10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2009

Commission File Number 000-13789

MDRNA, INC.

(Exact name of registrant as specified in its charter)

Delaware	11-2658569
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3830 Monte Villa Parkway, Bothell, WA	98021
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (425) 908-3600

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Date	Class	Shares Outstanding
July 28, 2009	Common stock — $0.006 par value	40,752,025

MDRNA, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2008 and June 30, 2009	3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2009	4
Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the six months ended June 30, 2009	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2009	6
Notes to Condensed Consolidated Financial Statements	7
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
ITEM 4 — CONTROLS AND PROCEDURES	25
PART II — OTHER INFORMATION
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26
ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	26
ITEM 5 — OTHER INFORMATION	26
ITEM 6 — EXHIBITS	26
SIGNATURES	27
EXHIBIT INDEX	28

Items 1, 1A and 3 of PART II have not been included as they are not applicable.

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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

MDRNA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	December 31, 2008			June 30, 2009
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	1,084		$	7,926
Restricted cash		2,268			1,451
Accounts receivable		32			60
Inventories		98			—
Prepaid expenses and other current assets		935			454
Assets held for sale		541			—
Total current assets		4,958			9,891
Property and equipment, net		7,844			5,841
Other assets		335			3
Total assets	$	13,137		$	15,735
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,039		$	1,239
Accrued payroll and employee benefits		2,410			468
Accrued expenses		1,472			1,594
Accrued restructuring — current portion		2,091			199
Capital lease obligations — current portion		4,112			—
Deferred revenue — current portion		400			—
Total current liabilities		12,524			3,500
Accrued restructuring, net of current portion		609			656
Capital lease obligations, net of current portion		1,017			—
Deferred revenue, net of current portion		318			—
Fair value liability for price adjustable warrants		—			10,820
Deferred rent and other liabilities		1,928			1,712
Total liabilities		16,396			16,688
Commitments and contingencies
Stockholders’ deficit):
Preferred stock, $0.01 par value; 100,000 authorized: no shares issued and outstanding:		—			—
Common stock and additional paid-in capital, $0.006 par value; 90,000,000 authorized:
31,244,018 shares issued and outstanding as of December 31, 2008 and 40,752,025 issued and outstanding as of June 30, 2009		250,826			254,269
Accumulated deficit		(254,085	)		(255,222	)
Total stockholders’ deficit		(3,259	)		(953	)
Total liabilities and stockholders’ deficit	$	13,137		$	15,735

See notes to condensed consolidated financial statements

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MDRNA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2009			2008			2009
	(In thousands, except per share data)
Revenue
License and research fees	$	431		$	306		$	1,113		$	14,374
Product revenue		241			—			729			70
Government grants		82			3			175			16
Total revenue		754			309			2,017			14,460
Operating expenses:
Cost of product revenue, including inventory write-down of $2,579 in the three and six month periods ended June 30, 2008		2,665			—			2,829			—
Research and development		8,493			4,340			19,419			8,456
Sales and marketing		445			70			1,018			213
General and administrative		3,380			2,181			7,609			4,145
Restructuring		—			178			1,917			311
Total operating expenses		14,983			6,769			32,792			13,125
Income (loss) from operations		(14,229	)		(6,460	)		(30,775	)		1,335
Other income (expense):
Interest income		135			1			428			3
Interest and other expense		(237	)		(168	)		(502	)		(311	)
Change in fair value liability for price adjustable warrants		—			(905	)		—			(1,932	)
Gain on settlement of liabilities, net		—			—			—			654
Total other expense		(102	)		(1,072	)		(74	)		(1,586	)
Net loss	$	(14,331	)	$	(7,532	)	$	(30,849	)	$	(251	)
Loss per common share — basic and diluted:
Net loss per common share — basic and diluted	$	(0.48	)	$	(0.21	)	$	(1.10	)	$	(0.01	)
Shares used in computing net loss per share — basic and diluted		29,722			35,962			27,966			34,113

See notes to condensed consolidated financial statements

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MDRNA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

For the Six Months Ended June 30, 2009

(Unaudited)

	Common Stock and Additional Paid-In Capital					Accumulated Deficit			Total Stockholders’ Deficit
	Shares		Amount
	(In thousands, except share data)
Balance December 31, 2008	31,244,018		$	250,826		$	(254,085	)	$	(3,259	)
Cumulative effect of change in accounting principle	—			—			(886	)		(886	)
Balance January 1, 2009	31,244,018			250,826			(254,971	)		(4,145	)
Proceeds from the issuance of common shares, net	5,250,000			1,221			—			1,221
Shares issued in connection with settlement of liabilities	3,596,010			982			—			982
Shares issued in connection with amendment of license agreement	606,061			1,000			—			1,000
Proceeds from the exercise of options, warrants and employee stock purchase plan purchases	68,500			152			—			152
Reclassification of fair value of warrants exercised on June 9, 2009	—			109			—			109
Compensation related to restricted stock, net of forfeitures	(12,564	)		(469	)		—			(469	)
Compensation related to stock options and employee stock purchase plan, net of forfeitures	—			448			—			448
Net loss	—			—			(251	)		(251	)
Balance June 30, 2009	40,752,025		$	254,269		$	(255,222	)	$	(953	)

See notes to condensed consolidated financial statements

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MDRNA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2008			2009
	(In thousands)
Operating activities:
Net loss	$	(30,849	)	$	(251	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Non-cash compensation related to stock options and employee stock purchase plan		1,366			448
Non-cash compensation related to restricted stock		1,392			(469	)
Depreciation and amortization		2,365			1,333
Accretion of restructuring liability		—			122
Loss on disposition of property and equipment		30			68
Write-down of inventory and prepaid supplies		2,681			—
Net gain on settlement of liabilities		—			(654	)
Non-cash change in fair value of price adjustable warrants		—			1,932
Changes in assets and liabilities:
Accounts receivable		(61	)		(28	)
Inventories		11			6
Prepaid expenses and other assets		394			580
Accounts payable		(1,897	)		(234	)
Deferred revenue		(475	)		(718	)
Accrued expenses and deferred rent and other liabilities		(1,585	)		54
Accrued restructuring		—			(1,249	)
Net cash provided by (used in) operating activities		(26,628	)		940
Investing activities:
Change in restricted cash		—			817
Purchases of property and equipment		(63	)		(8	)
Proceeds from sales of property and equipment		—			1,156
Purchases of investments		(1,024	)		—
Sales and maturities of investments		11,799			—
Net cash provided by investing activities		10,712			1,965
Financing activities:
Payments on note payable		—			(5,547	)
Payments on capital lease obligations		(2,513	)		—
Proceeds from exercise of stock options, warrants and employee stock purchase plan purchases		85			152
Proceeds from the issuance of common shares and warrants, net		7,254			9,332
Net cash provided by financing activities		4,826			3,937
Net increase (decrease) in cash and cash equivalents		(11,090	)		6,842
Cash and cash equivalents — beginning of period		27,704			1,084
Cash and cash equivalents — end of period	$	16,614		$	7,926
Non-cash financing activities:
Note payable issued upon cancellation of capital lease obligations	$	—		$	5,128
Issuance of common stock to settle liabilities		—			1,982
Supplemental disclosure:
Cash paid for interest	$	502		$	311

See notes to condensed consolidated financial statements

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MDRNA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2009 and 2008 (Unaudited)

Note 1 — Business, Going Concern and Summary of Significant Accounting Policies

Business

We are a biotechnology company focused on the discovery, development and commercialization of pharmaceuticals based on RNA interference (“RNAi”). Our goal is to be the leader in RNAi therapeutics and improve human health through the development of RNAi-based compounds that provide superior therapeutic options for patients. Our team of approximately 30 scientists brings expertise in the discovery, evaluation and optimization of small interfering RNAs (“siRNAs”) as well as siRNA delivery. We have the requisite experience in the areas of RNAi, molecular and cellular biology, lipid, oligonucleotide and peptide chemistry, pharmacology and bioinformatics necessary to discover and develop tailored RNAi-based compounds designed to elicit specific therapeutic effects on a target-by-target basis. Our infrastructure provides for pre-clinical scale manufacturing of both siRNAs and delivery materials, the comprehensive analysis and optimization of these compounds both individually and as drug candidates, and the filing of Investigational New Drug Applications. In addition to our own, internally developed technologies, we strategically in-license and further develop RNAi- and delivery-related technologies, forming a single integrated drug discovery platform. In order to protect our innovations, which encompass a broad platform of both siRNA and delivery technologies, and the eventual drug products that emerge from that platform, we will aggressively continue to build upon our extensive and enabling intellectual property (“IP”) estate.

We have recently completed a major restructuring of our business. Our business strategy is two-fold. First, we strive to establish collaborations and strategic partnerships with pharmaceutical and biotechnology companies in the area of RNAi-based therapeutics to: (1) generate revenue and non-dilutive financing; (2) gain access to technical resources; and (3) validate our drug discovery platform. Secondly, we expect to advance our own pipeline of RNAi-based therapeutics as a foundation upon which to improve all aspects of our drug discovery platform and eventually to have the opportunity to commercialize a drug therapy. With respect to collaborations and strategic partnerships, we are currently focused on our Meroduplex and UsiRNA constructs, as well as our DiLA² and peptide delivery technologies. Typically, we would expect to collaborate with partners who can take a drug candidate through to commercialization by utilizing their late stage clinical development, regulatory, marketing and sales capabilities. We expect to structure our collaborative arrangements in such a manner to receive upfront non-refundable payments, research and development funding, milestone payments and royalties on commercial sales of products.

We believe we have established ourselves as a leading RNAi-based therapeutics company by leveraging our broad and proven expertise in RNAi science and delivery into an industry-leading RNAi drug discovery platform, which is protected by a strong IP position and validated through licensing agreements with two large international pharmaceutical companies.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve month period following the date of these financial statements. As of June 30, 2009, we had an accumulated deficit of approximately $255.2 million and expect to incur additional losses in the future as we continue our research and development (“R&D”) activities. We have funded our losses primarily through the sale of common stock and warrants in the public markets and private placements, revenue provided by our collaboration partners, and, to a lesser extent, equipment financing facilities and loans. The further development of our RNAi programs will require additional funding. At June 30, 2009, we had working capital (current assets less current liabilities) of $6.4 million and approximately $9.4 million in cash and cash equivalents, including approximately $1.5 million in restricted cash. While we continue to implement cost containment efforts, our operating expenses, primarily R&D, will consume the majority of our cash resources.

On June 12, 2009, we raised net proceeds of approximately $9.3 million in a private placement of 5,250,000 shares of common stock along with warrants to purchase up to 5,250,000 shares of common stock at a negotiated purchase price of $2.00 per share, which warrants are exercisable during the five-year period beginning December 13, 2009 at a price of $2.38 per share. We believe that our current resources are sufficient to fund our planned operations to approximately year-end 2009. We based our estimate on our ability to perform planned R&D activities and our recent financing activity. The volatility in our stock price, as well as global market conditions, could make it difficult for us to raise capital on favorable terms, or at all. Any financing we obtain may further dilute the ownership interest of our current stockholders. If we fail to generate positive cash flows or fail to obtain additional capital when required, we could modify, delay or abandon some or all of our programs. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

We plan to continue to work with large pharmaceutical companies to conclude research and development collaboration agreements or investments, and to pursue public and private sources of equity financing to raise operating cash. However, there can be no assurance that we will be successful in such endeavors.

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Basis of Preparation and Summary of Significant Accounting Policies

Basis of Preparation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the year ended December 31, 2008, included in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”). The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented. The results of operations for the interim period ended June 30, 2009 are not necessarily indicative of the results for the year ending December 31, 2009 or for any future period.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Estimates having relatively greater significance include revenue recognition, R&D costs, stock-based compensation, valuation of our warrants, inventory reserves, impairment of long-lived assets, estimated accrued restructuring charges and income taxes. Actual results could differ from those estimates.

Impairment of Long-Lived Assets and Assets Held for Sale — Long-lived assets, such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Conditions that would necessitate an impairment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets are considered held for sale when certain criteria are met, including whether management has committed to a plan to sell the asset, whether the asset is available for sale in its immediate condition, and whether the sale is probable within one year of the reporting date. Assets held for sale are measured as the lower of carrying amount or fair value less cost to sell.

