In
addition, in 2003 we completed a collaboration with Geron Corporation, a biopharmaceutical company focused on oncology and regenerative medicine. Our first program, which began in 2001, was a process development consultation with Geron for GRN163, a
nucleic acid-based telomerase agonist for cancer. We successfully completed the program and renewed the agreement to manufacture GMP clinical-grade GRN163 for Gerons Phase I clinical study. Delivery under this agreement was completed in June
2003. We intend to continue to seek out process development and manufacturing collaborations in order to supplement our research activities.



Other Programs.As we have redirected our business to focus on RNA interference, our ribozyme related partnerships, are winding down. ANGIOZYME is
a ribozyme-based product candidate we were developing in collaboration with Chiron Corporation, or Chiron, to treat solid tumor cancers. We completed analysis of data from a Phase II colorectal cancer clinical trials. Due to our new business
strategy, however, 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 will be found, and if so,
under terms agreeable to both Chiron and Sirna.



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



23



---

##### Table of Contents

Developments in 2003



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



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.



At December 31, 2003, we had an outstanding convertible loan, including accrued interest, of $3.06 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.



Rights Offering.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. We offered the rights to give each stockholder
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.



University of Massachusetts License. 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 at the time
of signing, 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.



24



---

##### Table of Contents

Eli Lilly Collaboration. In January 2004, we announced a collaboration with Lilly to develop novel
RNAi therapeutics. During the eighteen-month collaboration we will investigate our proprietary modified siRNAs against specific oncology targets designated by Lilly. For the collaboration, we will provide the chemistry and pharmacology and Lilly
will provide the targets, preclinical in vivo models and research funding.



Critical Accounting Estimates



The
methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading Results of Operations following this section
of our MD&A. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include
recognition of revenue, valuation of our patent costs and accounting for our investments in our unconsolidated affiliates.



Revenue Recognition.To date, we have committed substantially all our resources to our research and product candidate development programs.
We have not generated any revenues from therapeutic product sales, nor do we anticipate generating any therapeutic product revenues in the foreseeable future. Revenue recorded from our collaborative agreements may consist of: research revenue,
contract manufacturing revenue, milestone revenue and license or royalty revenue. We generally recognize revenue when we have satisfied all contractual obligations and we are reasonably assured of collecting the resulting receivable. Given the
nature of our business and the infrastructure that we need to support, we often enter into collaborations where we receive nonrefundable up-front payments for prior or future expenditures. In compliance with current accounting rules, we recognize
revenue related to up-front payments over the period of the contractual arrangements as we satisfy our performance obligations. Occasionally, we are required to estimate the period of a contractual arrangement or our performance obligation when the
information is not clearly defined in the agreements we enter into. Should different estimates prevail, revenue recognized could be different. As of December 31, 2003, we evaluated our estimates for the periods of contractual arrangements and
determined that our estimates are appropriate. We depend upon funding from external financing and corporate collaborations for our research and product development programs and expect to depend upon this funding for the foreseeable future.



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



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



On April 21, 2003, as previously discussed, we completed a private placement. 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. Based on this review, we wrote off $447,000 of patent costs related to patents or patents that we abandoned in the second quarter of 2003. In addition, since we are no longer pursuing the
development of ribozymes internally, we expensed approximately $4.9 million of capitalized patent costs related to the ribozyme technology. This expense is reflected as a separate line item in our statement of operations for the year ended December
31, 2003.



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



Accounting for Investments in
Unconsolidated Affiliates. As part of the joint venture with Elan, we licensed HERZYME and Elan licensed its MEDIPAD® and certain liposomal drug delivery technologies to the joint venture, Medizyme. The joint venture was terminated in April 2003. While we own 100% of
the outstanding common stock of Medizyme, 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
December 31, 2003, we had absorbed the entire cost basis in our equity investment through our share of Medizymes net losses.



25



---

##### Table of Contents

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 approximately 10% of atugen common stock, which is subordinate to certain rights and preferences of atugens preferred shares.



Results of Operations for Twelve Months Ended December 31, 2003, 2002 and 2001



Revenues



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

|                        |  |              |       |      |   |       |  |   |      
|----------------------- |  | ------------ | ----- | ---- | - | ----- |  | - | -----
|                        |  | December 31,
|                        |  | 2003         |       | 2002 |   | 2001 
|Revenues                |  |              |       |      |   |       |  |   |      
|Geron (Manufacturing)   |  | $            | 2,783 |      | $ | 718   |  | $ |     
|Chiron (ANGIOZYME)      |  |              | 550   |      |   | 2,188 |  |   | 3,074
|Atugen (Licensing)      |  |              | 417   |      |   | 591   |  |   | 1,030
|Fujirebio (Diagnostics) |  |              | 169   |      |   | 556   |  |   |     
|Medizyme (HERZYME)      |  |              | 2     |      |   | 1,069 |  |   | 3,960
|Other                   |  |              | 254   |      |   | 26    |  |   | 244  
|                        |  |              |       |      |   |       |  |   |      
|Total Revenues          |  | $            | 4,175 |      | $ | 5,148 |  | $ | 8,308
|                        |  |              |       |      |   |       |  |   |      



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 for the development of HERZYME. Collaborative agreements-related parties consists of revenues recorded from atugen.



Our revenues for 2003 were $4.2 million, a decrease of $973,000 compared to
2002. The decrease was 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 had
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. As discussed previously, we are not pursuing independent development of ANGIOZYME and discontinued clinical trials in 2003. In addition, in April 2003, we terminated our joint venture with Elan and are not pursuing
independent development of HERZYME. Offsetting our loss in revenues in the ribozyme programs are the revenues related to our Geron manufacturing collaboration. Geron revenues increased $2.0 million in 2003 compared to 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. Revenues attributable to atugen have decreased due to an overall reduction in services provided.



Our revenues for 2002 were $5.1 million, a decrease of $3.2 million compared
to 2001. The decrease was primarily due to lower revenues associated with ANGIOZYME and HERZYME as discussed above. In addition, our revenues from atugen decreased by approximately $440,000 because atugen USA ceased operations during 2002 and our
services provided to them ceased as well. However, revenue from other sources and projects increased for the same period. During the first quarter of 2002, we signed an agreement with Fujirebio, a Japanese diagnostic company, for the use of
allosteric ribozymes that resulted in revenues of $556,000 during 2002. In addition, for the twelve months ended December 31, 2002, we recognized $718,000 from Geron for our process development and manufacturing scale-up for Gerons anti-cancer
drug, GRN163.



26



---

##### Table of Contents

The collaborations for which revenues were recognized during 2003 are completed or are currently in the
process of winding down. We are actively pursuing partnerships and collaborations to fund our research and development programs.



Expenses



Research and Development



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



|                              |  |              |        |      |   |        |  |   |       
|----------------------------- |  | ------------ | ------ | ---- | - | ------ |  | - | ------
|                              |  | December 31,
|                              |  | 2003         |        | 2002 |   | 2001  
|Research and development      |  |              |        |      |   |        |  |   |       
|Salaries and benefits         |  | $            | 7,144  |      | $ | 9,536  |  | $ | 10,108
|Chemicals and supplies        |  |              | 1,703  |      |   | 1,763  |  |   | 3,085 
|License fees                  |  |              | 6,197  |      |   | 5      |  |   |      
|Outside services              |  |              | 1,116  |      |   | 9,619  |  |   | 35,200
|Depreciation and amortization |  |              | 1,652  |      |   | 1,974  |  |   | 1,954 
|Other                         |  |              | 5,648  |      |   | 5,762  |  |   | 6,342 
|                              |  |              |        |      |   |        |  |   |       
|Total R&D expenses            |  | $            | 23,460 |      | $ | 28,659 |  | $ | 56,689
|                              |  |              |        |      |   |        |  |   |       
|R&D average staffing          |  |              | 66     |      |   | 82     |  |   | 106   



Our research and
development expenses for 2003 were $23.5 million, a decrease of $5.2 million compared to 2002. The decrease in expenses was primarily due to outside service costs decreasing $8.5 million because we discontinued clinical trials for ANGIOZYME in 2003.
Expenses such as clinical trial site fees and third party manufacturing costs of ANGIOZYME and HEPTAZYME (a ribozyme drug targeting hepatitis C virus) were included in outside service expenses in 2002. In 2003, outside service expenses included
completing phase II clinical studies for ANGIOZYME and outside studies conducted for our preclinical work in our RNAi programs. In addition, we had an overall reduction in staffing of 20% which decreased personnel costs $2.4 million. The reductions
in 2003 were offset by $6.0 million in expense recognized for RNAi technology licensed from the University of Massachusetts in September 2003 which was expensed because of the early stage of technology.



Our research and development expenses for 2002 were $28.7 million, a decrease
of $28.0 million compared to 2001. The decrease in 2002 was primarily due to $28.9 million of expenses, net of partner reimbursements, we incurred in 2001 for third party manufacturing costs for ANGIOZYME and HEPTAZYME drug to support our clinical
trials, compared to $3.3 million, net, we incurred in 2002. In addition, a 23% reduction in staffing led to a decrease in personnel costs of $572,000.



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



|                       |  |              |        |      |   |        |  |   |       
|---------------------- |  | ------------ | ------ | ---- | - | ------ |  | - | ------
|                       |  | December 31,
|                       |  | 2003         |        | 2002 |   | 2001  
|Project expenses       |  |              |        |      |   |        |  |   |       
|RNAi*                  |  | $            | 9,601  |      | $ |       |  | $ |      
|ANGIOZYME              |  |              | 802    |      |   | 5,194  |  |   | 13,844
|HEPTAZYME              |  |              | 85     |      |   | 7,153  |  |   | 30,396
|HERZYME                |  |              | 114    |      |   | 1,433  |  |   | 4,084 
|                       |  |              |        |      |   |        |  |   |       
|Total project expenses |  | $            | 10,602 |      | $ | 13,780 |  | $ | 48,324
|                       |  |              |        |      |   |        |  |   |       

---

|* | 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.



27



---

##### Table of Contents

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



| | 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.



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



|                           |  |              |       |      |   |       |  |   |      
|-------------------------- |  | ------------ | ----- | ---- | - | ----- |  | - | -----
|                           |  | December 31,
|                           |  | 2003         |       | 2002 |   | 2001 
|General and administrative |  |              |       |      |   |       |  |   |      
|Salaries and benefits      |  | $            | 3,221 |      | $ | 3,290 |  | $ | 3,213
|Other                      |  |              | 1,784 |      |   | 2,215 |  |   | 1,299
|                           |  |              |       |      |   |       |  |   |      
|Total G&A expenses         |  | $            | 5,005 |      | $ | 5,505 |  | $ | 4,512
|                           |  |              |       |      |   |       |  |   |      
|G&A average staffing       |  |              | 11    |      |   | 15    |  |   | 22   



General and
administrative expenses for 2003 were $5.0 million, compared to $5.5 million and $4.5 million for the years 2002 and 2001, respectively. General and administration expenses for year 2003 were $500,000 less than 2002 primarily due to concerted
efforts to reduce general expenses. General and administrative expenses for 2002 were $993,000 more than 2001 as a result of increased legal and professional fees in connection with business development efforts and patent protection. The immaterial
changes in personnel expenses over the last three years, despite our reduced staffing, are due to severance packages in restructuring and increases in salaries and benefits. We expect general and administrative costs to approximate the same levels
in 2004 as in 2003.



28



---

##### Table of Contents

Staffing levels for research, development and general administrative departments have fluctuated from a
high of 138 during 2002 to 74 as of March 2004. We increased staffing significantly during 2000 and 2001 in order to support the clinical development of ANGIOZYME and HEPTAZYME. During 2002, we discontinued HEPTAZYME clinical trials, scaled back
considerably the scope and number of ANGIOZYME trials and directed our efforts into the research and development of RNAi therapeutics. Our expenses in 2003, 2002 and 2001 reflect the staffing fluctuation. We do not currently expect to increase
staffing significantly in 2004.