Accrued Restructuring — We follow the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), as it relates to our facility at 3450 Monte Villa Parkway, Bothell, Washington (“3450 Monte Villa”), which we ceased to use in 2008. Under SFAS 146, an accrued liability for remaining lease termination costs is initially measured at fair value, based on the remaining payments due under the lease and other costs, reduced by sublease rental income that could be reasonably obtained from the property, and discounted using a credit-adjusted risk-free interest rate. We use a credit-adjusted risk-free interest rate of 15%, and we based our estimated future payments on current rental rates available in the Bothell real estate market, cash incentives available from the landlord to attract new tenants, our evaluation of the ability to sublease our facility in light of tightening credit markets, deteriorating conditions in the Bothell real estate market and increased vacancy rates in the competing downtown real estate markets. Accrued restructuring, and in particular those charges associated with exiting a facility, are subject to management’s assumptions and estimates. In addition to the interest rate used, the assumptions as to estimated future payments significantly impact the accrual and actual results may differ from our estimates. We review these estimates quarterly and adjust our accrual if necessary. For a further discussion of our restructuring charges, see Note 3 — Accrued Restructuring and Assets Held for Sale.

Fair Value of Financial Instruments — We consider the fair value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities to not be materially different from their carrying value. These financial instruments have short-term maturities.

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements and does not apply to measurements related to share-based payments. SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

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Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

We currently measure and report at fair value the liability for price adjustable warrants. The following table summarizes our financial liabilities measured at fair value on a recurring basis in accordance with SFAS 157 as of June 30, 2009 (in thousands):

	Balance at June 30, 2009		Level 1 Quoted prices in active markets for identical assets	Level 2 Significant other observable inputs	Level 3 Significant unobservable inputs
Liabilities:
Fair value liability for price adjustable warrants	$	10,820	—	—	$	10,820
Total financial liabilities at fair value	$	10,820	—	—	$	10,820

The following table is a roll forward for the three and six months ended June 30, 2009 of the fair value liability of price adjustable warrants, as to which fair value is determined by Level 3 inputs (in thousands):

Beginning balance at January 1, 2009	$	886
Change in fair value included in statement of operations		1,027
Balance, March 31, 2009	$	1,913
Fair value of warrants exercised on June 12, 2009		(109	)
Fair value of warrants issued on June 12, 2009		8,111
Change in fair value included in statement of operations		905
Ending balance at June 30, 2009	$	10,820

Net Loss Per Common Share — Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per share excludes the effect of common stock equivalents (stock options, unvested restricted stock and warrants) since such inclusion in the computation would be anti-dilutive. The number of shares that have been excluded in per share computations for the three and six month periods ended are as follows (in thousands):

	Six Months Ended June 30, 2008	Six Months Ended June 30, 2009
Stock options outstanding under our various stock option plans	8,432	7,828
Unvested restricted stock	360	57
Warrants	6,341	10,020
Total	15,133	17,905

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Note 2 — Concentration of Credit Risk and Significant Customers

We operate in an industry that is highly regulated, competitive and rapidly changing and involves numerous risks and uncertainties. Significant technological and/or regulatory changes, the emergence of competitive products and other factors could negatively impact our consolidated financial position or results of operations.

We have been dependent on our collaborative agreements with a limited number of third parties for a substantial portion of our revenue, and our discovery and development activities may be delayed or reduced if we do not maintain successful collaborative arrangements. We had revenue from customers, as a percentage of total revenue, as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2009		2008		2009
Novartis	—		60	%	—		52	%
Roche	—		—		—		34	%
Amylin	—		—		—		7	%
QOL Medical, LLC	47	%	—		49	%	6	%
Par Pharmaceuticals	—		39	%	—		1	%
Government grant	11	%	1	%	9	%	—
Undisclosed partner – undisclosed compounds	24	%	—		28	%	—
Undisclosed partner – Factor IX	18	%	—		14	%	—
Total	100	%	100	%	100	%	100	%

Note 3 — Accrued Restructuring and Assets Held For Sale

Since late 2007, we have restructured our operations to focus on our RNAi programs. As part of the restructuring, we have reduced our workforce from approximately 235 employees in late 2007 to approximately 40 full-time employees at June 30, 2009. We have also exited certain of our facilities and have taken other steps to reduce our cash expenditures. We have recorded restructuring charges related to employee termination costs, our facility consolidation and impairment of assets in accordance with our long-lived assets policy. During 2008, we exited our facility at 3450 Monte Villa Parkway, Bothell, Washington and recorded a restructuring liability, representing remaining lease payments due under the lease and other costs and discounted using a credit-adjusted risk-free interest rate. In March 2009, we entered into an amendment of our lease for this facility, which reduced our lease obligations by approximately $1.9 million until July 2010. Under the terms of the amendment, we released both a cash deposit of approximately $0.3 million and restricted cash under a letter of credit for approximately $1.0 million to the landlord, to be used by them to cover rent payments or as incentives to attract new tenants. As inducement to enter into the amendment, we issued 1.5 million shares of our common stock to the sole member of the landlord. Because of this amendment, we will have no further rent obligations under the 3450 Monte Villa lease for the period from January 2009 until July 2010. We use a credit-adjusted risk-free interest rate of 15%, and we based our sublease expectations on current rental rates available in the Bothell real estate market, cash incentives available from the landlord to attract new tenants, our evaluation of the likelihood of subleasing our facility in light of tightening credit markets, deteriorating conditions in the Bothell real estate market and increased vacancy rates in the competing downtown real estate markets. During the three and six months ended June 30, 2009, we recorded approximately $54,000 and $122,000 in accretion expense. We expect to incur approximately $0.2 million in accretion expense through the expiration of this lease in January 2016. As of June 30, 2009, the cash deposit had been released and offset against the restructuring liability, and $0.7 million of the restricted cash has been released to the landlord. Subsequent to June 30, 2009, approximately $0.2 million of restricted cash was released to the landlord.

Given the triggering event as a result of the employee terminations and facility consolidation, we have evaluated our long-lived assets for possible impairment under the guidance in SFAS 144. At December 31, 2008 property and equipment having a net realizable value of approximately $0.5 million, net of estimated costs to sell, was held for sale. All of these assets were sold as of June 30, 2009 and an additional loss on sale of assets of approximately $0.1 million was included in restructuring expense in the second quarter of 2009.

Accrued restructuring, and in particular those charges associated with exiting a facility, are subject to management’s assumptions and estimates, as well as changes in facts and circumstances. In addition to the interest rate used, the assumptions as to estimated future payments significantly impact the accrual and actual results may differ from our estimates.

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The components of restructuring are summarized as follows (in thousands):

	Three Months ended June 30,				Six Months ended June 30,				Cumulative to June 30, 2009
	2008		2009		2008		2009
Employee severance and termination benefits (including stock compensation charges)	$	—	$	—	$	1,623	$	—	$	3,986
Property and equipment impairment		—		137		—		137		2,099
Facility related charges		—		41		—		174		2,189
Other restructuring charges		—		—		294		—		294
Total restructuring	$	—	$	178	$	1,917	$	311	$	8,568

The following table reflects the activity in accrued restructuring for the six months ended June 30, 2009 (in thousands):

	Employee Severance and Termination Benefits			Facility Related Charges			Total
Balance, December 31, 2008	$	349		$	2,351		$	2,700
Additional accruals		—			52			52
Payments		(349	)		(1,670	)		(2,019	)
Accretion		—			122			122
Balance, June 30, 2009	$	—		$	855		$	855

Note 4 — Note Payable and Capital Lease Obligations

In January 2009, we entered into a Loan and Security Agreement (the “Loan Agreement”) with General Electric Capital Corporation (“GECC”) pursuant to which GECC converted the balance due under the capital lease obligations, along with a lease termination fee and amounts payable for property taxes, to a promissory note in the amount of $5.5 million at a fixed interest rate of 12.29% per year. The loan was paid off in full in June 2009 including the loan fee of 2% of the original loan balance, or approximately $0.1 million. As a result of the capital lease termination and issuance of the note payable, we recorded a lease termination fee of approximately $0.2 million during the first quarter of 2009, which has been presented as a component of gain on settlement of liabilities, net. The balance of the note payable at June 30, 2009 is zero.

Note 5 — Stockholders’ Equity

Common Stock Issuances — In January 2008, we filed a universal shelf registration statement with the SEC pursuant to which we can issue up to $50.0 million of our common stock, preferred stock, debt securities, warrants to purchase any of the foregoing securities and units comprised of any of the foregoing securities. The universal shelf registration statement was declared effective by the SEC on February 4, 2008. We accessed our universal shelf registration statement in connection with our April 2008 and June 2009 registered direct offerings of common stock and warrants described below. As of June 30, 2009, we had approximately $8.6 million remaining on our universal shelf registration statement. As of June 30, 2009, we also had approximately $82.8 million remaining on the registration statement that we filed with the SEC on October 19, 2006, and that was subsequently declared effective by the SEC on November 29, 2006, pursuant to which we were originally eligible to issue up to $125.0 million of our common stock. We previously accessed this latter registration statement in connection with our January 2007 offering of common stock.

In April 2008, we raised net proceeds of approximately $7.3 million in a registered direct offering of 4,590,277 shares of common stock along with warrants to purchase up to 5,967,361 shares of common stock at a negotiated purchase price of $1.728 per share. Warrants to purchase up to 4,590,277 shares of common stock are exercisable during the seven-year period beginning October 25, 2008 at a price of $2.376 per share. Additional warrants to purchase up to 1,377,084 shares of common stock at a price of $2.17 per share were exercisable for a 90-day period beginning October 25, 2008 and subsequently expired in January 2009. In addition, warrants to purchase up to 229,514 shares of common stock, which were exercisable during the five-year period beginning October 25, 2008 at a price of $2.376 per share, were issued to the placement agent in connection with the transaction. On June 9, 2009, 50,000 of the placement agent warrants were exercised resulting in cash proceeds of approximately $119,000.

In February and March 2009, we issued to eight of our vendors an aggregate of 1,364,285 shares of our common stock having an estimated market value of approximately $0.4 million on the issue dates to settle amounts due to these vendors of approximately $0.6 million in total and as a result we recorded a gain on settlement of liabilities of approximately $0.2 million during the first quarter of 2009.

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In March 2009, we entered into an amendment of our lease for 3450 Monte Villa Parkway which reduced our future cash expenditures related to this lease. As inducement to enter into the amendment, we issued 1.5 million shares of our common stock (the “Shares”) to the landlord pursuant to the Stock Purchase Agreement, which among other things provides the holder of the Shares with certain piggyback registration rights with respect to the Shares, which rights continue until such time as the Shares may be sold publicly without restriction under the Securities Act. The estimated market value of the shares issued was approximately $0.4 million on the date of issuance and was recorded as an increase in common stock and additional paid-in capital and as a decrease to the previously recorded restructuring liability.

In March 2009, we entered into an amendment of our agreement regarding severance obligations with our former Chief Scientific Officer, pursuant to which we agreed to pay the former executive a reduced sum of $0.9 million on June 30, 2009, and to issue the former executive 731,275 unregistered shares of our common stock having an estimated market value of approximately $0.2 million as of the agreement date, in full satisfaction of $1.7 million in severance obligations which was included in accrued employee compensation and employee benefits at December 31, 2008. As a result, we recorded a gain on settlement of liabilities of approximately $0.6 million during the first quarter of 2009. We have also agreed to use our best efforts to file a registration statement with the SEC to register the shares to be issued to the former executive on or prior to September 30, 2009. There is no requirement to transfer consideration if the registration statement is not filed by September 30, 2009.

On June 12, 2009, we raised net proceeds of approximately $9.3 million in a registered direct offering of 5,250,000 shares of common stock along with warrants to purchase up to 5,250,000 shares of common stock at a negotiated purchase price of $2.00 per share. The warrants are exercisable during the five-year period beginning December 13, 2009 at a price of $2.38 per share.

On June 18, 2009, we issued 606,061 shares of our common stock to Ribotask ApS as consideration for an amendment of our Patent Assignment and License Agreement dated May 21, 2008, as amended October 9, 2008. The estimated market value of the common stock of approximately $1.0 million was recorded as research and development expense during the second quarter of 2009.