Write-off of patent
costs. On April 21, 2003, as previously discussed, we completed a private placement. We also changed our business strategy which had 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. Based on 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 time such costs will be capitalized. Future patent-related legal costs will be included in research and
development expenses.



Interest income.Interest
income was $426,000 in 2003, compared to $389,000 and $2.2 million in 2002 and 2001, respectively. The fluctuation from year to year is due to the fluctuation of average balances in our cash, cash equivalents and securities available-for-sale. In
addition, overall average reductions are attributable to the decrease in the prevailing interest rates over the last few years.



Interest expense.Interest expense was $415,000 in 2003, compared to $803,000 and $820,000 for 2002 and 2001, respectively. Interest expense
in 2003 includes interest on a $1.1 million (as of December 31, 2003) equipment loan with a credit institution and the quarterly interest paid on our Schering AG loan. The decrease over the periods reported is primarily due to the conversion of the
Elan convertible note to Series B Preferred Stock in June 2002. 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 in 2002, compared to zero expense in 2003. Offsetting the decrease in accrued interest related to the Elan note during 2002, was interest expense related to the equipment loan established with a credit facility in December
2001. During 2001 interest expense was primarily related to our Elan convertible note. Interest expense is expected to increase in the future as we arrange for additional financing for operations.



Equity in loss of unconsolidated affiliate. Equity in loss of
unconsolidated affiliate $209,000 in 2003, compared to $5.3 million and $8.3 million in 2002 and 2001, respectively. The expense is our share of Medizymes expenses. The decrease in loss recognized for the last three years, is due to the
wind-down and subsequent termination of our joint venture with Elan in April 2003. As of December 31, 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 $36.6 million at December 31, 2003 compared with $8.8 million at December 31, 2002. The
$27.8 million increase in cash, cash equivalents and securities available-for-sale is primarily the result of $50.4 million received in net proceeds from equity sales, offset by $20.8 million used for operations, net of revenues of $4.2 million;
$749,000 used for investments in equipment, leasehold improvements, patents and additional investment in an unconsolidated affiliate; and $1.1 million paid for debt obligations.



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



Accounts receivable at December 31, 2003 were $156,000 compared to $483,000
at December 31, 2002. Accounts receivable at December 31, 2003 included $145,000 due from Archemix related to our manufacturing agreement.



Total additions for property, plant and equipment for the twelve months ended December 31, 2003 were $340,000. As of December 31, 2003, we have $1.1
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.



29



---

##### Table of Contents

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, whereby we paid the contract manufacturer the sum of $1,726,805 to settle all obligations instead of making the payments of $1.1 million and $873,491, together with the
interest owed.



Schering AG. At December 31, 2003, we
had an outstanding convertible loan, including accrued interest, of $3.06 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.



The following table summarizes our debt obligations as of December 31, 2003 (in thousands):



|                       |  |                        |       |      |   |       |  |      |       |      |   |            |  |       |   |  |   |   |  |   |      
|---------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | - |  | - | - |  | - | -----
|                       |  | Payments Due by Period
|                       |  | 2004                   |       | 2005 |   | 2006  |  | 2007 |       | 2008 |   | Thereafter |  | Total
|Long-term debt         |  | $                      | 582   |      | $ | 3,346 |  | $    | 137   |      | $ | 6          |  | $     | 4 |  | $ |  |  | $ | 4,075
|Operating leases       |  |                        | 1,122 |      |   | 1,156 |  |      | 1,180 |      |   | 809        |  |       |  |  |   |  |  |   | 4,267
|                       |  |                        |       |      |   |       |  |      |       |      |   |            |  |       |   |  |   |   |  |   |      
|Total debt obligations |  | $                      | 1,704 |      | $ | 4,502 |  | $    | 1,317 |      | $ | 815        |  | $     | 4 |  | $ |  |  | $ | 8,342
|                       |  |                        |       |      |   |       |  |      |       |      |   |            |  |       |   |  |   |   |  |   |      



The Companys
ability to pay dividends is restricted by the terms of its convertible debt and equipment loan facility agreements.



We have financed our operations through sales of equity securities in public offerings, private placements of preferred and common stock, funds received
under our collaborative agreements and financing under equipment and tenant improvement loans. We anticipate that, with the consummation of our private placements in April 2003, our existing financial resources and expected revenues from
collaborations, our cash should be sufficient to meet our anticipated operating and capital requirements through 2005. We expect to incur substantial additional costs, including costs related to:



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



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



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



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



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



We will continue to need to raise additional capital through any or all of the following: public or private financing, merger or acquisition, new
collaborative relationships, new credit facilities and/or other sources. If we raise funds by 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, 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



30



---

##### Table of Contents

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 5 to the Notes to Condensed Financial Statements for the quarterly disclosure requirements under SFAS No. 148.



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



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a
business enterprise has a controlling financial interest in a variable interest entity (VIE), the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. The consolidation requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003. The consolidation requirements for older VIEs are effective for financial
statements of interim or annual periods beginning after June 15, 2003, however in October of 2003 the FASB deferred the effective date of FIN 46 for older VIEs to the end of the first interim or annual period ending after December 15, 2003.
Certain disclosure requirements are effective for all financial statements issued after January 31, 2003, regardless of when the VIE was established. We do not have any ownership in any variable interest entities as of December 31, 2003. We will
apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.



Net Operating Loss Carryforwards.At December 31, 2003, we had available net operating loss carryforwards and research and development credit
carryforwards of $188.6 million and $5.0 million, respectively, for income tax purposes. However, pursuant to the change in ownership rules under Section 382 of the Internal Revenue Code, our ability to utilize our net operating loss
carryforwards is subject to an annual limitation in future periods. As a result of our private placement in April, 2003, which we deem a change of ownership for tax purposes, we believe that there are substantial limitations on the utilization of
our net operating loss carryforwards.



Off-Balance Sheet
Arrangements. As of December 31, 2003, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of the Securities and Exchange Regulation S-K.



31



---

##### Table of Contents

ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Submitted as part of Item 15(a) of this Form 10-K and incorporated herein by reference.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



Not applicable.



ITEM 9A. CONTROLS AND PROCEDURES



Controls
Evaluation and Related CEO and CFO Certifications



Under
the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report (the Evaluation Date). Based upon the
evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we
file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



32



---

##### Table of Contents

PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT



The information required by this item is included under Proposal No. 1: Election of Directors, Executive Compensation and Compliance with Section 16(a) of the Exchange Act in our
Proxy Statement, to be filed in connection with our 2004 Annual Meeting of Stockholders, and is incorporated herein by reference. Information regarding the audit committee of the Companys board of directors and information regarding an audit
committee financial expert is incorporated by reference from information contained under the caption Audit Committee Report in the Companys 2004 Proxy Statement. Information regarding the Companys code of business conduct and
ethics that applies to the Companys principal executive officer, principal financial officer and controller is incorporated by reference from information contained under the captionBoard of Directors and Committee MeetingsAudit
Committee in the Companys 2004 Proxy Statement. Information regarding our implementation of procedures for stockholder nominations to our board is incorporated by reference from information contained under the captionConsideration of Director NomineesStockholder Nominees in the Companys 2004 Proxy Statement.



ITEM 11. EXECUTIVE COMPENSATION



The information required by this item is incorporated by reference from the information under the caption Executive Compensation contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders which will be filed
with the Securities and Exchange Commission not later than 120 days after December 31, 2003.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information required by this item is incorporated by reference to the information under the caption Security Ownership of Certain Beneficial
Owners and Management contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this item is incorporated by reference to the information under the caption Compensation Committee Interlocks and Insider Participation and Certain Transactions
contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item is incorporated by reference to the information under the captions Report of the Audit Committee, Ratification of Selection of Independent Auditors
and Fees Paid to Ernst & Young contained in the Proxy Statement for the 2004 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.



33



---

##### Table of Contents

PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)(1) FINANCIAL STATEMENTS



|                                                                                          |  |     
|----------------------------------------------------------------------------------------- |  | ----
|                                                                                          |  | PAGE
|Report of Independent Auditors                                                            |  | F-1 
|Balance Sheets                                                                            |  | F-2 
|Statements of Operations                                                                  |  | F-3 
|Statements of Convertible Exchangeable Preferred Stock and Stockholders (Deficit) Equity |  | F-4 
|Statements of Cash Flows                                                                  |  | F-5 
|Notes to Financial Statements                                                             |  | F-6 



(a)(2) FINANCIAL STATEMENT SCHEDULES



Schedules have
been omitted since they are either not required or are not applicable.



(a)(3) EXHIBITS



|       |     |  |                                                                                                                                                                                                                                                                        
|------ | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |     |  | Description                                                                                                                                                                                                                                                            
|       |    
|3      | .1  |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                                                                                                                                                   
|       |    
|3      | .2  |  | Amended and Restated By-Laws of the Company (2)                                                                                                                                                                                                                        
|       |    
|4      | .1  |  | Specimen Stock Certificate (3)                                                                                                                                                                                                                                         
|       |    
|4      | .2  |  | Rights Agreement, dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, which includes the form of Certificate of Designation of
Series AA Junior Participating Preferred Stock attached as Exhibit A thereto (4)
|       |    
|4      | .3  |  | Amendment dated February 11, 2003 to Rights Agreement dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American Stock Transfer & Trust Company (5)                                                                                                   
|       |    
|4      | .4  |  | Registration Rights Agreement dated January 7, 2000, between Ribozyme Pharmaceuticals and Elan International Services, Ltd. (6)                                                                                                                                        
|       |    
|4      | .5  |  | Registration Rights Agreement dated January 7, 2000 among Ribozyme Pharmaceuticals, Elan International Services, Ltd. and Medizyme Pharmaceuticals Ltd. (6)                                                                                                            
|       |    
|4      | .6  |  | Form of Voting Agreement between Ribozyme Pharmaceuticals, Inc. and each stockholder who is a party thereto (5)                                                                                                                                                        
|       |    
|4      | .7  |  | Common Stock and Warrant Purchase Agreement dated as of February 11, 2003 by and among Ribozyme Pharmaceuticals, Inc. and the Investors named therein (5)                                                                                                              
|       |    
|10     | .1  |  | Employment Agreement dated January 4, 2001 between Ribozyme Pharmaceuticals and Howard Robin (11)                                                                                                                                                                      
|       |    
|10     | .2  |  | Employment Agreement dated as of February 11, 2003 between the Company and Howard Robin (2)**                                                                                                                                                                          
|       |    
|10     | .3  |  | Employment Agreement dated as of February 11, 2003 between the Company and Marvin Tancer (2)**                                                                                                                                                                         
|       |    
|10     | .4  |  | Employment Agreement dated May 2, 1996, between Ribozyme Pharmaceuticals and Nassim Usman (12)                                                                                                                                                                         
|       |    
|10     | .5  |  | Amendment to Employment Agreement between Ribozyme Pharmaceuticals and Nassim Usman, pursuant to letters dated December 15, 1996 (13)                                                                                                                                  
|       |    
|10     | .6  |  | Employment Agreement dated as of February 11, 2003 between the Company and Nassim Usman (2)**                                                                                                                                                                          
|       |    
|10     | .7  |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Howard Robin (2)                                                                                                                                                                          
|       |    
|10     | .8  |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Jeremy Curnock Cook (2)                                                                                                                                                                   
|       |    
|10     | .9  |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Douglas Fambrough and Alan G. Walton (2)                                                                                                                                                  
|       |    
|10     | .10 |  | Indemnification Agreement dated as of April 18, 2003 between the Company and James Niedel (2)                                                                                                                                                                          
|       |    
|10     | .11 |  | Indemnification Agreement dated as of April 18, 2003 between the Company and Bryan Roberts (2)                                                                                                                                                                         
|       |    
|10     | .12 |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Howard Robin (2)                                                                                                                                                  
|       |    
|10     | .13 |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Marvin Tancer (2)                                                                                                                                                 
|       |    
|10     | .14 |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Nassim Usman (2)                                                                                                                                                  
|       |    
|10     | .15 |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Barry Polisky (2)                                                                                                                                                 
|       |    
|10     | .16 |  | Non-Competition and Non-Solicitation Agreement dated as of February 11, 2003 between the Company and Bharat Chowrira (2)                                                                                                                                               
|       |    
|10     | .17 |  | Indemnification Agreement dated as of July 28, 2003 between the Company and R. Scott Greer (7)                                                                                                                                                                         