Warrants — In connection with offerings of our common stock, we have issued warrants to purchase shares of our common stock. In April 2008, we raised net proceeds of approximately $7.3 million in a registered direct offering of 4,590,277 shares of common stock along with warrants to purchase up to 5,967,361 shares of common stock at a negotiated purchase price of $1.728 per share. Warrants to purchase up to 4,590,277 shares of common stock are exercisable during the seven-year period beginning October 25, 2008 at a price of $2.376 per share, and warrants to purchase up to 1,377,084 shares of common stock were exercisable during the 90-day period beginning October 25, 2008 at a price of $2.17 per share. These 1,377,084 warrants expired on January 25, 2009. In addition, warrants to purchase up to 229,514 shares of common stock, which are exercisable during the five-year period beginning October 25, 2008 at a price of $2.376 per share, were issued to the placement agent in connection with the transaction. On June 9, 2009, 50,000 of the placement agent warrants were exercised resulting in cash proceeds of approximately $119,000 and the issuance of 50,000 shares of our common stock.

The warrants provide that the exercise price of the warrant will be reduced in the event of subsequent financings at an effective price per share less than the exercise price of the warrants, subject to certain exceptions and limitations. These provisions are commonly known as “down-round” provisions. The warrants were originally evaluated under the guidance set forth in EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). We originally considered the provisions of EITF 00-19 with respect to the warrants and had concluded that the warrants may be physically or net-share settled at the investor’s option and did not contain any net-cash settlement provisions or any provisions deemed under EITF 00-19 to be equivalent to net-cash settlement provisions and were appropriately classified as equity.

In June 2008, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”), which is effective for fiscal years ending after December 15, 2008, with earlier application not permitted by entities that have previously adopted an alternative accounting policy. The adoption of EITF 07-5’s requirements will affect accounting for convertible instruments and warrants with provisions that protect holders from declines in the stock price (“down-round” provisions). Warrants with such provisions will no longer be recorded in equity. EITF 07-5 guidance is to be applied to outstanding instruments as of the beginning of the fiscal year in which the EITF 07-5 is applied. The cumulative effect of the change in accounting principle shall be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year, presented separately. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial position before initial application of EITF 07-5 and the amounts recognized in the statement of financial position at its initial application. The amounts recognized in the statement of financial position as a result of the initial application are determined based on the amounts that would have been recognized if the guidance in EITF 07-5 had been applied from the issuance date of the instrument. Effective January 1, 2009, we adopted EITF 07-5.

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In connection with warrants issued in April 2008, the financial reporting (non-cash) effect of initial adoption of this accounting requirement for future financial statements resulted in a cumulative effect of change in accounting principle of approximately $0.9 million, based on a per share price of $0.34 at December 31, 2008, which increased accumulated deficit and recorded a fair value liability for price adjustable warrants. The warrants issued in June 2009 also contained “down-round” provisions and were valued at $8.1 million as of June 12, 2009, which was recorded as fair value liability of price adjustable warrants, based on a per share price of $1.91 as of June 12, 2009. The June 2009 financing, at $2.00 per share of common stock along with warrants, was specifically excluded by the April 2008 investors from triggering any potential anti-dilution provisions of the April 2008 financing that could have resulted from the June 2009 financing.

The fair value liability is revalued quarterly utilizing Black-Scholes valuation model computations with the increase or decrease in fair value being reported in the statement of operations as other income (expense). At June 30, 2009 the weighted average assumptions used in our Black Scholes calculation as of June 30, 2009 were as follows: contractual life equal to 5.8 years, volatility equal to 111%, risk-free rate of 2.9% and dividend rate of 0%. During the three and six months ended June 30, 2009, the fair value increased approximately $0.9 and $1.9 million, respectively, which increased net loss.

The following summarizes warrant activity during the six months ended June 30, 2009 (in thousands).

Warrants outstanding, December 31, 2008		6,197
Warrants issued		5,250
Warrants exercised		(50	)
Warrants expired		(1,377	)
Warrants outstanding, June 30, 2009		10,020
Weighted average exercise price, June 30, 2009	$	2.38

Stockholder Rights Plan — In February 2000, our board of directors adopted a stockholder rights plan and declared a dividend of one preferred stock purchase right for each outstanding share of common stock. Each right entitles the holder, once the right becomes exercisable, to purchase from us one one-thousandth of a share of our Series A Junior Participating Preferred Stock, par value $.01 per share. We issued these rights in March 2000 to each stockholder of record on such date, and these rights attach to shares of common stock subsequently issued. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors and could, therefore, have the effect of delaying or preventing someone from taking control of us, even if a change of control were in the best interest of our stockholders.

Holders of our preferred share purchase rights are generally entitled to purchase from us one one-thousandth of a share of Series A preferred stock at a price of $50.00, subject to adjustment as provided in the Stockholder Rights Agreement. These preferred share purchase rights will generally be exercisable only if a person or group becomes the beneficial owner of 15 percent or more of our outstanding common stock or announces a tender offer for 15 percent or more of our outstanding common stock. Each holder of a preferred share purchase right, excluding an acquiring entity or any of its affiliates, will have the right to receive, upon exercise, shares of our common stock, or shares of stock of the acquiring entity, having a market value equal to two times the purchase price paid for one one-thousandth of a share of Series A preferred stock. The preferred share purchase rights expire on March 17, 2010, unless we extend the expiration date or in certain limited circumstances, we redeem or exchange such rights prior to such date. Initially, 10,000 Series A Junior Participating Preferred shares were authorized. In January 2007 this was increased to 50,000 shares, and in June 2008 this was further increased to 90,000 shares, so that a sufficient number of Series A Junior Participating Preferred shares would be available to the holders of shares of common stock for issuance in satisfaction of such rights, given increases in the number of shares of common stock outstanding.

Note 6 — Stock Incentive Plans

At June 30, 2009, options to purchase up to 7,827,731 shares of our common stock were outstanding, unvested restricted stock awards for an aggregate of 57,465 shares of our common stock were outstanding under our 2004 Plan and 846,336 shares were available for future grants or awards under our various stock incentive plans.

We generally issue new shares for option exercises unless treasury shares are available for issuance. We had no treasury shares as of June 30, 2009 and have no plans to purchase any in the next year, however, we may accept the surrender of vested restricted shares from employees to cover tax requirements at our discretion.

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Stock-based Compensation — The following table summarizes stock-based compensation expense (benefit) (in thousands):

	Three Months ended June 30,					Six Months ended June 30,
	2008		2009			2008		2009
Stock-based compensation:
Research and development	$	695	$	(200	)	$	1,453	$	(279	)
Sales and marketing		106		(20	)		236		(13	)
General and administrative		543		203			1,069		271
Total stock-based compensation	$	1,344	$	(17	)	$	2,758	$	(21	)

The net benefit in the 2009 periods is due to a change in estimation of forfeitures.

Non-cash compensation expense is recognized on a straight-line basis over the applicable vesting periods of one to five years, based on the fair value on the grant date. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the applicable plan and certain employment agreements we have with key officers).

Stock Options — Stock options to purchase shares of our common stock are granted under our existing stock-based incentive plans to certain employees, at prices at or above the fair market value on the date of grant. In addition, in June 2008, we granted 1,099,963 options to our Chief Executive Officer, outside of our stock-based incentive plans as an employment inducement grant. In March 2009, our former Chief Scientific Officer agreed to surrender, without consideration, for cancellation, options to purchase 800,000 shares of common stock at an exercise price of $12.94 per share.

Option activity was as follows during the six-month period ended June 30, 2009:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	(in thousands)					(in thousands)
Outstanding December 31, 2008	6,189		$	4.35
Options granted	2,764			1.26
Options exercised	(15	)		2.14
Options expired	(115	)		11.67
Options forfeited	(195	)		1.61
Options cancelled	(800	)		12.94
Outstanding at June 30, 2009	7,828		$	2.34	8.4 years	$	927
Exercisable at June 30, 2009	3,699		$	2.99	7.3 years	$	315

The fair value of stock-based awards was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions for the periods presented as follows:

	Three months ended June 30,						Six months ended June 30,
	2008			2009			2008			2009
Expected dividend yield		0	%		0	%		0	%		0	%
Risk free interest rate		3.6	%		2.6	%		3.5	%		2.3	%
Expected stock volatility		71	%		106	%		71	%		103	%
Expected option life		5.8 years			5.9 years			5.8 years			5.8 years
Fair value of options granted	$	0.66		$	1.21		$	0.73		$	0.91

As of June 30, 2009, we had approximately $2.7 million of total unrecognized compensation cost related to unvested stock options. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of approximately 1.9 years.

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The intrinsic value of stock options outstanding and exercisable at June 30, 2009 is based on the $1.38 closing market price of our common stock on that date, and is calculated by aggregating the difference between $1.38 and the exercise price of each of the outstanding vested and unvested stock options which have an exercise price less than $1.38. No options were exercised during the three and six-month periods ended June 30, 2008. In the three and six-month periods ended June 30, 2009, 15,000 options were exercised. We recorded stock-based compensation expense related to stock options of approximately $0.7 million and $1.3 million in the three and six-month periods ended June 30, 2008 and $0.4 million and $0.4 million in the three and six-month periods ended June 30, 2009, respectively. The total fair value of options that vested during the three and six-month periods ended June 30, 2008 was approximately $0.5 million and $0.8 million, respectively. The total fair value of options that vested during the three and six-month periods ended June 30, 2009 was approximately $1.0 million and approximately $1.3 million, respectively.

On June 10, 2008, in connection with our annual shareholders meeting, five members of our board of directors retired. Our board of directors approved a resolution to extend the amount of time the retiring directors have to exercise their vested options from 90 days to two years. Additional compensation expense recognized as a result of the modification was not material. On May 20, 2009, in connection with our annual shareholders meeting, three members of our board of directors retired. Our board of directors approved a resolution to extend the amount of time two of the retiring directors have to exercise their vested options from 90 days to two years. Additional compensation expense recognized as a result of the modification was approximately $117,000. The third retiring director’s options were governed by his employment contract at his employment termination date of November 30, 2008

Non-Employee Option Grants — In June 2008 and in May 2009 we granted stock options to non-employee members of our Scientific Advisory Board. For stock options granted as consideration for services rendered by non-employees, we recognize compensation expense in accordance with the requirements of SFAS 123(R), Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees,” as amended. Non-employee option grants are recorded as an expense over the vesting period of the underlying stock options. At the end of each financial reporting period prior to vesting, the value of these options, as calculated using the Black-Scholes option pricing model, will be re-measured using the fair value of our common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair value of options granted to non-employees is subject to change in the future, the amount of future compensation expense will include fair value re-measurements until the stock options are fully vested. During the three and six-month periods ended June 30, 2008, we recognized expense of approximately $38,000 relating to options granted to non-employee members of our Scientific Advisory Board. During the three and six-month periods ended June 30, 2009, we recognized expense of approximately $17,000 relating to options granted to non-employee members of our Scientific Advisory Board.

Restricted Stock Awards — Pursuant to restricted stock awards granted under our 2004 Stock Incentive Plan, we have issued shares of restricted stock to certain employees and members of our Board. Non-cash compensation expense is recognized on a straight-line basis over the applicable vesting periods of one to four years of the restricted shares based on the fair value of such restricted stock on the grant date. We granted restricted stock awards representing 66,429 shares of common stock with a per share weighted average fair value of $2.28 in the six-month period ending June 30, 2008. There were no restricted stock awards granted during the six-month period ending June 30, 2009. Additional information on restricted shares is as follows (in thousands, except per share amount):

Unvested restricted shares outstanding, January 1, 2009		107
Restricted shares granted		—
Restricted shares forfeited		(12	)
Restricted shares vested		(38	)
Unvested restricted shares outstanding, June 30, 2009		57
Weighted average grant date fair value per share	$	8.11

Our total unrecognized compensation cost related to unvested restricted stock awards granted under our 2004 Stock Incentive Plan was approximately $0.2 million at June 30, 2009. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of approximately 1.1 years.

We recorded stock-based compensation expense related to restricted stock grants of approximately $0.6 million and $1.4 million in the three and six months ended June 30, 2008. In the three months ended June 30, 2009 we recorded a benefit of $0.4 million and in the six months ended June 30, 2009 we recorded a benefit of $0.5 million due to forfeitures. The fair value of restricted stock vested during the three and six-month periods ended June 30, 2008 was approximately $0.8 million and $1.6 million and the fair value of restricted stock vested during the three and six-month periods ended June 30, 2009 was approximately $0.2 million and approximately $0.3 million.

On June 10, 2008, in connection with our annual shareholders meeting, five members of our board of directors retired. Our board of directors approved a resolution to accelerate the vesting of approximately 21,320 restricted shares which would have vested for the retiring directors over the next one or two years. Additional compensation expense recognized as a result of the modification

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was not material. On May 20, 2009, in connection with our annual shareholders meeting, three members of our board of directors retired. Our board of directors approved a resolution to accelerate the vesting of approximately 10,000 restricted shares which would have vested for two of the retiring directors over the next one or two years. The third retiring director held no unvested shares. The benefit to compensation expense recognized as a result of the modifications was not material.

Employee Stock Purchase Plan — In June 2007, our shareholders approved the adoption of our 2007 Employee Stock Purchase Plan (“ESPP”). A total of 300,000 shares of common stock have been reserved for issuance under our ESPP, of which 78,091 have been issued as of June 30, 2009. Under the terms of the ESPP, a participant may purchase shares of our common stock at a price equal to the lesser of 85% of the fair market value on the date of offering or on the date of purchase. We recorded stock-based compensation expense related to the ESPP of approximately $33,000 and $72,000 in the three and six months ended June 30, 2008 and $14,000 and $22,000 in the three and six months ended June 30, 2009, respectively.

Note 7 — Contractual Agreements

RNAi-related

Roche — In February 2009, we entered into an agreement with Hoffman-La Roche Inc., a New Jersey corporation, and F. Hoffmann-La Roche Ltd., a Swiss corporation (collectively, “Roche”), pursuant to which we granted to Roche a worldwide, non-exclusive license to a portion of our technology platform, for the development of RNAi-based therapeutics, in consideration of a one-time non-refundable licensing fee of $5 million, which was recognized as license fee revenue during the three months ended March 31, 2009.

Novartis — In March 2009, we entered into an agreement with Novartis Institutes for BioMedical Research, Inc. (“Novartis”), pursuant to which we granted to Novartis a worldwide, non-exclusive license to our DiLA²-based siRNA delivery platform in consideration of a one-time, non-refundable fee of $7.25 million, which was recognized as license fee revenue during the three months ended March 31, 2009. Additionally, we entered into a separate agreement with Novartis to provide them with an exclusive period in which to negotiate a potential research and development collaboration as well as possible broader licensing rights related to our RNAi drug delivery platform. This exclusive period expired in the second quarter of 2009 and all remaining deferred revenue under this separate agreement of approximately $0.2 million was recognized as license fee revenue.

Ribotask ApS. — In October 2008, we announced that we had acquired the intellectual property related to Unlocked Non-nucleotide Analogs from Ribotask ApS, a privately held Danish company specializing in the development and synthesis of novel RNA chemistries. We believe that the technology will permit us to stabilize and provide drug-like properties to UsiRNAs in a novel and proprietary manner. This includes protection from enzymatic destruction and reduction, or elimination, of a cytokine response, two primary limitations for therapeutic application of siRNA; yet the appropriate substitution of UNA preserves high efficacy. These attributes have the potential for effective protein down regulation with lower total doses of siRNA while improving the safety profile. On June 18, 2009, we issued 606,061 shares of our common stock to Ribotask ApS and agreed to certain payments in consideration of an amendment to eliminate all downstream financial consideration to Ribotask resulting from collaborations established between us and potential pharmaceutical and biotechnology partners. The estimated market value of the common stock of $1.0 million was recorded as research and development expense in the three months ended June 30, 2009.

City of Hope — In November 2006, we entered into a license with the Beckman Research Institute/City of Hope for exclusive and non-exclusive licenses to the Dicer-substrate RNAi IP developed there. In the first quarter of 2009, we terminated our license agreement with the City of Hope for technology and intellectual property related to Dicer substrates to focus on the development of UsiRNA and meroduplex constructs.

Intranasal related

Amylin Pharmaceuticals, Inc. — In January 2009 we received a milestone payment, in the amount of $1.0 million, which was recognized as license fee revenue, from Amylin Pharmaceuticals, Inc. (“Amylin”) under our 2006 Development and License Agreement, as amended, for the development of intranasal exenatide (the “License Agreement”). The License Agreement was amended in January 2009 to provide for the accelerated $1.0 million milestone payment, and to reduce the aggregate amount of milestone and royalty payments that could be due to us from $89 million to $80 million. We are no longer responsible for any further development of the nasal spray formulation of intranasal exenatide or its manufacture.

Par Pharmaceutical — In March 2009 we entered into an Asset Purchase Agreement with Par Pharmaceutical (“Par”) pursuant to which, among other things, Par acquired certain assets pertaining to calcitonin, including tooling and equipment, inventories and the related technology, trade secrets, know-how, proprietary information and other intellectual property rights, and assumed certain contracts, including our manufacturing obligation to QOL Medical as well as our two building leases related to our operations in Hauppauge, New York. We received $0.8 million in cash and will receive profit sharing for five years on commercial sales of calcitonin. Calcitonin received full FDA approval and was launched in June 2009. In connection with this agreement, a 2004 License and Supply Agreement with Par, and a 2005 Supply Agreement with QOL Medical LLC, were terminated on 31 March 2009. We recognized a gain of approximately $0.1 million on the asset sale to Par which is included in research and development expense in the first quarter of 2009. In addition, in the first quarter of 2009 we recognized $0.7 million in deferred revenue related to the QOL Agreement.

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Thiakis Limited (“Thiakis”) — In September 2004, we acquired exclusive worldwide rights to the Imperial College Innovations and Oregon Health & Science University PYY patent applications in the field of nasal delivery of PYY and the use of glucagon-like peptide-1 (GLP-1) used in conjunction with PYY for the treatment of obesity, diabetes and other metabolic conditions. We recorded $1.2 million in research and development expense in the fourth quarter of 2008 related to the estimated obligations under this license agreement at December 31, 2008. This agreement terminated on May 6, 2009. In April 2009 we entered into a Deed of Release and termination pursuant to which we agreed to pay $1.1 million, payable in quarterly amounts commencing April 2009 and ending April 2010. The difference between $1.1 million and the amount originally estimated was recorded as reduction of expense in the first quarter of 2009.

Note 8 — Income Taxes

We continue to record a valuation allowance in the full amount of deferred tax assets since realization of such tax benefits has not been determined by our management to be more likely than not. At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year, and the rate so determined is used in providing for income taxes on a current year-to-date basis. The difference between the expected provision or benefit computed using the statutory tax rate and the recorded provision or benefit of zero, is primarily due to the estimated change in valuation allowance more likely to result due to taxable losses anticipated for the applicable fiscal year.

Note 9 — Commitments and Contingencies

Leases — We lease space for our research and development and corporate offices in Bothell, Washington under operating leases expiring in 2016. In connection with the terms of our lease of our Bothell, Washington facilities, we provide our landlords with stand-by letters of credit that total approximately $1.5 million.

Until March 2009, we had facilities for manufacturing, warehousing and research and development activities in Hauppauge, New York under operating leases expiring in June 2010. In March 2009 we entered into an Asset Purchase Agreement with Par under which Par assumed full responsibility for all future operating costs and leases associated with the facilities.

In March 2009, we entered into an amendment of our lease for 3450 Monte Villa Parkway, which reduces our lease obligations by approximately $1.9 million until July 2010. Under the terms of the amendment, we released both a cash deposit of $0.3 million and restricted cash under a letter of credit for $1.0 million to the landlord, to be used by them to cover rent payments or as incentives to attract new tenants. In connection with the amendment, we issued 1.5 million shares of our common stock (the “Shares”) to the sole member of the landlord, and granted certain piggyback registration rights with respect to the Shares until the Shares may be sold publicly without restriction under the Securities Act. Because of this amendment, we have no further rent obligations under the 3450 Monte Villa Parkway lease until July 2010.

We had a capital lease agreement with General Electric Capital Corporation (“GECC”), which allowed us to finance certain property and equipment purchases over three- or four-year terms depending on the type of equipment. Under this agreement, we purchased assets approved by GECC, at which date GECC assumed ownership of the assets and we were reimbursed. The equipment was then leased to us. Interest rates on capital lease borrowings averaged approximately 10% during 2008. Assets leased were pledged as collateral for capital lease borrowings. The lease agreement was cancelled in January 2009 pursuant to the Loan Agreement further described in Note 4 — Note Payable and Capital Lease Obligations.

Contingencies — We are subject to various legal proceedings and claims that arise in the ordinary course of business. Our management currently believes that resolution of such legal matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

Note 10 — Subsequent Events through July 30, 2009

There were no significant events that have occurred from June 30, 2009 through July 30, 2009.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause

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actual results to differ materially from those projected or suggested in any forward-looking statement made by us. These factors include, but are not limited to: (i) the ability of our company to obtain additional funding; (ii) the ability of our company to attract and/or maintain manufacturing, research, development and commercialization partners; (iii) the ability of our company and/or a partner to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; (iv) the ability of our company and/or a partner to obtain required governmental approvals, including product and patent approvals; and (v) the ability of our company and/or a partner to develop and commercialize products that can compete favorably with those of competitors. In addition, significant fluctuations in quarterly results may occur as a result of the timing of milestone payments, the recognition of revenue from milestone payments and other sources not related to product sales to third parties, and the timing of costs and expenses related to our research and development programs. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in our filings with the Securities and Exchange Commission, including those factors discussed under the caption “Forward-Looking Information” in our most recent Annual Report on Form 10-K, as may be supplemented or amended from time to time, which we urge investors to consider. We undertake no obligation to publicly release revisions in such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as otherwise required by securities and other applicable laws.

We are a biotechnology company focused on the discovery, development and commercialization of pharmaceuticals based on RNA interference (“RNAi”). Our goal is to be the leader in RNAi therapeutics and improve human health through the development of RNAi-based compounds that provide superior therapeutic options for patients. Our team of approximately 30 scientists brings expertise in the discovery, evaluation and optimization of small interfering RNAs (“siRNAs”) as well as siRNA delivery. We have the requisite experience in the areas of RNAi, molecular and cellular biology, lipid, oligonucleotide and peptide chemistry, pharmacology and bioinformatics necessary to discover and develop tailored RNAi-based compounds designed to elicit specific therapeutic effects on a target-by-target basis. Our infrastructure provides for pre-clinical scale manufacturing of both siRNAs and delivery materials, the comprehensive analysis and optimization of these compounds both individually and as drug candidates, and the filing of Investigational New Drug Applications. In addition to our own, internally developed technologies, we strategically in-license and further develop RNAi- and delivery-related technologies, forming a single integrated drug discovery platform. In order to protect our innovations, which encompass a broad platform of both siRNA and delivery technologies, and the eventual drug products that emerge from that platform, we will aggressively continue to build upon our extensive and enabling intellectual property (“IP”) estate.

We believe we have established ourselves as a leading RNAi-based therapeutics company by leveraging our broad and proven expertise in RNAi science and delivery into an industry-leading RNAi drug discovery platform, which is protected by a strong IP position and validated through licensing agreements with two large international pharmaceutical companies.

We have recently completed a year-long effort to restructure our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company. Since July 2008, we have accomplished the following: (1) reduced our workforce from approximately 75 employees in July 2008 to approximately 40 employees as of the date of this filing; (2) suspended all further clinical development of our intranasal programs in August 2008; (3) renegotiated and significantly reduced our long-term legacy liabilities; and (4) sold our intranasal contract manufacturing operations, in New York, to Par Pharmaceutical Companies, Inc. (“Par”) in March 2009. Our business model is now centered on the development of strategic R&D partnerships with international pharmaceutical companies as well as the pre-clinical and early stage clinical development of our own pipeline of RNAi-based therapeutics. Over the near- and mid-term, we will focus on: (1) expanding our delivery technologies; (2) maintaining and expanding our IP estate; (3) continuing our cost containment efforts; and (4) raising sufficient capital necessary to support and execute our business model. There can be no assurance that our efforts will produce acceptable results. This business model or any other future changes to the business may not prove successful in the short or long term due to a variety of factors, including competition, success of our research efforts or our ability to establish pharmaceutical partnerships, and may have a material impact on our financial results including a decline in our stock price.

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We are developing novel technologies and therapeutics based on the Nobel Prize-winning discovery of RNAi. The discovery of RNAi, in 1988, has led not only to its widespread use in the research of biological mechanisms and target validation but also to its application in down-regulating the expression of certain disease-causing proteins found in multiple diseases such as inflammation, cancer, and metabolic dysfunction. RNAi-based therapeutics work through a naturally occurring process within cells that has the effect of reducing levels of messenger RNA (mRNA) required for the production of proteins. RNAi enables the targeting of disease at a genetic level and thus is highly specific to particular disease-causing proteins. At this time, several RNAi-based therapeutics are being evaluated in human clinical trials.