34



---

##### Table of Contents

|   |     |  |                                                                                                                                                 
|-- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|   |    
|10 | .18 |  | Schering AG Waiver Letter (5)                                                                                                                   
|   |    
|10 | .19 |  | Elan Waiver and Conversion Letter (5)                                                                                                           
|   |    
|10 | .20 |  | Ribozyme Pharmaceuticals 2001 Stock Option Plan (10)**                                                                                          
|   |    
|10 | .21 |  | Amended and Restated Ribozyme Pharmaceuticals 1996 Stock Employee Stock Purchase Plan dated as of April 30, 2001 (10)**                         
|   |    
|10 | .22 |  | Amendment to Lease for Real Property dated March 13, 1997, between Aero Tech Investments and Ribozyme Pharmaceuticals (8)                       
|   |    
|10 | .23 |  | Research, License, Supply and Royalty Agreement between Schering Aktiengesellschaft and Ribozyme Pharmaceuticals dated April 9, 1997 (9)*       
|   |    
|10 | .24 |  | Purchase Agreement dated April 9, 1997, among Ribozyme Pharmaceuticals, Schering Berlin Venture Corporation and Schering Aktiengesellschaft (9)*
|   |    
|10 | .25 |  | Addendum to the Employment Letter dated February 11, 2003 between Sirna Therapeutics, Inc. and Marvin Tancer, dated February 12, 2004 (14)**    
|   |    
|23 | .1  |  | Consent of Ernst & Young LLP, Independent Auditors (14)                                                                                         
|   |    
|31 | .1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (14)                                         
|   |    
|31 | .2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (14)                                         
|   |    
|32 | .1  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (14)            

---

|* | The Company has applied for and received confidential treatment with respect to portions of these exhibits.
|- | -----------------------------------------------------------------------------------------------------------

|** | Indicates compensatory plan or arrangement.
|-- | -------------------------------------------

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

|(2) | Incorporated by reference to certain exhibits to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|(6) | Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed with the Securities and Exchange Commission on February 8, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to certain exhibits to the Companys Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 10-KSB and amendment for the year ended December 31, 1996.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K dated June 12, 1997.
|--- | --------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Proxy Statement in connection with a Special Meeting of Stockholders filed with the Securities Exchange
Commission on March 7, 2003.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 10-K for the year ended December 31, 2000.
|---- | --------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-QSB for the quarter ended June 30, 1996.
|---- | ----------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference herein to certain exhibits to Ribozyme Pharmaceuticals Form 10-KSB and amendment for the year ended December 31, 1996.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Filed herewith.
|---- | ---------------



(b) REPORTS ON FORM 8-K



We filed the following current reports on Form 8-K for the fourth quarter of the fiscal year ended December 31, 2003.



35



---

##### Table of Contents

| |  | Current Report on Form 8-K dated November 4, 2003, filed with the Securities and Exchange Commission on November 5, 2003 under Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits and Item 12. Results of Operations and Financial Condition.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Current Report on Form 8-K dated December 23, 2003, filed with the Securities and Exchange Commission on December 24, 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 for the fourth quarter of the fiscal year ended December 31, 2003.



| |  | Current Report on Form 8-K dated November 5, 2003, furnished to the Securities and Exchange Commission on May 14, 2003 under Item 9. Regulation FD Disclosure Item 12. Results of
Operations and Financial Condition.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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 in Boulder, Colorado, on March 17, 2004.



SIRNA THERAPEUTICS, INC.By:

/s/ HOWARD W. ROBINHoward W. RobinChief Executive Officer and President




Pursuant to the
requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                 |  |                                                                                             |  |               
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                                       |  |               
|/s/ Howard W. RobinHoward W. Robin               |  | President and Chief Executive Officer, Director (Principal Executive Officer)               |  | March 17, 2004
|                                                 |  |                                                                                            
|/s/ Patti KetchnerPatti Ketchner                 |  | Vice President and Corporate Controller (Acting Principal Financial and Accounting Officer) |  | March 17, 2004
|                                                 |  |                                                                                            
|/s/ James NiedelJames Niedel                     |  | Chairman of the Board of Directors                                                          |  | March 17, 2004
|                                                 |  |                                                                                            
|/s/ Jeremy L. Curnock CookJeremy L. Curnock Cook |  | Director                                                                                    |  | March 17, 2004
|                                                 |  |                                                                                            
|/s/ Douglas FambroughDouglas Fambrough           |  | Director                                                                                    |  | March 17, 2004
|                                                 |  |                                                                                            
|/s/ R. Scott GreerR. Scott Greer                 |  | Director                                                                                    |  | March 17, 2004
|                                                 |  |                                                                                            
|/s/ Bryan RobertsBryan Roberts                   |  | Director                                                                                    |  | March 17, 2004



37



---

##### Table of Contents

REPORT OF INDEPENDENT AUDITORS



To the
Stockholders and Board of Directors

Sirna Therapeutics, Inc.



We have audited the accompanying balance sheets of Sirna Therapeutics, Inc. as of December 31, 2003 and 2002, and the related statements of operations,
redeemable preferred stock and stockholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of Sirna Therapeutics, Inc. at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the
United States.





|                 |  |  |  |                       |  |  |  | 
|---------------- |  |  |  | --------------------- |  |  |  | 
|                 |  |  |  | /s/ Ernst & Young LLP
|Denver, Colorado |  |  |  |                      
|January 23, 2004 |  |  |  |                      







F-1



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                                                                                                                                      |  | December 31 |         
|                                                                                                                                                                                                                                                                                                                      |  | 2003        |          |   | 2002 |  
|ASSETS                                                                                                                                                                                                                                                                                                                |  |             |          |   |      |   |          |  
|Current assets:                                                                                                                                                                                                                                                                                                       |  |             |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                             |  | $           | 18,793   |   |      | $ | 2,065    |  
|Securities available-for-sale                                                                                                                                                                                                                                                                                         |  |             | 17,831   |   |      |   | 6,756    |  
|Accounts receivable                                                                                                                                                                                                                                                                                                   |  |             | 156      |   |      |   | 264      |  
|Accounts receivablejoint venture                                                                                                                                                                                                                                                                                     |  |             |         |   |      |   | 157      |  
|Accounts receivablerelated parties                                                                                                                                                                                                                                                                                   |  |             |         |   |      |   | 62       |  
|Notes receivablerelated parties                                                                                                                                                                                                                                                                                      |  |             | 157      |   |      |   | 214      |  
|Prepaid expenses and other                                                                                                                                                                                                                                                                                            |  |             | 400      |   |      |   | 542      |  
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|Total current assets                                                                                                                                                                                                                                                                                                  |  |             | 37,337   |   |      |   | 10,060   |  
|Property, plant, and equipment:                                                                                                                                                                                                                                                                                       |  |             |          |   |      |   |          |  
|Machinery and equipment                                                                                                                                                                                                                                                                                               |  |             | 10,700   |   |      |   | 10,426   |  
|Leasehold improvements                                                                                                                                                                                                                                                                                                |  |             | 5,273    |   |      |   | 5,227    |  
|Office furniture and equipment                                                                                                                                                                                                                                                                                        |  |             | 1,852    |   |      |   | 2,020    |  
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|                                                                                                                                                                                                                                                                                                                      |  |             | 17,825   |   |      |   | 17,673   |  
|Accumulated depreciation                                                                                                                                                                                                                                                                                              |  |             | (14,423  | ) |      |   | (13,149  | )
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|                                                                                                                                                                                                                                                                                                                      |  |             | 3,402    |   |      |   | 4,524    |  
|Notes receivablerelated parties                                                                                                                                                                                                                                                                                      |  |             | 355      |   |      |   | 692      |  
|Deferred patent costs, net of accumulated amortization (2003$235,725; 2002$993,058)                                                                                                                                                                                                                                 |  |             | 765      |   |      |   | 5,887    |  
|Other assets                                                                                                                                                                                                                                                                                                          |  |             | 825      |   |      |   | 735      |  
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|Total assets                                                                                                                                                                                                                                                                                                          |  | $           | 42,684   |   |      | $ | 21,898   |  
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                                                                                                        |  |             |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                                                                                                                                                                  |  |             |          |   |      |   |          |  
|Accounts payabletrade                                                                                                                                                                                                                                                                                                |  | $           | 884      |   |      | $ | 943      |  
|Accrued wages                                                                                                                                                                                                                                                                                                         |  |             | 1,576    |   |      |   | 1,136    |  
|Accrued liabilities                                                                                                                                                                                                                                                                                                   |  |             | 800      |   |      |   | 1,180    |  
|Deferred revenue, current portionrelated parties                                                                                                                                                                                                                                                                     |  |             |         |   |      |   | 400      |  
|Deferred revenue, current portion                                                                                                                                                                                                                                                                                     |  |             | 200      |   |      |   | 894      |  
|Current portion of long-term debt                                                                                                                                                                                                                                                                                     |  |             | 582      |   |      |   | 480      |  
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                                                                                                                                             |  |             | 4,042    |   |      |   | 5,033    |  
|Other long term liabilities                                                                                                                                                                                                                                                                                           |  |             | 375      |   |      |   |         |  
|Long term debt                                                                                                                                                                                                                                                                                                        |  |             | 558      |   |      |   | 3,029    |  
|Convertible debtrelated parties                                                                                                                                                                                                                                                                                      |  |             | 2,935    |   |      |   | 3,460    |  
|Commitments and contingencies                                                                                                                                                                                                                                                                                         |  |             |          |   |      |   |          |  
|Preferred stock, $.01 par value; Series A convertible exchangeable preferred stock, 25,000 shares authorized; zero and 12,015 shares issued
and outstanding at December 31, 2003 and 2002, respectively (preference in liquidation, including accreted dividends, of zero and $14,329 in 2003 and 2002, respectively) |  |             |         |   |      |   | 12,015   |  
|Accreted preferred stock dividends                                                                                                                                                                                                                                                                                    |  |             |         |   |      |   | 2,314    |  
|                                                                                                                                                                                                                                                                                                                      |  |            
|Stockholders equity (deficit):                                                                                                                                                                                                                                                                                       |  |             |          |   |      |   |          |  
|Preferred stock, $.01 par value; 5,000,000 shares authorized; Series B convertible preferred stock, zero and 9,905 shares issued and
outstanding at December 31, 2003 and 2002, respectively (preference in liquidation of zero and $11,033, in 2003 and 2002, respectively)                                          |  |             |         |   |      |   |         |  
|Preferred stock issuable                                                                                                                                                                                                                                                                                              |  |             |         |   |      |   | 1,127    |  
|Accreted preferred stock dividends                                                                                                                                                                                                                                                                                    |  |             |         |   |      |   | 748      |  
|Common stock, $.01 par value; 120,000,000 shares authorized; 31,692,369 and 3,380,894 shares issued and outstanding at December 31, 2003 and
2002, respectively                                                                                                                                                       |  |             | 317      |   |      |   | 34       |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                            |  |             | 261,137  |   |      |   | 188,640  |  
|Accumulated deficit                                                                                                                                                                                                                                                                                                   |  |             | (224,350 | ) |      |   | (194,509 | )
|Unearned deferred compensation                                                                                                                                                                                                                                                                                        |  |             | (2,350   | ) |      |   |         |  
|Unrealized gain on securities available-for-sale                                                                                                                                                                                                                                                                      |  |             | 20       |   |      |   | 7        |  
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|Total stockholders equity (deficit)                                                                                                                                                                                                                                                                                  |  |             | 34,774   |   |      |   | (3,953   | )
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                                                                                                                  |  | $           | 42,684   |   |      | $ | 21,898   |  
|                                                                                                                                                                                                                                                                                                                      |  |             |          |   |      |   |          |  



See accompanying notes.