We have created a drug discovery platform that combines novel and proprietary siRNA constructs with novel and proprietary siRNA delivery technologies, to develop RNAi-based therapeutics for the treatment of human diseases. In 2008, we demonstrated pre-clinical efficacy using both local and systemic routes of administration in rodent models of cancer and metabolic dysfunction. At present, we are focusing our resources on liver (hepatocellular carcinoma — HCC) and bladder cancer. We intend to build on our pre-clinical successes in 2008 as we move these programs toward early clinical studies. In addition, we will continue to increase the breadth and capabilities of our drug discovery platform including advancing additional proprietary delivery technologies. Our business model anticipates that the advancement of a therapeutic pipeline, either through partnerships or on our own, will provide proof of concept for our drug discovery platform as well as value for shareholders.

We will continue to focus our R&D efforts on RNAi-based therapeutics, and continue to develop and expand our RNAi technologies and IP estate. As of July 22, 2009, we owned or controlled 4 issued U.S. patents and 40 pending U.S. patent applications, including provisional patent applications, to protect our RNAi proprietary technologies.

Our collaboration efforts are expected to generate license fees, non-refundable upfront payments, R&D funding, milestone payments, patent- and product-based royalties and profit sharing. Because of our collaborations and other agreements, we recognized revenue of approximately $0.8 million and $2.0 million in the three and six months ended June 30, 2008 and $0.3 million and $14.5 in the three and six months ended June 30 2009, respectively. In 2008, our revenue related primarily to our intranasal programs including the supply agreement with QOL for Nascobal^® and agreements with feasibility partners. In 2009, our revenue was primarily from revenue from licensing our RNAi platforms including agreements with Novartis and Roche.

Cash Position, Going Concern and Recent Financings

We have prepared our consolidated financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2009, we had an accumulated deficit of approximately $255.2 million and expect to incur additional losses in the future as we continue our R&D activities. We have funded our losses primarily through the sale of common stock and warrants in the public markets and private placements, revenue provided by our collaboration partners and, to a lesser extent, equipment financing facilities. The further development of our RNAi programs will require capital. At June 30, 2009, we had working capital (current assets less current liabilities) of $6.4 million and approximately $9.4 million in cash and cash equivalents, including $1.5 million in restricted cash. Our operating expenses, primarily R&D, will consume the majority of our cash resources. We have received an opinion from our independent registered public accounting firm indicating the substantial doubt about our ability to continue as a going concern due primarily to our cash position at December 31, 2008.

Discussion of cash flows

We generated cash of approximately $0.9 million in our operating activities in the first half of 2009, compared to using cash of $26.6 million in the first half of 2008. Cash generated from operating activities relates primarily to amounts received under our license agreements offset by funding operating expenses. Cash used in operating activities relates primarily to funding net losses and changes in deferred revenue, accounts and other receivables, accounts payable and accrued expenses and other liabilities, partially offset by non-cash restructuring charges, depreciation and amortization and non-cash compensation related to restricted stock, stock options and our employee stock purchase plan. We expect to use cash for operating activities in the foreseeable future as we continue our R&D activities.

Our investing activities provided cash of approximately $2.0 million in the first half of 2009, compared to $10.7 million in the first half of 2008. Changes in cash from investing activities are due primarily to changes in restricted cash, maturities of short-term investments net of purchases and sales and purchases of property and equipment. In 2009 and 2008, we pledged some of our cash as collateral for letters of credit and we report changes in our restricted cash as investing activities in the consolidated statements of cash flows.

Our financing activities in the first half of 2009 consisted of net proceeds from the sale of common stock and warrants of $9.3 million, offset by fully paying off our note payable with GECC in the amount of approximately $5.5 million. In the first half of 2008, our financing activities consisted of regular monthly lease payments under our former capital lease obligations with GECC which amounted to approximately $2.5 million in total for the first half of 2008, offset by net proceeds from the sale of common stock and warrants of $7.3 million.

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Recent Financing Activities

In January 2008, we filed a universal shelf registration statement with the SEC pursuant to which we can issue up to $50.0 million of our common stock, preferred stock, debt securities, warrants to purchase any of the foregoing securities and units comprised of any of the foregoing securities. The universal shelf registration statement was declared effective by the SEC on February 4, 2008. We accessed our universal shelf registration statement in connection with our April 2008 and June 2009 registered direct offerings of common stock and warrants described below. As of June 30, 2009, we had approximately $8.6 million remaining on our universal shelf registration statement. As of June 30, 2009, we also had approximately $82.8 million remaining on the registration statement that we filed with the SEC on October 19, 2006, and that was subsequently declared effective by the SEC on November 29, 2006, pursuant to which we were originally eligible to issue up to $125.0 million of our common stock. We previously accessed this latter registration statement in connection with our January 2007 offering of common stock.

On June 12, 2009, we raised net proceeds of approximately $9.3 million in a private placement of 5,250,000 shares of common stock along with warrants to purchase up to 5,250,000 shares of common stock at a negotiated purchase price of $2.00 per share, which warrants are exercisable during the five-year period beginning December 12, 2009 at a price of $2.38 per share. The warrants contain “down-round” provisions and as such, are subject to the provisions of EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). The warrants were valued at June 12, 2009 at $8.1 million which was recorded as fair value liability for price adjustable warrants, based on a per share price of $1.91 as of June 12, 2009. The warrants will be revalued quarterly during the periods that the warrants remain outstanding.

On April 25, 2008, we raised net proceeds of approximately $7.3 million in a registered direct offering of 4,590,277 shares of common stock along with warrants to purchase up to 5,967,361 shares of common stock at a negotiated purchase price of $1.728 per share. Warrants to purchase up to 4,590,277 shares of common stock are exercisable during the seven-year period beginning October 25, 2008 at a price of $2.376 per share. Additional warrants to purchase up to 1,377,084 shares of common stock at a price of $2.17 per share were exercisable during the 90-day period beginning October 25, 2008 and subsequently expired in January 2009. In addition, warrants to purchase up to 229,514 shares of common stock, which are exercisable during the five-year period beginning October 25, 2008 at a price of $2.376 per share, were issued to the placement agent in connection with the transaction. On June 9, 2009, 50,000 of the warrants issued to the placement agent were exercised resulting in $119,000 cash proceeds. The warrants provide that the exercise price of the warrant will be reduced in the event of subsequent financings at an effective price per share less than the exercise price of the warrants, subject to certain exceptions and limitations. These provisions are commonly known as “down-round” provisions. The warrants were originally evaluated under the guidance set forth in EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). We originally considered the provisions of EITF 00-19 with respect to the warrants and had concluded that the warrants may be physically or net-share settled at the investor’s option and did not contain any net-cash settlement provisions or any provisions deemed under EITF 00-19 to be equivalent to net-cash settlement provisions and were appropriately classified as equity. According to the provisions of EITF 07-5, warrants with down-round provisions are no longer classified as equity. The adoption of EITF 07-5 resulted in a cumulative effect from accounting change of $0.9 million and a non-current liability for the fair value of the warrants as of January 1, 2009, which reflected the net cumulative impact of initial application, determined based upon the amounts that would have been recognized if the guidance in EITF 07-5 had been applied from the issuance date of the warrants. The warrants are revalued quarterly thereafter during the periods that the warrants remain outstanding.

For the three and six months ended June 30, 2009, we recorded expense related to valuation of the fair value of the price adjustable warrants of $0.9 million and $1.9 million, respectively.

Debt restructuring and reduction of other liabilities

In January 2009, we entered into a Loan and Security Agreement (the “Loan Agreement”) with General Electric Capital Corporation (“GECC”) pursuant to which GECC converted the balance due under the capital lease obligations, along with a lease termination fee and amounts payable for property taxes, to a promissory note in the amount of $5.5 million at a fixed interest rate of 12.29% per year. The loan was paid off in full in June 2009 including the loan fee of 2% of the original loan balance, or approximately $0.1 million. As a result of the capital lease termination and issuance of the note payable, we recorded a lease termination fee of approximately $0.2 million during the first quarter of 2009, which was presented as a component of gain on settlement of liabilities, net.

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Beginning in January 2009, we engaged in negotiations to reduce certain current and future obligations, including professional service fees due to our vendors incurred in the normal course of our business, rent on our 3450 Monte Villa Parkway facility (“3450 Monte Villa”) in Bothell, Washington, which we had ceased to use in 2008, and severance obligations due to former employees of our company. In February and March 2009, we issued to eight of our vendors an aggregate of 1,364,285 shares of our common stock to settle amounts due to these vendors of approximately $0.6 million in total.

In March 2009, we negotiated amendments to our agreements regarding severance obligations to both our former President and to our former Chief Scientific Officer to reduce our overall cash obligations through September 2009. In particular, we entered into an amendment of our agreement regarding severance obligations with our former Chief Scientific Officer, pursuant to which we agreed to pay to him a reduced sum of $0.9 million and to issue to him 731,275 unregistered shares of our common stock, in full satisfaction of $1.7 million in severance obligations. These obligations were included in accrued payroll and employee benefits at December 31, 2008. We made the cash payment to the former executive in June 2009. We have also agreed to use our best efforts to file a registration statement with the SEC to register the shares to be issued to the former executive on or prior to September 30, 2009. There is no requirement to transfer consideration if the registration statement is not filed by September 30, 2009.

Corporate restructuring

We have recently completed a major restructuring of our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company. Since July 2008, we have accomplished the following: (1) reduced our workforce from approximately 75 employees in July 2008 to approximately 40 employees as of the date of this filing; (2) suspended all further clinical development of our intranasal programs in August 2008; (3) renegotiated and significantly reduced our long-term legacy liabilities; and (4) sold our intranasal contract manufacturing operations, in New York, to Par in March 2009. We have recorded restructuring charges related to employee termination costs, our facility consolidation and impairment of assets in accordance with our long-lived assets policy. We continue to work to identify a partner or partners to further develop and commercialize our remaining legacy intranasal programs through either a sale or licensing transaction; however, there can be no assurance that we will be able to identify suitable partners for our intranasal programs or a sale or licensing transaction on terms acceptable to us or at all. In March 2009, we engaged a consulting firm with expertise in international markets to assist in the sale or licensing of these remaining programs.

We have streamlined operations and reduced expenses, which has included reductions in our workforce. We continue to focus on maximizing the performance of our business and controlling costs to respond to the economic environment and will continue to evaluate our underlying cost structure to improve our operating results and better position ourselves for growth. We have in the past and may in the future find it advisable to restructure operations and reduce expenses, including, without limitation, such measures as reductions in the workforce, discretionary spending, and/or capital expenditures, as well as other steps to reduce expenses. As such, we may incur further restructuring charges, including severance, benefits and related costs due to a reduction in workforce and/or charges for facilities consolidation or for assets disposed of or removed from operations as a direct result of a reduction of workforce. In the second half of 2009, we anticipate that our costs and operating expenses will track to a level that is consistent with our expected revenue and allow us to continue to invest in accordance with our strategic priorities. However, we may be unable to achieve these expense levels without adversely affecting our business and results of operations. We may continue to experience losses and negative cash flows in the near term, even if revenue related to collaborative partnerships grows.

Summary

We believe that our current resources are sufficient to fund our planned operations to approximately year-end 2009. We based our estimate on our ability to perform planned R&D activities and the receipt of planned funding. Volatility in our stock price, as well as global market conditions, could make it difficult for us to raise capital on favorable terms, or at all. Any financing we obtain may further dilute or otherwise impair the ownership interest of our current stockholders. If we fail to generate positive cash flows or fail to obtain additional capital when required, we could modify, delay or abandon some or all of our programs. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

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Consolidated Results of Operations

Comparison of Quarterly Results of Operations

Percentage comparisons have been omitted within the following table where they are not considered meaningful. All amounts, except amounts expressed as a percentage, are presented in thousands in the following table.