F-2



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.



STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)



|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                            |  | Year ended December 31 |        
|                                            |  | 2003                   |         |   | 2002 |   |         | 2001 | 
|Revenues:                                   |  |                        |         |   |      |   |         |      |  |   |         |  
|Collaborative agreements                    |  | $                      | 3,756   |   |      | $ | 3,488   |      |  | $ | 3,318   |  
|Collaborative agreementsjoint venture      |  |                        | 2       |   |      |   | 1,069   |      |  |   | 3,960   |  
|Collaborative agreementsrelated parties    |  |                        | 417     |   |      |   | 591     |      |  |   | 1,030   |  
|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Total revenues                              |  |                        | 4,175   |   |      |   | 5,148   |      |  |   | 8,308   |  
|Expenses:                                   |  |                        |         |   |      |   |         |      |  |   |         |  
|Research and development                    |  |                        | 23,460  |   |      |   | 28,659  |      |  |   | 56,689  |  
|General and administrative                  |  |                        | 5,005   |   |      |   | 5,505   |      |  |   | 4,512   |  
|Write-off of patent costs                   |  |                        | 5,344   |   |      |   |        |      |  |   |        |  
|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Total expenses                              |  |                        | 33,809  |   |      |   | 34,164  |      |  |   | 61,201  |  
|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Operating loss                              |  |                        | (29,634 | ) |      |   | (29,016 | )    |  |   | (52,893 | )
|Other income (expense):                     |  |                        |         |   |      |   |         |      |  |   |         |  
|Interest income                             |  |                        | 426     |   |      |   | 389     |      |  |   | 2,165   |  
|Interest expense                            |  |                        | (415    | ) |      |   | (803    | )    |  |   | (820    | )
|Other income (expense)                      |  |                        | (9      | ) |      |   |        |      |  |   | 51      |  
|Equity in loss of unconsolidated affiliates |  |                        | (209    | ) |      |   | (5,276  | )    |  |   | (8,341  | )
|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Total other expense                         |  |                        | (207    | ) |      |   | (5,690  | )    |  |   | (6,945  | )
|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Net loss                                    |  |                        | (29,841 | ) |      |   | (34,706 | )    |  |   | (59,838 | )
|Accretion of dividends on preferred stock   |  |                        | 562     |   |      |   | 1,571   |      |  |   | 775     |  
|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Net loss applicable to common stock         |  | $                      | (30,403 | ) |      | $ | (36,277 | )    |  | $ | (60,613 | )
|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Net loss per share (basic and diluted)      |  | $                      | (1.31   | ) |      | $ | (10.81  | )    |  | $ | (21.54  | )
|Shares used in computing net loss per share |  |                        | 23,279  |   |      |   | 3,356   |      |  |   | 2,814   |  



See accompanying notes.





F-3



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

STATEMENTS OF CONVERTIBLE EXCHANGEABLE PREFERRED STOCK AND STOCKHOLDERS
(DEFICIT) EQUITY

(in thousands)



|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------- |  | --------------------------------------- | - |  | --------------------------- | ------- | - | --------------------------------- | ------ | ------ | - | ------ | --- | ----------------------- |  | - | --------------------------------- | ------ | - | ------ | - |  | - | ------------------------- | - | ----- | ------------------- |  | - | ----------------------------------------------- |  | - | -------------------- | - |  | - | -------- | - |  | - | -- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                        |  | Convertible ExchangeablePreferred Stock |   |  | Convertible Preferred Stock |         |   | Common Stock                      |        |        |   |        |     |                         |  |   |                                   |        |   |        |  
|                                                                                        |  |                                         |   |  |                             |         |   | AccretedPreferred Stock Dividends |        |        |   |        |     | Preferred StockIssuable |  |   | AccretedPreferred Stock Dividends |        |   |        |   |  |   | AdditionalPaid-In Capital |   |       | Accumulated Deficit |  |   | Unrealized Gain onSecurities available-for-sale |  |   | Deferred Compenstion |   |  |   |         
|                                                                                        |  | Shares                                  |   |  | Amount                      |         |   |                                   | Shares |        |   | Amount |     | Amount                  |  |   |                                   | Shares |   | Amount |   |  |   |                           |   | Total |                    
|Balance at December 31, 2000                                                            |  | 12                                      |   |  | $                           | 12,015  |   |                                   | $      | 716    |   |        |    |                         |  | $ |                                  |        | $ |       |   |  | $ |                          |   |       | 2,710               |  | $ | 27                                              |  | $ | 163,220              |   |  | $ | (99,965  | ) |  | $ | (6 | ) |  | $ | (14    | ) |  | $ | 63,262  |  
|Issuance of common stock and warrants for cashpublic offering, net of costs of $932    |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 377                 |  |   | 4                                               |  |   | 8,564                |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 8,568   |  
|Issuance of common stock and warrants for cashElan Corporation, net of costs of $64    |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 208                 |  |   | 2                                               |  |   | 7,937                |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 7,939   |  
|Issuance of common stock in exchange for product rightsChiron Corporation              |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 7                   |  |   |                                                |  |   | 275                  |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 275     |  
|Issuance of common stock under stock option and employee stock purchase plan            |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 21                  |  |   |                                                |  |   | 448                  |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 448     |  
|Issuance of common stock under 401(k) plan                                              |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 12                  |  |   |                                                |  |   | 289                  |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 289     |  
|Issuance of warrants in exchange for professional services                              |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   | 198                  |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 198     |  
|Compensation for issuance of common stock options                                       |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   |         |   |  |   |   |   |  |   | 14     |   |  |   | 14      |  
|Preferred stock dividends accreted                                                      |  |                                        |   |  |                             |        |   |                                   |        | 775    |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   | (775                 | ) |  |   |         |   |  |   |   |   |  |   |       |   |  |   | (775    | )
|Net loss                                                                                |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   | (59,838  | ) |  |   |   |   |  |   |       |   |  |   | (59,838 | )
|Change in unrealized gain on securities                                                 |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   |         |   |  |   | 17 |   |  |   |       |   |  |   | 17      |  
|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                      |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   | (59,821 | )
|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2001                                                            |  | 12                                      |   |  |                             | 12,015  |   |                                   |        | 1,491  |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 3,335               |  |   | 33                                              |  |   | 180,156              |   |  |   | (159,803 | ) |  |   | 11 |   |  |   |       |   |  |   | 20,397  |  
|Issuance of common stock under stock option and employee stock purchase plan            |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 46                  |  |   | 1                                               |  |   | 123                  |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 124     |  
|Conversion of convertible debt to preferred stock, Series BElan                        |  |                                        |   |  |                             |        |   |                                   |        |       |   |        | 10  |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   | 9,906                |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 9,906   |  
|Preferred stock issuable to Elan for financing                                          |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   | 1,127  |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 1,127   |  
|Compensation for issuance of stock options                                              |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   | 25                   |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 25      |  
|Preferred stock dividends accreted                                                      |  |                                        |   |  |                             |        |   |                                   |        | 823    |   |        |    |                         |  |   |                                  |        |   |       |   |  |   | 748                       |   |       |                    |  |   |                                                |  |   | (1,570               | ) |  |   |         |   |  |   |   |   |  |   |       |   |  |   | (822    | )
|Net loss                                                                                |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   | (34,706  | ) |  |   |   |   |  |   |       |   |  |   | (34,706 | )
|Change in unrealized gain on securities                                                 |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   |         |   |  |   | (4 | ) |  |   |       |   |  |   | (4      | )
|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                      |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   | (34,710 | )
|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2002                                                            |  | 12                                      |   |  |                             | 12,015  |   |                                   |        | 2,314  |   |        | 10  |                         |  |   |                                  |        |   | 1,127  |   |  |   | 748                       |   |       | 3,381               |  |   | 34                                              |  |   | 188,640              |   |  |   | (194,509 | ) |  |   | 7  |   |  |   |       |   |  |   | (3,953  | )
|Issuance of common stock and warrants for cashprivate offering, net of costs of $3,000 |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 24,242              |  |   | 242                                             |  |   | 44,789               |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 45,031  |  
|Issuance of common stock for cashrights offering, net of costs of $370                 |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 2,525               |  |   | 25                                              |  |   | 4,605                |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 4,630   |  
|Issuance of common stock in exchange for rights to license                              |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 579                 |  |   | 6                                               |  |   | 2,994                |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 3,000   |  
|Preferred stock dividends accreted                                                      |  |                                        |   |  |                             |        |   |                                   |        | 215    |   |        |    |                         |  |   |                                  |        |   |       |   |  |   | 347                       |   |       |                    |  |   |                                                |  |   | (562                 | ) |  |   |         |   |  |   |   |   |  |   |       |   |  |   | (215    | )
|Conversion of preferred stock to common stock                                           |  | (12                                     | ) |  |                             | (12,015 | ) |                                   |        | (2,529 | ) |        | (10 | )                       |  |   |                                  |        |   | (1,127 | ) |  |   | (1,095                    | ) |       | 542                 |  |   | 6                                               |  |   | 16,761               |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 14,545  |  
|Issuance of common stock under stock option and employee stock purchase plan            |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 260                 |  |   | 3                                               |  |   | 648                  |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 651     |  
|Issuance of common stock under 401(k) plan                                              |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 135                 |  |   | 1                                               |  |   | 464                  |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   | 465     |  
|Compensation for issuance of stock options                                              |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   | 2,798                |   |  |   |         |   |  |   |   |   |  |   | (2,350 | ) |  |   | 448     |  
|Cashless warrant exercise                                                               |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       | 28                  |  |   |                                                |  |   |                     |   |  |   |         |   |  |   |   |   |  |   |       |   |  |   |        |  
|Net loss                                                                                |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   | (29,841  | ) |  |   |   |   |  |   |       |   |  |   | (29,841 | )
|Change in unrealized gain on securities                                                 |  |                                        |   |  |                             |        |   |                                   |        |       |   |        |    |                         |  |   |                                  |        |   |       |   |  |   |                          |   |       |                    |  |   |                                                |  |   |                     |   |  |   |         |   |  |   | 13 |   |  |   |       |   |  |   | 13      |  
|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                      |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   | (29,828 | )
|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2003                                                            |  |                                        |   |  | $                           |        |   |                                   | $      |       |   |        |    |                         |  | $ |                                  |        | $ |       |   |  | $ |                          |   |       | 31,692              |  | $ | 317                                             |  | $ | 261,137              |   |  | $ | (224,350 | ) |  | $ | 20 |   |  | $ | (2,350 | ) |  | $ | 34,774  |  
|                                                                                        |  |                                         |   |  |                             |         |   |                                   |        |        |   |        |     |                         |  |   |                                   |        |   |        |   |  |   |                           |   |       |                     |  |   |                                                 |  |   |                      |   |  |   |          |   |  |   |    |   |  |   |        |   |  |   |         |  



See
accompanying notes.





F-4



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



SIRNA THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                             |  | Year ended December 31 |        
|                                                                             |  | 2003                   |         |   | 2002 |   |         | 2001 | 
|Operating activities                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                     |  | $                      | (29,841 | ) |      | $ | (34,706 | )    |  | $ | (59,838 | )
|Adjustments to reconcile net loss to net cash used by operating activities:  |  |                        |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                 |  |                        | 1,414   |   |      |   | 1,697   |      |  |   | 1,756   |  
|Amortization                                                                 |  |                        | 237     |   |      |   | 277     |      |  |   | 198     |  
|Equity in loss of unconsolidated affiliates                                  |  |                        | 133     |   |      |   | 5,276   |      |  |   | 8,341   |  
|Financed third party manufacturing cost                                      |  |                        | (1,727  | ) |      |   | 3,573   |      |  |   |        |  
|Gain on pay off of third party manufacturing costs                           |  |                        | (246    | ) |      |   |        |      |  |   |        |  
|Write-off of patent costs                                                    |  |                        | 5,344   |   |      |   | 684     |      |  |   |        |  
|Patent expense                                                               |  |                        | (183    | ) |      |   |        |      |  |   |        |  
|Compensation related to common stock and options                             |  |                        | 383     |   |      |   | 25      |      |  |   | 304     |  
|Compensation for forgiveness of notes receivablerelated parties             |  |                        | 394     |   |      |   | 189     |      |  |   | 201     |  
|Purchase of license through issuance of common stock                         |  |                        | 3,000   |   |      |   |        |      |  |   |        |  
|Stock issued in exchange for product rights                                  |  |                        |        |   |      |   |        |      |  |   | 275     |  
|Expense related to issuance of stock and warrants                            |  |                        |        |   |      |   |        |      |  |   | 198     |  
|Revenue recognized for stock received in licensing agreement                 |  |                        |        |   |      |   |        |      |  |   | (205    | )
|Loss (gain) on disposal of equipment                                         |  |                        | 48      |   |      |   | 6       |      |  |   | (51     | )
|Accrued interest included in convertible debtrelated parties                |  |                        | 240     |   |      |   | 689     |      |  |   | 819     |  
|Recognition of deferred revenuerelated parties.                             |  |                        | (400    | ) |      |   | (400    | )    |  |   | (400    | )
|Changes in operating assets and liabilities:                                 |  |                        |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                          |  |                        | 328     |   |      |   | 1,060   |      |  |   | 2,053   |  
|Prepaid expenses and other                                                   |  |                        | 142     |   |      |   | (368    | )    |  |   | 3       |  
|Other assets                                                                 |  |                        | (90     | ) |      |   | 1       |      |  |   | 5       |  
|Accounts payabletrade                                                       |  |                        | (60     | ) |      |   | (1,157  | )    |  |   | 1,015   |  
|Accrued wages and liabilities                                                |  |                        | 806     |   |      |   | (142    | )    |  |   | 597     |  
|Deferred revenue                                                             |  |                        | (694    | ) |      |   | 894     |      |  |   |        |  
|                                                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash used by operating activities                                        |  |                        | (20,772 | ) |      |   | (22,402 | )    |  |   | (44,729 | )
|                                                                             |  |                        |        
|Investing activities                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Additions to property, plant, and equipment                                  |  |                        | (340    | ) |      |   | (1,639  | )    |  |   | (2,823  | )
|Proceeds from the disposition of property, plant and equipment               |  |                        |        |   |      |   |        |      |  |   | 96      |  
|Additions to deferred patent costs                                           |  |                        | (277    | ) |      |   | (1,303  | )    |  |   | (884    | )
|Sales of securities available-for-sale                                       |  |                        | 33,259  |   |      |   | 20,915  |      |  |   | 92,974  |  
|Purchases of securities available-for-sale                                   |  |                        | (44,322 | ) |      |   | (16,178 | )    |  |   | (72,150 | )
|Additional investment in joint venture                                       |  |                        | (132    | ) |      |   | (1,699  | )    |  |   | (5,545  | )
|Loan repaymentsrelated parties                                              |  |                        |        |   |      |   | 220     |      |  |   | 988     |  
|Loan advancesrelated parties                                                |  |                        |        |   |      |   | (450    | )    |  |   | (1,738  | )
|                                                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by investing activities                             |  |                        | (11,812 | ) |      |   | (134    | )    |  |   | 10,918  |  
|                                                                             |  |                        |        
|Financing activities                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Net proceeds from issuance of common, preferred stock and exercised warrants |  |                        | 50,357  |   |      |   | 124     |      |  |   | 16,955  |  
|Payments under loan facilities.                                              |  |                        | (1,117  | ) |      |   | (1,898  | )    |  |   |        |  
|Draw down on line of credit with Elan                                        |  |                        |        |   |      |   | 1,687   |      |  |   | 5,540   |  
|Borrowings under loan facilities.                                            |  |                        | 23      |   |      |   | 1,190   |      |  |   | 2,643   |  
|Conversion of debt                                                           |  |                        | 49      |   |      |   |        |      |  |   |        |  
|                                                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                    |  |                        | 49,312  |   |      |   | 1,103   |      |  |   | 25,138  |  
|                                                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                         |  |                        | 16,728  |   |      |   | (21,433 | )    |  |   | (8,673  | )
|Cash and cash equivalents at beginning of year                               |  |                        | 2,065   |   |      |   | 23,498  |      |  |   | 32,171  |  
|                                                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                     |  | $                      | 18,793  |   |      | $ | 2,065   |      |  | $ | 23,498  |  
|                                                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|                                                                             |  |                        |        
|Non-cash activity                                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|Preferred stock dividends accreted                                           |  |                        | 562     |   |      |   | 1,570   |      |  |   | 775     |  
|Note payable converted into Series B Preferred Stock                         |  |                        |        |   |      |   | 9,906   |      |  |   |        |  
|Interest paid                                                                |  |                        | 766     |   |      |   | 111     |      |  |   |        |  



See accompanying notes.



F-5



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



SIRNA THERAPEUTICS, INC.



NOTES
TO FINANCIAL STATEMENTS



December 31, 2003



1. Summary of Significant Accounting Policies



Description of Business



Sirna Therapeutics, Inc., (formerly known as Ribozyme Pharmaceuticals,
Inc.), since its inception in 1992, has engaged in research to engineer RNA-based molecules for therapeutic and diagnostic purposes. Until recently, Sirna (the Company) focused on developing therapeutics and diagnostics based on ribozymes (a type of
RNA). In 2003, the Company discontinued its efforts in ribozymes and redirected its focus to the development of a new type of nucleic acid-based therapeutic based on RNA interference (RNAi). The Company is using its expertise to design, stabilize,
manufacture and deliver small interfering nucleic acids (siRNAs) that activate selectively the process of RNA interference. In addition, the Company manufactures oligonucleotides (chains of nucleotides that can be chemically synthesized;
oligonucleotides are a form of nucleic acid) for its use and for use by its collaborators and customers, in order to generate revenue for the purpose of supporting the Companys therapeutic discovery operations.



The Company is in research and/or preclinical development with product
candidates in the following areas: (a) Age-Related Macular Degenerationit is developing chemically stabilized siRNAs that target genes in the Vascular Endothelial Growth Factor, or VEGF, pathway to treat macular degeneration and (b) Hepatitis
C Virus, or HCV, Infectionthe Company is developing chemically stabilized siRNAs that target the HCV viral RNA to treat HCV infection. The Company is also evaluating other disease targets and indications for the development of RNA
interference-based therapeutics.



To date, the Company has
engaged in the research and development of its technologies and has experienced significant operating losses in each fiscal year since inception. The Company has not generated any revenue from the commercialization of its technologies and expects to
continue to incur significant operating losses over at least the next several years.



Capital Requirements, Managements Plans and Basis of Presentation



The Company incurred a net loss of $29.8 million for the year ended December 31, 2003 and has an accumulated deficit of $224.3 million at December 31, 2003. Development of the Companys products will require a
commitment of substantial additional funds to conduct the costly and time-consuming research, preclinical and clinical testing necessary to bring its proposed products to market and to establish manufacturing and marketing capabilities. The
Companys future capital requirements will depend on many factors, including, among others, the progress of the Companys research, development and drug discovery efforts, the ability of the Company to establish collaborative arrangements
for clinical testing, progress with preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims,
competing technological and market developments, changes in the Companys existing research relationships, determination as to the commercial potential of the Companys potential products, effective commercialization activities and
arrangements, and the cost and availability of third-party financing for capital expenditures.



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



F-6



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



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.



Stock Split



On April 16, 2003, at the Special Meeting of Stockholders at which the terms of the Stock Purchase Agreement with the investors were approved,
stockholders approved, among other things, a one-for-six reverse stock split. Subsequent to the approval, every six shares of the Companys common stock were replaced with one share of its common stock. Accordingly, all share and per share
amounts for all periods presented have been restated to reflect the reverse split.



Use of Estimates



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



Stock Based Compensation



Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation defined 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 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.



Pro forma information regarding net loss and loss per share is required by SFAS 123, which also requires that the
information be determined as if the Company has accounted for its employee stock options under the fair value method of SFAS 123. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the
options vesting period. Pro forma amounts may not be representative of future years. The Companys pro forma information follows (in thousands, except per share data):



|                                                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                 |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Net loss as reported                                                                                             |  | $    | (29,841 | ) |      | $ | (34,706 | )    |  | $ | (59,838 | )
|Add: Stock-based employee compensation expense included in reported income                                       |  |      | 322     |   |      |   |        |      |  |   | 14      |  
|Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards |  |      | (3,989  | ) |      |   | (2,908  | )    |  |   | (4,287  | )
|                                                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Pro forma net loss                                                                                               |  |      | (33,508 | ) |      |   | (37,614 | )    |  |   | (64,111 | )
|                                                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Pro forma net loss applicable to common stock                                                                    |  | $    | (34,070 | ) |      | $ | (39,185 | )    |  | $ | (64,886 | )
|Pro forma loss per share (basic and diluted)                                                                     |  | $    | (1.46   | ) |      | $ | (11.68  | )    |  | $ | (23.06  | )



F-7



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



Financial Instruments



Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash
equivalents and short-term investments. The Company places its cash equivalents and short-term investments with high credit-quality financial institutions. The Company invests its excess cash primarily in money market instruments, and municipal and
floating rate bonds. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. To date, the Company has not experienced significant losses on any of these
investments.



Cash and Cash Equivalents



The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The Companys cash equivalents are comprised of certificates of deposit, money market funds, and investment securities.



Property, Plant, and Equipment



Property, plant, and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets.
Useful lives of laboratory equipment and furniture are estimated at five years and all computer equipment is estimated at three years. Leasehold improvements and equipment subject to financing obligations are amortized on a straight-line basis over
the shorter of their estimated useful lives or the term of the lease.



Deferred Patent Costs



Due to the early stage
of the Companys technology, all patent legal costs are expensed directly as incurred in connection with patent applications or patents until it can be determined that the estimated recoverability of the patent costs is sufficiently probable,
at which time such patent costs are 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, the Company completed a private placement. Concurrent with the private placement, the Company also changed its business strategy which had focused on development of ribozyme-based therapeutics and diagnostics. The
Companys new focus is to develop 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 of 2003 $447,000 of patent costs related to patents or patents that were abandoned. In addition, since the Company is no longer
pursuing the development of ribozymes internally, approximately $4.9 million of capitalized patent costs were expensed that related to the ribozyme technology. This expense is reflected as a separate line item in the Companys statement of
operations for the year ended December 31, 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 are amortized
over three years, due to the early stage of the RNAi technology.



Below is an estimate of patent amortization expense for the next five years (in thousands):



|                               |  |      |     |      |   |       |  |      |     |      |   |   |  |   |  
|------------------------------ |  | ---- | --- | ---- | - | ----- |  | ---- | --- | ---- | - | - |  | - | -
|                               |  | 2004 |     | 2005 |   | 2006  |  | 2007 |     | 2008
|Estimated amortization expense |  | $    | 856 |      | $ | 1,235 |  | $    | 425 |      | $ |  |  | $ | 



It is possible the
above estimates of future economic life of the Companys commercialization revenues, the amount of anticipated future commercialization revenues, or both, will be reduced significantly in the near term due to alternative technologies developed
by other biotechnology or pharmaceutical companies. As a result, the carrying amount of deferred patent costs may be reduced in the future.





F-8



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



Revenue Recognition



Contract revenue for research and development is recorded as earned based on the performance requirements of the contract. Nonrefundable contract fees
for which no further performance obligations exist, and there is no continuing involvement by the Company, are recognized on the earlier of when the payments are received or when collection is assured.