	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2008			2009			$			%		2008			2009			$			%
Revenue
License and research fees	$	431		$	306		$	(125	)	(29	)%	$	1,113		$	14,374		$	13,261		1,191	%
Product revenue		241			—			(241	)				729			70			(659	)	(90	)%
Government grants		82			3			(79	)	(96	)%		175			16			(159	)	(91	)%
Total revenue		754			309			(445	)	(59	)%		2,017			14,460			12,443		617	%
Operating expenses
Cost of product revenue		2,665			—			(2,665	)				2,829			—			(2,829	)
Research and development		8,493			4,340			(4,153	)	(49	)%		19,419			8,456			(10,963	)	(56	)%
Sales and marketing		445			70			(375	)	(84	)%		1,018			213			(805	)	(79	)%
General and administrative		3,380			2,181			(1,199	)	(35	)%		7,609			4,145			(3,464	)	(46	)%
Restructuring		—			178			178					1,917			311			(1,606	)	(84	)%
Total operating expenses		14,983			6,769			(8,214	)	(55	)%		32,792			13,125			(19,667	)	(60	)%
Interest income		135			1			(134	)	(99	)%		428			3			(425	)	(99	)%
Interest and other expense		(237	)		(168	)		69		(29	)%		(502	)		(311	)		191		(38	)%
Change in fair value liability for price adjustable warrants		—			(905	)		(905	)				—			(1,932	)		(1,932	)
Gain on settlement of liabilities, net		—			—			—					—			654			654
Net loss	$	(14,331	)	$	(7,532	)	$	(6,799	)	(47	)%	$	(30,849	)	$	(251	)	$	30,598		(99	)%

Comparison of the Three and Six Months Ended June 30, 2008 to the Three and Six Months Ended June 30, 2009

Revenue. We had revenue from certain customers, as a percentage of total revenue, as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2009		2008		2009
Novartis	—		60	%	—		52	%
Roche	—		—		—		34	%
Amylin	—		—		—		7	%
QOL Medical, LLC	47	%	—		49	%	6	%
Par Pharmaceuticals	—		39	%	—		1	%
Government grant	11	%	1	%	9	%	—
Undisclosed partner – undisclosed compounds	24	%	—		28	%	—
Undisclosed partner – Factor IX	18	%	—		14	%	—
Total	100	%	100	%	100	%	100	%

License and research fees revenue. Revenue from license and research fees increased by $13.3 million to $14.4 million in the six months ended June 30, 2009 compared to the same period in 2008. For the three month period ended June 30, 2009, revenue decreased by $0.1 million compared to the same period in 2008.

In the six months ended June 30, 2009, license and research fee revenue was primarily from licensing our RNAi platforms including agreements with Novartis and Roche as well as a $1.0 million milestone payment received from Amylin, recognition of $0.7 million in deferred revenue recognized upon termination of the QOL agreement and revenue recognized under the asset purchase agreement with Par. In the three months ended June 30, 2009, license and research fee revenue included revenue from Novartis and Par. Revenue recognized in the three and six month periods ended June 30, 2008 consisted primarily of revenue from our intranasal partners including QOL Medical and other collaboration or feasibility partners.

Government grants revenue. The National Institutes of Health awarded us a grant in September 2006 for $1.9 million over a five year period to prevent and treat influenza. Revenue recognized under this grant totaled $0.1 million and $0.2 million for the three and six months ended June 30, 2008 and $3,000 and $16,000 for the three and six months ended June 30, 2009. We are terminating our government grant in the third quarter of 2009 and we expect government grant revenue to be minimal for the rest of 2009.

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Product Revenue. During the three and six months ended June 30, 2008, product revenue was $0.2 million and $0.7 million, respectively, which consisted of sales of Nascobal^® brand products. As a result of the Asset Purchase Agreement with Par, our Supply Agreement with QOL was terminated as of March 31, 2009. We recognized $0.1 million in the first quarter of 2009 related to a cancellation fee paid by QOL for cancellation of a planned production lot. We expect no product revenue for the rest of 2009.

Cost of product revenue. Cost of product revenue consists of raw materials, labor and overhead expenses. We did not produce any production lots of Nascobal^® nasal spray in 2009. We recorded a non-cash impairment charge of approximately $2.6 million to cost of goods sold related to the write-down of inventory in the second quarter of 2008. We expect no cost of product revenue for the rest of 2009.

Research and Development. R&D expense consists primarily of salaries and other personnel-related expenses, costs of clinical trials, consulting and other outside services, laboratory supplies, facilities costs and other costs. We expense all R&D costs as incurred. R&D expense for the three and six months ended June 30, 2009 decreased $4.2 million and $11.0 million as compared to the 2008 periods, due to the following:

• Personnel-related expenses decreased by 57% and 60% to $1.1 million and $2.5 million in the three and six months ended June 30, 2009 compared to $2.6 million and $6.2 million in the three and six months ended June 30, 2008 due to a decrease in headcount as a result of our restructuring.

• Costs of clinical trials, lab supplies, consulting, and outside testing and services decreased by 81% and 90% to $0.5 million and $0.7 million in the three and six months ended June 30, 2009 compared to $2.7 million and $6.7 million in the three and six months ended June 30, 2008. We discontinued our PTH(1-34) clinical trial in the first quarter of 2008, and completed a Phase 2 clinical trial for PYY(3-36) in July 2008. The costs for the 2009 period were significantly lower than 2008 as we restructured our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company.

• Facilities and equipment costs decreased by 63% and 55% to $0.9 million and $2.0 million in the three and six months ended June 30, 2009 compared to $2.4 million and $4.6 million in the three and six months ended June 30, 2008 due to a decrease in rent and related expenses and a decrease in depreciation of equipment and related maintenance and calibration costs. Depreciation expense included in R&D in the three and six months ended June 30, 2009 was $0.4 million and $0.9 million, compared with $0.9 million and $1.7 million in the three and six months ended June 30, 2008.

• Stock-based compensation included in R&D expense decreased from approximately $.7 million and $1.5 million in the three and six months ended June 30, 2008 to a benefit of $0.2 million and a benefit of $0.3 million in the three and six months ended June 30, 2009. The decrease was due to lower headcount and to recognize the accounting impact of forfeitures of restricted stock awards in the current year periods.

• R&D expense by project, as a percentage of total R&D project expense, was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2009		2008		2009
RNAi Projects	44	%	94	%	36	%	95	%
Legacy Intranasal Projects	56	%	6	%	64	%	5	%
Total	100	%	100	%	100	%	100	%

We expect our R&D expenses to decrease in 2009 due to the restructuring of our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company. Our current strategy is focused on entering into collaborations with third parties to participate in the development of, and ultimately the commercialization of, our RNAi technology.

Sales and marketing. Sales and marketing expense consists primarily of salaries and other personnel-related expenses, consulting, trade shows and advertising. The 84% and 79% decrease in sales and marketing expense in the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 resulted primarily from headcount reductions in connection with our restructuring and our cost containment efforts. We expect sales and marketing costs, which primarily include business development staff and activities, to continue to decrease in 2009 compared to 2008 due to continued cost containment efforts and the restructuring of our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company.

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General and administrative. General and administrative expense consists primarily of salaries and other personnel-related expenses to support our R&D activities, non-cash stock-based compensation for general and administrative personnel and non-employee members of our Board, professional fees, such as accounting and legal, corporate insurance and facilities costs. The 35% and 46% decrease in general and administrative expenses in the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 resulted primarily from the following:

• Personnel-related expenses decreased by 10% and 39% to $0.6 million and $1.1 million in the three and six months ended June 30, 2009 compared to $0.7 million and $1.7 million in the three and six months ended June 30, 2008 due primarily to decreased headcount related to administrative activities.

• Costs of legal and accounting fees, consulting, corporate insurance and other administrative costs decreased by 46% and 49% to approximately $1.0 million and $2.2 million in the three and six months ended June 30, 2009 compared to approximately $1.9 million and $4.3 million in the three and six months ended June 30, 2008, due primarily to cost containment efforts and the restructuring of our business from a clinical stage intranasal drug delivery company to a pre-clinical RNAi drug discovery company.

• Non-cash stock-based compensation included in general and administrative expense decreased from approximately $0.5 million and $1.1 million in the three and six months ended June 30, 2008 to $0.2 million and $0.3 million in the three and six months ended June 30, 2009.

We expect general and administrative expenses to decrease in 2009 compared to 2008 due to continued cost containment efforts.

Restructuring. We have recorded restructuring charges related to employee termination costs, our facility consolidation and impairment of assets in accordance with our long-lived assets policy. In addition, we also incurred approximately $0.3 million related to our decision in the first quarter of 2008 to place our Phase 2 PTH(1-34) clinical trial on hold until further funding has been obtained. We continue to work to identify a partner or partners to further develop and commercialize our remaining legacy intranasal programs through either a sale or licensing transaction; however, there can be no assurance that we will be able to identify suitable partners for our intranasal programs or a sale or licensing transaction on terms acceptable to us or at all.

During 2008, we exited our facility at 3450 Monte Villa Parkway and recorded a restructuring liability, representing estimated future payments and other costs, and discounted using a credit-adjusted risk-free interest rate. In March 2009, we entered into an amendment of our lease for this facility, which reduced our lease obligations by approximately $1.9 million until July 2010. Under the terms of the amendment, we released both a cash deposit of $0.3 million and restricted cash under a letter of credit for $1.0 million to the landlord, to be used by them to cover rent payments or as incentives to attract new tenants. As inducement to enter into the amendment, we issued 1.5 million shares of our common stock to the sole member of the landlord. Because of this amendment, we will have no further rent obligations under the 3450 Monte Villa Parkway lease for the period from January 2009 until July 2010. We use a credit-adjusted risk-free interest rate of 15%, and we based estimated future payments on current rental rates available in the Bothell real estate market, cash incentives available from the landlord to attract new tenants, our evaluation of the likelihood of subleasing our facility in light of tightening credit markets, deteriorating conditions in the Bothell real estate market and increased vacancy rates in the competing downtown real estate markets. During the three and six months ended June 30, 2009, we recorded approximately $54,000 and $122,000 in accretion expense. We expect to incur approximately $0.2 million in accretion expense through the expiration of this lease in January 2016.

Given the triggering event as a result of the employee terminations and facility consolidation, we have evaluated our long-lived assets for possible impairment under the guidance in SFAS 144. In 2008, leasehold improvements having a net book value of approximately $1.5 million and fixed assets whose net book value exceeded the net realizable value by approximately $0.4 million in aggregate were considered impaired by management as they related to our facility which we had ceased to use. A related charge was included in restructuring expense in 2008. At December 31, 2008, property and equipment having a net realizable value of approximately $0.5 million, net of estimated costs to sell, was held for sale. All of these assets were sold as of June 30, 2009.

Interest Income. The 99% decrease in interest income in the both the three and six months ended June 30, 2009 compared to the same periods in 2008 was primarily due to lower average balances available for investment.

Interest Expense. We incurred interest expense on our capital leases and in 2009 on our note payable. The 29% and 38% decrease in interest expense in the three and six months ended June 30, 2009 compared to the same periods in 2008 was due to a decrease in the average borrowings. At June 30, 2009 we have no interest-bearing debt outstanding.

Change in fair value liability for price adjustable warrants. For the three and six months ended June 30, 2009, we recorded expense related to valuation of the price adjustable warrants of $0.9 million and $1.9 million based on the June 30, 2009 closing price of our stock of $1.38 per common share.

Gain on settlement of liabilities, net. We recorded a net gain on settlement of liabilities of approximately $0.7 million in the first quarter of 2009. This included a $0.7 million gain relating to the amendment of our agreement regarding severance obligations with our former Chief Scientific Officer. In addition, we recorded a gain of approximately $0.2 million related to the issuance of shares of

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stock valued at $0.4 million to eight of our vendors to settle amounts due to these vendors of approximately $0.6 million in total. These gain amounts were partially offset by a lease termination fee of approximately $0.2 million incurred pursuant to the termination of our lease agreement with GECC and subsequent refinance of the amounts due under our Loan and Security Agreement with GECC.

Off-Balance Sheet Arrangements

As of June 30, 2009, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. — CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in reports filed under the Securities Exchange Act of 1934, as amended.

(b) Internal Control Over Financial Reporting. There have been no changes in our internal controls over financial reporting or in other factors during the fiscal quarter ended June 30, 2009, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting .

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PART II — OTHER INFORMATION

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 18, 2009, we issued 606,061 shares of our common stock to Ribotask ApS as consideration for an amendment of our Patent Assignment and License Agreement dated May 21, 2008, as amended October 9, 2008. The shares were offered and sold in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act.