Revenue from nonrefundable up-front license fees where the Company continues
involvement through development collaboration or an obligation to supply product, is classified as deferred revenue and recognized as the obligation is fulfilled or ratably over the development period or the period of the obligation, as appropriate.



Revenue associated with substantive performance milestones is
recognized based upon the achievement of the milestones, as defined in the respective agreements. Revenue under research and development cost reimbursement contracts is recognized as the related costs are incurred.



Non refundable advance payments received in excess of amounts earned are
classified as deferred revenue.



Research and Development Expenses



Research and development costs are expensed as incurred.



Segment Information



Statement of Financial Accounting Standards No. 131, Disclosure
About Segments of an Enterprise and Related Information, establishes standards for the reporting of information about operating segments. The Companys operations are one operating segment.



Accounting for Investments in Unconsolidated Affiliates



The Company accounts for its investments in Medizyme Pharmaceuticals,
Ltd. (Medizyme) and atugen under the equity method. The Company has recorded its share of Medizymes net losses against its cost basis. At December 31, 2003 the Company had absorbed its entire cost basis in its investment in Medizyme (see Note
7). In 1999, the Company had absorbed its entire cost basis in atugen through its share of atugens net losses and since the Company has no other funding commitments to atugen the Company has ceased recording its share of atugens net
losses. The Company accounts for its investment in Archemix under the cost method.



Impact of Recently issued 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.



F-9



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



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 Stock Based Compensation above for the annual disclosure requirements under SFAS No. 148.



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



In January 2003, the FASB issued FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities
that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity (VIE), the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of the business enterprise. The consolidation requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003. The consolidation requirements
for older VIEs are effective for financial statements of interim or annual periods beginning after June 15, 2003, however in October of 2003 the FASB deferred the effective date of FIN 46 for older VIEs to the end of the first interim or
annual period ending after December 15, 2003. Certain disclosure requirements are effective for all financial statements issued after January 31, 2003, regardless of when the VIE was established. The Company does not have any ownership in any
variable interest entities as of December 31, 2003. The Company will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.



F-10



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



2. Securities Available-for-Sale



At December 31, 2003 and 2002, management determined that certain marketable securities held by the Company were
available-for-sale. Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of stockholders equity. The amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is included in investment income or expense, as appropriate. Realized gains and losses and declines in value judged to be other-than-temporary on securities available-for-sale are
included in investment income. Interest and dividends on securities available-for-sale are included in investment income. The cost of securities sold is based on the specific identification method. The following is a summary of securities
available-for-sale (in thousands):



|                               |  |                     |        |                      |   |                       |  |                     |   |  |   |       
|------------------------------ |  | ------------------- | ------ | -------------------- | - | --------------------- |  | ------------------- | - |  | - | ------
|                               |  | AmortizedCost Basis |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFair Value
|At December 31, 2002:          |  |                     |        |                      |   |                       |  |                     |   |  |   |       
|U.S. Corporate Debt Securities |  | $                   | 6,749  |                      | $ | 7                     |  | $                   |  |  | $ | 6,756 
|At December 31, 2003:          |  |                     |        |                      |   |                       |  |                     |   |  |   |       
|U.S. Corporate Debt Securities |  | $                   | 17,811 |                      | $ | 20                    |  | $                   |  |  | $ | 17,831



3. Long-Term Debt



Long-term debt as of December 31, 2003 and 2002, consists of the
following ( in thousands):



|                                      |  |      |       |   |      |   |       |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                      |  | 2003 |       |   | 2002 |  
|Equipment loan (I)                    |  |      | 1,055 |   |      | $ | 1,535 |  
|Convertible debtrelated parties (II) |  |      | 2,995 |   |      |   | 3,460 |  
|Truck loan (III)                      |  |      | 25    |   |      |   |      |  
|Note payable (IV)                     |  |      |      |   |      |   | 1,974 |  
|                                      |  |      |       |   |      |   |       |  
|                                      |  |      | 4,075 |   |      |   | 6,969 |  
|Current portion                       |  |      | (582  | ) |      |   | (480  | )
|                                      |  |      |       |   |      |   |       |  
|Long-term debt                        |  | $    | 3,493 |   |      | $ | 6,489 |  
|                                      |  |      |       |   |      |   |       |  

---

|I. | In December 2001, the Company negotiated an equipment credit facility of $4,000,000 with a financing company. The agreement requires monthly principal and interest payments for 36
or 48 months, depending on the type of equipment financed. The interest rate fixed to each draw down is 5.61% and 5.42% over the rates of 36 or 48 month treasury bills, respectively, at the time of the draw down. The facility expired in November
2002 and therefore no additional amounts can be borrowed. The interest rate on these borrowings averaged 9.5% at December 31, 2003. Final payments under the facility are due in June 2006.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|II. | In April 1997, the Company entered into a collaboration agreement with a corporate partner whereby, among other items, the Company borrowed from the corporate partner up to $2.0
million annually through 2001. The loans are collateralized 50% by equipment purchases. The loans carry an interest rate of 8% per annum and under certain circumstances are convertible into equity, at the then current market price, at the option of
the corporate partner. In April 2000, the Company paid down $6.9 million of the outstanding debt with proceeds from a public offering. In June 2000, the corporate partner elected to convert the remaining balance of approximately $997,205 into 42,435
shares of the Companys common stock. Since the June 2000 conversion of the balance, the Company has drawn down the final $3.0 million on the debt facility, which as of December 31, 2003 was outstanding. Prior to April 2003, principal and
interest payments on the loans were deferred until their maturity which was in April 2004. Pursuant to the Companys financing that occurred in April 2003, the loan was restructured whereby the principal payment is deferred until January 2005
and the interest payments are due on a quarterly basis. See Note 7 on Schering AG.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|III. | In June 2003, the Company purchased a corporate vehicle on credit terms. The five year loan was for $27,220 and carries an interest rate of 5.5%.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------

|IV. | In the fourth quarter of 2002 the Company purchased on credit $3.6 million of drug from a contract manufacturer. The terms of payment for the purchase were $1.6 million due paid
October 30, 2002; $1.1 million to be paid on or before October 30, 2004; and $873,491 to be paid on or before June 30, 2005. In June 2003, the Company entered into an agreement with the contract manufacturer, wherein in lieu of the payments of $1.1
million, and $873,491 together with the interest payable, the Company paid the contract manufacturer the sum of $1,726,805 to settle all obligations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash paid for interest for the years ended December 31, 2003, 2002 and 2001 was $ 766,174, $110,890 and $0, respectively. At
December 31, 2003 the carrying amounts of the Companys long-term debt approximates the fair value as all borrowings bear interest rates which are comparable to the current market rate for such borrowings.



F-11



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



As of December 31, 2003, maturities of long-term debt are as follows (in thousands):



|     |  |        |      
|---- |  | ------ | -----
|     |  | Amount
|2004 |  | $      | 582  
|2005 |  |        | 3,346
|2006 |  |        | 137  
|2007 |  |        | 6    
|2008 |  |        | 4    
|     |  |        |      
|     |  | $      | 4,075
|     |  |        |      



4. Leases



The Company leases office space in two buildings under noncancelable
operating leases that expire in October 2007 and June 2007. According to the terms of the leases, rent for the buildings will increase each year based on Consumer Price Index increases, with a minimum of 3.5% and a maximum of 6.0%. Total rent
expense, including miscellaneous laboratory equipment rentals, was $1,087,942, $853,108 and $782,819 in 2003, 2002 and 2001, respectively.



The Companys minimum operating lease commitments at December 31, 2003 are as follows (in thousands):



|                    |  |        |      
|------------------- |  | ------ | -----
|                    |  | Amount
|2004                |  | $      | 1,122
|2005                |  |        | 1,156
|2006                |  |        | 1,180
|2007 and thereafter |  |        | 809  
|                    |  |        |      
|                    |  | $      | 4,267
|                    |  |        |      



Under a separate
agreement, the Company sublet a portion of their building to atugen USA, an unconsolidated affiliate during 2002 and 2001. Rental income from atugen USA for 2002 and 2001 was $105,062 and $188,814. The sublease expired in October 2002 and
subsequently atugen USA ceased operations.



5. Redeemable Preferred Stock
and Stockholders Equity



Series A Preferred
Stock



In January 2000, the Company issued 12,015
shares of Series A Preferred Stock to Elan Corporation (Elan) to fund its 80.1% share of the initial capitalization of Medizyme (see Note 7). At Elans option, the Series A Preferred Stock was convertible into the Companys common stock or
could be exchanged for a 30.1% interest in Medizyme. Because of this exchange feature, the Company classified for the periods presented $12,015,000 of its Series A Preferred Stock and related preferred stock dividends of $2,314,366 and $1,491,802 at
December 31, 2002 and 2001, outside of permanent equity in accordance with EITF Topic No. D-98, Classification of and Measurement of Redeemable Securities. The right of Elan to exchange the Series A Preferred Stock was applicable for the
period October 2002 through May 2003. Subsequently, 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.



Employee Stock Purchase
Plan The Company adopted an Employee Stock Purchase Plan, as amended (the Purchase Plan), authorizing the issuance of 933,333 shares pursuant to purchase rights granted to employees of the Company. The Purchase Plan provides a means by which
employees purchase common stock of the Company through payroll deductions. The Purchase Plan is implemented by offerings of rights to eligible employees. Generally, the duration of each offering is twenty-four months with purchases occurring on each
October 31 and April 30 during each offering. Common stock is purchased for accounts of employees participating in the Purchase Plan at a price per share equal to the lower of (i) 85% of the fair market value of a share of common stock on the date
of commencement of participation in the offering or (ii) 85% of the fair market value of a share of common stock on the date of purchase. Generally all regular employees, including executive officers, may participate in the Purchase Plan and may
authorize payroll deduction of up to



F-12



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



15% of their base compensation for the purchase of stock under the Purchase Plan. The Companys Board of
Directors has the authority to terminate the Purchase Plan at its discretion. Shares are deemed issued for accounting purposes in the year the shares are purchased. As of December 31, 2003, 220,023 shares have been issued under the Purchase Plan.
The Company required stockholders to approve additional shares for issuance under the Purchase Plan for the offering period commencing November 1, 2002, therefore the Company is required to recognize compensation expense for purchases during the
offering that were subsequent to approval. The related compensation expense for 2003 was $18,604.



Stock Option Plans The Company has established a Non-Qualified Stock Option Plan and an Incentive Stock Option Plan (collectively, the
Plans, as amended), under which it authorized stock option grants to purchase up to 6,627,859 shares of the Companys common stock to eligible employees, consultants, and other individuals, as defined in the Plans. Options to purchase the
Companys common stock are exercisable at a price as determined by the Board of Directors at the time the option is granted, which shall not be less than 100% of the fair market value (110% in the case of 10 percent shareholders) at the date of
grant. Vesting rights are determined by the Board of Directors at the time the option is granted and generally past options became exercisable at twenty percent at the end of each of years one through five. However, in December 2000 the Board of
Directors approved future vesting of grants at twenty-five percent at the end of each of years one through four. If not exercised, the options expire after ten years.



Changes in stock options for the years ended December 31, 2003, 2002 and 2001 were as follows:



|                                 |  |           |   |  |                |              
|-------------------------------- |  | --------- | - |  | -------------- | -------------
|                                 |  | Options   |   |  | Exercise Price
|                                 | 
|Outstanding at December 31, 2000 |  | 345,986   |   |  | $              | 2.70$187.50 
|Options granted                  |  | 172,467   |   |  | $              | 24.00$ 63.00
|Options exercised/cancelled      |  | (41,160   | ) |  | $              | 2.70$173.28 
|                                 |  |           |   |  |                |              
|Outstanding at December 31, 2001 |  | 477,293   |   |  | $              | 2.70$187.50 
|Options granted                  |  | 318,168   |   |  | $              | 1.62$ 29.82 
|Options exercised/cancelled      |  | (167,602  | ) |  | $              | 2.70$186.00 
|                                 |  |           |   |  |                |              
|Outstanding at December 31, 2002 |  | 627,859   |   |  | $              | 1.62$187.50 
|Options granted                  |  | 5,442,585 |   |  | $              | 2.10$ 8.68  
|Options exercised/cancelled      |  | (317,157  | ) |  | $              | 1.62$158.28 
|                                 |  |           |   |  |                |              
|Outstanding at December 31, 2003 |  | 5,753,287 |   |  | $              | 1.62$187.50 



The weighted average
exercise price of options outstanding at December 31, 2003, 2002 and 2001 was $4.32, $4.55 and $8.44, respectively.



Stock options vest as follows:



|                       |  |          
|---------------------- |  | ---------
|                       |  | Options  
|Currently exercisable. |  | 935,859  
|2004                   |  | 1,565,217
|2005                   |  | 1,290,652
|2006                   |  | 1,179,332
|2007                   |  | 624,230  
|2008 and thereafter.   |  | 157,997  
|                       |  |          
|Total.                 |  | 5,753,287
|                       |  |          



F-13



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



The following table summarizes information concerning outstanding and exercisable options as of
December 31, 2003:



|                          |  |                     |  |                                          |  |                               |        |                   |         |                               |   |       
|------------------------- |  | ------------------- |  | ---------------------------------------- |  | ----------------------------- | ------ | ----------------- | ------- | ----------------------------- | - | ------
|                          |  | Options Outstanding |  | Options Exercisable                     
|Range of Exercise Price   |  | Numberoutstanding   |  | WeightedAverageRemainingContractual Life |  | WeightedAverageExercise Price |        | NumberExercisable |         | WeightedAverageExercise Price
|$        1.62 - $    2.10 |  | 4,766,135           |  | 9.11                                     |  | $                             | 2.10   |                   | 609,236 |                               | $ | 2.09  
|$        2.34 - $    4.68 |  | 542,875             |  | 9.28                                     |  | $                             | 4.34   |                   | 145,669 |                               | $ | 4.34  
|$        5.20 - $  24.78  |  | 282,867             |  | 8.22                                     |  | $                             | 9.83   |                   | 72,748  |                               | $ | 15.60 
|$      25.44 - $167.28    |  | 160,994             |  | 6.63                                     |  | $                             | 60.08  |                   | 107,954 |                               | $ | 59.09 
|$    168.78 - $187.50     |  | 416                 |  | 6.73                                     |  | $                             | 183.77 |                   | 252     |                               | $ | 183.71
|                          |  |                     |  |                                          |  |                               |        |                   |         |                               |   |       
|$        1.62 - $187.50   |  | 5,753,287           |  | 9.02                                     |  | $                             | 4.32   |                   | 935,859 |                               | $ | 10.12 
|                          |  |                     |  |                                          |  |                               |        |                   |         |                               |   |       



Pro Forma
Information Pro forma information regarding net loss and net loss per share is required by SFAS 123, and has been provided in Note 1. The information has been determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002 and 2001, respectively: risk-free
interest rates of 2.78%, 4.75% and 4.3%; a dividend yield of 0%; volatility factors of the expected market price of the Companys common stock of 1.14, 1.09 and 1.04; and a weighted-average expected life of the option of 5, 6 and 6 years. The
weighted average fair value of stock options granted during 2003, 2002 and 2001 was $2.40, $5.04 and $42.18, respectively.



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.



Stock Based
Compensation During 2003, 2002, and 2001, the Company recorded $321,531, $24,835 and $14,476, respectively, of compensation relating to the grant of stock options and an anti-dilution agreement. The expense recorded in 2003 is for options
granted that were subject to approval by shareholders. 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. Since the price of the stock
closed at a higher price on the day of approval (effective grant date) than the exercise price of the options, the Company was required to record unearned compensation of $2.7 million, which is the $0.60 difference in stock price multiplied by the
4.5 million shares that required approval. The compensation is deferred and will be expensed as the options vest. Generally, the options vest monthly over four and five years. The expense recorded in 2001 relates to pre-IPO issuances that were
deferred until vesting was completed, and the 2002 expense relates to options issued to consultants, which was accounted for under the requirements of SFAS 123.



Shareholder Rights Plan In November 2000, the Company adopted a Shareholder Rights Plan (the Rights Plan) designed to protect and
maximize shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all shareholders in the event of a hostile bid to acquire the Company. The Rights Plan imposes a significant penalty upon any person or group
that acquires 15 percent or more of the Companys outstanding common stock without the approval of the Sirna Board. Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of
the close of business on December 8, 2000. The rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15 percent or more of the



F-14



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



Companys common stock. In that event, each right will entitle the holder, other than the unapproved acquirer
and its affiliates, to purchase either the Companys common stock or shares in an acquiring entity at one-half of market value. The rights expire on December 8, 2010.



Rights OfferingIn connection with the Stock Purchase Agreement, the Company gave 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. 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.



Common Stock ReservedBelow is a summary of common stock
reserved by the Company at December 31, 2003 for issuance upon the exercise of the various options, warrants, the 401(k) plan and Purchase Plan.



|                                                |  |           
|----------------------------------------------- |  | ----------
|                                                |  | Shares    
|Stock option plans                              |  | 6,416,053 
|Employee stock purchase plan                    |  | 713,310   
|Employee 401(k) stock match                     |  | 888,872   
|Warrants at $2.52 per share (expires in 2008)   |  | 5,100,870 
|Warrants at $3.48 per share (expires in 2006)   |  | 59,186    
|Warrants at $30.00 per share (expires in 2006)  |  | 50,199    
|Warrants at $32.82 per share (expires in 2004)  |  | 1,500     
|Warrants at $59.64 per share (expires in 2004)  |  | 4,167     
|Warrants at $72.00 per share (expires in 2006)  |  | 58,333    
|Warrants at $94.50 per share (no expiration)    |  | 212       
|Warrants at $120.00 per share (expires in 2007) |  | 50,000    
|Warrants at $135.00 per share (expires in 2006) |  | 74,815    
|                                                |  |           
|                                                |  | 13,417,517
|                                                |  |           



The Companys
ability to pay dividends is restricted by the terms of its convertible debt and equipment loan facility agreements.



6. Unconsolidated German Affiliate  atugen AG



In 1998, the Company transferred its gene function and target validation business and technology to atugen, a separately funded German affiliate.
Financing for atugen was accomplished through an equity investment of $2.0 million in cash from the Company in 1998, a venture capital investment of $7.0 million and a commitment by the German government to provide grants and loans of up to $10.0
million. As a result, at December 31, 1998, the Company retained a 49.5% ownership in atugen. However, since formation, atugen has had additional rounds of financing and as a result the Company has approximately a 10% ownership in atugen as of
December 31, 2003. The Company historically accounted for its investment in atugen under the equity method of accounting and as of 1999 had absorbed its entire cost basis in this equity investment through its share of atugens net losses.



7. Collaborative Agreements



Chiron



In July 1994, the Company entered into a research and development collaboration agreement with Chiron to research, develop
and market ribozyme products directed towards five genetic targets, and all human clinical indications associated with those targets. According to the agreement, the Company and Chiron share equally in the costs and profits of any jointly developed
products. In addition, Chiron could, at its option, finance the Companys portion of its Phase II and Phase III drug development costs for mutually approved programs. The Company retained the option to reacquire its rights by reimbursing Chiron
for such development costs plus a predetermined risk premium. As part of this agreement, Chiron made a $10,000,000 equity investment in the Company.





F-15



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



Chiron and the Company were jointly collaborating in the development of ANGIOZYME, the Companys
lead ribozyme product candidate for the treatment of solid tumor cancers. The Company recorded revenues and credit to expenses from Chiron of $557,481, $2,582,260 and $11,935,567, in 2003, 2002 and 2001, respectively, for 50% of ANGIOZYME clinical
development and manufacturing expenses incurred by the Company. There are no future obligations between the Company and Chiron related to revenues that were recognized in 2003, 2002 and 2001.



In March 2001, the Company issued 6,487 shares of the Companys common
stock to Chiron in exchange to reacquire all rights to develop any ribozyme product containing or utilizing an HIV target. An expense of $275,000 was recorded in 2001 in connection with the issuance of the stock.



The Company is no longer pursuing ribozyme technology and therefore it does
not intend to develop ANGIOZYME independently. The Company and Chiron have agreed to seek a licensee for the further development of ANGIOZYME; however, it is uncertain whether or not an interested party will be found, and if so, under terms
agreeable to both Chiron and Sirna.



Schering AG, Berlin



On April 9, 1997, the Company entered into a research collaboration with
Schering AG, Berlin, (Schering AG) focusing on the use of ribozymes for therapeutic target validation, as well as the development of ribozymes as therapeutic agents. The collaboration utilized the special selectivity of ribozymes to validate new
molecular therapeutic targets and to discover new therapeutic agents based on those targets. The Company provided its expertise in ribozyme design, synthesis and delivery, and Berlex Laboratories, Inc., a U.S. subsidiary of Schering AG (Berlex)
provided candidate targets, cell culture screens, animal models and development and commercialization expertise to the collaboration. Since the formation of atugen in 1998, the Company subcontracted the work related to the collaboration to atugen.



Through its agreement with the Company, Schering AG also
provided various loans. At December 31, 2003, the Company 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 the Companys agreement to pay accrued interest on the loan on a quarterly basis, Schering AG extended the due date for repayment of the loans from April 2004 to January 2005. Upon the closing of the Stock Purchase
Agreement in April 2003, the Company paid $520,000 to Schering AG for interest accrued on the loan through March 2003. Subsequent to March 2003, interest payments to Schering are paid on a quarterly basis.



Elan Corporation



In January 2000, the Company formed a joint venture with Elan Corporation (Elan) for the development and commercialization
of HERZYME, the Companys product to treat breast and other cancers. As part of this arrangement, the Company licensed HERZYME and Elan licensed its MEDIPAD® 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 accounted for this joint venture under the equity method because Elan retained significant minority investor rights. During 2003, the Company wrote off the remaining
cost basis in its equity investment through its share of Medizyme losses.



Initial funding of Medizyme included $12.0 million from the Company and $3.0 million from Elan. The Companys $12.0 million capital contribution was funded by the sale to Elan of (i) 12,015 shares of the
Companys Series A Convertible Exchangeable Preferred Stock (the Series A Preferred Stock), (ii) a warrant to purchase up to 33,333 shares of the Companys common stock at an exercise price of $90.00 per share, which expired unexercised in
January 2002, and (iii) a warrant to purchase up to 50,000 shares of the Companys common stock at an exercise price of $120.00 per share with a term of seven years. The Series A Preferred Stock had a stated dividend rate of 6.0% which was
payable semi-annually through the issuance of additional shares of Series A Preferred Stock at a nominal value of $1,000 per share.



F-16



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



Medizyme paid Elan in cash a $15.0 million non-refundable license fee for the MEDIPAD® drug delivery technology. As a result of this licensing
transaction, Medizyme capitalized the entire license fee and amortized the balance over the three-year term of the agreement since Medizymes license of the MEDIPAD® device was intended for use with any ribozyme drug developed by Medizyme targeting a gene believed responsible for
certain breast cancers. The Company estimated that funding for Medizyme would require approximately $15.0 million in additional operating and development costs. In connection with expected funding requirements, Elan agreed to provide the Company
with a $12.0 million credit facility to fund the Companys pro rata portion of Medizymes operating costs over the development period, which was 42 months. In June 2002, Elan converted this debt and accrued interest into 9,905 shares of
the Companys Series B Convertible Preferred Stock (the Series B Preferred Stock). As of April 2003, the Company had utilized the credit facility and had borrowed $9.9 million. The Series B Preferred Stock ultimately was convertible into shares
of the Companys common stock at a 50% premium to the average price of its common stock for the 60 days prior to the time of the applicable draw down on the credit facility. The Series B Preferred Stock had a stated dividend rate of 12%, which
was payable semi-annually through the issuance of additional shares of Series B Preferred Stock at a nominal value of $1,000 per share.