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

Our stockholders approved the following proposals at our Annual Meeting of Stockholders held on Wednesday, May 20, 2009:

1) The election of the following five (5) directors, each to hold office for a term of one (1) year or until their respective successors have been duly elected or appointed:

Nominee	Votes FOR	Votes WITHHELD
J. Michael French	28,037,709	1,175,531
Daniel Peters	27,982,103	1,213,137
James E. Rothman, Ph.D.	28,000,598	1,212,642
Gregory Sessler	27,968,049	1,245,197
Bruce R. Thaw	27,761,649	1,451,591

2) Ratification of the appointment of KPMG LLP as our independent registered public accountants for the year ending December 31, 2009:

Votes FOR	Votes AGAINST	Votes ABSTAINED
28,971,267	204,715	37,256

3) The approval of the amendment to our amended and restated certificate of incorporation to effect a reverse split, at a time in the future, and in such ratio between a one-for-two and one-for-ten reverse stock split, to be determined by the Board of Directors, in conjunction with advice from our investment bankers, to be in the best interest of MDRNA, Inc.:

Votes FOR	Votes AGAINST	Votes ABSTAINED
23,744,638	5,398,555	70,044

ITEM 5 — OTHER INFORMATION

On July 27, 2009, we and BMR-3450 Monte Villa Parkway LLC (“BMR”), the successor-in-interest to Phase 3 Science Center LLC, entered into a fourth amendment (the “Fourth Amendment”) of that certain Lease dated as of April 23, 2002, as amended by that certain First Amendment to Lease dated as of July 1, 2003, that certain Second Amendment to Lease dated as of January 29, 2004, and that certain Third Amendment to Lease dated as of March 5, 2009 (as amended, the “Lease”), whereby we lease certain premises from BMR at 3450 Monte Villa Parkway in Bothell, Washington (the “Premises”). Pursuant to the Fourth Amendment, the rentable area of the Premises shall be reduced by approximately 19,108 square feet to approximately 31,892 square feet. As previously disclosed, as a result of the Third Amendment to the Lease, we have no obligation to pay rent on the Premises until July 1, 2010, upon which date, and with accrual commencing as of such date, our obligation to pay rent and operating expenses shall resume in accordance with the terms of the Lease.

The foregoing summary is qualified in its entirety by reference to the text of the Fourth Amendment, a copy of which is attached to this Quarterly Report as Exhibit 10.3 and incorporated herein by reference.

ITEM 6 — EXHIBITS

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized, in Bothell, State of Washington, on July 30, 2009.

MDRNA, INC.
By:	/s/    J. Michael French
	J. Michael French
	Chief Executive Officer and President
By:	/s/    Peter S. Garcia
	Peter S. Garcia Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Amendment No. 1 to the Securities Purchase Agreement, dated as of April 25, 2008, between the Registrant and the purchasers identified therein. (1)
10.2	Form of Amended and Restated Common Stock Purchase Warrant issued to the investors in the April 2008 financing. (1)
10.3	Fourth Amendment, dated as of July 27, 2009, to Lease Agreement dated April 23, 2002, with BMR-3450 Monte Villa Parkway LLC (as successor-in-interest to Phase 3 Science Center LLC). (1)
31.1	Certification of our Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (1)
31.2	Certification of our Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. (1)
32.1	Certification of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
32.2	Certification of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1) Filed Herewith.

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EX-10.1

Exhibit 10.1

AMENDMENT TO SECURITIES PURCHASE AGREEMENT

THIS AMENDMENT to that certain Securities Purchase Agreement dated as of April 25, 2008 between MDRNA, Inc., a Delaware corporation (the “Company”), and the purchaser identified on the signature page hereto (the “Purchaser”) (the “Purchase Agreement”), is dated as of June 9, 2009.

WHEREAS, the parties desire to amend the Purchase Agreement in the manner set forth in this Amendment.

NOW, THEREFORE, in consideration of the mutual covenants contained in this Amendment, the Company and the Purchaser hereby agrees as follows:

1. The definition of “Exempt Issuance” is hereby amended to add the following: “and (d) shares of Common Stock and warrants to purchase Common Stock (including the shares of Common Stock issuable upon exercise of such warrants) issued pursuant to that certain Securities Purchase Agreement, dated as of June 9, 2009, by and among the Company and the other parties thereto.”

2. The definition of “Warrants” is hereby deleted in its entirety and replaced with the following:

““Warrants” means, collectively, the Common Stock purchase warrants delivered to the Purchasers at the Closing in accordance with Section 2.2(a) hereof, which Warrants shall be exercisable upon the six month anniversary of the date hereof and have a term of exercise equal to seven years, as to the Warrant issued pursuant to Section 2.2(a)(iv), and 90 days, as to the Warrant issued pursuant to Section 2.2(a)(v), otherwise in the form of Exhibit A attached hereto, as may be amended from time to time.”

3. Section 4.12 of the Purchase Agreement is hereby amended by substituting (i) “two Trading Days” for “three Trading Days” in Section 4.12(b) and (ii) “second (2^nd) Trading Day” for “third (3^rd) Trading Day” in Sections 4.12(c), (d) and (e).

4. This Amendment shall be effective upon the Company’s execution and receipt of the same amendment executed by all the other Purchasers.

5. Except as otherwise expressly provided by this Amendment, all of the terms and conditions of the Purchase Agreement and each other Transaction Document (as defined in the Purchase Agreement) is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that on and after the effectiveness of this Amendment (A) all references in the Purchase Agreement to the “Purchase Agreement,” “hereto,” “hereof,” “this Agreement,” “hereunder” or words of like import referring to the Purchase Agreement shall mean the Purchase Agreement as amended by this Amendment and the other same amendments, and (B) all references in the other Transaction Documents to the

“Purchase Agreement,” “thereto,” “thereof,” “thereunder” or words of like import referring to the Purchase Agreement shall mean the Purchase Agreement as amended by this Amendment and the other same amendments, and (ii) the execution, delivery and effectiveness of this Agreement shall not operate as an amendment of any right, power or remedy of the Purchaser under any Transaction Document, nor constitute an amendment of any provision of any Transaction Document and all of them shall continue in full force and effect, as amended or modified by this Amendment and the other same amendments.

6. This Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of laws thereof. This Amendment may be executed in two or more identical counterparts, all of which shall be considered one and the same amendment and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event that any signature is delivered by facsimile transmission or by an e-mail which contains a portable document format (.pdf) file of an executed signature page, such signature page shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such signature page were an original thereof.

[signature page follows]

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IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed by their respective authorized signatures as of the date first set forth above.

MDRNA, INC.
By:	/s/    Bruce R. York
Name:	Bruce R. York
Title:	CFO

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[PURCHASER SIGNATURE PAGES TO AMENDMENT TO SECURITIES PURCHASE AGREEMENT]

IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed by their respective authorized signatures as of the date first set forth above.

Name of Purchaser:                                                                                                                                                                                       

Signature of Authorized Signatory of Purchaser:                                                                                                                                   

Name of Authorized Signatory:                                                                                                                                                                 

Title of Authorized Signatory:                                                                                                                                                                      

E-mail Address of Authorized Signatory:                                                                                                                                                 

Fax Number of Authorized Signatory:                                                                                                                                                       

[SIGNATURE PAGES CONTINUE]

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EX-10.2

Exhibit 10.2

AMENDED AND RESTATED COMMON STOCK PURCHASE WARRANT

MDRNA, INC.

Warrant Shares:	Initial Exercise Date: October ___, 2008
	Issue Date: April ___, 2008

THIS AMENDED AND RESTATED COMMON STOCK PURCHASE WARRANT (the “Warrant”) amended and restated in its entirety that certain warrant issued to Holder to purchase the same number of Warrant Shares set forth above issued on April __, 2008 and certifies that, for value received,                      (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the six month anniversary of date hereof (the “Initial Exercise Date”) and on or prior to the close of business [IF PURSUANT TO SECTION 2.2(A)(IV) — on the seven year anniversary of the Initial Exercise Date][IF PURSUANT TO SECTION 2.2(A)(V) — on the 90th day following the Initial Exercise Date][ (the “Termination Date”) but not thereafter, to subscribe for and purchase from MDRNA, Inc., a Delaware corporation (the “Company”), up to                      shares (the “Warrant Shares”) of Common Stock; provided, however, that the          period set forth above as the Termination Date shall be extended for the number of days during such period in which (i) trading in the Common Stock is suspended by any Trading Market, or (ii) the Registration Statement is not effective but in no event later than                     . The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the “Purchase Agreement”), dated April     , 2008, among the Company and the purchasers signatory thereto.

Section 2. Exercise.

a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) and to Company Counsel of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto; and, within 3 Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within 3 Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall

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have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within 1 Business Day of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be [IF PURSUANT TO SECTION 2.2(A)(IV) — $2.376][IF PURSUANT TO SECTION 2.2(A)(V) — $2.17, subject to adjustment hereunder (the “Exercise Price”).

c) Cashless Exercise. If at any time during the term of this Warrant there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A)	=	the VWAP on the Trading Day immediately preceding the date of such election;
(B)	=	the Exercise Price of this Warrant, as adjusted; and
(X)	=	the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

d) Holder’s Restrictions. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude

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the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(d), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report, as the case may be, (B) a more recent public announcement by the Company or (C) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(d) to correct this paragraph (or any portion hereof) which may be defective or

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inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

e) Mechanics of Exercise.

i. Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is then a participant in such system and either (A) there is an effective Registration Statement permitting the resale of the Warrant Shares by the Holder or this Warrant is being exercised via cashless exercise, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within 3 Trading Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant (if required) and payment of the aggregate Exercise Price as set forth above (the “Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vi) prior to the issuance of such shares, have been paid. If the Company fails for any reason to deliver to the Holder certificates evidencing the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such certificates are delivered.

ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

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iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(e)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

iv. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

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vi. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

Section 3. Certain Adjustments.

a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of

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Common Stock, at an effective price per share less than the then Exercise Price (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced and only reduced to equal the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise Price payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price prior to such adjustment; provided, however, (x) no adjustment pursuant to this Section 3(b) shall cause the Exercise Price to be less than $2.17 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction occurring after the date hereof) (the “Floor Price”) until such date that Shareholder Approval is (I) obtained or is not required under the rules and regulations of the Trading Market on which the shares of Common Stock are then listed for the Company’s issuance of all of the Securities as described in the Transaction Documents or (II) no longer required to eliminate restrictions on the issuance of shares of Common Stock pursuant to the Transactions Documents or floor prices to limit upward adjustments to the number of shares of Common Stock issuable upon exercise or conversion of exercisable or convertible instruments; and (y) on and after the date that Shareholder Approval is obtained or is not so required, no adjustment pursuant to this Section 3(b) shall cause the Exercise Price to be less than $1.00 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction occurring after the date hereof); provided, further, however, (1) clause (y) above shall be of no further force or effect (and shall be null and void ab initio) on the first date (if any) (the “Null and Void Date”) on or after June 9, 2009 on which the Company issues or is deemed to have issued in the aggregate during any immediately preceding 365 days shares of Common Stock or Common Stock Equivalents (including, without limitation, the shares of Common Stock issuable upon conversion, exercise or exchange thereof or to which any holder thereof is entitled to receive) or any combination thereof which exceed 25% of the issued and outstanding shares of Common Stock as of the first day of such 365 days, and on the Null and Void Date the Exercise Price shall be automatically adjusted to the lowest price that it would have been adjusted had clause (y) not applied during such period (it being understood that issuances solely pursuant to clauses (a), (c) and (d) of the defined term Exempt Issuance shall not be counted in determining whether such 25% was exceeded). Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing but subject to the immediately preceding proviso, no adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. The Company shall provide each stockholder entitled to vote at the next meeting (whether a special meeting or an annual meeting) of stockholders of the Company (the “Shareholder Meeting”) a proxy statement soliciting each such stockholder’s affirmative vote at the Shareholder Meeting for approval of resolutions (“Resolutions”) providing for the Company’s issuance of all of the Securities as described in the Transaction Documents and the elimination of the Floor Price in accordance with applicable law and the rules and regulations of the principal Trading Market (which is the Nasdaq Global Market) (such affirmative approval being referred to herein as the “Shareholder Approval”), and the Company shall use its commercially reasonable efforts to solicit its stockholders’ approval of the Resolutions and to cause the Board to recommend to the stockholders that they approve the Resolutions.

c) Subsequent Rights Offerings. If the Company, at any time while the Warrant is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the VWAP at the record date mentioned below, then, the Exercise Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered (assuming receipt by the Company in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such VWAP. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants.

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d) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

e) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which

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a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(e) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act or (3) a Fundamental Transaction involving a person or entity not traded on a national securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market, the Company or any successor entity shall pay at the Holder’s option, exercisable at any time concurrently with or within 30 days after the consummation of the Fundamental Transaction, an amount of cash equal to the value of this Warrant as determined in accordance with the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (A) a price per share of Common Stock equal to the VWAP of the Common Stock for the Trading Day immediately preceding the date of consummation of the applicable Fundamental Transaction, (B) a risk-free interest rate corresponding to the U.S. Treasury rate for a 30 day period immediately prior to the consummation of the applicable Fundamental Transaction, (C) an expected volatility equal to the 100 day volatility obtained from the “HVT” function on Bloomberg L.P. determined as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of such transaction and the Termination Date.

f) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

g) Notice to Holder.

i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. If the Company enters into a Variable Rate Transaction, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised.

ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any

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class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice.

Section 4. Transfer of Warrant.

a) Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section

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4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Initial Exercise Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

Section 5. Miscellaneous.

a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a Stockholder of the Company prior to the exercise hereof as set forth in Section 2(e)(i).

b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

d) Authorized Shares.

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or

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regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.

f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall

12

be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement.

i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and Holders holding Warrants at least equal to 67% of the Warrant Shares issuable upon exercise of all then outstanding Warrants.

m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

********************

(Signature Pages Follow)

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

MDRNA, INC.
By:
	Name:
	Title:

14

NOTICE OF EXERCISE

TO: MDRNA, INC.

(1) The undersigned hereby elects to purchase                                                                   Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2) Payment shall take the form of (check applicable box):

¨ in lawful money of the United States; or

¨ [if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

________________

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

________________

(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

Name of Investing Entity:                                                                                                                                                                                                                    

Signature of Authorized Signatory of Investing Entity:                                                                                                                                                              

Name of Authorized Signatory:                                                                                                                                                                                                         

Title of Authorized Signatory:                                                                                                                                                                                                            

Date:                                                                                                                                                                                                                                                            

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [    ] all of or [            ] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

___________________________________________________________________________________________ whose address is

Dated:                        ,         

Holder’s Signature:        

Holder’s Address:

Signature Guaranteed:                                                                                                                                                                                                                           

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-10.3

Exhibit 10.3

FOURTH AMENDMENT TO LEASE

THIS FOURTH AMENDMENT TO LEASE (this “Fourth Amendment”) is entered into as of this 27th day of July, 2009 (“Effective Date”), by and between BMR-3450 MONTE VILLA PARKWAY LLC, a Delaware limited liability company (“Landlord,” as successor-in-interest to Phase 3 Science Center LLC (“Original Landlord”)), and MDRNA, INC., a Delaware corporation (“Tenant,” as successor-in-interest to Nastech Pharmaceutical Company Inc. (“Original Tenant”)).

RECITALS

A. WHEREAS, Original Landlord and Original Tenant entered into that certain Lease dated as of April 23, 2002, as amended by that certain First Amendment to Lease dated as of July 1, 2003, that certain Second Amendment to Lease dated as of January 29, 2004, and that certain Third Amendment to Lease (“Third Amendment”) dated as of March 5, 2009 (collectively, the “Lease”), whereby Tenant leases certain premises (the “Premises”) from Landlord at 3450 Monte Villa Parkway in Bothell, Washington (the “Building”);

B. WHEREAS, Landlord and Tenant desire to terminate the Lease with respect to certain portions of the Premises; and

C. WHEREAS, Landlord and Tenant desire to modify and amend the Lease only in the respects and on the conditions hereinafter stated.

AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, agree as follows:

1. Definitions. For purposes of this Fourth Amendment, capitalized terms shall have the meanings ascribed to them in the Lease unless otherwise defined herein.

2. Premises. The “Premises”, as described in Section 1.1 of the Lease and depicted on Exhibit C to the Lease, are hereby amended to mean that certain space containing approximately thirty-one thousand eight hundred ninety-two (31,892) square feet as depicted on the schematic attached hereto as “Exhibit C Fourth Amendment”, which supersedes and replaces the Exhibit “C” attached to the Lease. Landlord shall be responsible for demising the amended Premises from the remainder of the Building at Landlord’s sole cost and expense; provided, however, Landlord shall not be responsible to Tenant for any loss or damage resulting therefrom to the amended Premises or any personal property located therein, other than to the extent arising from the gross negligence or willful misconduct of Landlord; and provided further that Tenant shall not be required, upon the surrender of the Premises at the expiration or earlier termination of the Term, for the repair or reverting of the work done in so demising the amended Premises. Effective as of the Effective Date, the term “Premises,” as used in the Lease, shall refer to the Premises as modified by this Fourth Amendment.

3. Rentable Area. The Rentable Area of the Premises is hereby reduced by nineteen thousand one hundred eight (19,108) square feet from fifty-one thousand (51,000) square feet to thirty-one thousand eight hundred ninety-two (31,892) square feet.

4. Basic Annual Rent. Effective as of July 1, 2010, Basic Annual Rent shall be increased by Eight Thousand Five Hundred Seventy-Three Dollars ($8,573) per month (based on approximately Twenty-Seven Cents ($0.27) per rentable square foot of the amended Premises per month) from Ninety-Six Thousand Seven Hundred Sixty-Six and 26/100s Dollars ($96,766.26) for a total of One Hundred Five Thousand Three Hundred Thirty-Nine and 26/100s Dollars ($105,339.26) (based on a total of Three and 30/100s Dollars ($3.30) per rentable square foot of the amended Premises per month), subject to increase as set forth in Section 6.1 of the Lease.

5. Pro Rata Share. Sections 2.1.4 and 7.3(a) of the Lease are hereby amended to provide that Tenant’s Pro Rata Share is decreased from one hundred percent (100%) to sixty-two and fifty-three one hundredths percent (62.53%) of the Project.

6. Parking. The first sentence of Section 15.3 of the Lease is amended to read as follows: “As an appurtenance to the Premises, Tenant, and its employees and invitees, shall be entitled to use without charge Tenant’s Pro Rata Share of the Project parking facilities, equal to two and four tenths spaces (2.4) per one thousand (1,000) rentable square feet on an un-reserved and un-assigned basis, less Tenant’s Pro Rata Share of required handicap parking spaces serving the Project.”

7. Maintenance Obligations. Section 2 of the Third Amendment is hereby amended as follows: Notwithstanding anything in the Lease to the contrary, Landlord hereby agrees to: (a) maintain and repair the roof; the exterior of the Building; the landscaping; the parking lot; the elevator; and the HVAC, electrical, plumbing, security, exterior generator, fire sprinkler (including related alarms) systems, and other building systems including the RODI water system and air compressor systems serving the Premises, (b) wash the outside windows of the Building, (c) supply regular janitorial service for the Premises, including refuse removal, (d) maintain one (1) small Millipore water system, one (1) large glass washer located within the Premises, and (e) supply the following utilities to the Premises for the period of time that Tenant is not actively conducting business in the Premises: phones for the elevators and alarms, water, sewer, gas and electricity (collectively the “Maintenance Obligations”), the cost of which shall be paid by Tenant as Additional Rent, except as abated by Section 6 to the Third Amendment. For avoidance of doubt, Landlord shall not be responsible to maintain the autoclave, any vacuum pumps, nitrogen, or any cubicles or furniture.

8. Lender’s Consent. This Fourth Amendment shall be of no force or effect unless and until Landlord gives Tenant written confirmation that Landlord has obtained the consent of Landlord’s lender or lenders to this Fourth Amendment. Tenant shall pay all costs incurred by Landlord in obtaining the consent of Landlord’s lender(s), including, without limitation, reasonable attorneys’ fees (not to exceed $10,000).

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9. No Surrender or Acceptance; No Waiver. Nothing in this Fourth Amendment shall be construed as a surrender of the Premises by Tenant or an acceptance of the Premises by Landlord and, except with regard to its performance of the Maintenance Obligations, Landlord is not waiving any rights it may have under the Lease, at law or in equity. Except as explicitly stated in this Fourth Amendment, the Lease remains unmodified and in full force and effect, including, without limitation, Tenant’s obligations to pay Rent as amended hereby and to ultimately surrender the Premises to Landlord at the expiration or earlier termination of the Term in the condition required by the Lease.

10. Broker. Each of Landlord and Tenant represents and warrants that it has not dealt with any broker or agent in the negotiation for or the obtaining of this Fourth Amendment and agrees to indemnify, defend and hold the other harmless from any and all cost or liability for compensation claimed by any such broker or agent employed or engaged by it or claiming to have been employed or engaged by it.

11. No Default. Each of Landlord and Tenant represents, warrants and covenants that, to the best of its knowledge, Landlord and Tenant are not in default of any of their respective obligations under the Lease and no event has occurred that, with the passage of time or the giving of notice (or both) would constitute a default by either Landlord or Tenant thereunder.

12. Effect of Amendment. Except as modified by this Fourth Amendment, the Lease and all the covenants, agreements, terms, provisions and conditions thereof shall remain in full force and effect and are hereby ratified and affirmed. Each party agrees to pay its own costs and expenses (including legal fees) incurred in connection with this Fourth Amendment except as stated in Section 8. The covenants, agreements, terms, provisions and conditions contained in this Fourth Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and, except as otherwise provided in the Lease, their respective assigns. In the event of any conflict between the terms contained in this Fourth Amendment and the Lease, the terms herein contained shall supersede and control the obligations and liabilities of the parties. From and after the date hereof, the term “Lease” as used in the Lease shall mean the Lease, as modified by this Fourth Amendment.

13. Miscellaneous. This Fourth Amendment becomes effective only upon execution and delivery hereof by Landlord and Tenant. The captions of the paragraphs and subparagraphs in this Fourth Amendment are inserted and included solely for convenience and shall not be considered or given any effect in construing the provisions hereof. All exhibits hereto are incorporated herein by reference.

14. Counterparts. This Fourth Amendment may be executed in one or more counterparts that, when taken together, shall constitute one original.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands as of the date and year first above written, and acknowledge that they possess the requisite authority to enter into this transaction and to execute this Fourth Amendment.

LANDLORD:

BMR-3450 MONTE VILLA PARKWAY LLC,

a Delaware limited liability company

By:	/s/    Kevin M. Simonsen
Name:	Kevin M. Simonsen
Title:	VP, Real Estate Counsel
TENANT:
MDRNA, INC.,
a Delaware corporation
By:	/s/    Bruce R. York
Name:	Bruce R. York
Title:	V.P. Finance, Chief Accounting Officer and Secretary

CALIFORNIA ALL-PURPOSE

CERTIFICATE OF ACKNOWLEDGMENT

State of California

County of San Diego

On July 27^th 2009, before me, Christy Bartlett, Notary Public

personally appeared Kevin M. Simonson

who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

/s/ Christy D Bartlett	Christy D Bartlett
Signature of Notary Public	Comm #1614771
	NOTARY PUBLIC —  CALIFORNIA SAN DIEGO COUNTY
	Commission Expires Nov 16, 2009

ACKNOWLEDGEMENT

STATE OF _Washington_	§
	§
COUNTY OF _Snohomish	§

On      July 27, 2009     , before me, a Notary Public in and for said state, personally appeared      Bruce R. York     , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, in that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.

WITNESS my hand and official seal.

/s/    Kelli J. Endreson

Kelli J. Endreson , Notary Public

My Commission Expires: 12/20/2011

EXHIBIT C FOURTH AMENDMENT

PREMISES

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

REQUIRED BY RULES 13A-14 AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS AMENDED

I, J. Michael French, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MDRNA, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2009

By:	/s/    J. Michael French
Name:	J. Michael French
Title:	Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

REQUIRED BY RULES 13A-14 AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS AMENDED

I, Peter S. Garcia, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MDRNA, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2009

By:	/s/    Peter S. Garcia
Name:	Peter S. Garcia
Title:	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, J. Michael French, President, Chief Executive Officer and Director of MDRNA, Inc. (“MDRNA”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of MDRNA on Form 10-Q for the fiscal quarter ended June 30, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of MDRNA.

Date: July 30, 2009

By:	/s/    J. Michael French
Name:	J. Michael French
Title:	Chief Executive Officer and President

A signed original of this written statement required by Section 906 has been provided to MDRNA and will be retained by MDRNA and furnished to the Securities Exchange Commission or its staff upon request.

This certification accompanies each periodic report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by MDRNA for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter S. Garcia, Chief Financial Officer of MDRNA, Inc. (“MDRNA”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of MDRNA on Form 10-Q for the fiscal quarter ended June 30, 2009 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of MDRNA.

Date: July 30, 2009

By:	/s/    Peter S. Garcia
Name:	Peter S. Garcia
Title:	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to MDRNA and will be retained by MDRNA and furnished to the Securities Exchange Commission or its staff upon request.

This certification accompanies each periodic report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by MDRNA for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.