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 December 31, 2003, the Company owned 100% of the capital stock of Medizyme, but since it does not intend to pursue independent development of HERZYME, all operations of Medizyme ceased during
2003. 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.



Archemix Corporation



In May 2001, the Company entered into a collaborative agreement with
Archemix, a privately held company. One of Archemixs technologies, RiboReporters, incorporates allosteric ribozymes. This technology allows researchers to detect individual molecules in complex mixtures, for drug discovery and environmental monitoring. Under the terms of the agreement with
Archemix, the Company granted certain licenses and sublicenses to its intellectual property covering the allosteric ribozyme technology. The Company also received a license to Archemixs intellectual property covering allosteric ribozymes for
use in molecular diagnostic applications. In exchange for the licenses, the Company received an equity position in Archemix. The Company owns approximately 2% of the outstanding common stock of Archemix and accounts for its investment under the cost
method. In addition, in September 2003, the Company entered into a manufacturing agreement with Archemix, whereby it will manufacture and supply to Archemix cGMP-grade ARC183, an anti-thrombin aptamer. The Company recognized revenues of $142,000 in
2003 under the agreement.



Geron Corporation



In December 2001, the Company announced a collaboration with Geron
Corporation (Geron), a biopharmaceutical company focused on developing and commercializing therapeutic and diagnostic products for applications in oncology and regenerative medicine and research tools for drug discovery. Initially, Geron paid the
Company for consultation in nucleic acid technology to improve process development, scale-up and the manufacturing process for GRN163. In July 2002, the Company announced an agreement whereby the Company manufactured GRN163 for use in Gerons
preclinical studies. Delivery under this agreement was completed in June 2003. As of December 31, 2003 and 2002, the Company had recognized revenues of $2.8 million and $718,000, respectively, related to the agreement.



University of Massachusetts Medical School



In September 2003, the Company announced that it 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 technology covering short interfering siRNAs. The license grants the Company
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.



F-17



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



Under the terms of the license agreement, the Company paid $3.0 million in cash and issued 579,150
shares of its common stock, valued at $3.0 million, to the Medical School in exchange for the license. The $6.0 million fee was expensed to research and development during the third quarter of 2003 due to the early stage of the technology. 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.



8. Related Party Transactions



At December 31, 2003, 2002 and 2001, the Company had a total of $512,000,
$906,000 and $865,000, respectively, of non-interest bearing loans due from executive officers. The balances may be forgiven by the Company under certain employment agreement provisions. The loan balances are forgivable or payable to the Company
under various terms not to exceed five years. The Company forgave $394,000, $189,000 and $201,187, of these loans during each of the years ending December 31, 2003, 2002 and 2001, respectively.



In March 2002, the Company reached an agreement with Jeremy Curnock Cook, the
Companys Chairman of the Board, whereby the Company utilized his consulting firm, Bioscience Management, plc, for strategic planning. During 2002, the Company paid $85,000 and $39,884 to Bioscience Management and Mr. Cook, respectively, in
fees for consulting services provided. During 2003, the Company paid $24,000 to Mr. Cook for consulting fees.



9. Income Taxes



The
Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS 109). Under the provisions of SFAS 109, a deferred tax liability or asset (net of a valuation
allowance) is provided in the financial statements by applying the provisions of applicable tax laws to measure the deferred tax consequences of temporary differences that will result in net taxable or deductible amounts in future years as a result
of events recognized in the financial statements in the current or preceding years.



At December 31, 2003, the Company has the following net operating loss and tax credit carryforwards for income tax purposes (in thousands):



|                |  |                      |         |                                  |   |      
|--------------- |  | -------------------- | ------- | -------------------------------- | - | -----
|Expiration Date |  | Net Operating Losses |         | Research and Development Credits
|                | 
|                | 
|2002            |  | $                    |        |                                  | $ |     
|2007            |  |                      | 3,506   |                                  |   | 101  
|2008            |  |                      | 7,363   |                                  |   | 185  
|2009            |  |                      | 9,239   |                                  |   | 316  
|2010            |  |                      | 11,953  |                                  |   | 139  
|2011            |  |                      | 15,125  |                                  |   | 181  
|2012            |  |                      | 15,291  |                                  |   | 297  
|2018            |  |                      | 10,109  |                                  |   | 475  
|2019            |  |                      | 8,215   |                                  |   | 405  
|2020            |  |                      | 7,456   |                                  |   | 709  
|2021            |  |                      | 52,170  |                                  |   | 646  
|2022            |  |                      | 28,676  |                                  |   | 1,011
|2023            |  |                      | 19,497  |                                  |   | 505  
|                |  |                      |         |                                  |   |      
|Total           |  | $                    | 188,600 |                                  | $ | 4,970
|                |  |                      |         |                                  |   |      



F-18



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and
tax credit carryforwards if there has been a change of ownership as described in Section 382 of the Internal Revenue Code. Such a change of ownership may limit the Companys utilization of its net operating loss and tax credit carryforwards,
and could have been triggered by the Companys initial public offering or by subsequent sales of securities by the Company or its shareholders. See Note 1 regarding change in ownership. As a result of the private placement in April, 2003, which
the Company considers a change of ownership for tax purposes, the Company believes that there are substantial limitations on the utilization of its net operating loss carryforwards.



The components of the Companys deferred tax assets and liabilities, net of taxes, as of December 31, 2003 and 2002 are
as follows (in thousands):



|                                              |  |      |         |   |      |   |         |  
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                              |  | 2003 |         |   | 2002 |  
|Deferred tax assets:                          |  |      |         |   |      |   |         |  
|Net operating loss carryforwards.             |  | $    | 70,347  |   |      | $ | 63,054  |  
|Research and development credit carryforwards |  |      | 4,970   |   |      |   | 4,548   |  
|Depreciation.                                 |  |      | 402     |   |      |   | 1,081   |  
|Equity in loss of unconsolidated affiliate    |  |      | 8,853   |   |      |   | 8,769   |  
|Deferred income                               |  |      | 75      |   |      |   | 483     |  
|Other                                         |  |      | 2,829   |   |      |   | (1      | )
|                                              |  |      |         |   |      |   |         |  
|                                              |  |      | 87,476  |   |      |   | 77,934  |  
|Valuation allowance                           |  |      | (87,113 | ) |      |   | (76,169 | )
|                                              |  |      |         |   |      |   |         |  
|Net deferred tax assets                       |  |      | 363     |   |      |   | 1,765   |  
|Deferred tax liabilities:                     |  |      |         |   |      |   |         |  
|Deferred patent costs                         |  |      | 285     |   |      |   | 1,678   |  
|Other                                         |  |      | 78      |   |      |   | 87      |  
|                                              |  |      |         |   |      |   |         |  
|Total deferred tax liabilities.               |  |      | 363     |   |      |   | 1,765   |  
|                                              |  |      |         |   |      |   |         |  
|                                              |  | $    |        |   |      | $ |        |  
|                                              |  |      |         |   |      |   |         |  



A
reconciliation between the statutory federal income tax rate of 34% and the Companys 0.0%, effective tax rates for the years ended December 31, 2003, 2002, and 2001, respectively, is as follows (in thousands):



|                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                    |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Expected benefit from federal income taxes at statutory rate of 34% |  | $    | (10,146 | ) |      | $ | (11,800 | )    |  | $ | (20,319 | )
|Permanent differences                                               |  |      | 11      |   |      |   | 20      |      |  |   | 31      |  
|State taxes, net of federal benefit                                 |  |      | (596    | ) |      |   | (1,068  | )    |  |   | (1,839  | )
|Other                                                               |  |      | (213    | ) |      |   | 6       |      |  |   | 1,064   |  
|Valuation allowance                                                 |  |      | 10,944  |   |      |   | 12,842  |      |  |   | 21,063  |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Effective income tax rate                                           |  | $    |        |   |      | $ |        |      |  | $ |        |  
|                                                                    |  |      |         |   |      |   |         |      |  |   |         |  



10. Employee Savings Plan



The Company has a 401(k) plan that allows participants to
contribute 1% to 25% of their salary, subject to eligibility requirements and annual limits. The Board may, at its sole discretion, approve matching contributions with the Companys common stock. In 2003, 2002 and 2001, the Board approved a 50%
common stock match equal to total participant deferrals made in each respective year. Expense related to the stock match was $227,000, $238,000 and $290,000 for years ended 2003, 2002 and 2001, respectively. The Company stock match is subject to
vesting restrictions.



F-19



---

##### Table of Contents

SIRNA THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTSContinued



11. Quarterly Results (Unaudited, in thousands, except per share data)



|                                     |  |             |        |   |             |   |        |             |  |   |             |   |  |   |         |  
|------------------------------------ |  | ----------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                     |  | 1st Quarter |        |   | 2nd Quarter |   |        | 3rd Quarter |  |   | 4th Quarter |  
|2003                                 |  |             |        |   |             |   |        |             |  |   |             |   |  |   |         |  
|Total revenues                       |  | $           | 490    |   |             | $ | 2,983  |             |  | $ | 283         |   |  | $ | 419     |  
|Total expenses                       |  |             | 5,166  |   |             |   | 10,846 |             |  |   | 11,222      |   |  |   | 6,575   |  
|Other (expense) income               |  |             | (238   | ) |             |   | 28     |             |  |   | (7          | ) |  |   | 10      |  
|Accretion of dividends               |  |             | 562    |   |             |   |       |             |  |   |            |   |  |   |        |  
|                                     |  |             |        |   |             |   |        |             |  |   |             |   |  |   |         |  
|Net loss applicable to common stock  |  |             | (5,476 | ) |             |   | (7,835 | )           |  |   | (10,946     | ) |  |   | (6,146  | )
|                                     |  |             |        |   |             |   |        |             |  |   |             |   |  |   |         |  
|Basic and diluted net loss per share |  | $           | (1.62  | ) |             | $ | (0.28  | )           |  | $ | (0.37       | ) |  | $ | (0.19   | )
|                                     |  |             |        |  
|2002                                 |  |             |        |   |             |   |        |             |  |   |             |   |  |   |         |  
|Total revenues                       |  | $           | 1,579  |   |             | $ | 1,622  |             |  | $ | 1,308       |   |  | $ | 639     |  
|Total expenses                       |  |             | 8,223  |   |             |   | 9,176  |             |  |   | 6,734       |   |  |   | 10,031  |  
|Other expense                        |  |             | 1,650  |   |             |   | 1,703  |             |  |   | 1,387       |   |  |   | 950     |  
|Accretion of dividends               |  |             | 203    |   |             |   | 301    |             |  |   | 520         |   |  |   | 547     |  
|                                     |  |             |        |   |             |   |        |             |  |   |             |   |  |   |         |  
|Net loss applicable to common stock  |  |             | (8,497 | ) |             |   | (9,558 | )           |  |   | (7,333      | ) |  |   | (10,889 | )
|                                     |  |             |        |   |             |   |        |             |  |   |             |   |  |   |         |  
|Basic and diluted net loss per share |  | $           | (2.55  | ) |             | $ | (2.85  | )           |  | $ | (2.18       | ) |  | $ | (3.23   | )



12. Subsequent Event



Eli Lilly Collaboration



In January 2004, the Company announced a collaboration with Eli Lilly &
Company (Lilly) to develop novel RNAi therapeutics. During the eighteen-month collaboration, Lilly and the Company will investigate the Companys proprietary modified siRNAs against specific oncology targets designated by Lilly. For the
collaboration, the Company will provide the chemistry and pharmacology and Lilly will provide the targets, preclinical in vivo models and research funding. The Company expects to receive at least $2.1 million under the collaboration.





F-20